Microvast Holdings Inc
NASDAQ:MVST
Earnings Call Analysis
Q4-2023 Analysis
Microvast Holdings Inc
The company demonstrated significant progress in financial metrics during Q4 2023, with notable improvements in both gross margins and net losses as it scales operations and advances its technologies. Operating expenses for the quarter increased to $46 million, up from $37.3 million in Q4 2022, largely due to an expanded workforce required for facilities in Colorado and Tennessee. However, over the full year, operating expenses slightly decreased by 3%, a testament to cost management efforts. A reduction in GAAP net losses from $158.2 million in 2022 to $106.4 million in 2023 further highlighted the company's effective loss-narrowing strategies.
Adjusted gross profit showed a remarkable increase from $4.2 million to $24.6 million in Q4 2023, pushing the adjusted gross margin up by 17.1 percentage points to 23.5%. Full-year figures aligned with this positive trend, with an adjusted gross profit rise from $16.8 million to $63.3 million and an adjusted gross margin boost by 12.5 percentage points to 20.7%. These improvements were attributed to higher sales volumes, better utilization of manufacturing facilities, and improved raw materials pricing, reflecting a stronger operational efficiency for the company.
Management provided optimistic guidance for Q1 2024, with revenue expected to surge between 40% to 60%, targeting a range of $65 million to $75 million. The aim to sustain a gross margin between 20% to 25% underscores confidence in the company’s profitability, backed by the anticipated product delivery across all three Huzhou phases and a concerted push in R&D initiatives.
Asia Pacific and EMEA regions exhibited expansive growth, with year-over-year increases of 19% and 434%, respectively. Conversely, U.S. business faced a slight decline, which the company plans to counteract by eventually reaching operational efficiencies at the Clarksville facility. The management's decision to reduce OpEx and CapEx in the U.S. hinges on securing the required funding, estimated to be around $150 million to finalize the facility, which is yet to be secured but is a focus area to enable planned growth.
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Thank you for standing by, and welcome to Microvast Fourth Quarter 2023 and Full Year Conference Call. [Operator Instructions] and the conference is being recorded. [Operator Instructions]
I would now like to hand the call over to Microvast Investor Relations. Please go ahead.
Thank you, operator, and thank you, everyone, for joining us today. With me on today's call are Mr. Yang Wu, Founder, Chairman and CEO; and Mr. Craig Webster, Chief Financial Officer. Mr. Wu will start off with a high-level overview of the quarter before providing some operational updates Mr. Webster will then discuss our financials in more detail before handing it back to Mr. Wu to address our second quarter 2024 outlook and opening the call up to questions. Ahead of this call, Microvast issued its fourth quarter and full year 2023 earnings press release, which can be found on the Investor Relations section of the company's website, ir.microvast.com. In addition, we have posted a slide presentation to the website to accompany management's prepared remarks.
As a reminder, please note that statements made in this call are forward-looking and based on current expectations and assumptions. They should not be relied upon as representative of views for subsequent dates, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements due to new information or future events.
Actual results may differ materially from expectations due to a variety of risks and uncertainties. For more information on material risks and other important factors that could affect our financial results, please refer to our filings with the SEC.
We may also discuss non-GAAP financial measures during this call. These measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. These non-GAAP measures have been reconciled to their most comparable GAAP metrics in the tables included at the end of our press release.
After the conclusion of this call, a webcast replay will be available on the Investor Relations section of Microvast website.
And now I will turn the call over to Mr. Wu for opening remarks.
Thank you, and thank you all for joining us today. Please turn to Slide 3 as I cover a few highlights from our full year 2023 financial performance before turning to our key achievements in Q4.
I'm pleased to say that we booked a record revenue of $306.6 million for the full year 2023. This was driven primarily by substantial year-over-year revenue increases in our EMEA business, which grew revenue for 134% compared to 2022.
We also saw double-digit percentage growth in both APAC and China. The overall business saw a top line increase of 50% year-over-year, and we delivered this strong revenue performance at a high gross margin, which increased to 90% from the 4% in the prior year.
I'm also very pleased with the results from our Huzhou Phase 3.1 expansion that was completed during the year.
