Earnings call: XPeng reports a gross margin growth of 12.9%

XPeng Inc (NYSE:XPEV). (XPeng), the electric vehicle manufacturer, has unveiled its first-quarter earnings for 2024, highlighting a significant year-over-year (YoY) increase in deliveries and gross margins. The company disclosed a 20% increase in Smart EV deliveries totaling 21,821 vehicles.

Gross margin saw a substantial rise to 12.9%, a notable improvement from the previous year's same quarter. XPeng's strategic investments in research and development, particularly in Smart EV platforms and Advanced Driver-Assistance Systems (ADAS), have contributed to these positive financial results. Looking ahead, XPeng anticipates a delivery volume of 29,000 to 32,000 units and total revenue of RMB7.5 billion to RMB8.3 billion for the second quarter of 2024.

Key Takeaways

• XPeng delivered 21,821 Smart EVs in Q1 2024, a 20% YoY increase.
• Gross margin doubled to 12.9% compared to the same quarter last year.
• The company introduced its AI-powered in-car operating system, XOS 5.1.0.
• XPeng is expanding its sales network globally, including partnerships in Europe, Southeast Asia, the Middle East, and Australia.
• Strategic partnership with the Volkswagen (ETR:VOWG_p) Group is deepening, with joint development projects.
• Q2 2024 delivery volume is projected to be between 29,000 to 32,000 units.
• Q2 2024 revenue is expected to be between RMB7.5 billion and RMB8.3 billion.
• The company aims to achieve Level 4 vehicle autonomy by next year.

Company Outlook

• XPeng plans to introduce new models each quarter, covering major price segments until 2026.
• The right-hand drive G6 model is set to launch in Europe in Q3 2024.
• The company is actively conducting Highway NGP tests in overseas markets.
• XPeng's revenue from E/E architecture is expected to be recognized starting the second half of this year.

Bearish Highlights

• There was a quarter-over-quarter decrease in total revenues and vehicle sales revenues for Q1 2024.
• The company anticipates higher R&D expenses due to the provision of XNGP functions in overseas markets.

Bullish Highlights

• XPeng's strategic investments in R&D are yielding financial benefits.
• The company is experiencing robust growth in service revenues.
• XPeng's technological leadership is expected to drive new car sales and monetization opportunities.

Misses

• There are challenges in the transition from PHEVs to BEVs due to technology and global regulations.
• XPeng is cautious about the market shift and is closely monitoring the situation.

Q&A Highlights

• XPeng focuses on the 2C market with limited penetration into the 2B market.
• The MONA series aims to combine beauty with profitability and autonomous driving capabilities.
• XPeng is likely to focus on BEVs for future car models.
• The partnership with DiDi is expected to impact the 2B segment positively.
• XPeng is open to exploring partnerships similar to the one with Volkswagen with other players.

XPeng's CEO, Xiaopeng He, emphasized the company's commitment to building aesthetically pleasing and profitable vehicles with autonomous driving capabilities. The international expansion strategy is on track, with the company entering new markets and planning to increase its global delivery numbers. XPeng's President and Vice Chairman, Brian Gu, highlighted the potential for autonomous functions in the 2C segment and the impact of the DiDi partnership on the 2B segment. CFO Charles Zhang underscored the strategic collaboration with Volkswagen and openness to similar partnerships. XPeng's focus on technological innovation and global expansion sets a promising trajectory for the company's future endeavors.

InvestingPro Insights

XPeng's first-quarter earnings for 2024 have demonstrated strong performance in terms of vehicle deliveries and gross margins, indicating a robust start to the year. To provide a more comprehensive financial picture, let's delve into some key metrics from InvestingPro and tips that could offer additional context to the company's current financial health and market positioning.

InvestingPro Data indicates a market capitalization of approximately $7.81 billion, reflecting the company's substantial size in the electric vehicle sector. Despite a challenging environment, XPeng's revenue has grown by 14.23% over the last twelve months as of Q4 2023, showcasing its ability to expand amidst industry headwinds. The gross profit margin stands at a slim 1.74%, which may be an area for the company to focus on improving.

Notably, InvestingPro Tips highlight that XPeng holds more cash than debt on its balance sheet, providing it with a solid liquidity position to navigate market uncertainties and invest in future growth opportunities. Analysts anticipate sales growth in the current year, which aligns with the company's own projections for increased delivery volumes and revenues in the second quarter of 2024.

It's worth mentioning that XPeng's stock price movements have been quite volatile, as noted by InvestingPro Tips. This could be a factor for potential investors to consider, especially those with a lower tolerance for risk.

InvestingPro offers additional insights for those interested in a deeper analysis of XPeng's financials and market performance. With a total of 11 InvestingPro Tips available for XPeng, users can gain a more nuanced understanding of the company's strengths and challenges.

