QuantumScape Corporation (QS) Earnings Call Transcript & Summary

All right. Okay. Good morning, everybody. Welcome to Day 2 of the Morgan Stanley Laguna Conference. I'm absolutely delighted to have representing QuantumScape, Kevin Hettrich, Chief Financial Officer. Kevin, thanks for coming today.

Thank you, Adam, for having us.

You said you were out in the water yesterday. How was it?

I was. I'm married to a Brazilian and it's a requirement to enter the ocean whenever you have a chance. It was nice, and I survived.

Yes. Marrying a Brazillian is entering the ocean for you, okay.

Both, both are good for the health, and also can be hazardous.

Well, my wife's from Madrid so I'm used to the Latin flavor in a household.

So thanks for joining us. I just want to give you an opportunity at the top to update investors on some of the key messages that you want to convey out there.

Perfect. QuantumScape is a company we've been at it for 10-plus years, trying to develop and commercialize significantly better batteries, specifically solid-state, lithium-metal batteries, we can talk about that a little more in detail later on the technology, if that's of interest. And at this point, I don't think there's disagreement that the market for automotive alone for significantly better batteries is -- measures in the many hundreds of billions of dollars. And also, I don't think there's disagreement that lithium metal batteries that I mentioned can offer compelling performance benefits, specifically in terms of charge time and energy density and safety. And for us, we became a public company about 3 years ago, not quite with a technology demonstration showing performance levels in automotive that at the time had not been shown before and still to this day, have not yet been matched. And as of last year, at the end of last year, we shipped our first A0 samples, which formally started product qualification with multiple OEMs. So it's been a great couple of years of progress. And as we mentioned on our last shareholder letter, we've announced our first product, the QSC5, and we're already working with a prospective launch customer for that product. So to go from a massive market opportunity with a very difficult challenging technologies to develop and commercialize to be in the qualification of line of sight to finishing the product is a very exciting moment for the company.

So you launched customer -- is that a consumer electronics customer or auto?

Automotive.

Okay. Fantastic. And when do you think first revenue would be?

First revenue is typically recognized at the end of the B sample stage. So on customer acceptance, we're targeting high-volume B samples in '25.

These would be small amounts of revenue.

Small amounts of revenue. It's more of a milestone than it is -- it's more of a binary that you have that level of maturity than anything that really moves the needle.

And then, more commercially installed revenue, remind us what that timeline is, and whether that...

We've talked about it being after. I think we'll provide more guidance when there's more to share about that first program.

So you're doing like a really hard applied science here, hard tech science.

That's right.

One of the well-known bear cases is that, you're doing samples for 4 layers or a number of layers. And when you scale that up -- to scale it up to, how many layers were your...

24.

When you get to 24, if any one of those layers fail, the whole battery fails. There's not the metrology there to even measure and your science is moving ahead of metrology and you're going to need AI to figure this out. And I will ask in the AI question too, by the way. But kind of what's your response to that, the technological mountain that you're climbing?

So that's -- it's a good question that the products have to work and be robust.

By the way, Kevin comes from tech side, but unusual career path. I don't know if you want to describe that.

So I have done a number of things. I've been at QuantumScape 12 years, and have worn a number of apps, including product management, operations management, finance now, a little bit of IT because of the need to launch an ERP system, becoming a public company, so.

Sorry to interrupt your flow.

No. So you were asking me about hard tech. So yes, it is a hard problem. That's almost the nature of -- you don't have multi-hundred billion dollar opportunities without some level of difficulty kind of going into it. it. And the way we approach that was we said, okay, solving this problem, first, material has to exist. We didn't even know if the material existed when we started the company. You need to make it with earth abundant materials, and you need to make it with continuous flow equipment that, that equipment or similar equipment exists in other industries, because if you don't have those things, you don't even have a shot. And even once you have those things, there's still work to do. So if you can make earth abundant materials off of continuous flow equipment, you then have to identify the process conditions, why if you make it, it works, and it's reliable, and it has sufficient yield. And that is the work of the process development behind the scenes. So you get -- we've been giving investors a view into that when we talk about film starts. This year, we -- one of our 4 goals is to demonstrate what we call the Raptor process. It's the -- it's a very exciting continuous flow process that using similar equipment we used last year, we modified it and we were able to triple the outcome, the output rather. And with learnings from that tool, plus some prototype tools, we -- the next stage of that is the Cobra tool, which would support the high-volume B samples in 25. We're very excited about that process. But full circle to your point, it's all about what are the process conditions you need to hit the upper or the lower limits. How do you detect it? How do you get the feedback into the tool. And that's just -- that's kind of classic manufacturing that is done in batteries and semiconductors in disk drives. We just hired Dr. Siva Sivaram, President of Western Digital to lead our technology and manufacturing front. And that's just -- that's a skill set that added to the bench where very high -- those companies make millions of devices, driving billions of dollars of revenue per year, very applicable skill set to our scale up.

