QuantumScape Corporation (QS) Earnings Call Transcript & Summary

Good day, and welcome to QuantumScape's Third Quarter 2022 Earnings Conference Call. John Saager, QuantumScape's Head of Investor Relations, you may begin your conference.

Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape's Third 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.

Thank you, John. We're pleased to share an update on our progress since our last call. I'd like to start with progress towards our 24-layer A sample. This sample is our next major milestone and is intended to demonstrate our commercially relevant battery cell format and a meaningful increase in layer count relative to previous generations of customer samples. As we discussed on our Q2 earnings call, earlier in the year, we encountered a contaminant in our material. Over the summer, our team focused on identifying the root cause. And as a result of these efforts, we're pleased to report we've dramatically reduced the level of this contaminant in our films. In addition, we've also rolled in a number of other process improvements that we believe will produce better performing films. This progress has allowed us to freeze the major design parameters of the film and cell and turn our full attention to building 24-layer test cells. Before we deliver a new generation of battery cells to customers, we run what we refer to as a sample campaign involving several successive phases designed to build the necessary confidence in quality to ship cells to customers. We've kicked off our 24-layer A sample campaign and frozen major design parameters and are now ramping [ film ] production to enable larger volumes of cells to test and collect data on performance and quality. It's important to note that while we have frozen the major design parameters, other parameters may still change as we learn more from our testing process and address any knock-on effects resulting from these improvements. So much work remains to be done. We will not begin shipping cells for customer sampling until we've gathered data that establishes confidence in the performance of finished cells. We'll report progress on this front on our next quarterly earnings call. One key aspect of the A sample design is the cell architecture. All lithium-metal batteries experience uniaxial expansion and contraction during charge and discharge. And we believe existing cell formats are not well equipped to handle this expansion. To address the requirements for our A sample films, we've been developing a new hybrid cell architecture. In our shareholder letter, we've shared the first public [indiscernible] of this architecture, which is in certain respects a cross between a prismatic cell and a pouch cell. We progressed through multiple [ iterations ] of the design with the goal of improving its manufacturability and long-term robustness and expect to continue [ iterating ] on this design. Next, I'd like to provide an update on our customer engagement. We continue to see strong interest in the automotive sector. In addition, on previous earnings calls, we've described potential markets for our technology beyond the automotive sector, including consumer electronics. We believe a key selling point for consumer electronics is the ability of our battery cells to run with zero externally applied pressure since volume constraints within the consumer device make it difficult to apply significant pressure. We're engaged with some of the leading global consumer electronics companies, and I'm pleased to report we've shipped dozens of zero externally applied pressure single-layer pouch cells for customer testing within this sector. Sister cells made with the same design and tested under the same test conditions in our own labs, show the leading cells have achieved over 500 cycles. While we remain focused on the automotive sector to drive our long-term growth and demand from this sector remains robust, we believe the consumer electronics market represents an interesting opportunity that could potentially provide additional revenue and field validation of our technology. I'd like to end with a look at the big picture. While the world is currently facing macroeconomic headwinds and geopolitical disruptions, we believe the fundamentals driving the demand for energy storage remain unchanged. In fact, we believe the need for better batteries has never been more urgent. We've taken important steps forward over the past quarter, and our progress is thanks to the incredible work of our team to overcome challenges, solve new problems and deliver results as we build momentum towards commercialization. On that note, I'll hand things over to our CFO, Kevin Hettrich.

Thank you, Jagdeep. In the third quarter, our operating expenses were $121 million. Our GAAP net loss for the quarter was $118 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 $79 million for the quarter. For full year 2022, we reiterate our cash OpEx guidance of $225 million to $275 million. CapEx in the third quarter was approximately $54 million. The majority of Q3 CapEx was directed towards facility investments. Other large payments went towards our Phase 2 engineering line, medium-scale continuous kiln, cell assembly and testing equipment and QS-0 coating equipment. In terms of full year 2022 CapEx, we expect to be on the lower end of our guidance of $175 million to $225 million. We continue to try to maximize capital efficiency and our ongoing build-out of the QS-0 pre-pilot line. For example, a significant number of tools that we will use as part of our Phase 2 engineering line can also be used to for initial low-volume production as part of our QS-0 line. Including these tools, we continue to target year-end delivery of the majority of equipment needed for this early production on our QS-0 line. With respect to cash, we spent $110 million on operations and CapEx in the third quarter. And we now expect to enter 2023 with over $1 billion in liquidity, above previous guidance of over $950 million. With that, I'll pass it over to you, John.

Thanks, Kevin. We'll begin today's Q&A portion with a few questions we've received from investors. Jagdeep, we'll start with you. What was the impact of the contaminant discovery to your time line this year?

So the impact was required a cross-functional team to identify a root cause and fix the issue, all in a highly compressed schedule. Now the team was able to do all this while not giving up on the goal of delivering a 24-layer cell by year-end is, we think, a testament to the quality and commitment of the team. Resulting [ this issue ] did, however, require additional work that took time away from our sampling campaign, so it does increase the degree of difficulty of achieving our A sample go on schedule. It also puts more work ahead of us, even though we believe we've resolved the contaminant [ in cells ] because any time you make a change like this, you have to validate the fix as you implement, that can take time. I'd like to add that this is the kind of challenge the team has overcome repeatedly over the years. Making a lithium-metal anode cell is not easy [indiscernible] would already be in the market. So this is not the first time we face a challenge like this, and I'm sure it won't be the last.

Okay. And that leads us into our next question. We have roughly 8 weeks remaining in the quarter. How confident are you in your ability to hit the A sample goal by year-end?