For readers seeking to leverage these insights, InvestingPro invites you to explore its platform using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. This offer could be particularly beneficial for those tracking the dynamic electric vehicle market and XPeng's role within it.

Full transcript - Xpeng Inc (XPEV) Q1 2024:

Operator: Hello, ladies and gentlemen, thank you for standing by for the First Quarter 2024 Earnings Conference Call for XPeng Inc. At this time, all participants are in listen-only mode. After management's remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Alex Xie, Head of Investor Relations of the company. Please go ahead, Alex.

Alex Xie: Thank you. Hello, everyone, and welcome to XPeng's first quarter 2024 earnings conference call. Our financial and operating results were issued via newswire services earlier today and available online. You can also view the earnings press release by visiting the IR section of our website at ir.xiaopeng.com. Participants on today's call from our management team will include our Co-Founder, Chairman, and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Corporate Finance and Investments, Mr. Charles Zhang; Vice President of Finance and Accounting, Mr. James Wu; and myself. Management will begin with prepared remarks and the call will conclude with a Q&A session. A webcast replay of this conference call will be available on the IR section of our website. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed with the US 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 XPeng's earnings press release and this conference call includes a disclosure of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. XPeng's earnings press release contains a reconciliation of unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to our Co-Founder, Chairman, and CEO, Mr. He Xiaopeng. Please go ahead.

