QuantumScape Corporation (QS) Earnings Call Transcript & Summary

I'm very happy to have QuantumScape with Kevin Hettrich, the CFO here of QuantumScape. We're going to do -- give some slides, and then we're going to do a fireside chat. If you guys -- we have a small enough room. If you have questions, you can raise your hand. You can also e-mail [ [email protected]. ] Take it away, Kevin. Thank you.

Good morning, and thank you for being here. What I'll do, just in the interest of time because we have less time in the chat, is I'll present 2 slides and show a picture. So QuantumScape is working to develop significantly better batteries for the automotive space. It's about every -- it isn't common that you get a new chemistry. The last time we got a new chemistry were lithium-ion batteries in the 1980s for consumer electronics devices. What we're working on is a new chemistry called lithium-metal chemistry, specifically solid-state lithium-metal chemistry, which has a number of advantages that we will talk through. So this is the first slide. So on the left, you have a single layer of a lithium-ion battery. You have the cathode on the bottom, the anode on the top, in between is a separator. And the way battery works is when you charge up a battery, lithium ions in the cathode, when it's discharged, charge it up, you push it into the anode. It's like rolling a ball up the hill. When you want the energy back out, ball rolls -- ball rolls back down. So that's all batteries. Lithium ions from the cathode to the anode to charge; discharge comes right back out. So that structure, the folks hear people talk about metals in the battery space. The ones that are more scarce and more expensive come from cathode things like nickel, manganese, cobalt, et cetera. The anode tends to be made of graphite or graphite blended with silicon. It's like a host structure, and it's just a place for lithium ions to live when you charge it up. So that's lithium ion on the left. So what we're doing on the right is, as it turns out, you don't need that anode electrode at all. You don't need to store lithium ions in a space. You can actually play it out as pure metal. So our structure as made, you noticed that there's not a graphite silicon anode, there's also not a liquid electrolyte kind of within that anode either. So the -- and then the lithium ions on first charge just played out as pure metal. In order to make that structure work, you have to replace the kind of porous separator on the left with a solid-state one. So that's why it's solid-state lithium metal. And then just visually by not making 1 of the 2 electrodes at manufacture, it's kind of apparent that you're taking weight and volume out of the cell. So it's more energy dense. Why do you care about that? As a driver of an electric car, you can translate that into more range. Also, there's a significant improvement to power. Imagine you're a lithium ion, you're leaving the cathode, you only have half the distance to travel now. And you crudely double the rate of charging or you have the rate of charge time. So as an automotive customer, those are 2 of the most important things. What is the range of the car? What is the charge time? I won't go into this unless it's in the questions. But by removing organic material from the cell, that also tends to improve safety. So that's the real value proposition to move to the chemistry. And it's not -- and then this is the second slide I'll show. So we're pushing both dimensions at the same time, which is unheard of in the current chemistry. So here, we've laid out a number of kind of Porsches and Teslas and Rivians just to show automotive makers making trade-offs between power and energy density. By the way, these slides can be found on ir.quantumscape.com in our presentation deck. So the y-axis is charge time. How many minutes to go from 10% to 80% of charge? And then the x-axis is energy density. How many watt hours do you have per unit of volume? And you see Rivian, in exchange for a 40-minute charge time, which is relatively slow in that range, has the best energy density. Porsche went the opposite direction. They take about a 20% hit on energy density in exchange for charge time. So our first product, the QSE-5, which we're -- we'll talk about the status probably in the questions, is where that blue line is. That blue line may be better than whatever lithium ion may ever achieve. And that's just the start of our road map. We'd make a larger area cell in the green and then go on with the road map. So that's -- and then I'll show you a picture, and then I'll hand it over to Ben for questions. So we -- 2 years, at the end of '22, we started A-sample testing with a number of automotive players, including the Volkswagen Group, with whom we have a deep partnership. The Volkswagen Group in January talked about how impressed they were of our A-sample testing. The A sample was that cell on top. And then we have a more efficient packaging with higher energy density cathodes. It will be the basis of our B samples in our first commercial product, the QSE-5 on the bottom. So with that as an intro, I'll pause and give it over to Ben for questions.

Thank you. Again, just raise your hand or you can e-mail here. So maybe you guys are very milestone-driven. If you could talk about some of your recent milestones and how they fit into your 4 strategic goals.

