Participants

Yuanting Shi; Investor Relations Director; Hesai Group

Yifan Li; Chief Executive Officer, Co-Founder, Director; Hesai Group

Tim Hsaio; Analyst; Morgan Stanley Asia Ltd.

Tina Hou; Analyst; Goldman Sachs L.L.C.

Jessie Lo; Analyst; BofA Global Research

Zhang Hui; Analyst; Huatai Securities

Jackie Zhong; Analyst; CICC

Presentation

Operator

Hello, ladies and gentlemen. Thank you for standing by for Hesai Group's second-quarter 2024 earnings conference call. (Operator Instructions) Please note that today's conference call is being recorded.
I will now turn the call over to our first speaker today, Yuanting Shi, the company's Investor Relations Director. Please go ahead.

Yuanting Shi

Thank you, operator. Hello, everyone. Thank you for joining Hesai Group's second-quarter 2024 Earnings Conference Call. Our earnings release is now available on our IR website at investor.hesaitech.com as well as via newswire services.
Today, you'll hear from our CEO, Dr. David Li, who will provide an overview of our recent updates and address our financial results before we open the call for questions.
Before we continue, I refer you to the Safe Harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Please also note that the company will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported on GAAP in our news release and SEC filings.
With that I'm pleased to turn over the call to our CEO, Dr. David Li. David, please go ahead.