Xiaopeng He: [Foreign Language] Good evening, everyone. In the first quarter of 2024, Xpeng announced the delivery of 21,821 Smart EVs, marking a 20% year-over-year increase. Notwithstanding significant market competition, our first quarter gross margin expanded substantially to 12.9%, doubling from the previous quarter with an increase of 6.7 percentage points. This development underscores Xpeng's innovative approach to enhancing profitability and international market potential through the provision of smart technologies based on its Smart EV business. This has created a completely new unique model. Over the past decade, since its inception, XPeng has consistently made a robust investment in R&D for Smart EV platforms, Electrical/Electronic Architecture and Advanced Driver Assistance Systems or ADAS for short. These strategic investments are now yielding positive financial outcomes. As artificial intelligence continues to redefine the auto industry in China and globally, XPeng has been at the forefront of exporting its in-house developed smart technologies, resulting in significant recurring revenue and profits. This achievement is poised to profoundly impact the company's profitability model instilling confidence in paving the way for further technical advancements as XPeng continues to lead the technology transformation within the automotive sector. [Foreign Language] At the end of Q1, we had RMB41.4 billion in cash with our significantly improved gross margin. This healthy cash position allows us to concentrate more on strategic initiatives for the future. Our strategic transformation is not solely focused on boosting sales volume as the past, we are also dedicated to achieving excellence in quality, efficiency and overall enhancement of the company's competitiveness. By leveraging our strengths and addressing any weaknesses, our goal is to become well-rounded and pursue larger-scale end profits in the long run. I am very delighted to say that we have been able to start this thinking and have this vision much earlier on than our peers. Moving forward, we will vigorously drive this transformation whilst accelerating crucial talent recruitment and improving organizational effectiveness and strategic execution. We have confidence that with our hyper-integrated comprehensive intelligence technology platform, XPeng is well positioned to efficiently launch highly competitive models worldwide and lead the widespread adoption of AI-powered smart cars. [Foreign Language] Since the beginning of 2024, XPeng has been actively recruiting top talents in others R&D, brand marketing, style design and other key areas. We will soon introduce them to you. Our goal is to rapidly elevate our marketing, customer experience and design capabilities to industry's most cutting-edge levels. This will enable us to effectively translate our advanced technologies into compelling product experiences and utilize the marketing strategies to better communicate the value of our technology to customers. With our weaknesses properly addressed, our industry-leading AI capabilities, comprehensive R&D framework supporting rapid global scalability and customer-oriented product design will better serve as the competitive edges that set us apart and drive our success. [Foreign Language] During the first quarter, the X9, our large seven-seater flagship model, emerged as a top seller in the pure electric NPV segment as well as the pure electric three-row model segment following its market launch. The success of the X9 firmly establishes product innovations and technological advancements as our most effective competitive edges. Moving forward, we will confidently build on this success to enrich our premium product portfolio. Our aim is to provide family customers with the most advanced Smart EV technologies in large vehicles, delivering styling, space, comfort and opulence akin to luxury cars priced above RMB1 million. [Foreign Language] In the third quarter of this year, we will embark on an extensive product launch cycle, introducing a number of new models within the next three years. These models will cover major price segments ranging from RMB100,000 to RMB400,000. Like the X9, our new models will come with disruptive innovations to target new segments. All products will feature cutting-edge ADAS technology and with the various product theories will cater to diverse customer needs in pricing and design, both home and abroad. We are committed to establishing a Volkswagen-like super brand in the EV space with a global market presence and a wide-ranging product portfolio that caters to broad customer groups, ultimately bringing AI-powered vehicles into the mainstream. [Foreign Language] Our new A-class electric sedan, the first model of our MONA series product will debut in June and officially launch and commence mass delivery in the third quarter of this year. This groundbreaking product boasts exquisite styling, advanced intelligence and highly competitive cost structure, making it a potential favorite among younger consumer groups within the RMB200,000 price range. We are confident that it will set the standard in the A-class BEV market. Over the next two years, we will introduce several additional products based on the A-class platform. In addition, we are determined to target the RMB100,000 to RMB200,000 price segment where the highest sales volume is with our high-level ADAS. [Foreign Language] In the upcoming fourth quarter, we will be launching a new XPeng branded B-class battery electric sedan. We have successfully achieved a 25% cost reduction through technological advancements for the first time with this model. We expected to become a best-selling B-class BEV model in the second half of this year. With the incremental volume from this new B-class model and MONA, we are confident of substantial year-over-year growth in monthly delivery volume in the fourth quarter. [Foreign Language] On AI Day, May 20th, we began the full-scale rollout of our AI-powered in-car operating system XOS 5.1.0 or AI Tianji OS. This cutting-edge, large model built system seamlessly integrates AI technology into smart cockpits and ADAS. XOS 5.1.0 is available to all owners of our major models, solidifying XPeng's position at the forefront of non-HD map and end-to-end AI model applications in China and in China's auto industry, which means our technology architecture is one or two generations ahead of our competitors without using any of these HD maps and which also means that by third quarter of this year, XNGP not only would be able to roll it out in all the national roads, and we would be able to drive on all the roads around China and from end-to-end to half this in all the cars, which means that going forward in terms of autonomous driving capabilities in each quarter, we would be able to see exponential times of improvement. And this would mean that in terms of the old way of human-made method of rules and coding method, this will be revised into the training of models and based on the algorithms, we aim to have XNGP accessible on all the roads nationwide by third of the quarter, as I have said. And our end-to-end AI model will enable us to rapidly advance our software and AI technology on a monthly basis. And we predict that by the end of 2025, we will be able to elevate the city road ADAS experience to match of that of the current highway NGP, which means only one manual takeover per hundreds of kilometers of driving. [Foreign Language] Our XNGP is expected to achieve the driving capabilities that are equal to or surpass those of human drivers in complex scenarios. This will soon be possible as our ADAS technology architecture is powered by advanced end-to-end AI model with extensive training using massive amounts of high-quality data, underscoring our competitive edge in data. With our B-class sedan model commencing delivery in the second half of this year, broader customers base will soon have access to AI-powered ADAS features. The widespread adoption of a high-level ADAS will accelerate and rapidly scale up our XNGP fleet, which in turn will generate a tremendous amount of data to expedite AI model training and iterations. Large AI models will bring our owners an unprecedented AI-powered driving experience, boosting the penetration of Smart EVs equipped with high-level ADAS features. [Foreign Language] Regarding the international market, this year, we will expedite our expansion into drive sales and profit growth. We plan to expand our overseas sales network from Nordic countries to over 20 countries worldwide. In the first half of 2024, we established partnerships with the leading auto dealership groups in Western Europe, Southeast Asia, the Middle East, and Australia. New sales stores have gradually opened under these partnerships. In early April, we shipped nearly 1,000 G9s, worth over RMB500 million to Europe. In May, we announced the selling price and started accepting pre-orders for the G6 model with a left-hand drive in Europe. We plan to introduce the right-hand drive G6 in the third quarter. Highway NGP tests in the overseas markets are progressing well too. Our product strengths, such as ultra-fast charging and smart technologies, are highly valued by overseas dealers and consumers. XPeng is confidently positioned as a mid-to-high-end tech-savvy brand in international markets, offering superior product experiences and eco-friendly Smart EV models. [Foreign Language] Our strategic partnership with the Volkswagen Group is rapidly deepening and expanding. Within just one year of establishing our partnership, on April 17, we announced our third strategic cooperation project with Volkswagen. This project involves the joint development of industry-leading E/E architecture for Volkswagen's EV platform designed for the Chinese market. This platform, which will be applied to China-produced Volkswagen branded EV models starting from 2026, will integrate XPeng's latest generation of EV architecture based on centralized computing and domain controller technologies. We are confident in our ability to leverage more mutually beneficial cooperation opportunities with Volkswagen and create significant strategic synergies as we lead the global automobile industry's transition into the AI-powered driving era. Since the first quarter of 2024, our platform and software services have become a significant driver of our earnings. This clearly showcases XPeng's innovative and unique business model, setting us apart from the traditional auto companies. Our cutting-edge smart technologies not only enhance monetization through XPeng's branded EV sales, but also through partnership with a world-leading auto OEM. This will result in an expanded market presence and increased financial returns for our company. [Foreign Language] I would like to reiterate, in this ultra-competitive market, we should not only have our eyes on the scale of the sales, rather to focus on becoming a well-rounded player in the market. Despite the headwinds in the auto market in the second quarter, we have already observed a positive impact from our ongoing organizational and transformative changes. That said, we anticipate that the total delivery volume will range between 29,000 and 32,000 units in the second quarter of 2024, reflecting a year-over-year increase of 25% to 37.9% and a quarter-over-quarter increase of 32.9% to 46.6%. Furthermore, we project that our second quarter total revenue will fall within the range of RMB7.5 billion to RMB8.3 billion, representing a year-over-year increase of 48.1% to 63.9%. We anticipate witnessing more transformation driven results in the latter half of this year. Starting in October, we will be poised to enter a fast-track growth phase, confident in achieving significant breakthroughs in sales volume, margins, cash flow and AI-powered ADAS system, and this is for the long run into the future as well. [Foreign Language] Thank you, everyone, again. With that, I will now turn the call over to our VP of Finance, Mr. James Wu, to discuss our financial performance for the first quarter of 2024.

