Good evening, and good morning, everyone. Welcome to NIO's Q3 2018 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website. In today's call, we have Mr. William Li, NIO's Founder, Chairman and Chief Executive Officer Mr.
Louis Hsieh, our Chief Financial Officer and Mr. Nick Wang, our Vice President of Finance. Louisa and Nick will begin with prepared remarks and William will join for the Q and A session. Before we continue, please be kindly reminded that today's discussion will contain forward looking statements made under the Safe Harbor provisions of the U. S.
Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in the filings of the company with the U. S.
Securities and Exchange Commission. The company does not assume any obligation to update any forward looking statements, except as required under applicable law. Please also note that NIO's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non GAAP financial measures. Please refer to NIO's press release, which contains a reconciliation of the unaudited non GAAP measures to comparable GAAP measures. With that, I will now turn to this call over to our CFO, Mr.
Luis Hsieh. Luis, please go ahead.
Thank you, Jade. Hello, everyone. Thank you for joining our inaugural earnings conference call today. On behalf of William and the entire NEEO team, we are excited to report our Q1 as a public company, following the listing on the New York Stock Exchange on September 12. We would like to thank our employees, investors and particularly our users, whose support has allowed us to continue our journey to fulfill our mission and to execute on our strategies.
We are pleased to report a solid set of financial results for the quarter. The smooth ramp of our JAC NIO manufacturing facility led to the production of over 4,200 ES8s and the brand new direct delivery system and procedures that we've created successfully delivered 3,268 vehicles in the 3rd quarter that generated revenues of over RMB1.4 billion, up substantially for the Q2. Deliveries of the ES8 in October reached 1573, slightly below the September number due to the anticipated slower deliveries in early October when vehicle registration offices were closed for the 7 day Golden Week national holidays in China. We utilized the time during the slower holiday period to modify our production line in our JAC Neo plant to prepare for the future launch of our ES6. We remain confident that our Q4 deliveries will be on the range of 6,700 to 7,000 vehicles, which leads to our reaffirmed guidance that the number of ESAs deliveries will reach 10,000 in the second half of twenty eighteen.
We expect to finish production of all founders additions ES8s within the next few weeks and plan to deliver the vast majority of them by the end of the year as vehicle registration procedures allow. We plan to start to deliver a small number of base edition ES8s in the production order pool in early December. In the future, as our production continues to ramp, our target is to deliver ES8s to our users within 2 to 3 months after the production order deposits are received. The ES8s have been delivered to over 170 cities in China with over 5,000 vehicles in operation. We have received valuable feedback from our users.
Users have lauded the powerful solid acceleration, while also providing reliable braking and other safety features. Users have also noted that the spacious and comfortable interiors are with a well thought out design for families. Users that compare the driving performance of the ES8 to well known established premium brands such as Mercedes, BMW and Audi or to Tesla's Model S and Model X, the only premium SEV brand in China and find the ES8 very competitive or even better in a variety of performance specifications while providing a much more luxurious and spacious interior and comfortable ride with customized entertainment system and applications for an enjoyable driving experience. Nomi, the first voice enabled deep learning AI digital assistant installed in the Chinese premium cars has won the hearts of ES8 users. Users tell us Nomi acts as an intelligent and human like companion that makes driving much more fun.
Starting from this month, we are rolling out an upgrade to the ES8 software version 1.1 point 0, the first over the air software upgrade in our history. Version 1.1 turns on a 3 60 degree camera view around the vehicle to assist in parking and provides a positive safety assistance for active safety assistance function, such as forward collision warning, FCW, and lane departure warning, LDW, as well as improving many other functions that made driving safer and more pleasant. Thinking beyond the delivery of our vehicles, we continue to expand our service network and enhance our service capabilities. As of today, we have 12 NIO houses open in 10 cities, including Shanghai, Beijing, Guangzhou, Nanjing, Hangzhou, Shenzhen, Suzhou and Chengdu, Xi'an and Hefei. We also have another 9 pop up NIO houses open in large cities where we see increasing demand for the ES8 and brand recognition of NIO.