Yifan Li

Thank you, Yuanting, and thank you, everyone, for joining our call today.
I'll begin with an overview of the wider market trends and some recent business highlights before moving on to our second-quarter financial and operational results. We are thrilled to announce that Hesai has been recognized as the number one automotive LiDAR company by market share for the third consecutive year, according to the latest LiDAR for automotive reports from Yole Intelligence, a world renowned European independent research firm.
2023 was a stellar year for Hesai, marked by record breaking revenues and shipments, strategic design wins, and expanded product lineup and new partnerships. Our expertise in both passenger cars and robo-taxis enabled us to capture 37% of the global LiDAR markets and an impressive 74% share of the global robo-taxi LiDAR market in 2023, demonstrating our clear leadership of the global automotive LiDAR market. Yole's recognition inspires us to aim even higher as we continue to deliver the most advanced and powerful LiDAR products, driving further growth and innovation in the dynamic automotive industry.
Next, a brief update on autonomous mobility business. At present, one of the most exciting developments in China is the [variety] robo-taxi market, which is scaling and commercializing at an impressive pace. We're delighted to witness this movement and proud of Hesai's key role in promoting this trend. Baidu's Apollo Go, an autonomous driving channel travel platform, has recently launched operations in Wuhan, one of China's largest cities. This launch has garnered significant market interest and numerous orders highlighting the continued development path and the tremendous potential of the robo-taxi business.
According to media reports, Apollo Go has provided over 6 million robo-taxi rides in 11 Chinese cities since 2019. We'll be serving as Baidu Apollo Go's exclusive supplier for their vehicles' main perception LiDAR. With their sixth generation rolling out this year, each vehicle is equipped with four of our AT128 ADAS LiDARs, marking the first large-scale application of ADAS LiDAR solution on robo-taxis in China.
Our collaboration with Apollo Go is a prime example of how our advanced LiDAR solution at an attractive price point can provide a comprehensive object perception, accelerating the adoption and the commercialization of driverless vehicle globally.
Let's now turn our attention to the ADAS market. In the last quarterly update, we underscored the significance of 2024 as a decisive year for the LiDAR industry leap to mass market popularity. According to GGII, a renowned automotive research and consulting firm, the LiDAR adoption rate among EV priced above RMB150,000 is projected to surpass 16% this year, [baring] towards 50% in alignment with the famous crossing the Kaizen innovation adoption model.
We are pleased to note that this critical 16% inflection point will reach earlier than the market anticipate it. According to the latest data, our overall LiDAR penetration rate in China reached an impressive 22% in June of this year, driven by consistent monthly increases of approximately 2% over the past three months. Additional June statistics also reflected strength, revealing that average LiDAR adoption rate among the top 10 best-selling new EV makers in China exceed 60% of the total sales and volume.
In the first half of the year, LiDAR installations increased remarkably by approximately 250% year over year, outpacing the growth rate of other sensor installations by almost 10 times These figures highlight LiDAR's accelerated acceptance and its critical role in enhancing vehicle safety and comprehensively improving autonomous driving capabilities.
We anticipated that LiDAR will continue to drive innovation across automotive industry and shape the future of smart transportation. In light of these LiDAR market trends, our strategic approach of offering both ultimate performance and ultimate value-to-cost products has positioned us to adapt fully address the diverse needs of our extensive client base.
Our next-generation flagship products, such as the ATS and AT512 are gaining significant traction -- OEMs competing intelligent audio functions. Maintaining a flexible and competitive product roadmap has also enabled us to secure crucial design wins for new car models scheduled for SOP in 2025 and beyond.
In the second quarter, we recorded a series of new design wins we did in the domestic market. Our deliveries for those models are scheduled to begin next year. These include a flagship model from a top-selling EV maker, new to our client roster, which currently has 15,000 vehicles shipments per month. Our existing customers who are among the largest EV shippers in China have also extended their partnership with us to include multiple new models and facelifts set to launch starting in 2025.
The rapid adoption of our products by these key players reflects our competitive edge and the substantial value we provide. Notably [and elsewhere] autonomous driving technology promises that unprecedented consumer experience. There is a growing trend in the domestic market to prioritize high-performance LiDAR products for next-generation vehicles targeting L3 standards alongside domestic OEM's historical focus on cost efficiency.
Among the previously mentioned new design wins, a leading EV maker has already signed agreements with us to exclusively adopt Hesai next-generation L3 ultra-high-performance LiDAR for all their new models scheduled for release in 2025. This further solidifies our position as a leader in advanced LiDAR technology and opens the gate for more domestic OEM to follow.
On the international front, we have secured design wins with four prominent global OEMs, including three joint ventures in China with two American and one European automotive companies. Some of the models will be shipped both domestically and globally.
Most notably, we have been selected by a global automotive OEM for its worldwide shipping program. Unlike some of the competitors who are still in the B sample development phase, we are progressing towards the actual delivery of B samples for this milestone design win. Additionally, we've been awarded new POC programs with two leading global OEMs from Europe, including a prestigious sports car brand to test Hesai's next-generation high-performance long-range and short-range LiDAR.
While these two POCs are not yet fully design wins, we believe they have potential to convert into real deals in the future. To date, we have secured ADAS design wins with a total of 19 OEMs globally across over 70 vehicle models. This includes ADAS series production partnerships with 6 out of the top 10 global OEMs directly or two entities within the group, and 8 out of the top 10 domestic OEMs measured by their revenue in 2023.
Among these 19 OEMs, 13 of them have chosen Hesai as their exclusive long-range LiDAR supplier, further demonstrating the trust and confidence industry places in our products and capabilities.
Now let's briefly go through our operating and financial results for the second quarter of 2024. To be mindful of the length of the earnings call today, I encourage listeners to refer to our second-quarter earnings press release for further details.