James Wu: Thank you, Xiaopeng. Now let me provide a brief overview of our financial results for the first quarter of 2024. I'll reference RMB only in my discussion today unless otherwise stated. Our total revenues were RMB6.55 billion for the first quarter of 2024, an increase of 62.3% year-over-year and a decrease of 49.8% quarter-over-quarter. Revenues from vehicle sales were RMB5.54 billion for the first quarter of 2024, representing an increase of 57.8% year-over-year and a decrease of 54.7% quarter-over-quarter. The year-over-year increase was mainly attributable to higher deliveries, particularly the model X9, in the first quarter of 2024. The quarter-over-quarter decrease was mainly attributable to lower deliveries of the G6 and the 2024 G9, compounded by seasonal impact, which is partially offset by contribution of the X9. Revenues from services and others were RMB1 billion for the first quarter of 2024, representing an increase of 93.1% year-over-year and an increase of 22.1% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were primarily attributable to the increases of revenue from technical research and development service related to the platform and software strategic technical collaboration with the Volkswagen Group. Gross margin was 12.9% for the first quarter of 2024 compared with 1.7% for the same period of 2023 and 6.2% for the fourth quarter of 2023. Vehicle margin was 5.5% for the first quarter of 2024, compared with negative 2.5% for the same period of 2023 and 4.1% for the fourth quarter of 2023. The year-over-year and quarter-over-quarter increases were primarily attributable to the cost reduction and the improvement in product mix of models partially offset by the inventory provision and losses on purchase commitments related to the model P5, with a negative impact of 3.2 percentage points on vehicle margin for this quarter as management lowered the P5 forecasted sales due to the expected stronger market demands for the upcoming new vehicle models. R&D expenses were RMB1.35 billion for the first quarter of 2024, representing an increase of 4.2% or year-over-year and an increase of 3.3% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly in line with the timing and progress of new vehicle programs SG&A expenses were RMB1.39 billion for the first quarter of 2024, which is flat on a year-over-year basis and a decrease of 28.3% quarter-over-quarter. The quarter-over-quarter decrease was mainly due to lower commissions to the franchise stores and lower marketing, promotional and advertising expenses. Fair value gain on derivative liability relating to the contingent consideration was RMB0.18 billion for the first quarter of 2024 compared with RMB0.03 billion for the first quarter of 2023. This non-cash gain was resulted from the fair value change of the contingent consideration related to the acquisition of DiDi's smart auto business. As a result of the foregoing, loss from operations was RMB1.65 billion for the first quarter of 2024 compared with RMB2.59 billion for the same period of 2023 and RMB2.05 billion for the fourth quarter of 2023. Net loss was RMB1.37 billion for the first quarter of 2024 compared with RMB2.34 billion for the same period of 2023 and RMB1.35 billion for the fourth quarter of 2023. As of March 31st, 2024, our company had cash and cash equivalents, restricted cash, short-term investments and time deposits in total of RMB41.4 billion. To be mindful of the length of our earnings call, I would encourage listeners to refer to our earnings press release for more details on our first quarter 2024 financial results. This concludes our prepared remarks. We'll now open the line to questions. Operator, please go ahead.

Operator: [Operator Instructions] Your first question comes from Tim Hsiao with Morgan Stanley.

