QuantumScape Corporation (NYSE:QS) Q4 2022 Earnings Call Transcript

QuantumScape Corporation (NYSE:QS) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Good afternoon, and thank you for attending today’s QuantumScape Corporation’s Fourth Quarter 2022 Earnings Conference Call. My name is Jason, and I’ll be the moderator for today’s call. All line will be muted during the presentation portion of the call and opportunity for questions and answers at the end. I would now like to pass the conference over to our host, John Saager.

John Saager: Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape’s fourth quarter 2022 earnings call. To supplement today’s discussion, please go to our IR website at ir.quantumscape.com to view our shareholder letter. Before we begin, I want to call your attention to the safe harbor provision for forward-looking statements that is posted on our website as part of our quarterly update. Forward-looking statements generally relate to future events, future technology progress, or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

There are risk factors that may cause actual results to differ materially from the content of our forward-looking statements for the reasons that we cite in our shareholder letter, Form 10-K and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be QuantumScape’s Co-Founder, CEO and Chairman, Jagdeep Singh; and our CFO, Kevin Hettrich. Jagdeep will provide a strategic update on the business, and then Kevin will cover the financial results and our outlook in more detail. With that, I’d like to turn the call over to Jagdeep.

Jagdeep Singh: Thank you, John. In 2022, we made significant advances in our technology, encountered and overcame obstacles, and ultimately achieved our major goal for the year. I’d like to briefly recap our key results in 2022 and provide an overview of our plans for 2023. Our most important goal for 2022 was to ship our first 24-layer A0 prototype battery cells to customers. To achieve this, we needed to incorporate several improvements into our system, from separator film and cathode production to cell assembly, focused on the quality, consistency, and throughput of our designs and processes. We are pleased that the team successfully incorporated these improvements, and rallied to meet our target of shipping 24-layer A0 cells to customers by year end.

We see this as a demonstration of the team’s ability to overcome adversity and deliver on our goals. While specific customer testing protocols and results can’t be disclosed, we can report that generally, most cells have performed well on initial testing, including fast charge and early-cycle capacity retention; however, we need continue to improve cell reliability as we move from prototype to product. This is a key focus area for 2023, and we expect that as we make progress on the quality and consistency of our materials and processes, reliability will continue its upward trajectory. We believe this 24-layer A0 milestone represents a significant step forward, though more work remains to turn our technology into a commercial product. I’ll discuss some of these remaining steps when I lay out our 2023 goals.

The A0 prototypes also incorporate our proprietary cell architecture, a hybrid between pouch and prismatic cell formats, designed to accommodate the volume expansion and contraction that occurs during the charge and discharge of lithium-metal cell. We shared the first images of this new architecture in our shareholder letter, and intend to share more details on this architecture later in the year. In addition to our cell development progress, in 2022, we also focused on scaling up cell production. One goal was to continue the build-out of our QS-0 pre-pilot production line by taking delivery of a majority of the necessary equipment. We’ve merged our Phase 2 engineering line with QS-0 and have now received a majority of the tools necessary for initial lower volume production on this consolidated QS-0 line.

Our final key goal for the year was to scale up production of our ceramic solid-electrolyte separator to a peak level of 8,000 weekly film starts. We achieved this goal, which demonstrates progress in process development, equipment qualification and manufacturing capability. Next, I’d like to briefly discuss our customer engagement. Over 2022, we continue to see strong interest in next-generation batteries for EVs from a variety of automotive OEMs. And as we previously reported, this culminated in sampling agreements with three more auto makers including a top 10 automotive OEM by global revenue and a pure-play EV OEM. For the consumer electronics industry, we shipped dozens of single layer pouch cells for customer testing with zero externally applied pressure.

We’re pleased to report that the sister cells from the sampling campaign we reported in our last quarter have now surpassed 800 cycles. We believe this exceeds the requirements for many consumer electronics applications. Now I’d like to lay out our goals for 2023. Beyond A0 prototype shipments, we plan to focus on subsequent generations of prototype samples, incorporating advances in cell functionality, process and reliability, as well as bringing online the manufacturing capability of our consolidated QS-0 line. Our goals for the year are focused on these four items. Our first goal is to increase cathode capacity loading to approximately 5 mAh/cm2. As in conventional lithium-ion batteries, our cathode can be optimized either for better energy density or higher rates of power.

We believe our current loading of approximately 3 mAh/cm2 would be in the range required for a power cell, but to optimize for energy density, we’re targeting a capacity loading in the range of approximately 5 mAh/cm2. This goal requires addressing several technical challenges, including coating thicker cathode electrodes, while maintaining quality, calendaring the cathodes to the necessary thickness, optimizing cathode microstructure and ensuring good catholyte interface with active material. Our second goal is to improve the efficiency of our cell packaging. While the active materials of the battery set a ceiling of how energy dense the battery could be, the ratio between active materials and inactive materials, the packaging efficiency determines the final energy density.