We currently have 38 service centers across 20 cities, mainly in authorized service centers. Our worry free services are highly praised by our users with over 90% of the ES8 users purchasing the worry free service packages. Our service teams are working diligently to make great service a hallmark of NIO's brand and users' experience. The Q3 was also critical to monitor our users utilize our full range of power solutions, including NIO home chargers, NIO app, power maps, power trucks, power swaps and one click power services. More than 70% of the ES8 owners thus far have installed home chargers in their own parking spaces, which gives them the most convenient and cost effective charging solution.
We have 2 95 power trucks covering 21 cities and swaps stations within 16 cities at the end of September. That is in addition to a growing infrastructure of public charges across the country and the NIO app has the location information for more than 130 public charging piles. All of these resources are accessible through the NIO app, which provides users with one click service to these charging solutions. The total number of one click services just exceeded 10,000 last week, demonstrating that the charging capabilities are well supported by flexible infrastructure, investment, data driven optimization and solid execution. Speaking of growing user community, we engaged with the growing user community through offline and online platforms.
Our app, our NIO app has over 626,000 active users in total and more than 170 active daily users by the end of October. We are pleased with the way our brand and our vision of a joyful lifestyle have been received by our users and we are excited to continue to grow the Neo community. We have built a strong team to support our future growth. Our focus remains to deliver vehicles with the highest quality to further improve the user experience and to prepare a successful launch of our ES6. I will now turn the call over to our Vice President of Finance, Mr.
Nick Wong to provide the financial details for the quarter.
Thank you, Luis. Speaking as one member of the NIO family, I echo Luis' sentiments and I'm very excited about our prospects for future. Our solid Q3 results get us off to a strong start following the 1st full quarter of production and deliveries. I will now go over some of our financial results for the Q3 of 2018. To be mindful of the length of this call, I will address financial highlights here and encourage listeners to refer to our earnings press release, which is posted online for additional details.
Our total revenues in the Q3 were RMB1.47 billion or $214,000,000 representing an increase of 3,095.3 percent from the Q2 of 2018. Our total revenues are made of 2 parts, vehicle sales and other sales. Vehicle sales were RMB 1 point 43,000,000,000 or $207,800,000 representing an increase of 3,000 113.8 percent from the Q2 of 2018. The increase over the Q2 of 2018 was attributed to accelerated delivery of the ESA in the 3rd quarter. Remember that we only started making deliveries of the ESA in the last 3 days of June.
So our 2nd quarter sales figures reflect sales from June 28 through June 30. Other sales were RMB42.7 million or $6,200,000 representing an increase of 2,581.8 percent from the Q2 of 2018. The increase over the Q2 of 2018 was mainly attributed to increased revenues recognized from the home charters installed in the 3rd quarter. Cost of sales was RMB1.6 billion or $230,900,000 representing an increase of 696.2 percent from the Q2 of 2018. The increase over the Q2 of 2018 was mainly driven by the delivery volume of the ESA.
Our gross margin was negative 7.9%, compared with the negative of 333.1% in the Q2 of 2018, mainly driven by the larger scale of production and delivery of the ESA. We expect gross margin to turn positive in the quarters ahead and as production and deliveries increase. Research and development expenses were RMB1.02 billion or $149,000,000 representing an increase of 37% from the Q3 of 2017 and an increase of 33.7% from the Q2 of 2018. The increase was primarily attributed to the 3 items. Number 1, increased share based compensation expenses recognized related to stock option granted to the company's employees.