Tim Hsiao: [Foreign Language] So my first question is about revenue contribution from the collaboration with Volkswagen. The management roughly quantified a contribution of the service revenue from Volkswagen in first quarters and we know that it's recurring. So will it continue climbing quarter-over-quarter in the following months? Is there any chance that the revenue from the new agreements related to the E/E architectures could also come through within the year? So that's my first question. Thank you.

Charles Zhang: Hi, Tim. This is Charles. So the Platform and Software collaboration revenue from Volkswagen has been recorded in the service and other revenue in Q1. As you know that, it is recurring in nature. So I think that going forward every quarter, we will be able to book such platform software technical services revenue. So in Q1, we booked multi-hundred million RMB platform software services revenue. And I think we believe that in the subsequent quarters, such revenue will be more than what we booked in Q1. And -- so obviously, I think that given the nature of the platform and the software revenue, it is very high margin business for us. And we believe that with our vehicle sales business and also the platform and software technical services revenue, our company-level GP margin can be sustainable at the low-to-mid-teens GP margin -- percentage GP margin. And therefore, I think that we -- as Xiaopeng pointed out, that we created a very unique business model in auto industry. In addition to that and we will continue to deliver our cost reductions through technology and also the supply chain, and to further improve our vehicle GP margin. To address your question regarding the revenue from the E/E architecture, and we expect that the revenue from the E/E architecture will start to be recognized from the second half this year. Thank you.

Tim Hsiao: Got it. Thank you very much, Charles. [Foreign Language] So my second question is about autonomous driving. Because we noticed that expense to leverage end-to-end large model to upgrade XNGP by third quarter of this year to cover basically overalls in China and with achieve a Level 4 vehicle autonomy next year. So to achieve that target, should we expect XPeng to meaningfully increase R&D spending during the period? And when do you think such a technological leadership can translate into upside to new car sales or potential monetization opportunity. That's my second question. Thank you.

Xiaopeng He: [Foreign Language] Thank you very much for your question. And before I answer your question, there's one correction to make, which is that we hope to achieve the ability of L4 next year and, however, we know that being able to actually implement that would also need to have the hardware as well as the rules and the regulations to catch up. So that's point one. And point two, with respect to the large models. And we know that AI large models is going to have a huge impact on all the companies involved. And therefore, as we say, in the past, in terms of the rules and regulations people have and those need to change, and the large models will actually generate these new rules. And thirdly, we don't actually need to increase our manpower at the moment and we have about the same amount of people working, continue to work on globalization. In terms of how fast it's going to take or what the speed is going to be like, I would say that it's hard to say, it's hard to quantify in the past when we relied on human power, and one would be able to say how many people we would need, how much time we would need. However, with a large model, and it's about the scale, the algorithm and the speed, etcetera. And my original thinking was that it's going to be the latter half of 2025 and now with the fast development of technology and AI, and I think that it would be earlier than 2025 or possibly next year. So we wait and see.

Tim Hsiao: Okay.

Operator: Your next question comes from Ming Lee with Bank of America.

Ming Lee: [Foreign Language] So my first question is related to more details of your new product pipeline. So in the second half, you will have two products. The first product is related to MONA project. So could you give more details regarding the launch timing for the 2B version and also the 2C version? And for the next year, the product pipeline, could you also give some guidance regarding the numbers of your MONA brand product and also your Xpeng's brand product?

Xiaopeng He: [Foreign Language] Thank you for your question. And first of all, in terms of all our car models and the mainstream offer that we bring to the market would still be for the 2C market. And the 2B market is not really our focus, including MONA. And for MONA, there is a brand and as we say, because of that what we are looking at is building this to the most beautiful and aesthetic cars out there in the market. Therefore, we do not really see this having too much of a big penetration rate into the 2B market. And secondly, starting from Q3 this year, following onwards, and in each different quarters, we will have different car models being launched in the market. And some quarters, perhaps there will be a few more different models, and in certain quarters, perhaps this will be simply an updated version of an existing model or a mixed version model, so to speak. And starting from 2024 to 2026, we will continue to roll out different car models into the market. And in terms of the specifics, I don't think that I'm in a position to release further details to the market at the moment. And our plans, you have already heard in my previous presentation. [Foreign Language] So the second part of my answer to your question, and for the MONA series, and actually going forward into next month, we will have more to share with the market in terms of our thinking about this series. And as I said before, for MONA series, we are looking at building a car that is the most beautiful and the most aesthetic on the external. And in addition, we also hope that this is a car that will bring the company a good amount of profit, and it will also cover various grades of intelligent or autonomous driving. And we hope that in the past, for autonomous driving, it was mainly for the cars in the price range of above RMB200,000. And with MONA series, we hope to bring the autonomous driving into the car with a price range of within RMB200,000.