So we’re targeting improvements on that front this year on our path to commercialization. Our third goal for 2023 as we move from prototypes to commercial products is to improve the quality and consistency of materials and processes. Some core drivers of quality and consistency in our manufacturing process include increased precision through automation and control, quality of input materials and particle reduction across our process flow. We plan to implement such process improvements and controls, which we believe will ultimately lead to higher reliability. Finally and most exciting, our fourth goal is to deploy a new fast separator production process that’s significantly faster than our current baseline. And in its initial implementation, we expect it can support up to three times more throughput using similar equipment to our current process.

When this new process comes online, we expect our consolidated QS-0 line will be ready to begin initial lower-volume production. We believe that deploying this fast process in 2023 is an important step on our path to mass production in the coming years. With the focus on these four key goals, we aim to make substantial progress in 2023 towards our ultimate target of product commercialization. On that note, I’d like to say a word about our strategic outlook. In our letter to shareholders last year, we laid out four key premises that underlie our commercial opportunity. First, battery electric powertrains represent the future of transportation. Second, anode-free lithium-metal batteries have the potential to deliver compelling improvements over current lithium-ion batteries.

Third, we can scale up our cells to many layers. And fourth, we can mass manufacture our cells. We continue to believe that the first 2 points are well established, and our work in 2022 was focused on the latter two propositions. Beginning shipments of 24-layer A0 cells demonstrated that it’s possible to scale up our cell layer count to the multi-amp-hour scale, a range we believe is relevant for a variety of applications. By hitting our weekly film starts goal and taking delivery of equipment for our consolidated QS-0 line, we have made progress toward our scale up goals. Of course, as I mentioned earlier, much more remains to be done. However, our results over the past two years have demonstrated that when difficult problems need solving, our team consistently rises to the occasion.

In the months and years ahead, new and difficult problems are sure to arise. When that happens, we’re confident that we’ll tackle these new challenges in the same way we solved the previous ones, with teamwork, stubborn determination and grit. Thank you for your continued support, and we look forward to sharing more of our progress over the year ahead. With that, I’ll hand you over to Kevin.

Kevin Hettrich: Thank you, Jagdeep. In the fourth quarter, our GAAP operating expenses were $113 million and for full year 2022 was $421 million. Our GAAP net loss for the quarter was $109 million and for full year 2022 was $412 million. This level of spend was in line with our expectations entering the quarter. Cash operating expenses defined as operating expenses less stock-based compensation and depreciation, were $70 million for the quarter and $266 million for the year, in line with previous guidance of $225 million to $275 million. CapEx in the fourth quarter was approximately $38 million and for full year 2022 was $159 million, below the guidance range of $175 million to $225 million. Drivers of the variance to guidance include deliberate postponement to further develop process and hardware specifications, cancellation of certain intermediate-stage separator production equipment to focus on our new fast separator production process, and savings captured through the incorporation of Phase 2 engineering line equipment into our consolidated preproduction QS-0 line.

Q4 CapEx was primarily directed towards facility investments, our medium-scale continuous film and cell imaging equipment. As we enter 2023, we continue to try to maximize capital efficiency and our ongoing build-out of the consolidated QS-0 line as well as to reduce our operating expenses. For full year 2023, we see capital expenditures of between $100 million and $150 million, the majority of which will be spent on our consolidated QS-0 line. On the operating expenses side, we’ve reduced spend where possible across the organization. Reductions came primarily through optimizing non-personnel resources such as services, materials and utility spend, as well as rebalancing personnel. For 2023, we see cash operating expenses between $225 million and $275 million.

The midpoint of which is approximately 10% below our Q4 2022 cash OpEx run rate. As a result of these cost savings initiatives, we believe our cash runway now extends into the second half of 2025, an increase from prior guidance through the end of 2024. Historically, we focused on maintaining a strong balance sheet, and we intend to continue this, by identifying new opportunities to reduce spending and by being strategic about opportunities to raise capital to further extend our cash runway. With respect to cash, we spent $101 million on operations and CapEx in the fourth quarter and ended 2022 with $1.08 billion in liquidity, above previous guidance of over $1 billion. With that, I’ll pass it over to you, John.

John Saager: Thanks, Kevin. We’ll begin today’s Q&A portion of with a few questions we’ve received from investors on the sale where I believe investors would otherwise be interested.

A – John Saager: Our first two questions are for Jagdeep. I’m summarizing several similar questions from investors here. But can you give more context on the A0 delivery? Primarily, what’s the significance of that milestone and what additional work needs to be done from here?