Number 2, an increased number of personnel related to product and software development teams and number 3, increased development expenses of ES6, the 5 seater premium electric SUV, which is expected to be launched by the end of 2018. If we exclude share based compensation expenses, R and D expenses were RMB947.3 1,000,000, or $137,900,000 Our selling, general and administrative expenses were RMB1.7 billion or $243,200,000 representing an increase of 208.9 percent from the Q3 of 2017 and an increase of 74.6% from the Q2 of 2018. The increase in SG and A expenses over the Q2 of 2018 was also primarily attributed to 3 items. Number 1, increased share based compensation expenses number 2, an increased number of personnel related to user development and service related teams and number 3, increased selling expenses for test drives and other promotional events. Excluding share based compensation expenses non GAAP, SG and A expenses were RMB1.3 billion or $192,500,000 Loss from operations was RMB2.8 billion or $409,100,000 representing an increase of 118.2 percent from the Q3 of 2017 and an increase of 49.9% from the Q2 of 2018.
Excluding share based compensation expenses non GAAP, adjusted loss from operations was RMB2.3 billion or $346,200,000 Operating margin was negative 191.2%, compared with the negative of 4,076.8% in the Q2 of 2018. Excluding share based compensation expenses non GAAP, adjusted operating margin was negative 100 and 61.8%, compared with negative 3,938.9% in the Q2 of 2018. Share based compensation expenses were RMB 432.2 million or
$62,900,000
representing an increase of 23 180.6 percent from the Q3 of 2017 and an increase of 581.2 percent from the Q2 of 2018. The increase in share based compensation expenses was primarily attributed to increased share based compensation expenses recognized because of the successful completion of our IPO. We recognized SBC expenses related to the stock options granted to the company's non US employees, whose grants included the condition of an IPO, which was a significant one time non cash charge and won't recur in the future at a similar level. Net loss was RMB2.8 billion or 409.2 million, representing an increase of 116.1 percent from the Q3 of 2017 and an increase of 56.6 percent from the Q2 of 2018. Excluding share based compensation expenses non GAAP, an adjusted net loss was RMB2.4 billion or $346,300,000 in the Q3 of 2018.
Net loss attributable to NIO's ordinary shareholders was RMB9.8 billion or $1,400,000,000 Accretion on convertible redeemable preferred shares and accretion on redeemable non controlling interest to redemption value were RMB6.9 billion or $1,000,000,000 and RMB31.4 million or $4,600,000 respectively in the 3rd quarters of 2018. A crushing on convertible redeemable preferred shares redemption value was a non cash event and will no longer recur after the company's IPO. Excluding share based compensation expenses, accretion on convertible redeemable preferred shares to redemption value and accretion on redeemable non controlling interest to redemption value. Adjusted net loss attributable to NIO's ordinary shareholders non GAAP was RMB2.37 billion or US345.1 million dollars Basic and diluted net loss per ADS were both RMB42.59 or $6.20 Excluding share based compensation expense to non GAAP, accretion on convertible redeemable preferred shares to redemption value and accretion on redeemable non controlling interests to redemption value, adjusted basic and diluted net loss per ADS were both RMB10.35 or RMB1.51 Our balance of cash and cash equivalents, restricted cash and short term investment was RMB9.2 billion or $1,300,000,000 as of September 30, 2018. And now for our business outlook.
For the Q4 of 2018, the Company expects deliveries of the ESA to be in the range of 6,700 to 7,000 vehicles, representing an increase of approximately 105% to 114% from the Q3 of 2018 and our total revenue to be between RMB2.87 billion to RMB2.99 billion or from US418.5 million dollars to US436 million dollars an increase of approximately 95.6 percent to 103.8 percent from the Q3 of 2018. This business outlook reflects the company's current and preliminary view on the current business situation and market condition, which is subject to change. Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q and A session.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. First question comes from the line of Dan Galves of Wolfe Research. Please ask your question.
Hello and thank you for taking my questions. Can you talk a little bit about how order flow has progressed over the last couple of months? Also how do you think things are going in terms of awareness of the product, brand recognition and what are you doing to actively grow awareness?
Okay. Thank you, Dan. Good morning. Great question. I think for order flow, it has remained relatively stable.