In the second quarter, we achieved quarterly revenue of RMB458.9 million, USD63.1 million, reaching the high end of our guidance. In addition, our LiDAR shipments rose to over 86,000 units, marking an increase of 66% year over year and a 46% quarter over quarter. Our blended gross margin was robust at approximately 45% improving quarter over quarter, thanks to effective cost management and our flywheel approach to costs and scale optimization as well as additional service revenue contribution during the quarter.
As a result, our quarterly net loss narrowed significantly by 33% quarter over quarter to RMB72.1 million, USD9.9 million. These accomplishments highlight our best-in-class execution within the global LiDAR industry in streamlining our operations. We continue to anticipate stronger performance in the second half of the year, both in terms of revenues and shipments.
For the third quarter of 2024, we expect net revenue to be between RMB450 million, USD61.9 million and RMB500 million, USD68.8 million, representing a year-over-year increase of approximately 1% to 12.2% in light of our downstream adjustments to accommodate the postponed SOP timeline for certain client vehicle models, we've revised our full year revenue forecast to be within a range of RMB2.0 billion to RMB2.3 billion, roughly USD280 million to USD320 million.
Additionally, we anticipate less than 20% of our total revenue will come from the US market. The vast majority of our revenue will be generated outside the US, driven by the increasing demand for LiDAR technology elsewhere. Despite the recent downstream adjustment in ADAS and unexpected production delays of the robo-taxis since late 2023, our financial strength remains robust, reflecting the resilience of our business.
Our cost management initiatives have yielded a better-than-expected result in terms of our blended gross margins, compared to our earlier guidance, which projected a blended gross margin at the higher end of the 30% to 35% range for the full year of 2024. We now foresee the blended gross margin for the third and fourth quarter is expected to be close to 40%. This expectation holds true even with the notable year-over-year growth in ADAS business, which although expanding rapidly, has traditionally had a lower margin.
We are not aware of any other player in the global LiDAR industry that matches our financial strength while operating on such a massive delivery scale. We anticipate that effective expense controls and optimized operational efficiencies will bring us closer to achieving profitability in the fourth quarter of this fiscal year.
We'd like to remind you that this outlook is based on the current market conditions and reflects the company's preliminary estimate of the market and operating conditions and customers' demand, which are all subject to change.
Looking ahead, we see strong growth opportunities. Our strategic initiative and market positioning laid a solid foundation for future success. We're confident in our growth potential for '25 and '26 and expect to continue outperforming our LiDAR peers, driven by the following key factors: first, we're strategically positioned to benefit from the rapid growth of the robo-taxi market, particularly in China. The recent launch of Baidu's Apollo Go across 11 major Chinese cities marks the beginning of a new era. Industry analysts estimate that this LiDAR deal is worth USD200 million to USD300 million based on Baidu's plan to deploy approximately 100,000 robo-taxi vehicles in China.
This move is expected to be the first extensive deployment of robo-taxi technologies in the Chinese market. And Baidu's advancements are just the tip of the iceberg. Other leading robo-taxi players are also making significant strides. Notably, all of the top five robo-taxi companies in China have selected Hesai as their exclusive main perception LiDAR supplier. As our robo-taxi customers continue to enhance cost efficiencies and scale their operations, we anticipate a strong rebound in our robo-taxi -related revenues in the coming years.
Second, the ADAS sector, which secured key design wins with 19 leading OEMs globally, 13 of which have selected us as their exclusive long-range LiDAR supplier. Our strategic approach of offering both ultimate performance and ultimate value to cost of products is generating a robust ADAS order pipeline for 2025 and 2026, stronger than that of our peers. Our ATS LiDAR designed for mass market and the large scale adoption has secured design wins from seven OEM as of the end of second quarter.
This positions us for millions of units used throughout the coming years based on customer demand forecast. Furthermore, we are the sole recognized provider of ultra-high performance LiDAR, particularly our AT512 for OEMs aiming to achieve level 3 standard in the next generation of intelligent vehicles. Notably, we're executing level 3 series production programs using this advanced technology, including collaborations with a leading EV maker in China and a leading global OEM.
These achievements position our ADAS business for exceptional growth, both domestically and internationally, supported by our cutting edge technology and proven track record of over 450,000 LiDAR deliveries since inception as of end of the second quarter.
Third, we anticipate that the introduction of regulations mandating higher safety standards will be transformative for the LiDAR industry. Initiatives such as China's newly launched level 3 policy and NHTSA's AVB speed requirements in the US are propelling advancements in intelligent driving with an unprecedented emphasis on safety. Meanwhile, more OEMs and consumers are recognizing LiDAR configurations as essential safety features just like safety belt or airbags. As a global leader in automotive LiDAR, Hesai is exceptionally well-positioned to capitalize on these dynamic safety trends.
Last but not least, before I conclude, I'm delighted to announce that the publication of Hesai inaugural ESG report. This report highlights our efforts and accomplishments in ESG across our business operations and underscores our ongoing commitment to sustainable development. As a leader in automotive LiDAR industry, Hesai is delighted not only to elevating people's lives within cutting-edge LiDAR technology and products but also fostering greener and more sustainable operations.
Moving forward, we'll continue to align our business goals with ESG best practices to ensure long-term value for our stakeholders and society. For more details on the ESG report, please visit our IR website.
In summary, we're poised to capitalize on emerging opportunities in the automotive industry, backed by our efficient operations, a robust financial foundation, and outstanding technological capabilities.
As we look to the remainder of 2024 and beyond, we remain committed, driving innovations and providing top-tier LiDAR solutions that enhance vehicle safety and autonomous driving worldwide while adhering to our ESG objectives.
This concludes our prepared remarks today. Operator, we're now ready to take questions.