I'm tempted to ask you, what's a harder problem? The cell itself or the manufacturing? But I think it's the 2.

The 2 are intimately woven together.

So anything that you'd like get top of mind in terms of what you're dealing with now?

So one -- people on that, so I would -- we have this great chart of the competitive landscape. We plot everybody's lithium metal performance globally around the world on a chart that has a lot of variables. There's charge time. There's energy density, there's cycle life, there's the conditions, it's all in 1 chart. And you can see how little the competitive landscape has moved, precisely because of that challenge, that if you think about it, you are making a solid-state device that needs to be less than the thickness of a human hair, stable to lithium metal. It has to outperform in terms of interfacial resistance by a factor of 20, what we have, almost free to manufacturer, so it's a wicked hard problem. And in just making it, even when it's done, ignore all the 300-plus patents, just figuring out how to reverse engineer it is almost an intractable problem because you have multiple different ways. It's a multistep problem, multiple different options for each step, multiple parameters within each tool. There are consumables that aren't present in the final product. And what material you use changes how you'd optimize all those other things. And often to get another shot on goal, and say, I want to explore this process, it can be 4, 5 quarters to even just get that data point. You're hiring new members of the team. It combines, kind of batteries with ceramics generally. So you have kind of core competencies that you don't naturally find in companies. So that's what we think makes it such a hard problem, I think, for many companies to go after.

To -- on top of that, the problem you have as a CFO, is to try to not run out of money in the process. And you have a strong balance sheet. You have that buffer on our numbers. It's a good 2 to 3 years, where you would get to a level. I don't know if you agree or disagree with that kind of thing.

Yes, I can give a little color on it. So ending the last conference call, Q2, we had $900 million in liquidity. Pro forma for the recent capital raise that boosts up to $1.2 billion. That's sufficient to go through all the milestones that I just mentioned, including the high-volume B samples at the end of '25, which that's finished products of manufacturing intent processes are recognizable as revenue on acceptance. And then when you go into '26, that just completely changes the nature of our funding requirements. We're going forward, we have the opportunity to say, okay, that's all behind us. I want to raise x funds for y customer program and under z business model. And then there's all sorts of really wonderful nondilutive opportunities out there to keep that as lean and mean as possible.

So if there is further capital needs, it will be tied to like offtake agreements and things like this where you have...

There's now the opportunity to do that because the manufacturing intent processes are being shown, the product is done. I would expect announcements if we keep making progress over the first customer and subsequent customers.

Okay. Yes. Time value of the option. How many people right now?

About 850.

And what would that have been a year ago?

Year ago, maybe in the mid-700s, probably? If you don't quote me on that. So it's been -- we've -- that's a pretty healthy team to both finish development and to develop the processes. There's some shift between the development team to the manufacturing team. And you have increasing levels of automation happening in the background that helps kind of slow that growth.

Any other cost control you're doing to kind of control the [indiscernible], post cap rates provides more opportunities.

All sorts of things. So it's -- that's one of the -- like philosophically, this is a problem that is so important if you pull it off, it begs for a strong balance sheet. There's a number of things that we -- there's -- we don't want to be knocked off course with this big of a problem, but something we can't control like a macroeconomic environment. That's opportunities. So start with a strong balance sheet, look for opportunities to make it stronger, then once we have it, have the discipline to truly have it extend the runway and only selectively invest. So once we've done that, we have initiatives across the company to look for areas to be a little leaner and meaner. At the start of the year, we had a small reduction in force. We have looked into all sorts of cost-saving measures, everything as mundane as let's look at the snack offerings in the canteen to -- in the post SVB world, we've moved to a pair of banks, and we've got better yields out of letters of credit. We're looking at reducing like change orders on tools. There's a -- that's sizable and we've been able to reinvest back into the business while staying within our OpEx guidance.