Great question. So at the end of 2022, so automotive testing has 3 stages, an A sample, which is show up technology. A B sample, the final B sample, the product is done and it's made off of manufacturing into processes. And then a C sample means that your -- not only is your product done, but you're actually -- and your process locked in, but you're actually making it off the equipment you'll use to satisfy whatever vehicle that you're pointed to with your automotive partner. So we -- at the end of '22, we shipped our first A samples to demonstrate the technology. A great press release by VW earlier this year. That testing takes a fair amount of time. And then in '23, in -- at a kind of a component forum, there were a number of things we needed to do to up the performance in order for us to do B-sample testing. Those were higher mass loading cathodes and more efficient packaging, which I showed you to continue to improve the throughput and yields and reliability of the cells as you move between stages. And then on the bottom, that's -- it's not enough just to have a compelling product, you also have to be able to make it automotive scale and an automotive price points. Our unique component is that solid-state ceramic separator. It's about the thickness of a human hair. And in order to make that with the right throughputs and economics, we have a fast process, which we've called Raptor and Cobra, the 2 different stages of it. So at the end of last year, we landed the equipment for the Raptor process, and we had some prototypes running for the subsequent kind of Cobra. So then this year, as Ben was alluding to, we've set out to do 4 things. At the end of the year is an important milestone, shipping the first B samples. That's a massive product stage for us. As a stepping stone there, we did prototypes called Alpha-2 samples, which showed off the higher mass loading cathodes and the more efficient packaging. We met that goal on the last earnings call. So that one's done. And the 2 other goals relate to how the product is made via Raptor and Cobra. Raptor is we have that core tool that does the heat treatment for our ceramic in. We got it in and started process development last year. And now we want to ramp it up to its full planned output. We made some progress in the last earnings call where we talked about installing automation in front of it and behind of it -- in front of it and behind it. So then we aren't bottlenecking the process elsewhere. And then the final thing is to keep Cobra tracking for next year. So if this year, we're doing our first B samples off of the Raptor line, next year, we'll do a higher volume of B samples off the Cobra line. It's that Cobra process that we would intend to take into a gigawatt hour scale.

And just on that front, your commercialization efforts so far in the road map, I mean you've kind of alluded to it there, but it's really getting out the first B sample this year, and then kind of how does it flow from there?

Yes. In last year, we announced the first product, which is that QSE-5. Let's see. Maybe -- That's okay. I'll go backwards. The QSE-5, which is that blue line, it's about a 5-amp power cell. So that would be more akin to the size of cells that like Tesla and Rivian use today. It's in that range of automotive cell size. Longer term, we would do a larger amp power cell, which is more like the cells that your like CATL and LG. That's more their kind of bread-and-butter cells. So we would intend to have 2 offerings, a small and a large cell to fit kind of automotive need. And we -- this year, B samples are a pretty massive milestone because you're both showing off the product performance as well -- off of your manufacturing [ intent ] processes. That's a very powerful thing to engage customers with. We also mentioned last year, we're working with our first launch partner on that QSE-5 and working quite closely on how that gets integrated into things like modules and packs, and then all the different volumes that we would need to ship and demonstrate in order to end with ourselves in a vehicle.

You mentioned the different benefits of your technology over, let's call it, traditional lithium ion. Is there one in particular? Can you stack rank them or just discuss about how customers approach the benefits?

If I can cheat a touch, it's this combination of power and energy at the same time. So in today's cells, you can move along that line, generally by just making the cathode thicker or thinner, which you can intuitively understand. If you have a nice big, thick cathode, that means it needs a big, thick anode, and then a very high percentage of the cell is storing energy. However, if you're the lithium ion, in that case, you have to move really great distances, so your power is negatively impacted. Then the flip side, if you have teeny thin cathodes and teeny thin anodes and a bunch of separators and foils and things, your energy density is weak, but that distance shrinks, and you have excellent power performance. So the fact that we push the frontier out so much and perform well on both, that's probably our #1 selling card.

Maybe taking a step back, you recently got a new CEO. Could you talk a little bit about the new CEO and some of the changes that he's brought?