Question and Answer Session

Operator

(Operator Instructions) Tim Hsiao, Morgan Stanley.

Tim Hsaio

Morning, David. Thanks for taking my questions. I have two questions.
The first one, we noticed that Financial Times reported that the US Defense Department has decided to remove Hesai from the backlist. Could you please elaborate a bit more on how the current developments and progress, and of course, the implication to your project wins and appreciating overseas because we think a business a very important milestone? So it'd be great if you can share more details. That's my first question. Thank you.

Yifan Li

Thank you, Tim, and thank you for the question.
And we have consistently maintained that our inclusion on the [1250H] list was a mistake. Our products are strictly for commercial and civilian use, and we have no connection to any military bodies. We are not a vendor to any military bodies either. As we discussed in the previous earning calls, being on the DoD means strictly that the US Department of Defense aka the Pentagon cannot buy our product starting mid-2026, but to be honest, as far as we know, we've never sold anything to DoD or any military.
And we definitely don't plan in the future. Or in simple terms, we've never generated any revenue from DoD or any other military. And if again, we don't expect to. However, being on the list did seriously impact our reputation, as you can see, the stock price. And also impeded some of the business opportunities over the past few months since we didn't include. And again, to be honest, actually made things very tricky for some of the customers because they're worried that we might have ties to the Chinese military as that's what the list meant.
Unfortunately, it's hard to disapprove until DoD officially takes us off the list. And we will not be able to speak to the actual [results] until it's official. But by any chance, if we are removed, with our leading technology and the best-in-class financial strength, we were very optimistic that we are locking more global deals. And this is the information we would like to share regarding the current status of the DoD.
Unfortunately, I will not be able to speak to the status of the Financial Times article because that's a speculation of the case. And we definitely need to wait for the official notice, but I think it's more important that people understand our position, understand the facts, and also understand that we [have endured] by this inclusion. And if by any chance we are removed, we are extremely optimistic that a lot of the progress that was in the (inaudible) paused will be to removed and hopefully on accelerated path.
Does this answer your question, Tim?

Tim Hsaio

Yes, yes. Thanks for sharing all the details.
And my second question is a currently on investor focus a lot on the robo-taxi. And we also shared quite a lot of updates that during the presentation. But as we mentioned, I think Hesai was chosen by Baidu Apollo's next-generation robo-taxi as suppliers across 11 cities. But if there's any further details, how should we think about the market opportunity? Because you also mentioned, in addition to our Baidu Apollo, the top-notch robo-taxi operators or makers also want to do business with us. How you mentioned like floor light up a car, with that kind of business as a boost of added content, how is like a potential assembly or software being integrated? In the meantime, for when do you think we are going to see inflection point were more meaningful revenue uptick? Can it be next year or the year after or we are going to see some progress later this year? So that's my second question. Thank you.

Yifan Li

Thank you, Tim. I will answer the first part. I think, for first -- with second, I missed your question on the software side and which I might have to ask you to ask again, but let me first take on the question of the business development of the robo-taxi.
I think it's fair to say that we are the biggest robo-taxi LiDAR supplier in the world by many measures. And in China, we are the exclusive -- the main perception LiDAR supplier of the top five robo-taxi supplier and most people believe that we have a product that's way superior than the peers, and including Baidu Apollo Go, right?
And based on that Yole's repost for 2023, we have a 74 market share of the global LiDAR market for robo-taxi, as we I think, have been communicated. And historically, those people use mechanical as being LiDAR. And now as you seem as we are scaling up, a lot of people are adopting ADAS AT128, and again, including Baidu Apollo, which is a very interesting transition as we see because AT128 is a new sensor that we've shipped hundreds of thousands of, and it's a very powerful, much more affordable sensor.
And I think this actually helps the customer to achieve a better balance between price and performance. At this point to me, the biggest inflections is more commercial than technological because technological advancement has always been continued -- continuously advancing .
Well, this year is the first year, most people are talking about commercialization in the sense that you need to look at a total cost of the equipment, you need to look at amortization, in the end, you come to a business case in which your sensors are still worth tens of thousands of dollars each as you [still], it's tricky for people to do that. And that's why we are working very closely with what would have the people to do that.
And by the way, it's one of the examples. And those are not the only one, by the way. Many other overheads, if you have also adopted a similar plan. So as a result, what we see is that we start to receive significantly larger LiDAR orders for robo-taxis for the years to come, as some of them have already been locked in. And as we expect this market to grow and we expect the customers to move from a smaller scale -- high price mechanical LiDARs with a larger scale ADAS LiDAR.
And also international robo-taxi players are still focusing on the performance. So they are still focused on the mechanical LiDAR, which is the more high priced and a more -- much higher margin business for us. And so this is on the business part.
And I guess I remember you had a question on that software. Can you repeat that so that I can clearly answer.

Tim Hsaio

Sure. Sure. So basically, just wanted to tell that if there would be any differences between our business with robo-taxi maker and the traditional carmaker. So in robo-taxis case, because we are going to provide like [announcement] LiDARs. So just wondering if there will be any potential upside to the battery content?
So in addition to your LiDAR, our hotels will provide like assembly services or together with some additional software to facilitate their robo-taxi. And so, in short, will there be any value content upside in addition to the LiDAR itself?

Yifan Li

Okay. So your question is to make (inaudible) we make more money from them by not only selling the hardware but also selling the software, right. So the quick answer is I believe it's a different business model in the sense that we do provide a lot of tools. We're trying to stay away from data per se, but we do provide tools for installation and calibration, stitching different point cloud into one panorama image. And those are the tools we have, but instead of targeting them separately, we think the business model is that we provide them with the software as part of the hardware package.
And now we allow us to have a better margin and a better -- a more competitive product. So in other words that already embedded in. That is one of our advantages of being able to cater to this market with a better offering.