Ming Lee: [Foreign Language] So last week XPeng brand officially entered Hong Kong market. Also in the next few months, XPeng will enter more and more countries, especially South Asia. So right now, based on your product launch in overseas market and also the progress of entering a new markets, right now, are you ahead of your original target, which you mentioned that the total volumes will be a few times more than 10,000 units. And will you incur more R&D expense because you will also provide XNGP functions in overseas market?

Brian Gu: Hey, Ming. it's Brian. Let me address your question. First of all, regarding our overseas plan, I would say, this year we are, as you can see, accelerating our pace of international development. We are targeting to roll out to more than 20 countries with our industry leading technology advanced EVs. The exact number of markets obviously also correlates to the type of models that we can make available to these markets. For example, right now in Europe, we're already selling the G9 and P7. We are launching the left-hand driving G6 this month will hopefully deliver very soon in other markets, for example, in Southeast Asia. And as you point out, Hong Kong, we are launching the right-hand driving G6, I would say, probably in a couple of months and also will probably be followed with the right-hand driving X9 to be delivered probably by the end of this year or early next year. So as you can see that the whole international expansion is on track. We think the original guidance we gave in terms of number, in terms of tens of thousands as well as this quarter, we would like to achieve more than 10% of our overall delivery number is still valid. So those are the right guidances we want to give on international expansion. And regarding the technical XNGP-related smart driving technology, we are actively now testing a number of overseas markets currently also working with regulatory bodies to make sure that this compliance with and also developing regulations in these markets. The development is actually not going to make material increase in our overall R&D. First of all, I think, we are still very targeted in the number of markets that we want to bring the subsets of our exchange GP capabilities. But again, also just echo what Xiaopeng just mentioned, our capability of development also has been increasing now with the help of AI and large model capabilities and also removing the need for the map as well as using the large language model to accelerate the development in different scenarios, also will benefit our development overseas. So in all, I think we will look forward to seeing some of these capability being made available by later this year as well as early next year in some of the oversea markets. And also at the same time, we don't see material increases of R&D expense because of that effort.

Ming Lee: Thank you, Brian.

Operator: Your next question comes from Bin Wang with Deutsche Bank.

Bin Wang: [Foreign Language] My first question is about number four quarter this year. You're actually very confident about the number four quarter this year. If you just say that the volume will have very high growth, if you assume there will be say 50% growth. And last year in number four quarter monthly volume will be 20k. So if it was just 30k, what's the breakdown between the existing products on upcoming MONA and F57 large sales today. Meanwhile, can you comment about the margin because we see three positive for the margin. Number one is the cost-reduction. Second is the export, which generally have a higher margin. And third one, additional EEA income from Volkswagen. So is that gross margin close to 15%? Thank you.

Brian Gu: Hey, Bin, it's Brian. Let me just respond, first of all, in the first fourth quarter of this year, you will see that our MONA product will be in full delivery and also we'll be launching the delivery of our -- the B-segment sedan. So those two products will contribute very meaningfully into the monthly delivery in the fourth quarter, but at a very different -- at different stages, as you can tell, because the starting of the delivery is different. So we are very excited about the prospect of both products in terms of generating significant volume. I would say, assuming both models are in full delivery month. I think the monthly numbers we anticipate significantly increased over last year's comparable monthly delivery numbers achievable. That's what we believe. Again, I'm not going to give you the exact number as well as breakdown, but that's how we envision the delivery number growth. But also what I want to emphasize is that, as you just heard that this -- these two products is only the beginning of our super product cycle that will last probably for the next 18 months to 24 months. And also because the early next year and we will also have additional products as well as updated models to be launched in the subsequent quarters. We want to make sure that a growth profile maintains stable as well as under control. So we actually want to make sure the additional volume that we want to achieve on a monthly basis is growing in a more stable and sequential manner rather than episodical big bursts like some other model launches you've seen. So I think that's kind of probably lasts until the remaining of next year, given the other models, we'll later -- hopefully will give you a prelude in the next few quarters of earnings. In terms of margin. I would like to comment first of all, I would say, the MONA model, even though it's an A-class sort of sedan, we are still anticipating healthy positive margin contribution from this model, and also in healthy quantities. For the B-segment sedan, we think it's going to be higher margin than probably our current models, except the X9. So both will contribute, I would say, materially to the product -- profit mix -- gross profit mix. And also, as Charles mentioned, the contribution from Volkswagen will continue to become a steady recurring income. At the same time, we anticipate additional contribution from EEA collaboration. So with all these contributions, as well as our sort of view currently on the potential gross profit margin for the new products, we are maintaining healthy mid to -- low-to-mid teen margin gross profit for our overall business by the end of this year.