So Dr. Siva Sivaram, he joined the company in the fall of last year. And this spring, Jagdeep, Founder and CEO, moved into a Chairman-only role, and then we promoted Siva into CEO. So Siva most recently come from Western Digital, where he was the President of Western Digital. Give me big [ air bars, ] but I think it does something like 70% of the world's data storage. So massive -- so complex product, massive scale, dominant market position. Prior to that, he had time with solar semiconductor. So he's used to taking sophisticated technology, bringing it to market and then taking it from that first market position to massive manufacturing multiple times across multiple products with a lot of success. So really perfect and stage appropriate for us. So in terms of change, I was -- we're actually walking and talking about this a bit with Ben. So Jagdeep, kind of Founder and CEO, you could put him in a room, give him all the different pieces of information across different customer and product choices and manufacturing constraints and development and outlook, put it in his head and out would pop a pretty great answer, just with Jagdeep being who he is. Siva's style is very different. So Siva has a PhD in chemistry and has written books on very sophisticated manufacturing. So he has the technical depth. Nonetheless, one of the first things that he did is -- we have decisions and accountability are made by individuals, not groups. And instead of the focus of the meeting being on like what's new and what's interesting and what changed, we start some of these big operational meetings just by, everybody take a piece of paper. Well, metaphorically, it's a PowerPoint now -- and start with, how are you doing against the goals that you [indiscernible], jump right to the ones that are that yellow or red, and then talk about what you're doing to restore them to their status, and then talk about the impact on other people, and let's discuss that. So instead of what's like new and exciting, what's the change, it's very much an execution focus, which is, I think, a great fit for the stage. He's also has a nice kind of cadence to things in terms of here's the platform for the first product. It either gets in there. If it doesn't, like the train is leaving the station so let's just figure out what's the functionality on it because behind it is that other train. So just establishing the processes and systems of execution and that kind of cadence of a product company, I think, are some key things I would highlight.

Has he brought in other former members of his team? Or are you guys still building out your team? Or where do you stand?

He's talked about this on the earnings call that he loves the team and the people and the depth of bench. It's any CEO's prerogative to fill out some of the talent. If that happened, it would probably be more towards our future selves as we become a larger organization focused on kind of scale. You can imagine us opening seats there, and that would be opportunities to bring in some folks. So there aren't -- there's no major executive position he's filled from his past to date, but there's -- that very well could happen in the future.

You mentioned the QSE-5 a couple of times. Could you talk to us about that in more depth, just what it means for commercialization.

Yes. So it's a benefit of -- so for us, as a product company, getting a product out the door that's compelling is a big deal. And if you ask -- if you take the different competitive landscapes of what folks are working on, we assume that the major change in the industry over the next couple of years is that on the anode side, folks will be blending in increasing amounts of silicon. There are some challenges to that, either in terms of cost or in terms of life. But if you [ give ] people full credit, you'd see some of those kind of target spots between where the curve is today and where our blue line is, that our, like, first product is -- might be better than what lithium ion could ever achieve and is only a start and is pretty exciting. And it's such a big market, if you think of like $5,000 of cells per vehicle on the premium, maybe more, 80-plus million vehicles. So it's like hundreds of billions of dollars' worth of TAM. And what we're seeking to do is to have a dramatically better product than anything else that's out there or anything that's close here, this is just a plot of others working on the same chemistry. It isn't a secret that this is a dominant chemistry. 34 years ago, when the inventors of lithium ion made the lithium-ion battery, they tried to make lithium-metal work first because of the obvious benefit, it's not an anode, and used the carbon anode just as a practical solution to get the system working. But this is all of the data that we're aware of in the world of folks working on lithium-metal anode and their performance. On the y-axis is charge rate. So here, it's how many times you can charge in an hour to between 10% and 80%. On the x-axis is cycle life. The size of the circle is correlated with energy density, meaning are you -- if you're working on lithium-metal and you have to put in excess lithium, either in terms of foil or evaporated or something, we [indiscernible] you with circle size. And then the color is just the difficulty of the conditions. If it's a red circle, we don't think it's a product made for anything because it has too much temperature pressure. Blue is probably automotive. The green is probably automotive or consumer electronics. And we're so far ahead of everyone. It's on multiple dimensions that we don't see -- while there's space in the market for other competitor, we don't see anyone yet who has a viable shot.