Yuanting Shi

Let me clarify on that. I think Hesai's key focus is exclusively on supplying LiDAR hardware and not the software. I think we are very strict about -- we never have any data security or privacy risks that can be caused because we never transmit data wirelessly. We do not, you know, stop even a second of the point cloud and we only supply the LiDAR hardware but not the software. I think that's key.

Yifan Li

I would -- I'll give you another example that I consider as analogous. If you think about, for example, Apple, right, they sell you cellphone. Technically, they could charge you for the iOS system or if you look at your MacBook, they could charge you for that and the MacOS system. They never do that. They just sell you a work centered hardware because most people now don't have the habit of buying a separate set of software for the hardware, even though they go together. I think software is served as a higher barrier and a better user experience for the hardware part. I mean, that's kind of the philosophy we're following.

Operator

Tina Hou, Goldman Sachs.

Tina Hou

Good morning, David and your team. Thanks for taking my questions. So I have two questions. The first one is regarding the robo-taxi LiDAR. So you report autonomous mobility LiDAR shipment separately, but now I understand that would include the AT128 LiDAR as well, right?
So just wondering like how much of that our 5,700 is AT and then the rest is [Pandora]. Could you give us like a breakdown? And then also for the AT128 that you sell to the robo-taxi customers, is it the same pricing and margin as you sell to them on EV OEMs?

Yuanting Shi

So that is a good question. So as we've said, you know, currently within the Chinese market, we are seeing a trend where our Chinese robo-taxi players, when they will like to commercialize their business, they're switching from the transitional mechanical spring LiDARs to adopt the ADAS LiDARs. And as a result, we have received significantly larger LiDAR orders for use in robo-taxis for the years to come. That means that the big order will be splitted into several years and we will record the ADAS LiDARs to these type of Chinese robo-taxi players in the coming years.
So holistically, I think on the robo-taxi side in China, we can expect that they are moving from the smaller scale, higher price mechanical LiDARs to larger scale ADAS LiDARs, and that will boost our revenue and gross profit in the long run after robo-taxi business grow in China.
And with regard to your second question, are we having the higher price? Are we having the higher margins for the ADAS LiDAR we sell to the robo-taxi players in China? The answer is yes. Because the amounts they are buying from us is not as significant as the passenger car OEMs they're buying from us. So basically, they will enjoy, of course, relatively better price. And of course, we are selling the ADAS LiDAR to them with the same costs, so the margin will be relatively better as well. So that's why I'm saying that will boost our revenue and gross profit for the long run.

Yifan Li

So the other angle to look at it is that to us, because they're buying the identical products and, in the end, the pricing is strictly tied to volume, right? If you kind of can look at the ADAS volume, usually, we're in the range of 100 to 1,000 units a year. Well, clearly, robo-taxi isn't there. So that's why they have to pay for a higher price and has the volume in the near. But having said that, the long-term frame agreements we have with different robo-taxi makers is such that by the time they reached (inaudible) level as the ADAS product, the price to them will be also go to the ADAS product. So it is the nature of such a business.

Yuanting Shi

And financially, I think it's an equation, right? It's about a price you have, multiplied by the volume you have, then multiplied by the gross margin you have. And so based on this equation, I think in the long run, you know, having the ADAS LiDAR shipped to our larger amounts of robo-taxi players and that will help -- to help them commercialize their business. And in the end, the equation for us, I think, will be beneficial for us financially as well.

Tina Hou

Thank you. That's very clear. Makes a lot of sense.
And the second question is regarding your gross margin because the second-quarter gross margin has improved quite a lot from first quarter. So could you give us a breakdown in terms of our factor for the improvement, how much is from product mix, how much is from like scale benefits?
And also, as David mentioned, the ADAS LiDAR gross margin has also significantly improved. So just wondering like how much difference is there between the ADAS gross margin and autonomous growth margin now. And maybe too many questions on gross margin as well. So as you guided for 3Q and 4Q gross margin at 40%, so wondering why is it lower than our second quarter margin. And lastly, how should we think about gross margin in 2025? Thank you.