Starting in the second half of 2023, we were delivering qualified products to our diverse customer base from our latest fully limited production line. This demonstrates that we can successfully industrialize our technology at scale.
please join me on slide 5 to over our success in the final quarter of the year. Along with some challenges that we also faced, we saw our highest revenue quarter of $104.6 million, jumping 61% year-over-year, and we achieved an adjusted gross margin of 23.5%. We saw major successes in our commercial vehicle business, expanding relationships with OEMs worldwide. We are working with the new manufacturers on testing our products for additional contracts in 2025. And we have begun to gain meaningful traction in specialized and differentiated vehicle segments.
However, the year also brought challenges. We saw a challenging financing environment and reduced energy storage contract through mutual resolution with the customer and an overall negative market sentiment in both the sector and for rapid growth companies like ours.
Turning to Slide 6. We have made some exciting business development in our commercial vehicle business. We received many new orders and delivered to customers a variety of products, showing the strength of our technology portfolio. This included leading OEM such as eVersum, Evoy, LGMG and Yongxin New Energy.
Please join me on Slide 7 to go over some updates around our APAC operations. As I mentioned in the opening, our Huzhou Phase 3.1 automated line has been successfully brought online is producing qualified 53-point-amp-hour cell. And the products are being delivered to customers. We do not expect significant additional CapEx associated with Huzhou Phase 3.1 going into 2024.
The APAC business generated revenue of $219 million in full year 2023, increasing 18% year-over-year. We anticipate that the APAC business will generate regional profitability as operations are now mature, self-funding and achieving sustainable gross margins. We also expect the further revenue expansion year-over-year. Our expectations are driven by 2 major components.
First is the market in China, where we stable from our established base of e-bus OEMs, but we are also seeing promising expansion opportunities in the electrified environment and earthmoving segments, where our high-power products offer performance advantages.
The second major contributor is the Indian market. where the e-Bus segment is growing rapidly and is supported by government incentives with some of our major partners expected to benefit.
Turning to Slide 8. We will go over some updates around our EMEA operations. We saw electrifying growth in 2023 with the regional revenues up more than 434% year-over-year. We have localized the production of our VDA modules and anticipated customer demand will lead to increasing volumes. We also expect additional revenue growth in the region of 2024.
Having narrowed our losses in 2023, we also have our sight set on regional breakeven for the coming year. In addition to a developing pipeline of the new and exciting commercial vehicle customers, we see several catalysts for continuing growth in 2024. One of those is higher expected volume from e-Bus and LCV platforms.
As we are seeing continued expansion and demand in the segment, we're also seeing segment demand and are working with a leading refuse truck OEM with a demo expected at IAA 2024.
Finally, join me on Slide 9 to go over some updates for our U.S. operations. The challenging financing environment means that for the time being, we have got Clarksville as far as we can on our own balance sheet. Because of this, regional growth and profitability in APAC and the EMEA will be the key drivers for our business in 2024 until the third-party financing needed to complete a Phase IA facility has been secured.
Accordingly, we are not currently anticipating material production volumes or revenues from our Clarksville facility, we are also not expecting IRA credits in 2024.
Once we are able to secure financing, our current estimate is that an additional 6 to 8 months is needed to bring Clarksville Phase IA to SOP. With the majority of this time allocated to equipment installation, in the interim, we will be slowing CapEx and OpEx spend in the U.S. This slowdown will allow us to better manage liquidity, evaluate financing opportunities and build out our U.S. operations for substantial success in 2025.
Once we reach SOP, we anticipate generating IRR credit and delivering qualified products to commercial vehicle and energy storage customer in the U.S.
This lack of funding in the U.S. has contributed to our assessment, there is currently a substantial doubt that we can continue as a going concern with our recent additional capital. And we are engaging in the financing and the customer activities to address this urgently. However, we remain bullish on the U.S. and the opportunity it presents to our business.
The energy storage market continues to be an area with exponential growth, and there is significant customer interest in our Clarksville capacity given the advantages in security battery supply that meets domestic content requirement.