Yes. [indiscernible]. So you guys are essentially an industrial biotech, developing a product, you've got cash burn rate. It's going to come out in [ a few ] years. How should we think -- how are you thinking about making sure that you have enough cash to get to fruition? And I'm going to guess that you're going to need money to build the facilities once you have proven concept.

Yes. Fantastic question. So we've been conservative on the balance sheet, have always been just because of the size of the market opportunity and because of that cash burn profile. So we ended last quarter with about $1 billion on the balance sheet. We talked about that cash going into the second half of '26. The exact amount of capital is business model dependent. QS-0, which is our set of facilities in San Jose, that's wholly owned. That will make the first QSE-5 for a very, very small automotive vehicle program. High profile, but small because of where we're making it. We have a commercialization agreement with Volkswagen. It's a joint venture that helps make things more capital light. They're stepping stones between 1 and then an expansion of a further 20 gigawatt hours. We also mentioned on recent earnings calls, interest in our technology in terms of a licensing agreement, which is, of course, the most capital light of those models. So for us and the way we look at it is that, that cash burn gets us all the way through all those different milestones where you have finished B samples coming off of your final processes working closely with a launch customer. We have an ATM place, which, through the end of last earnings call, we hadn't used. Our assumption is that doing all those things successfully is a massive value creation. If you think about it, I'm not an expert in the biotech space, but we would have hit some pretty massive phase trials by walking out with, hey, it's done, it's off of the final equipment, it's performing as it's supposed to, and we're feeding it into our launch customer who's saying really nice things. And that should be -- that should enable us to do whatever capital raising we would need for whichever business model or a combination of business models we choose. But it isn't lost on us that to be prudent and scrappy and disciplined with that use of the money that we have. But that's actually a fine kind of risk-reward comparison that we think about, too.

Obviously, the passenger EV market is established [indiscernible] to that. That's [indiscernible] [ 800-volt system. ] So is this scalable to the like [ 400-volt ] [indiscernible]?

Yes. You just -- you put enough -- it's a pack design question. If you think of the voltage of each cell being something like 3.2, 3.3 volts, again, CFO will give you some bookmark errors. You just put those in sequentially until you get to the voltage that you want. So you just put additional cells in series until you hit that ultimate voltage. And then you do kind of -- to make math easy, say, it's 400 cells in a series, you get to 1,200 volts. And then you would just have parallel strands of 1,200 cells until you get to the final capacity that the manufacturer wants. So yes and absolutely.

You mentioned the relationship with Volkswagen. Can you just talk about your number of commercial relationships? And then you mentioned you're delivering B-sample cell to a customer. Maybe just kind of give some more detail on all that.

So VW has been a fantastic partner almost over -- we've met them within a few years of the company being founded. We've been at this for a while. New chemistries are hard. So we've been working basically for a decade. They've invested hundreds of millions of dollars across multiple rounds. We've also -- our relationship now span many CEOs, and each CEO has tended to take the same relationship and even expand the depth across it. We -- they have 2 members on our Board. I've mentioned that they're investors. We have a commercialization agreement in place where, if we hit our milestones, we do a joint venture for manufacturing the cells, and then they turn around and buy out all the output. Their -- they, GM and Toyota kind of battle it out for who's kind of #1 in the world in terms of total kind of vehicles produced. But regardless of if they are 1, 2 or 3, they're one of the world's largest manufacturers of vehicles, and they have many of the world's kind of iconic brands. So they've been great. When we became a public company and had access to more capital, that enabled us to broaden our commercial partnerships as well. So we signed 5 other agreements in terms of sampling and development with other OEMs. So that brings the total to 6. There's a great mixture of traditional players, pure EV, you have larger volume-type brands, performance, niche, luxury, et cetera. So it really -- geographically, it gives us some nice variety, too. And then outside of automotive, we work with Fluence on the grid. We signed a leading consumer player as well. They're probably the most notable non-EV. What's the photo that I showed before? It's kind of cool. So that QSE-5 is about the size of this. It's about the size of the kind of a deck of cards, and it's fairly thin. So it's in the Venn diagram overlap between automotive and consumer, which is nice to have a single product direction, and you can give samples of that into leaders in both spaces, which was a fastest path to market. It's also very -- it's like a free option value on consumer along the way.

The slide with the competitive landscape, some companies, OEMs have projects going on in-house versus smaller companies versus mega-cap companies. How do you -- do you see it where you have OEMs buying from multiple sources?