Yifan Li

Thank you. Yeah, there are many, mini questions in this. So I will try to give you the top-level thinking and maybe we can have a more interactive discussion based on this.
The first is that despite the downstream adjustments to accommodate the postponed SOP timeline for certain clients and our ADAS ASP will remain relatively stable within a year. The pricing was negotiated at the time of the contract and signed typically fixed for the year.
The mechanical LiDAR, each specific product also remains stable because most people recognize as being by far the best mechanical LiDAR on the market. And then you're right that we had a 45% gross margin blended in 2Q, highlighting financial strength and it's definitely the resilience of the business despite some of the shorter-term headwinds.
I think one thing I wanted to point out is that our quarterly gross profit total is more than RMB200 million. That's roughly 3 times that of the next to highest publicly listed competitor on the global side. And I think a few reasons. One is our cost management effort has paid off because we upgraded AT128 featuring a more integrated design along with improvement of our in-house A6. I think that's one of the biggest factors.
And the other one is definitely we're benefiting from the economies of scale as we ramp up the shipments and also, we were able to take advantage of that to drive down materials and the manufacturing costs. And there is also -- I have to say there is also a one-off high margin service fee aka NRE from one of the global leading OEM in the second quarter, which is very helpful on the gross margin side, because it's the service revenue. So these are the status of it.
And looking ahead, I think we initially guided a blended gross margin of the higher end of 30% to 35% range for the full year. We now expect the margin for Q3 and Q4 to be closer to 40%.
But to be honest, we are not aware of any other player in the global LiDAR industry that can match our financial strength at the level of the revenue and the number of units we deliver, which is already at scale. And with effective expense controls and optimized operational efficiencies, our OpEx is expected to grow 10% to 15% compared to the full year of 2023. And these initiatives bring us closer to achieving profitability in the fourth quarter of the year.
We are also optimistic about approaching non-GAAP breakeven for the second half of 2024. And these are what we expect for the future and also the current status of the year.

Yuanting Shi

So in short, our gross margin will be very robust. So we delivered 45% into 2Q and we are expecting Q3 and Q4 to be closer to the 40%. You mentioned why there will be a QoQ slightly declined by -- from 45% to 40%, it is because we recorded a one-off high margin services revenue during the second quarter, as David mentioned. However, on the other side, if you look at the trust management capability we have, if you look at the economies of scale benefits we are enjoying, the 40% level of the gross margin is probably very leading position in the industry.
And if we look at the gross profit, in absolute value, we have recorded more than RMB200 million in 2Q alone. I think we can -- as of now we are not aware of anyone else in the industry actually have this kind of financial strengths and that is helping us to [down their] a lot of deals from other passenger car OEMs as well because the best-in-class financial strength, they have more confidence in us -- to partner with us in the following years to come.

Yifan Li

Does that help you understanding that the gross margin fluctuation?

Tina Hou

Yes, very helpful. Thank you.

Operator

Jessie Lo, Bank of America Security.

Jessie Lo

Hi, David and team. Thank you for taking my question. My first question you sort of just answered just now because I was wondering that we have already we iterate our breakeven for the fourth quarter of this year. And then you just mentioned that we are targeting the non-GAAP breakeven second half of 2024. I'm just making sure that I have heard it correct.

Yuanting Shi

Excuse me, Jessie, would you mind repeat your question? (multiple speakers)

Yifan Li

We answered that already. Is there a new question?

Yuanting Shi

Is that about the breakeven timeline? I think we just answered that question when Tina bring (multiple speakers)

Jessie Lo

And then I would like to ask about, you know, as still mentioned that (inaudible) going forward, of course, there are not a need for clients to us as of now. But then we were just wondering that would it be a good chance that other (inaudible) will try to follow what they're doing on the technology side because what we see is very diverse for us. We are seeing a lot of orders coming in LiDAR side inches, a lot of sampling with our clients. But on the other hand side, there still, as you've seen, from (inaudible) I guess they have their own reasons as why also how these issuances is dissolved in the future?

Yuanting Shi

So may I clarify your question? If you are asking about the domestic project pipeline?

Jessie Lo

I am asking about Exxon. They are not using -- they decide not to use the LiDAR on their future models and are there (technical difficulty) in the future, trying to follow or copy what they're doing right now.

Yifan Li

So let me make sure [under] your question.

Yuanting Shi

So you're asking about the question about Tesla's vision-only solution and extend switching from LiDAR solution to non-LiDAR. Am I correct?

Jessie Lo

Yes, yes, and then, of course, that does not impact us. But then what if other OEM trying to copy or like in what they're trying to do right now?

Yuanting Shi

Oh, yeah. Sure, sure.