Jagdeep Singh: Sure, John. So the significance of these first A0 deliveries is that they demonstrate the core functionality of our technology and our ability to make multi-amp-hour cells. We’ve previously shared some compelling data on the performance of our technology at smaller scales, but we think the multi-amp-hour scale is a significant milestone, because capacity in this range is commercially relevant for a variety of applications, including both automotive and consumer electronics. In terms of what’s left to do, as we reported in our letter, we’re now focused on two important areas. One is a set of activities relating to increasing energy density, including thicker cathodes and improved packaging efficiency. And the other is continued work on production quality and efficiency, leading to improved reliability.

Finally, we’re also excited about and plan to work on deploying our new fast separator production process, about which we’ll share more information at a later date.

John Saager: Okay. Great. How does the delivery of the A0 affect your time line to commercialization?

Jagdeep Singh: Regarding the commercialization time line, we haven’t provided any updated communications on this front since our last earnings call. The main point I’d like to emphasize here is that the path to all subsequent samples, including BMC samples, runs through our 2023 goal. In other words, those samples all require the increased cathode electrode thickness, improved packaging efficiency, incorporate the faster-driven production process and improve quality consistency, leading to improved reliability.

John Saager: Okay. Our next question is for Kevin. Turning our attention to the finances for a moment now. You mentioned the extension of our cash runway into the second half 2025. Can you help explain in more details, what the drivers of these cost savings are?

Kevin Hettrich: Yes, John. We found savings in a number of areas, optimization of nonpersonnel OpEx savings areas, including services, materials and utility spend. CapEx savings resulted predominantly from the merger of the Phase 2 engineering line into a consolidated QS-0 preproduction line, as well as savings associated with the new fast separator process described in the letter. As an organization, we have and always are going to want to be as lean and efficient as possible while keeping in mind our development time line, which is, of course, our highest priority. And this lean and efficient focus by the team contributed to our year-end liquidity of about $1.08 billion, which was in excess of the $1 billion guidance. So, as you mentioned, forecasting runway now into the second half of 2025, an improvement from the end of 2024. That’s something that we’re pretty encouraged with.

John Saager: Okay. Thanks, Kevin. Turning back to you, Jagdeep. Can you talk more about the new separator process that you disclosed in the shareholder letter?

Jagdeep Singh: Sure, John. So we’ve been working on this for some time now as an advanced development project, one that we saw is high risk, but high return has worked. We’ve seen some very encouraging data from this process on small-scale equipment and believe this will allow us to produce significantly faster and with a higher level of quality and consistency. So based on this data, we’ve chosen to focus on this faster process as our primary scale pathway. Now in the fullness of time, i.e., for commercial production, we think this process can allow us to scale over an order of magnitude greater throughput than our current process. But we also believe that we can use this new process with a modified version of our current film production equipment and get about a 3x improvement in throughput in the near term as well. Deployment of this near-term version of the process is one of our key 2023 goals. And of course, we look forward to sharing progress on future calls.

John Saager : Okay. Great. We also got a couple of questions in from Jose Asumendi of JPMorgan. Jose’s first question is a little bit longer-term in nature. He asks, with a three to five-year view, can you remind us of the different gates and stages that you plan to go through from the current 24-layer A0 prototype to final prototypes with the OEMs?

Jagdeep Singh: Sure. So as we’ve said before, the typical automotive stage gates included A-samples, which are typically demonstrations of the core capabilities of the product, followed by B and C-samples, which typically focus on increasing manufacturing maturity. As I said earlier, the important point I’d emphasize is that the road to all the subsequent milestones leads through our 2023 goal. Adding functionality that improves cell level energy density, such as bigger cathodes, more efficient packaging as well as improved reliability through better quality and consistency as well as the new fast separator process that I mentioned earlier. Those things form the foundation for both more advanced A-samples as well as subsequent B-and C-samples and, of course, commercial products.

John Saager : Okay. Jose’ the second question is for you, Kevin. Can you elaborate around the topic of protecting the balance sheet, remaining cash focused and protecting the balance sheet until 2025?

Kevin Hettrich: As I mentioned earlier, we want to be as lean and efficient as possible while keeping in mind our development time line, which is, of course, our highest priority. And I believe we struck the right balance in our 2023 plan shared today. We’re able to resource the 2023 goals laid out in the letter, while also forecasting an extension in cash runway. Our prior guidance was through the end of 2024, and we’re now forecasting cash runway into the second half of 2025. And regarding the question on the protection of our balance sheet, we intend to continue this by identifying new opportunities to reduce spending and by being strategic about opportunities to raise capital to further extend our cash runway.

John Saager : Okay. Thanks so much, guys. We’re now ready to begin the Q&A portion of today’s call. So operator, please open the line up for questions.

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Q&A Session

Operator: Our first question is from Jordan Levy with Truist Securities. Your line is now open.