All right. Finish the sentence for me. Artificial intelligence helps QuantumScape by?

Not at all.

That's [indiscernible].

Well, so artificial intelligence. We use very advanced statistics to do process control. And there are like learning algorithms to help do better prediction. But it's chemistry. It needs to be robust. It needs to work. We showed in our battery showcase in 2020 that the material well made at a component, it's capable of like 2.5-minute type charge times, which is obscenely fast and other things will limit you in the cell. That's a factor of 6 margin relative to what we need. And we've made the material better since then. So the chemistry needs to work and be robust. You shouldn't have a gimmick around until like detecting. But it's not important.

Thank you for that dose of realism. That's good. So one of the things I really respect about your company, the mission is there's just a scarcity of U.S. domiciled tech in these areas. It's just -- so much of that IP is just completely dominated overwhelmingly by outside this country, which, for obvious reasons, presents a problem. So tell us how the IRA, or some of the DOE envelopes, the loan program office, kind of enters into opportunities. Or maybe, maybe not opportunities because it might find a lot of other bulls*** topics along that compete against you.

It's -- if the objective is to develop a closed chain North American like loop for making cells and recycling them vertically, it should have the intended effect quite strongly. There are 2 parts. I believe it's 48-C. There's an investment tax credit, which you can then turn into cash. It's probably most appropriate for smaller-scale facilities that are appropriate for folks doing like pilot lines. You can get 1/3 of the CapEx back in terms of a credit or cash. And then for more mature facilities, Section 45-X, you can get $35 a kilowatt hour. Just for the folks in the room, the selling price of the cell is more in the magnitude of $100 a kilowatt hour. So that's a 35% zip code support. So that's a massive thumb on the scale to shift battery production to the United States. And it's having the intended effect. So I think that's a healthy thing that will be good for the domestic supply chain.

How's the VW relationship going?

It's good. We -- it's at multiple levels. We have 2 members on the board. We have a joint venture together. They have many iconic brands. New technology tends to be commercialized with performance-type brands. And then within VW, there's a number -- you have Lamborghini and Porsche and Audi and Ducati, and all sorts of fun groups of engineers to work with. So I think it's in a fantastic shape.

And remind us, how many OEMs? I don't want to get the number wrong. I'm thinking 8.

6 total, representing pretty good diversity. There are 2 other kind of top OEMs in terms of volume in there. There's a pure-play, EV in there, and then there's 2 kind of global luxury performance brands in there.

Anything the China EV community represented in that list?

We haven't given -- we said that it's geographically diverse. But we haven't given any more color to the competition.

Got it, Kevin. So I asked Jagdeep this question a year ago, which was you start out with a very specific hard problem to solve. And then along the way, you end up learning what works, what doesn't, and you develop a great team of 850 people. How many of those, by the way, are manufacturing versus, let's say, the chemistry side?

It's maybe 50% manufacturing.

Well, as you tackle this problem, it might open up other doors and that it could potentially change the business model, open up new markets, maybe it's a licensing thing, or more asset light, and you had to kind of do the tech work. So what are those kinds of pivots because I asked Jagdeep, would you consider -- maybe someone else values your tech and can scale it, and that you had to do it yourself and do the hard stuff for a number of years, a decade plus.

Absolutely. On the last -- there's kind of 2 questions. There's -- you have a -- I'll split it into there's kind of a product strategy, and then there's also a business model. If you have a significantly higher energy density, faster charging, safer, longer lived, energy storage device, the product market fit options are many across some large markets. We've tried to solve that piece of it in our kind of QSE-5 product. First is, we want to get it to market as quickly as we can, what better way than commercializing the layer count and the x, y dimensions, what we've already shipped at the end of last year. It's about a 5 amp power cell that's uniquely in the overlap between the consumer and the automotive space. We are automotive-focused, launch customer, a prospective launch customer is automotive. Interestingly, the grid, there are good players who actually use automotive cells. So you have a single product direction where we can engage like the leaders of 3 different industries on. So that's how we've tried to keep the focus on the development front. On the business model side, until the point where we have the equipment specifications, the process specifications nailed down, we won't be in a position to teach it for like a licensing type opportunity. So until the point of scale, you should assume either a wholly owned facility or a joint venture. But then in the fullness of time, we have received -- we mentioned in last earnings call, we've received inbound interest in all of those different material options. And we've said that we see ourselves pursuing all of those different options, both to engage a broader swath of the industry. And because it's such a big space, if we can line up incentives, protect the IP and get a fair return, the licensing is fantastic because it's such a big opportunity across multiple models that we see as a real player in the mix.