Bin Wang: Okay. [Foreign Language] And the second question is that we do see our peers actually launch the EIV version and we won't have a big increase. What's our plan for our powertrain? We also launched an EIV version for the product? Thank you.

Xiaopeng He: [Foreign Language] Thank you for your question. And generally speaking, we would not be very willing to disclose any information in relation to our product designs because it is simply still in the planning stage. And going forward, this is something that we would be looking at being implemented in our flying cars. And in terms of the BEV, and I can say that, so for the flying party and the auto part, it will be BEV. And so for the further details, it is better that we wait until the product actually becomes more concrete when we have more detailed plans and more ready to share with the market. Thank you. [Foreign Language] So please allow me just to supplement a few points. And my first point is that, yes, indeed, in the past one year and in the next year to come, we will see that there is quite a lot of demand coming from the market, from the consumers for PHEVs. However, you will see that a lot of these consumers, they will realize that despite having a PHEV and out of a year, in terms of the times that they actually go to the petrol station and to get it filled up, it's very little, only just a few times. And by having this experience, more and more consumers actually have more confidence in BEVs and pure electric vehicles so to speak. And at the moment, we are also working hard on the construction and the building of our Ultra X5 series product. And I do believe that for consumers, having experienced PHEVs and for the next car model and it is very likely that they will go for BEVs. [Foreign Language] In addition in terms of the technology and the movement from these cars and into BEVs, actually it's quite a jump into -- in terms of the technology. And you can also see if we look at it globally and for instance, in certain countries in Asia versus certain countries in Europe or in elsewhere, and sometimes certain parts could only run on a certain path or certain roads, et cetera. And we do think that it is not as simple, it is not as straightforward as what we hear from the market. And we do think that we would need to be very cautious and we need to maintain very vigilant. And for XP (NASDAQ:XP), obviously, we will also continue to watch the space very carefully.

Operator: Your next question comes from Paul Gong with UBS.

Paul Gong: [Foreign Language] So my first question is regarding the end-to-end big model. There has been some feedback in the industry saying that it involves uncertainty in terms of the decision-making, and also it makes it more difficult to figure out why the decision was made in that way. And also the feedback is when the model becomes natural, it kind of slows down in terms of upgrading. So how does XPeng think about this issue? This is my first question.

Xiaopeng He: [Foreign Language] Thank you very much for your question. Yes, indeed. In the very beginning, we did worry about it. And however, with the advancement of the technology, we can now see the huge value that end-to-end large models can bring. And of course, with the technologies there are always uncertainties. And what we need to do is to make sure that we are able to keep an eye and ensuring the safety of the black box, of the control of the vehicle, et cetera, and as well as the end-to-end capability. And secondly, we are also building a large-size analog model and to help us to carry out the various pilots and the trials. [Foreign Language] With respect to your second question, I am not entirely sure if I have understood what you are trying to get, but I will try my best to answer. And I would say that from an autonomous driving model versus a large language model, these two are actually different. And looking at it from transformers and this is not open source. And if we do have our own model, actually we will not need to use such amount of data as what the industry requires was set to be and for instance, 30B, or whatever and we would be able once identifying the appropriate model and we would be able to work on that basis and to move forward. Thank you.

Paul Gong: [Foreign Language] And so my second question is regarding the distribution channel. So far I can see that the stores are mostly in some prime location but with relatively limited area as XPeng gradually launch new models and expand the portfolio, including MONA, do you see the need to expand the average size of the stores or the area of the stores even at the cost of, say, shifting out from the most prime location?

Xiaopeng He: [Foreign Language] Thank you for your question. And first of all, we have always continued to optimize our channels and for instance, we are looking at going into the lower-tier cities and to try and cover as many lower-tier cities as possible. In the past, we have mainly focused on the high-end and the mid-end tier cities. And secondly, we do believe that four asset stores, these comprehensive stores would be able to provide better support of services. And thirdly, even with the new stores that we open up in the malls, and again, we are not going to open them up with a huge area of floor area because we do believe that even with an appropriate amount of space available for these stores in the mall and the conversion rate of successful order is actually very high. [Foreign Language] And in addition in terms of our plans for store openings in Q4 last year, and we can see that it has been well recovered in Q1 and Q2 this year. And we predict that by Q3 this year, we will have about 600 stores.

Paul Gong: Thank you very much. That's quite helpful. [Foreign Language]

Operator: Your next question comes from Tina Hou with Goldman Sachs.

Tina Hou: [Foreign Language] Let me just translate. So in terms of our MONA brand so for the 2C customers, what are some of the competing models in the market? And then also for the customers with this price segment, they might have less demand in terms of the smart functions and higher demand for like the pricing. So aside from, I think, the vehicle design, what are some of our key competitive advantages in the segment? Also, do we have any sales volume target for the 2B part of MONA distribution? Thank you.