So John, as we laid out in the shareholder letter, we have a plan that we're executing to, under which we believe it remains possible to deliver an A sample by year-end. However, it's not a [indiscernible]. The time line is [ not ] tight. Things need to go right, and there's not a lot of margin for error. If unknowable issues come up, it will [ present a ] challenge relative to the near-term time line. Having said that, when we do deliver 24-layer cells, it will be a massive milestone.

Okay. Great. Turning over to you, Kevin. How does the continued macroeconomic uncertainty and challenging capital markets environment affect QuantumScape's plans and strategy?

We can't control macroeconomics or the health of capital markets, which continue to be challenging and uncertain. What we can control is our cash use. There are 2 classes of opportunity [indiscernible] spending, near term and long term, and we're exploring both. Near term on OpEx, it's things like flattening headcount growth relative to plan or in-sourcing services we were previously outsourcing given greater internal capabilities. On CapEx, it's looking at ways to be more efficient with our spend. An example we gave in the letter is finding ways to utilize our Phase 2 engineering line equipment for the initial low-volume production on our QS-0 line. Long term, it's potential opportunities include the evaluation of entry into other markets and more capital-efficient business models. We do plan to end the year with over $1 billion in liquidity. We're not taking that for granted. And as our letter references, we are continuing to look for additional opportunities, both near term and long term, to reduce these cash expenditures.

Okay. Thanks, Kevin. Our next series of questions come from Jose Asumendi of JPMorgan. He writes, when comparing the product development between automotive and consumer electronics end products, what are the commonalities in the product development or the synergies in the product learning curve for both products and end markets? What are the largest differences in the terms of the end product, size of cell, charging time, charging-discharge intensity, cycle times, et cetera? And then finally, do you foresee a larger chance to obtain commercial success earlier in consumer electronics products versus auto? Or is it more or less the same? So to summarize, he is really asking 3 questions. What are the commonalities, what are the differences and then what does the timing look like?

Yes. This is -- these are great questions about the consumer market. So in most ways, the consumer electronics market has easier specs in automotive. For example, the charge rates are lower, the operating temperature requirements are not as stringent, the layer counts are lower. So all those are good things. Offsetting these benefits is our belief this application requires zero externally applied pressure because physical space is limited in most consumer devices. And we believe this feature is hard to implement with lithium-metal anodes, which in the past have generally required pressure to operate. In fact, many groups over the decades have published papers suggesting that lithium metal intrinsically requires pressure to work. And so we see this as a scientific breakthrough. The fact that we've shown zero applied pressure in customer labs is what gives us confidence that we can, in fact, add value in consumer electronics. And this is also why we believe we're seeing strong demand pull from the consumer electronics companies. Now the market size for consumer devices, while it's over $10 billion in size is somewhat smaller than the potential market for automotive batteries. But this is also offset by the fact that it might provide a more direct and as you point out, Jose, potentially earlier path to market. Relative to commonalities, what I would say is that a lot of the things that we need to do, such as a more efficient packaging, [indiscernible] cathodes and so on applied to both markets. So we don't actually believe that serving this segment will take us too far off our long-term metric.

Okay. Thanks so much, guys. We're now ready to begin the Q&A for the live Q&A portion of today's call. Operator, open the line for questions.

[Operator Instructions] Our first question comes from the line of Chris Snyder with UBS.

I appreciate all the updates today. So back in July, the company provided test results for the 24-layer prototype, which I think got to a bit over 100 cycles. Can you talk about what needs to be done to go from those results to the delivery of the A sample to the customer? Is it a kind of getting the results up to the gold standard test results, which the company has talked about in the past?

Yes. So first of all, every customer has a different set of tests that they plan to run on the A sample, the 24-layer A sample. So there's not a single sort of test that covers all customers. Now the cells we reported on this summer were the very first 24-layer cells we have built, and we are very pleased that we were able to assemble them and actually get cycling results. But before we can deliver cells to customers, they need to obviously have a much higher level of confidence in terms of both performance and reliability and so on. And we have a process map up for how we get there, right? And that process is as follows. While we're in the development phase, we're doing a lot of design tweaks to try to improve performance and overall behavior. But at some point, when we're ready to start making cells to ship, we do what's called -- we run what's called the sampling campaign. And that starts by freezing many of the key parameters of the design [ itself ] because once we freeze the parameters, that's when we can start ramping up production volumes internally of our separator films of cells. As we make more films, we then build more cells with those films. We then put those cells on test. We usually -- we try and test the same -- under the same protocol that the customer will test the cells. Based on those test results, we assess whether we're ready to ship or not. And once we say we're ready to ship, we build cells for customers and basically select the ones that we want to ship based on the data that we've generated through the previous testing internally. So that's the process that we have. And where we are in the process right now is we've -- as we said in the letter, we have, in fact, frozen the major design parameters. I want to make clear that there are other parameters that we will continue to be improving based on these test results. As we put cells on tests and we learn things, we will, in fact, incorporate insights. So freezing design parameters doesn't mean that there's -- there are going to be no tweaks at all being made, but the major parameters are already selected. Then we will use those separator films to make cells, 24-layer cells, which we will put on tests. And we're in the process right now of ramping up film production. We've said before our goal for the year is to ramp up to around 8,000 films per week -- for the peak week. That still remains our goal, and we want to get to that goal because that's what will allow us to make enough cells to test internally to get the confidence that we need. And then finally, when we do all that, if the cells perform the way that we believe they need to be, it gives us confidence that's when we ship to customers. That's kind of the process and where we are right now in the stage where we're freezing the major parameters and are ramping up production to start building these cells to test internally.

We really appreciate that color around that process. I guess kind of just following up on potential tweaks to the parameters. Would those come internally from QuantumScape as you're analyzing the test results and your making tweaks? Or would they come -- or could it also come from feedback from the customer after the A sample [ have shipped ]?