Got it. Questions for Kevin in the audience? Got a mic back there too, or two. Just speak up, you're too far.

So the question for the folks in the room is what -- how does -- how is what you're working on different in terms of what -- you had some kind of different cathode materials, NMC, NCA, lithium-ion phosphate, as well as kind of form factors in terms of prismatic and cylindrical.

So our -- I'll start with the form factor first. We're a little -- we're -- you can think of it as like a hybrid between kind of a prismatic metal can cell and a pouch cell. There's a photo. There's photos on our website in our shareholder letter. It looks like a pouch cell kind of a frame around it. And we have -- during cycling, the -- as made, the separator is right on the metal current collector. So there's nothing there is made. So traditional battery factors would make 2 electrodes, we literally don't manufacture an electrode. So this is quite a tangent. But talking about national security, which I forgot to answer.

Are those done here?

100% of -- so the anode is primarily graphite. That's 100% imported, 65% or more from China. We take -- like you literally don't -- you don't manufacture. That goes away. So if you want to think of a threat to sell supply, it's actually on the anode side. It's also the most dirty thing to recycle. But anyway, so that goes away. When you played out lithium metal, it actually makes the stack a little taller. So if you look at that, the reason for the picture frame is in a discharged state, there's about a 1 to 2-millimeter depression, say, and then a charge state that actually is flush. So that's, I think, a very elegant low-cost way to handle the volume expansion and to remain in a prismatic form. So that's for the sell side. On the cathode side, we're agnostic to the choice of material. If you want to optimize for energy density, you use like a nickel-rich NMC, if you want to go more towards the low cost end of the spectrum, you use like lithium iron phosphate. And that would just be a conversation with the OEM about what they're trying to optimize for. And then you had a competitive differentiation kind of part of it, what's different. We think of there's 2 camps, there's lithium ion and there's lithium metal. But then, lithium -- relative to lithium ion, because we don't manufacture an anode, we think we have a path to lower cost. We eliminate materials with higher energy density. The distance for that lithium ion to travel is shorter, and you don't have a kind of -- you don't have to find a space in the anode to go into, so you reduce the charge times. We eliminate 2 to 3 organic materials along the way to improve safety. So we don't exist yet. So that's our main thing we need to develop it. But -- and then relative to lithium metal, we're the only group that's ever shown what we think entitlement to automotive performance is. We're waiting for folks. We plot everybody's performance. But until folks show their chemistry at even some small scale that works, what we define as charge and discharge in an hour, each do at 800-plus cycles, 80% capacitor tension, don't cheat by using really high temperatures and pressures. And if you can do that, we think you have a shot at automotive product, no one else has other than us. So we don't see anyone on the horizon, at least so far.

Any difference in expansion properties between LFP or nickel based?

No. It's -- you might have a -- not really. You may have more layers in an LFP-type cell just because there's probably practical coding thickness, you can have and you need more layers around. But nothing notable. You'd see about that same. It would be a function of -- it would be correlated with the capacity of the cell.

And you have been testing LFP?

We have been testing LFP.

More questions for Kevin? Please.

[indiscernible]

Great question. So there was 2 questions. Compare the difficulty between a unit cell and a 24-layer cell, unit cell has got 2 layers in it. And the second question is just talk about pressure, is there something needed at the back level. So on the unit cells, so those unit cells that we ship are literally the components of the 24-layer cells. So you'd assemble 12 of them together. That's what we did for the A0s. For remaining work for the rest of the year, we want to make that packaging more efficient. So we've shown the data behind and then sampled the unit cells for the higher cathode loading. That's a cathode achievement, but also because we have doubled the cathode loading, we're sending twice as much current through the separator. So it's actually signals that we're making the separator better and more reliable in parallel. The remaining work that we need to -- we want to demonstrate that Raptor process and we actually want to make that packaging more efficient. So stay tuned for further developments. I'm just making that more kind of efficient over time, thinking about like the margins of things and the thickness of inactive components. On the pressure, so these are -- our end ambition is to have 0 pressure cells. We think that's required in consumer electronics. We're the first ones ever to show lithium metal, these type of power rates ever working in a 0 pressure environment. That's one of a long list of things that were thought to be impossible, that the company has done. I can go through -- there's quite a list. So that we think opens up consumer electronics that led to sampling with single-layer cells in the space, those we have done, I think, well. In the automotive context, we've been testing at 30 -- kind of 30 -- sorry, 3 atmospheres are less of pressure, and the trend has been to take that down. When you're at that level of pressure, you're in the zone of what automotive folks do at the module level anyway. There'll be some compression from the 2 sides, but it's in the range of what lithium ion already gets today. The reason the cells like that is you help keep the layers of the cells and good contact with each other and promote interfacial resistance. But our -- the plan is to be at worst in the zone of what they're used to, and at best be able to do 0.