Xiaopeng He: [Foreign Language] Thank you very much for your question. And actually, this question is better asked in our MONA products launch event. Anyway, I'll make a few comments. And first of all, for this MONA product as introduced and presented earlier, and this is a product with very high beauty as well as external aesthetics. And in addition, it also comes with a cheaper price. And we actually have a model which is what we call the US$10,000 rule, which means that every time the price goes down by US$10,000 and you will see that the sales of that product will actually go up by one time or actually go up by two times. And this model has been validated in our old experience with our other vehicles of a price range above 200,000. And now, if we would be able to implement this and to give a bit of a price discount for MONA series and in terms of the specific price reduction we will talk about that in our MONA product launch. And I believe the scale that we are looking at is actually huge. And I would say it's about two times to four times of the present level. In the past, for 100,000 to 200,000 price range, nobody was able to provide the consumers with a car that is not only beautiful, has a good space, but also a smart car with very good technology. After four years of hard work and R&D and so much investment into this, finally, XP has been able to come up with the products in MONA that is able to meet all the above demands. In other words, if you look at our competitors at the moment, yes, some of them say that they can sell 20,000 to 50,000 units of cars per month. And however, I can assure you that for our MONA product, and you would see a huge difference between our car versus the competitors' cars, because not only that we are able to provide the beauty, to provide the space, but also to provide this range of price with a good technology and good smart driving functionalities that is -- this need that was not able to be met in the past. [Foreign Language] So to answer your second question, and with respect to smart driving or autonomous driving, and I would say that it is likely, yes, some of these consumers they may not need very highly advanced functions. And we will possibly looking at -- be looking at a strategy that is stratifying and giving out different levels of ADAS to the consumers. And I would actually like to quote the Internet thinking that when I was establishing my business, and something that was quite popular in the industry back in those days, and what it says is that for the mobile phone users, actually they are not the high-end generators of the data. It is rather that the people who are making fewer phone calls are the high-end data generators. So to adopt that analogy with that thinking, and if we look at the RMB100,000 to RMB200,000 price range, and this is actually the group of consumers that would need more of the autonomous driving functions. It's simply that in the past, this was out of their price range and they were not able to afford this. Once they are able to afford this, they would be all over the autonomous driving cars in this price range. And I do believe that next year, in 2025, we will see this coming into a reality.

Brian Gu: So Tina, also, this is Brian, let me just comment on your question on the 2B segment. What we see in this price segment of product, the successful 2C product will also will be used quite prevalently in 2B channels as well. So I think a success of this product, even though not targeted at the 2B segment, but still will have significant obviously use cases applied to 2B mobility used. And also with our partnership and collaboration with DiDi, I think that multipurpose sort of use case will be very, very prevalent in our user base for MONA.

Tina Hou: [Foreign Language] So just to quickly follow up, so for the 2B part, should we still expect 100,000 units in the first 13 months and then 100,000 units in the next 12 months? Is this still a reasonable expectation? Thank you.

Brian Gu: The agreement we have with DiDi is still valid. We still provide such an incentive for MONA to be used in DiDi system, if they achieve those volume, I think the incentive will still be valid, yes.

Tina Hou: So this is mainly, it's up to DiDi how many they want to purchase.

Brian Gu: No, I think if you read our agreement which is made public available, it is actually an agreement that if the MONA product is used in the DiDi system, in the mobility ecosystem, they could up to a certain number they will receive additional incentives. It does not relate to their own purchases.

Brian Gu: Okay. Thank you. [Foreign Language] So my second question is in terms of the software services revenue, so we see started recognition and has been very helpful in terms of our overall margin and profitability. So because our collaborative agreement with Volkswagen is not exclusive, are we actually actively exploring similar collaboration with other partners?

Charles Zhang: Hi, Tina. I think that our strategic collaboration with Volkswagen actually creates very strong value -- strategic value to each other. For example, we are collaborating on the technology and also we are collaborating on supply chain and also during the process we also identified opportunity to work more closely going forward in other areas. We believe there are a lot of things we can do as a strategic partner to each other. However, I think, that from the collaboration perspective, our collaboration with Volkswagen were not exclusive to each other. So therefore, I think, that we are also open-minded to looking for the strategic collaborative opportunity with other players. However, I think, that what we value most is that we see the -- how we can bring value to a partnership and create value to each other, not just a supplier relationship.

Operator: That does conclude our question-and-answer session. I'd like to turn the call back over to the company for closing remarks.

Alex Xie: Thank you once again for joining us today. If you have further questions, please feel free to contact XPeng's Investor Relations through the contact information provided on our website or the Piacente Financial Communications.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

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