So right now, as far as I know your question relates to backlog. Right now, we've delivered over 5,300 vehicles, and we expect to deliver about 2,500 each of the next 2 months, so November December each to reach our 10,000 goal. Every day we're receiving between 5080, sometimes 100 new orders from the RMB5,000 deposit. And our RMB45,000 production order deposit is healthy, but the backlog right now of over 5,000. So order in demand remains solid.
We're not doing that much as far as any kind of direct marketing, but we have opened up more NIO houses. So most of the ones we mentioned earlier of the 12 were opened in the last couple of months. So they're beginning to get a lot more visitors. Our app currently now has 626,000 active users. So we are getting awareness throughout the country.
Plus we have 5,000 cars on the road. So people are being talked about NIO. And William, do you want to?
Yes. I will speak in Chinese and you will help me to translate.
Just like Luis mentioned, our community is growing rapidly and gradually. By the end of October, we have around 620 6,000 users and the DAU is around 170,000. As you can see, the brand awareness is increasing in the market and our delivery status is also going quite smooth. We are now doing the user referral and the scenario based test drives. All these helped us to get more new users.
And we think this is well received among all the users. We think the user referral is a very good approach because one user in Wenzhou actually gave the recommendation to around 10 users and we're quite confident with the word-of-mouth reputation building in the market.
That's great information. Thank you very much. Ahead. Can you talk about some of the most important items in the plan to improve the gross margin from where it was in Q3? Like what are the levers?
What are the mechanisms to improve gross margin?
Go ahead, Nick. Yes.
There are 2 major components in the gross margin. 1 is to build a material or material cost. The other one is a fixed cost. We anticipate improvement on these two areas in Q4 because of a better economy scale and better leverage that we have with our supply chain.
Okay. Thank you very much.
We expect the gross margin to improve. We expect the vehicle margin, with if we hit our deliveries of 7,000 this quarter to turn the vehicle margin should definitely turn positive if we hit the 7,000.
Okay. Great. Thanks very much.
Thank you. Our next question comes from the line of Nick Lai of JPMorgan. Please ask your question.
Yes. Thank you, William and Louise. It's Nick from JPMorgan. Two very quick questions. First, on profitability and profit margin, can you share with us our view that our profit outlook in 2019 and after taking into account 2 major factors, 1 is potential subsidy cut and another one is a cost drop on battery side, expecting battery costs to come down?
Secondly, can you share with us the number of shipment and production? In the Q3, production was 4,200 and shipment was 3,200. Is there any bottleneck that we should be aware? Thanks.
Okay. The bottleneck is really there's not bottleneck other than just getting our logistics system set up correctly. This is new to us. And then also there's as you know, in China, most of the registration systems have a waiting list. So it takes time to get through the registration of the license plates.
The factory is running relatively smoothly. We did during the Golden Week holidays, we did close the we didn't close it, but basically didn't produce cars, but used it to revamp our line so they can produce both ES8s and ES6s and also can custom make just specific orders for customers. What was your earlier question, Nick? I'm sorry, I forgot the first one. Gross margins.
The gross margin subs that we don't know, they'll be set at the end of this year.
Of course, the subsidy in the next year will decrease. The government is still asking for opinions. And we think this is not going to affect our gross margin that much because the sales price includes the subsidy and this will not affect us that much, but this will affect the money paid from the users.
And your earlier question about cost down is I think we expect some reduction in the cost of the battery and also in the BOM and as we get the volume order. So we Nick and team are working very hard to get 5% to 10% reduction on the cost of the vehicle production side. Okay.
Okay. Thank you.
Also on the fixed cost side, because we're going to have the bigger volume next year, Apparently, the fixed cost amortization piece as part of the GM is going to become an improvement as well.
Thank you. Our next question is from the line of Fei Fang of Goldman Sachs. Please ask your question.
Hi, Louis, Nick, William. Congrats on the results. You mentioned that you have modified production line to accommodate ES6 to be launched at year end. Can you maybe talk a little bit more about the roadmap for launching the new model? Do you also try to build a backlog as well?
And also what will be the key marketing strategy? Then I have a follow-up question. Thanks.