Jordan Levy: Afternoon all and thanks for taking my question. I appreciate the update. I wanted to just see if I could start asking to the extent that you can talk about it on your thoughts in the consumer electronics space and process knowing that it’s probably sort of a shorter cycle sector than the auto sector and how you’re thinking about approaching that space?

A €“ Jagdeep Singh: Yeah. No, we think that’s a very interesting space for us. Obviously, we’ve been very focused on automotive. There’s a longer cycle with automotive product development. So it was important for us to engage there early. We feel good about our engagements in that space. And as we mentioned on previous calls, we are seeing a fair bit of interest from the consumer sector. We also mentioned in this letter as well as previous letters that we’ve provided single layer cells to the consumer electronics sector to be tested under zero applied pressure. We mentioned in the letter that those cells are performing well. We’ve seen that — we’ve published data from the sister cells that show they’ve exceeded 800 cycles now at zero applied pressure, which we’re really excited about.

We keep talking about zero applied pressure because that is really important in the consumer sector. If you have a battery that requires pressure application apparatus, that’s going to take up volume, space in the phone or in the consumer device, which there isn’t that much. So just having a high energy density cell is not enough, you really want to have that cell operate without a lot of external pressure. And the lower specialty you get to is, of course, no applied pressure. So you only have the one ambient atmospheric pressure on the cell and to our knowledge, we are the only non-LIPON-based, non micro battery style lithium-metal cell that has been shown to operate with zero applied pressure. So we’re excited about those results. Our — the consumer partners that we’re engaged with share that excitement.

And as you point out, it’s a shorter cycle to get to market. So we expect to continue to move those engagements forward, and we’ll report progress as we have progress to report.

Jordan Levy: Great. Thanks for that. And then just a quick follow-up. Any commentary you could give as it relates to the stationary storage side of things. It seems like you’re working kind of on the power cell side of it, but that sort of goes to kind of the other side of it?

Jagdeep Singh: Yeah. I think we mentioned last year that we have seen in this from stationary storage. We announced one early agreement in that space. The feedback we’re hearing from that space is that the performance and specifications for cells that meet the requirements of the automotive sector are good for that sector as well for stationary storage as well. So as we get further along in terms of our production capacities, we fully intend to explore that market opportunity as well. I think the main point that I think comes out of your questions, which is a really good one, is that, if you have a better battery that has better characteristics in terms of energy density, in terms of power capability, perhaps safety, these are all things that resonate across the full spectrum of applications from automotive to consumer to stationary storage.

And the question of which ones we go after, that question is going to be more based on what makes the most business sense for us rather than the fundamental applicability of our technology.

Jordan Levy: Thanks so much.

Jagdeep Singh: Of course.

Operator: Our next question comes from Gabe Daoud with Cowen. Your line is now open.

Gabe Daoud: Hey, afternoon, guys. Thanks for all the prepared remarks. Jagdeep maybe hoping to, to the extent you could share get a bit more color on the initial A sample, the A0. So, is there an update on cycle-like performance, I think as of last quarter, you disclosed it achieved about 100 cycles or so? And then similarly, your comments around your OEM partners being pleased, I guess, with early cycle capacity retention. So, maybe could you define early cycle capacity retention and then provide an update on cycle if there is one.

Jagdeep Singh: Yes. So we didn’t see anything on customer-specific testing, we actually — we obviously can’t comment on customer-specific tests. Those tend to be proprietary to customers themselves. What we did say is that really, the purpose of the A0 samples is to demonstrate the core functionality of the technology and our ability to make multi-amp-hour cells. And these samples did that. We’ve actually been pleased with the performance. We don’t expect these first days efforts to have the same level of reliability as a commercial product. But we’ve seen, as I mentioned to you, I mentioned in the letter, good performance on both fast charge and early capacity retention. So, when we say early capacity retention, what we mean is the shape of the capacity retention curve.

So, remember that one of the ways that batteries hit end of life is that with every charge discharge cycle, you lose a little bit of lithium to side reactions. And so the capacity that remains in the battery decreases with every charge in this short cycle and eventually when it gets to 80% of the original capacity, the cell is deemed to be at end of life. And what we were referring to on letter is that the shape of that capacity retention curve or capacity degradation curve was quite good. In fact, it was similar to what we’ve seen in previous results that we published. So that’s what we meant by early capacity retention. And then what we tried to do is, as I mentioned in the letter as well and on the call, coming — this coming year is add a few key functionality that we think are going to be very important.

One set of features is going to be related to energy density. So, we mentioned the thicker cathode. We mentioned the more efficient packaging. Those are all things that will allow the energy density to the actual prototype cell to approach the energy density that we believe the system is capable of. And then the other parallel track of that is good reliability. And our path to improved liability is very simple. It comes down to basically improving the quality and consistency of our materials and processes in our system, we believe, as we get high-quality in our materials and processes that directly translates to better reliability. So, that’s a quick summary of both the testing and our plans going forward this year.