On the commercial vehicle side, OEMs are increasingly electrifying their vehicle line with this. We see demand for our varied technology across a wide area of segments and have numerous projects underway that we anticipate will create demand for Clarksville production in 2025. So 2023 was not without challenges. It was also full of successes, and we are proud of our achievements in the last year. We are looking forward to executing on the many opportunities ahead of us in 2024.
I will now turn the call over to Craig Webster to discuss financials in more detail.
Thank you, Mr. Wu. I'll spend the next few minutes discussing our full year and Q4 2023 financial results. Please turn to Slide 11, and I will summarize the main line items from our Q4 and full year P&L. We recorded revenue of $104.6 million in Q4 2023 compared to $64.8 million in Q4 2022, a 61% year-over-year increase. As Mr. Wu mentioned earlier, a record revenue quarter for the company.
On a full year basis, despite facing several challenges, we achieved revenue of $306.6 million, up 50% from $204.5 million in the prior 12-month period.
We posted gross profit of $23 million in Q4 2023 compared to gross profit of $2.2 million in Q4 2022, a 934% improvement. On a full year basis, our gross profit was $57.2 million compared to a gross profit of $9.1 million for the prior year, a 531% improvement.
Our gross margin for full year 2023 was 18.7%, whereas in the prior year, it was 4.4%, a 14.3 percentage point improvement.
Operating expenses were $46 million in Q4 2023 compared to $37.3 million in Q4 2022. The largest contributor to the increase in operating expenses was the increased headcount for both our Colorado and Tennessee facilities as we build out our U.S. operations.
Full year 2023 operating expenses were $165.9 million compared to $170.7 million in the prior year, a 3% decrease.
GAAP net loss was $24.6 million in Q4 2023 compared to a net loss of $33.7 million in Q4 2022.
GAAP net loss for full year 2023 was $106.4 million compared to a net loss of $158.2 million in the full year 2022. These results show that as we scale our business and industrialize our technologies, we are narrowing our losses.
We believe a more appropriate representation of our financial performance especially as it relates to cash operating expenses and operating loss is as illustrated in Slide 12.
After adjusting for noncash settled share-based compensation expense in our cost of sales, adjusted gross profit was $24.6 million in Q4 2023 compared to adjusted gross profit of $4.2 million in Q4 2022. This translates into an adjusted gross margin of 23.5% in Q4 2023 compared to 6.4% in Q4 2022, a 17.1 percentage point improvement. We're pleased to see another quarter of gross margin improvement as our business benefits from higher sales volumes, increased utilization and better raw materials pricing on these higher volumes.
By making the same adjustments for full year 2023, our adjusted gross profit was $63.3 million compared to an adjusted gross profit of $16.8 million in the full year 2022. This translates into an adjusted gross margin of 20.7% in full year 2023 compared to 8.2% in the full year 2022, a 12.5 percentage point improvement.
After adjusting for noncash SBC expense in SG&A and R&D, our adjusted operating expense in Q4 2023 was $34.3 million compared to $21.4 million in Q4 2022. We're making the same adjustment for full year 2023. Our adjusted operating expense was $107.1 million compared to $96.5 million for full year 2022. This was an 11% year-over-year increase being a much slower rate of increase than our top line growth of 50%.
After making those noncash SBT expense adjustments and accounting for changes in fair value of our warrant liability, adjusted net loss was $11.4 million in Q4 2023 compared to $15.9 million in Q4 2022.
On a full year basis, adjusted net loss was $41.6 million in full year 2023 and compared to $77.3 million in full year 2022.
Reconciliations of these non-GAAP metrics to the most comparable GAAP metrics are included in the tables at the end of our earnings press release.
Slide 13 shows the geographic breakdown of our revenue for the 12 months ended December 31, 2023, compared to the prior year period. As you can see, our 3 largest markets were Asia Pacific, China and EMEA, growing 19%, 18% and 434%, respectively, year-over-year.
Revenue in our U.S. region for full year 2023 posted a slight decline of 14% compared to full year 2022 with revenue losses in our ESS division being the biggest disappointment. However, as Mr. Wu mentioned, despite some near-term financing challenges to address in the U.S., we expect our U.S. business to make meaningful contributions in the future as we are well positioned to capitalize a domestic content opportunity in the U.S. once our Clarksville facility reaches SOP.