The ES6 has already gone offline this May in the pallet production line in our Nanjing Advanced Manufacturing Center. And our plan right now is to do the official launch of the ES6 at the middle of December. So the whole company is now preparing for this launch event. The model of the ES6 will also be make to order and our plan is we will start the delivery of ES6 next year probably around June July.
That's great. Thanks, William. And if possible at all, it will be very helpful to give us a sense of how you would expect gross margin to progress over time for S6? For example, what's the breakeven volume for gross margin for this smaller model? Is it similar to S8 or it will be easier for you to profitable at the gross margin level?
I think the quick answer for that is pretty similar to GSA for ESA. I think on a per unit basis, because of the lower a little bit lower attractive lower price point, on a per unit basis, the margin the contribution margin a little bit lower, but this can be well offset by much larger volume provided by ES6, which basically means fixed cost amortization is going to be less. We anticipate a similar level of that of ES8.
I would like to mention another point that is ES8 and ES6 share the components at a large extent, and we also use many supply chain partners for the ES6 and ES8 at the same time. So it means that ES8 and ES6 volume will significantly improve the gross margin of both of the models.
That's great. Thanks very much.
Thank you.
Thank you, Feng.
Thank you. Our next question is from the line of Vincent of Deutsche Bank. Please ask your question.
Hi. Good evening, William, Louis and Nick. Congratulations on the decent set of results for the Q1 of the listing. I have two questions and let me ask the first question first. Earlier, Louis mentioned that we currently have 12 new house and also 36 service centers already on the ground.
Now just want to get a quick highlight I'm sorry, quick summary or target of what how many new houses or service centers and other kinds of network that we plan to achieve by the end of this year and probably by the end of next year? And what would that be implying to the operating expense trend, which is the SG and A trend going forward? That's my first question.
This year, we will have one additional new house. This will open around December in Dongguan. And next year, we will gradually open more new houses. According to the sales plan, we think currently it will be around 20 to 30 new houses, but we will adjust this plan according to the sales status and the order of the ES6. We will have a detailed plan for the Q1 of the next year.
In terms of the service network, just now we mentioned that we have already delivered our ES8 in over 170 cities. We think it's going to be more for the ES6. And we have the authorized service centers. We think we will evaluate the existing market and adopt the most effective way to deploy our service network. We are quite confident with this efficiency.
Vincent, to answer the last part of your question, the NIO houses will cost about $1,500,000 to set up because these aren't going to be in Beijing and Shanghai. They'll be in a little bit smaller cities, dollars 1,500,000 to $2,000,000 So that's the cost and the operating cost will be about a little bit less than that per city.
Okay. Understood. Now the quick second question is, could you also update us on the percentage of customer who is opting for the battery leasing option and also the battery swapping coverage service? Because some key question that I've been keep getting from some investors that concern if that's if the battery swapping option is getting really, really popular, we may run into a risk of like having a big stock of replacement batteries and that could kind of like put some pressure on our cash usage. Could you give us an update on that?
Thanks.
To answer I'll answer the easy part. The fax figures on a percentage of user to take battery leasing is 73% by the end of Q3. And I don't have the percentage number for the battery swapping, but our estimate is around 6%.
Just like Luis mentioned, we have already got over 10,000 one click power services and most of the power services is delivered by the power truck. And in terms of the situation, we are quite unexpected in terms of the home charger installation because we have a 76% of users who can install the home chargers. And this suggests that average income and the status of the home charging facilities is much better than we expected. This can also help us to reduce the infrastructure investment. This is a holistic solution because we noticed that in some cities users do not need to use their car right away when the car is out of power.
So it means that we can use the power trunk or the faster charging facilities to solve the users' issues. But for other highways, we noticed that users would like to have fast access and they would like to get their cars back very soon. It's quite different from those cities. So it means that this will affect our power swap deployment strategy. In the urban area, we do not need to deploy a lot of power swap stations, but we would like to deploy more power swap stations in the highways, for example, in the Yangsbriefer Delta and the Pearl Delta, we would like to deploy more powerswap stations, but this can also help us to control the cost because in those highways, we just need to rent 3 parking spaces to view the power swap stations, and we do not need to do any kind of civil constructions.