Yifan Li

The Tesla question is the same question as it is before, right? The one thing I think people should pay closer attention is that there has been a publication by the Wall Street Journal, and they've been lifting out a lot of the publicly available sources on the different technological challenges on the safety side Tesla have. And definitely, some of them could have been avoided with a LiDAR.
I think even though it's public data, it was very interesting for people to collect them in such a way and to see, oh, and it's a much more intuitive image for us to understand LiDARs as the seat belt or the airbag.
And the other fact I want to point out is that in my mind, Tesla flash a lot of the carmakers today, they're shipping level 2 or level 2 plus plus systems, which -- ultimately, it's not human, right? It's not on the machine. Well, clearly, there have been lot of efforts globally for sure and also in China that the industry is moving towards the level 3. The nature of Level three is you need redundant measures to achieve that level off functional safety.
Functional safety meaning that you need the redundancy to have different ways to measure the same result or same object, and that requires a LiDAR, and at least that's what we see almost every other global OEM and the vast majority of the OEMs in China when they develop a level 3 system.
So the message is that, A, look at Tesla’s recent accidents; B, for level 3 globally, everybody else agreed you need a LiDAR. Look at China level 3, everybody agrees you need a LiDAR. For level 2, some people think you could save that money. But even with that, we're making that affordable enough that most people are widely adopting that and a lot of the players decided to make it a standard configuration moving forward. And so this is really the status of the industry.

Jessie Lo

Yeah, sure. Thank you so much. And then, second -- I still have one more question, which is our previously guided third-quarter shipments to be under 50,000, fourth quarter 200,000, and then full year at 500,000. Would that having update, and if you could, could you sort of shed some light on [NetSuite] client trade down as well, [for example, versus the US]?

Yuanting Shi

Sure. I can take that question. So for the second half of '24, we are now expecting 300,000 to 350,000 shipments in the second half of the year. And this is due to downstream adjustments like certain ADAS clients where some of their models have been pushed out to early next year.
However, on the other side, we are seeing two trends. The first trend is that our ATX has garnered significant interest among the domestic OEMs. And as we stated in the earnings as that we have already secured, several OEMs for our ATX products already.
And the second trend is that we have noticed that in China, especially recently, there has been a growing trend where the domestic OEMs are also moving towards level 3 standards. So they are requesting for even better performance of the ADAS LiDAR. So like we said in the earnings that one of the leading EV maker has already signed the agreements with -- to adopt our next-generation ultra-high performance ADAS LiDAR for all of their new models scheduled to SOP in 2025.
And we believe that this will open the gates for others to follow as well for these ultra-higher performance like ours. And so as we offer both ultimate performance and also ultimately value to cost products, we are seeing some clients that have decided to switch from our competitor to us. So that's why we are -- we will be anticipating very strong and solid order pipelines in 2025 and 2026. And in 2024, as we stated, because of the pushouts was certain models from the clients, we are guiding a 300,000 to 350,000 for the second half of the year.

Operator

[Zhang Hui], Huatai Securities.

Zhang Hui

Good morning. With ATX about to go on the market, my first question is, do you know what's the difference between ATX and AT128 for 203 and what the impact was on gross margin?
(spoken in foreign language)

Yuanting Shi

That's a good question. Thank you, Zhang Hui. So our ATX is a high value-to-cost low-rent ADAS LiDAR and comparing with AT128, I think, the key point that it's having a very reasonable price, of course. And unlike similar products, from our competitors that sacrifice performance for their, you know, lower-priced ADAS LiDARs. So ATX offers both performance upgrades and cost efficiencies.
And why we are securing a bigger number of, you know, partnerships on the OE? So since its launch, we have seen that the ATX has secured design wins with several major OEMs by the second quarter's results. And the SOP timing for ATX, we expect that it will begin in the first quarter of next year with significantly larger volumes expected in 2026 as well.
And we anticipate that it will penetrate into a broader range of vehicle pricing segments with small models featuring as a standard configuration and further driving our flywheel of scale and cost optimization. Because of this, I think the gross margin for the ATS product will be rather reasonable. Even though we didn't specifically disclose for them, but gross margins will help.

Zhang Hui

Okay, thank you. And my second question is what do you see other competitors that they have within the holder for the robo-taxis LiDAR? Could you tell us more about the -- for the robot hold? Do you some robotics holder? Thank you.

Yuanting Shi

You are talking about the robotic (multiple speakers)

Zhang Hui

(spoken in foreign language)

Yifan Li

Right. So the question is, do we have a specific product for robotics industry. And depending on the definition of robotics, we always had and now ADAS sensors, for example, (inaudible), they were never ADAS products. So we always had that. And having said that, we do recognize that there have been a lot more embodied AI and robotics applications who would benefit from even more miniaturized product with a lower price point. And so we are looking into that. And we do have a lot of interest and some of the orders already at a reasonably large scale and from the non-ADAS industry. But we don't have plans to disclose their names yet, but we have been aggregating them into the generic robotics sector, what is now ADAS sector.