I will now turn it back over to Mr. Wu to provide some visibility into outlook for the coming year.
Thanks, Craig. Please turn to Slide 15. We expect Q1 2024 revenue to increase 40% to 60% year-over-year. This puts Q1 revenue guidance in the range of $65 million to $75 million. We also aim to maintain a gross margin target of between 20% to 25%. From Asia Pacific operations, we expect all 3 Huzhou phases to deliver qualified products to customers throughout 2024.
We will also be targeting increasing utilization, continuing progress on R&D for new products and targeting regional profitability.
In 2024, we also expect our EMEA operations to continue meaningful revenue growth with new customer wins for specialty commercial vehicles. We are targeting regional breakeven for the year.
Turning to U.S. We plan a reduction in OpEx and the CapEx spending for the year until we can secure funding for Clarksville. Once the facility is online, we will be talking rapidly growth and aiming to secure capacity commitments from both energy storage and commercial vehicle customers to achieve high utilization levels. For 2024, the company's core focus is going to be maintained revenue growth and our margin profile as [indiscernible] to improve our liquidity and providing us with a role to breakeven.
With that, I would now like to open the call up to your questions. Operator, please provide instructions for the Q&A session.
[Operator Instructions] our first question comes from the line of Colin Rusch of Oppenheimer. Colin.
Can you talk a little bit about the overall quantum of capital that you're going to need to secure to get Clarksville back on track? And then also, how we should think about the moderation in OpEx in the U.S. and how that impacts the overall company OpEx run rate?
Mr. Wu, do you want me to take that one?
Yes, please. Great.
Colin, help you well. So as we indicated last time, we've got about halfway through Clarksville on CapEx. So to get it done, it's about $150 million. That includes some aging AP. And so the majority of what's left to spend relates to equipment and installation. And to do that, we need to raise money. As we've always said, we've got this as far as we could on balance sheet. So we've been working for quite a period now, and you're probably sick of hearing us talk about it on the financing. It wasn't done at the end of the year. We're still making progress on that. No guarantees that it's done, but we've been spending a lot of time with 1 lender in particular.
The estimated timing to get closer to SOP would be 6 to 8 months from when we close that financing. And as I just mentioned, the majority of that time is to do installation. We've already started some installation during Q4.
OpEx-wise, currently, we're managing that because we've not closed the financing. So really, as we mentioned on the call, there's a regional focus on what we do, which is China has got really good and decent growth rate. It's profitable, it's self-financing. It's got access to its own CapEx and OpEx credit lines.
Europe, as you just saw, had a really good year. The start of like electrification for a lot of its customers. And we'd expect Europe to have another really solid year in '24. The operating base in Europe is much smaller because it's just a module line, doesn't need any financing, got a really good customer base. Does that answer your question?
Yes, it does. And then in terms of the customer growth in Europe and China, can you talk a little bit about -- you talked a little bit about the content revenue for the first quarter, but can you talk about the order activity and how that's trending versus where you were at a year ago in terms of backlog and how those orders are rolling through?
Okay. The backlog impact we've had has come from energy storage. So we've reached a mutual resolution with a customer to reduce the volumes on their contract that's impacted backlog. So backlog now is predominantly a commercial vehicle. You know our business pretty well, so Q4 is always seasonally the strongest quarter, particularly in China, where they defer a lot of their orders until the end of the year. Q1 still going to be a really solid quarter for us. And as you know, it's always the slowest one because of the impact of Chinese New Year. So we lose a lot of revenue in now to the February this year.
The encouraging part on Europe is a number of platforms that we're on. So it's e-Bus, it's commercial vehicles and it's commercial truck specialty. So we'd expect Europe to have a big contribution to overall revenue growth in the year. But just looking at where we're at on the financing side, which is a key focus, we can give you a much more informed decision on the year and what things look like in a couple of months' time.
[Operator Instructions] Our next question comes from the line of Sean Milligan of Janney Montgomery Scott.