So we think this can help us to control the cost, and we just need to evaluate the growth of our users and the scope of our users to come up with a detailed plan in terms of the powerswap deployment.
Vincent, he monitored this very closely. So as William said, it depends on the demand. As of September 30, we're in 16 cities with Power Swap with a little bit over 30 swap stations, But it depends on current need. We were pleasantly surprised that over 70% of the people are installing home chargers, which is the best solution, right? And also, the power trucks are quite heavily used.
So if that meets their needs, then that's fine. So we basically want to deliver the best service by monitoring consumer and our users' demand and feedback. So we won't overbuild, we won't but we want to make sure we meet their charging needs. Yes. Okay.
Thank you. Okay.
Fully understood. Thank you.
Thank you. Next question is from Paul Gong of UBS. Please ask your question.
Hi, good evening management. I have two questions. The first one is still regarding the orders. Did I recall it's right that at this moment, you have about 5,000 active backlog after 5,000 of 3 100 of delivery. Does that mean some earlier orders who has paid the RMB 5,000 have actually canceled the order?
Is that the right understanding? And also given right now the order intake rate is roughly 50 to 80 per day, does that mean the intake and the deliveries in the next 2 months is roughly on par to each other? Is that right on spending?
Yes. I mean, it depends on, obviously, how many people do cancel. So you're right, Paul, that some of the people, the original people who put in the RMB 5,000 deposit have canceled because they didn't want to wait so long. As you recall, our ES8 was delayed by several months. And so some of these orders date back to last December, early January.
So they were we do have a number of cancellations. But as far as the order backlog, we delivered over 5,300 cars and the 45,000 production order deposit rate is over 5,500. So we're pretty comfortable that we'll be able to deliver between 10000, 11000 cars in the next couple of months. Our facility is producing very well. So that's the issue.
And then every day we're receiving between 5080 or so new orders for the 5,000 refundable deposit. But that one is subject to cancellation, obviously. So if
I place an order today, I expect to receive the card within the next 2 months. Is that the right expectation?
Not currently, because the founders additions need to be delivered first, the first 10,000. So you can probably get it within 3 months, 3 or 4 months at most. Okay. But once we clear the founders' editions, the first 8000 or 9000 cars, then we'll begin to speed it up. That's why we put in the new equipment.
So we can produce cars as an order by order basis in the Hefei Shrine. It's a made to order basis.
Yes, sure. My second question is regarding the Founders edition and also the relatively cheaper ones. Do you expect the same margin derived from this founder's addition and subsequent models? Or do you expect similar profit contribution per unit? How do we think about these different margins and all these I think
the newer cars, the orders after the founders edition should have slightly higher margin because the founders editions were given a special, right? They're sold for RMB448,000 even though they're really equivalent to RMB548,000 with full options. So the other ones are made to order. The ones who pick the options will have slightly higher gross margin.
I think one thing I want to add is actually the margin for the base model plus option versus the full load fully loaded founders version, their margins are quite similar. But obviously, it's a function of the option take rate. Maybe for the base model plus option, there are going to be more users to take our high end option like NOMI. Maybe that's going margins to our product for sure. But I think we will see the incoming orders from those new users to order base model plus option come in, we're going to see the data.
That's going to become more clear to us.
So at this moment, if we expect similar margins for the base plus options as a blended average versus the founders addition that is about the similar margin. That's right?
Similar. I think it's maybe slightly lower. But again, we need to see the incoming order and then we can perform a proper analysis and we will be in a better position to tell.
Sure. Thank you so much. That's quite helpful.
Thank As there are no further questions now, I'd like to turn
the call back over to
the company for closing remarks.
Thank you once again for joining us today for the conference call. If you have any further questions, please feel free to contact our IR team and also TPG, the company's IR partner. Thank you very much.