Kevin, taking that question, but adding a time horizon to it. How are you tracking on meeting your 2023 goals? Anything you can add?

We -- just to reiterate what we said in the last call. So the cathode 1 is done for that Raptor line, which is really exciting. We did factory acceptance. We installed the equipment. We had site acceptance, so we just need to do the process development and start production, off of it and baseline it. And then on the remaining two, we're making progress on reliability because we ship those unit cells with kind of twice the performance on the cathode side that I mentioned. And then packaging, we mentioned, we're tracking to -- and that to be successful, we'd show off what we've been up to.

Just to confirm, how many layers are in the cells that you're shipping?

For the unit cells was 2 for the -- that first QSC5 product would have 12 of those unit cells for 24 layers.

And the B samples?

Same thing. So the QSC5 is a roughly 5 amp power product featuring 24 layers.

Okay. And milestones that you want us to think about, that we can kind of measure progress as we think towards the 2024 goals of those B samples.

The same 4 ones that we set out at '23 that literally bridge from those first A0s that set up the B sample stage is the higher mass loading cathodes, which is done to demonstrate the Raptor process. The equipment is installed, so we need to do the process development. Improve the packaging efficiency of the cells and then continue to improve the reliability as we move between A to B, B to commercialization stages.

Any more questions for Kevin? Please.

B Samples [indiscernible]. Yes, with the B samples kind of you mentioned that -- I thought you said something that could be for commercial electronics. Can you tell us about that?

So that -- the form factor about the size of a deck of cards in that capacity range of 5 amp power, you're in the zip code of what, like a smartphone would be in, and a lot of consumer devices have about that capacity. So it's something you can sample to, it would be a bit like a needle in a haystack if that particular form literally slot into a consumer device. So at a -- your consumer partner, to actually -- for a design win would request some small changes because they're so sensitive to volumetric energy density that they work very, very closely on the exact dimensions and their product cycle is so tight that they kind of plug even and go. But that about 5-amp power size we see as being relevant to all 3 industries. The automotive space is kind of segmented into 2. There's small form factors and larger form factors. Our next product would be kind of larger x, y dimension cells that would help that part of the segment. If you do that, you naturally lift up energy density another like 20%.

Good question. Any more? We got a few minutes left. In the audience? Kevin, any final thoughts on either the commercial side, the tech side or the financial strength that you've recently bolstered for us?

No, I think we've talked about -- it's a good problem to have. The team is to have that -- if we're successful in development, there are so many different opportunities to commercialize, and we're seeing so much excitement from the partners. We have the capital on the balance sheet to fund it. We've got the shot at doing exactly what we need to do. We have line of sight to that first product already working with the launch customers. So it's a really nice moment, and we look forward to sharing some positive development as we move forward.

And the stocks reacted pretty favorably over the last few months, with the move you've made to give yourself more time. I mean, my message to a lot of companies in a similar position as you, is to stay in business.

Yes. Stay in business, that's right.

Time is value. Who knows where it will end up. But each year, you can keep those 850 people working on this really hard problem, is -- that's where the value can be.

It was something like in the zip code of 8% dilution to bring in $300 million kind of gross proceeds. That...

You give it all day long.

Well, and we're not playing a game of a couple of dollars. We're playing a game of like, many tens of dollars. So it's just -- and we've got progress on some of the other fronts that strengthen up the balance sheet even further. Anyway, that's a good summary.

Kevin, thanks so much for joining us.

Adam, Thank you.

Take care.