Craig, can you walk us through expectations for 2024 on kind of like operating cash flow? You highlight that you're trying to run Asia and Europe kind of breakeven or above breakeven, just kind of trying to get the expectations on op cash flow for this year and then just updated CapEx figures? If you're not spending anything for CapEx in the U.S., where is spending on that 48 amp-hour line in China, and that's still fully funded via the facility, correct?
Yes. So any CapEx spend in the U.S. is going to be completely contingent on raising financing to do that. So if we are successful to close, then we'd expect to spend around $150 million in the U.S. That's Clarksville Phase IA debt funded. CapEx elsewhere would be very, very minimal. China, if we need to do the Phase III 0.2 expansion, that's a smaller amount of dollars like we estimate around $30 million to do that, we would do it provided we've got financing in place. And as you know, we've got the CapEx. It's a line we've not used yet in China from the local banks.
So the biggest project, and it's highly contingent on that financing is doing Clarksville Phase IA.
Operating-wise, we're self-funded in China, self-funded in Germany. Germany has got a very strong position with its customers. in terms of backlog increasing sales, and it's not an expensive operating base to run. We've got to be quite careful in the U.S. And depending on where we get to in terms of that total financing solution for the U.S., we're going to have to be quite prudent in how we manage U.S. operations going forward.
Okay. And so right now, as it stands, that Phase 3.2 in China. Is that going forward or not?
Currently, we'll put 3.2 on hold. We've still got a decent -- fairly decent growth opportunities in China without that.
Our next question comes from the line of Derek Soderberg of Cantor Fitzgerald. Derek.
On gross margin guidance, 20%, 25%, a really good number there. Curious what's driving that. Can you talk a bit about Huzhou utilization today and kind of where that's going to move throughout the year? And then maybe if you could just kind of frame gross margin directionally from there how we should sort of move throughout the year, that would be helpful.
Mr. Wu, do you want me to take that one?
Go ahead. You can answer the questions, correct?
Okay. Okay, sure. Okay. Thank Derek, you're right. Really, a really solid year for us in terms of gross margin business fundamentals. We know the news on liquidity in U.S. is not great, but we feel we've got solutions for that, and the business fundamentals lend into it, right? So we -- we've just grown revenue 50%. We really expanded the gross margin line, and we really managed our OpEx. And remember, we're a global business. So compare our OpEx to other people that they're trying to launch a sort of new technology battery business right as a global operation, and we've managed that pretty well.
Gross margin expansion really came down to higher sales, always helps, so higher sales better pricing on our raw materials, yields being really good across the 3 phases, Phase 1, 2 and 3, and then raw material prices have helped as well. So that's been the real contribution there.
As we look out this year, I think we're going to see good utilization on all lines, Phase 1, 2 and 3. Phase 3, as you know, is 53.5 because they're going to be delivering to all regions, China, Asia Pacific, Europe and the U.S. So we'd expect this year to be able to hold gross margin at 20% to 25%. And then it will just come down to if we're really accelerating Clarksville again, then there will be some push up on OpEx. But if we don't do that, we will be managing OpEx not far from where it's currently at.
Got it. That's helpful. And then just related to sort of a previous question, just wanted to clarify some things with the OpEx management here, is there sort of a revenue run rate you would need to get to reach profitability? Could you share that with us? And then just to clarify, it sounds like APAC is going to be profitable this year. What about EMEA and the broader business, if you can kind of relate that back to the revenue run rate you need to get to from profitability, that would be helpful.
Sure. So APAC had consistent profitability, the whole year '23. We'd expect that to continue into '24. EMEA, if it can deliver the volumes that we're expecting, so a decent growth year would be very close to breakeven. The -- our Q4 numbers are quite illustrative of what it needs to take to get close to breakeven. So probably when we're at a sort of 150 run rate revenue per quarter, we're going to be very close to breakeven.
I would now like to turn the conference back to Yang Wu for closing remarks. Sir.
Okay. Thank you all for joining us today. We look forward to updating you our progress again soon for the first quarter 2024 along with additional operational updates and guidance for the rest of the year. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.