Yuanting Shi

Yeah, I think industrial robotics has always been part of our AM business. And remember that we are the global leader in AM capturing most of the market worldwide. And all thanks to the best performance of our mechanical LiDARs. For example, if I look at the recent news in July, we just signed a deal with Westwell to speed up the global expansion in AD for logistics. And our LiDARs can, of course, be used in many kinds of robotics applications, namely logistics, mining trucks, last-mile delivery robotics, electronic, even human -- robotics in the future potentially. We see huge growth opportunities ahead, I will say. And then also, stay tuned for our IAA event in Germany in September this year.

Operator

[Jackie Zhong], CICC.

Jackie Zhong

Management team, thank you for taking my questions. I’m Jackie Zhong from CICC. So all congratulations on this quarter results. I have two question to ask. The first one is regarding to the level 3. You just now mentioned that level 3 requires certain level of redundancy. So I want to go to more specific regarding the conditions. So are there any scenarios or conditions that can only be met with a LiDAR so that make LiDAR in effect to our level 3? Thank you.

Yifan Li

Yeah, that is a very good question in a sense that if you think about level 3 and the function of safety requires that, first, you need to have multiple measures of the same mark check in case one fails, right? That's the nature of such assistance. And then, directly to your question, will we see the best use of LiDAR being the one that stepped up one camera sale. There are two main scenarios. And those are not hypothetical cases. Those are the data we see from the 100, 200 of sensors which have shipped and when that are operating on the road, we get those feedbacks.
One is -- they call that general objects and for EV functions, if you have object, a truck laid down sideways on a highway or an unidentified object, lots to cargo that type of object, your network training would require your system to have seeing such an object in a path to be able to recognize that. That's one.
The other is generally at night. Again, I encourage you to look into the Wall Street Journal datasets, which I think, they include more than 200 cases. And if you look at those cases, a lot of them are generally in the change of lighting condition, especially in darkness or in or out of the tunnels in which your computer vision is struggling to see anything until it's too late and that is where a LiDAR could reliably and stably and precisely identify the best timing to break or not.
So those are the two scenarios we consistently see across different -- even level 2 plus plus application. But again, that's for level 2 plus plus, it's always blame the human. And that's not a big deal if machine fails because humans are supposed to be the backup plan. Until level 3, you're giving humans freedom to not to pay attention. And that is a big safety risk.

Yuanting Shi

And we also talked about the introduction of regulations, mandating higher safety standards, for example, the level 3 policy rolling out from China and also the AEB speed requirements rolling out from NHTSA. I think with these kinds of safety standards rolling out, the [content] per vehicle financially will be higher as well. That means that LiDAR -- the number of LiDARs per car can potentially increase. That will be beneficial to us financially. Hope that answers your question, Jackie.

Jackie Zhong

Yeah, that's very clear.
So for my second part, I have few mini questions regarding to the ATX product. The first one is the progress on of ATX to the integrator with headlight. I guess there should be some -- there probably be some technical issues with that.
And the second mini question is regarding how do you guys achieve a lower cost for ATX other than the economic scales. Do we employ more maybe the Chinese supply chain, et cetera? Thank you.

Yifan Li

So I'll do the second question first. The way we achieve a lower cost for ATX are a few things. The first is that the level of economies of scale, as we expect (inaudible) resolve units to be shipped over the lifetime of such a product, and we already see that. And second is the further into level of integration and [A6] because it's using our gen four semiconductor.
Well, if you remember AT was Gen 2. And so that is a major improvement on the level of integration. Integration In semiconductor industry means half the savings because you just you -- less area part of the wafer to build such a chip.
Number three is the product definition fit in a sense that AT's areas was more generic because that's the first time we define ADAS forward-looking center. By the time of ATX, we had hundreds of thousands of sensors of experience knowing where to focus and where we can relapse, with respect a little bit to achieve a relatively similar higher performance. So we are able to fine-tune such a center and to fully utilize what is needed and then cut costs as a part that is not necessary.
With the combination of those three factors, we are able to achieve a superior cost to performance ratio.

Yuanting Shi

And with regards to your first question about integration, we signed a partnership together with Marelli several months ago to integrate our ATX LiDARs into the headlights. And remember that Marelli is, of course, one of the most famous Tier 1 suppliers for global OEM, so that's about integration. I think ATX can be applied to many placements on the cars, and we will be seeing large adoption for the ATX products starting in 2025 and even bigger volume in 2026.

Operator

Thank you. That concludes our question-and-answer session. I'd like to turn the call back over to the company for closing remarks.

Yuanting Shi

Thank you once again for joining us today. If you have further questions, please feel free to contact our IR team. That concludes today's call and we look forward to speaking to you again next quarter. Thank you and goodbye.

Yifan Li

Thank you, everyone.

Operator

This concludes today's conference call. You may now disconnect your lines. Thank you very much.