Yes. So absolutely. I think the classic automotive purchasing playbook is to have multiple vendors, for example, like a big vendor and a minor vendor and then just make them ruthlessly compete every purchasing cycle. And then for the OEMs, the batteries determines all performance of electric vehicle effectively. Range, charge time, safety. It's big, heavy, high-volume thing that you have to design the whole car around. So it's not lost on them on how -- and then you also -- I don't know, just take some of the Germans, like the Audis and Porsches and Mercedes and BMW. They all have very beautiful cars and they used to -- they're competing on the vehicle level. It's not common where you'll get -- or maybe it's unheard of that you'll have a significant powertrain advantage from one of those brands over the other that they can then like really hold over their competitor and take massive share. That's the type of advantage that we're targeting, and they're very excited about it.

I know it's probably early to discuss cost and pricing, but any kind of framework you think about having a premium product in the kind of commodity-type market?

Yes. Yes. So the -- that performance, in terms of energy and power, we talked about safety. The other thing you noticed like in the VW press release is that we have about half the rate of fade that they're used to seeing in lithium ion. We think that's because you [ don't have an anode, ] you don't have a liquid there. So that's also life. And the power, energy density, life safety, those are all the things that people care about. And we hope to be better at -- on all of them at the same time. So that should command a pretty healthy premium. And then the cool thing is you get there by not making 1 of your 2 electrodes. So all that savings in the bill of materials, that's -- of the graphite/silicon. There's -- any of the [ liquid ] ion conductor that would be contained within it is savings. And then we need to make our solid-state separator, we need to substitute it in for the porous one. So at lower scales with less manufacturing maturity, we don't expect to have a cost of goods sold advantage. When we get to larger scale factories, say in the tens of gigawatt hours at maturity, we are targeting a cost of goods sale advantage relative to that same lithium ion stack because we eliminate 1 of the 2 electrodes as manufactured.

Is there a difference in [indiscernible] because of the material [indiscernible]? Meaning that the lithium-ion process has problems or defects and [indiscernible]. Is that [indiscernible] and how do you factor [indiscernible] is that advantage with the competition?

We would -- I'm not an expert on some of -- like if you're comparing with like how a porous separator or something is made, I'm not an expert in terms of -- I think that's literally made by like taking whatever polyolefin film and it kind of stretches it to give it the right spacing and things. So that's a mature product that's made at scale well and it works. We would -- when we replace into it, we have different things that we look for in the manufacturing process. And when our sales are made well, they work well, as you kind of saw in the press release. So one of our jobs is to tighten the conditions over time as we mature and get more experience in making it so that the output is increasingly higher yielding and has the reliability that we expect, and that's just part of kind of coming down the curve.

And maybe last one just because we have so many headlines that seem like the OEMs are retrenching and not going to make EVs and no one's buying EVs. And what are you guys seeing just as far as inbounds or customer discussions as it relates to that?

They continue to say what you all work -- are working on, it blows our mind in terms of performance. Put it in a box and ship it to us so we can then test it and put it in a vehicle. Like if the end market is -- I don't know -- when we're kind of commercializing, it's like 15% of the market versus 20% versus 12% versus 23%, doesn't really matter to us. There's like such excitement over this differentiation that we don't have to worry. We won't bump into the addressable market for some time. And in fact, our -- hopefully, our product actually expands what's addressable. So they're as enthusiastic as ever. And you also -- just in terms of a competitive advantage, just to be sitting on $1 billion with a technology lead in this environment where no one else is getting funding, is also, we think, longer term is actually going to benefit us.

Great.

And just on that, so range anxiety is the #1 issue. You solved for that. So tell me, if you had the same size physical battery of what you're getting now, what is the difference in the range?

It would be correlated with that chart. So call it, does it go like 20% depending on where you're comparing it to. And then we actually get range both ways. If they pack the vehicle with cells, you get 20% more range. And then we're also charging in half the time. So you get it both ways. Your car will go farther and then it will charge faster. So you get both benefits at the vehicle level.

I mean could you make a cell that has [ 500-mile ] range? I mean I think that's...

Well, that is just a pack size thing. So if you -- if the OEM will dedicate more cells to the pack, absolutely.

So we'll have to leave it there. Thank you so much.

Yes. Thank you.