ECARX Achieves First Profit Metric as Revenue Grows 4%

The maker of digital cockpits for smart cars reports growth in revenue and a key profit metric turning positive for the first time.

Highlights of the Report:

• Analysts predict a new partnership with a prominent European OEM could elevate ECARX’s revenue potential to 10 billion yuan.
• ECARX achieved its first adjusted EBITDA profit and showed improved confidence in sustaining profitability.

Global mobility technology provider ECARX Holdings Inc. (ECX.US) made significant strides in its quest for sustainability during the fourth quarter. The company announced that it achieved a positive profit metric for the first time, as disclosed in its latest quarterly report published on Monday. Additionally, it has formed a key new partnership with European automobile manufacturer Volkswagen.

As the primary supplier of digital cockpits for Geely, one of China’s leading private automakers, ECARX is now looking to further diversify its customer base. The partnership with Volkswagen is expected to accelerate its growth trajectory in the rapidly evolving market for digital cockpits and advanced driver assistance systems (ADAS).

However, ECARX operates in a competitive global automotive market where growth remains sluggish. This reality was reflected in the company’s latest revenue performance and ongoing pressure on margins.

According to analysts, the Volkswagen partnership could boost revenue growth as early as 2027, while a more established partnership with China’s FAW could begin generating revenue this year. In addition, Geely’s recent initiative to optimize its supply chains could position ECARX favorably, enabling it to serve a broad array of brands, including Zeekr, Volvo, and Lotus.

The company is poised for considerable rewards if it can successfully navigate this crowded marketspace. However, a consolidation of technology suppliers in the sector appears inevitable. With its strong ties to Geely, ECARX is well placed to thrive amidst the competition, although it may also seek funding through capital markets to secure necessary cash flow.

Shen Ziyu, co-founder and CEO of ECARX, characterized the current automotive landscape as “challenging” due to slow growth and intensified competition for market share.

“As growth slows and remains uneven globally, it becomes ever more important for companies to stand out from competition and define themselves,” Shen said during an earnings call. “We are capitalizing on this growing demand and helping automakers differentiate themselves with our innovative product portfolio, diverse customer base, and strategic global partnerships.”

Notably, just days prior to its quarterly report, ECARX announced its agreement with Volkswagen to supply digital hardware and software for Volkswagen and Skoda models. This partnership anticipates producing a “significant number” of vehicles utilizing ECARX technology, starting in markets such as Brazil and India.

Partnerships and Future Value

UBS projects that ECARX will begin generating revenue from a “well-known European OEM” by 2026, predicting a lifetime partnership value of 10 billion yuan ($1.38 billion). While UBS did not disclose the name directly, it appears this forecast may pertain to the Volkswagen collaboration.

Analysts expect the new European OEM partnership and the existing FAW collaboration to energize ECARX’s revenue growth over coming years. UBS suggested that the company is well-positioned to benefit from Geely’s supply chain consolidation efforts, which could see ECARX providing 68% of Geely’s digital cockpits by 2026 compared with 50% last year.

UBS began its coverage of ECARX in February, offering a “buy” rating. This sentiment is echoed by all six analysts surveyed by Yahoo Finance. Despite a 33% increase in stock value this year, ECARX shares still reflect a modest price-to-sales (P/S) ratio of 1.25. In comparison, domestic competitor iMotion (1274.HK) has a P/S of 3.58, while global leader Mobileye (MBLY.US) reaches 7.63.

Following the release of its latest report, ECARX’s shares dipped by 6.7%, influenced by broader market conditions, including a nearly 4% decline in the S&P 500 over the past week.

In the fourth quarter, ECARX reported a 4% revenue increase to 1.94 billion yuan. While 16% revenue growth was seen in digital cockpits, declines in software licensing and service revenues tempered growth overall. The company shipped 718,000 units in the quarter, contributing to a record total of 2 million units shipped for the fiscal year. Currently, ECARX technology is installed in 8.1 million vehicles worldwide, serving 18 automakers across 28 brands.

Additionally, ECARX is working on a new product called Skyland Pro, a next-generation ADAS platform already integrated into some Geely vehicles. CFO Peter Cirino described this as “crucial for driving the long-term sustainable growth of our business and the global automotive industry.”

The company implemented strict cost controls, resulting in a 32% reduction in overall operating expenses year-on-year in the fourth quarter. Nevertheless, competition led to a decrease in gross margins from 23% to 21.2% due to a “penetration pricing strategy” aimed at boosting revenue from its automotive computing platforms.

While the net loss improved significantly to 39.5 million yuan from a loss of 326.7 million yuan the previous year, ECARX’s cash reserves fell to 367 million yuan by year-end from 588 million yuan a year earlier. The company indicated it has completed necessary filings to raise additional capital, suggesting a potential fundraising initiative to capitalize on current positive investor sentiment. The filing mentioned could allow for up to $300 million through issuing more shares.