QuantumScape Corporation (QS) Earnings Call Transcript & Summary

Kevin Hettrich, Chief Financial Officer of QuantumScape. Thank you for joining us.

Thank you for having us.

You had a morning loaded up with hedge fund one-on-one. So this is going to be...

I did. Adam promised me, a nice relaxing right after our conversation.

So if you want to throw some curveballs at Kevin's way, just raise your hand and get involved. But I'd like to just start out maybe some of the initial messages for the audience and where you are on the story of -- on the journey of solid-state batteries and saving the world with more energy dense batteries?

We are on the path to doing exactly that. solid-state lithium-metal batteries promise improvements in the things you care about, energy density, charge rate, safety. You get there by taking a ceramic sheet and eliminating today's anode material, the graphite and the silicon to get pure lithium metal, and that's what leads to all those benefits. We've been at this for some time. If you look at the data of our prototypes, as evidenced we're far ahead of everyone else. We -- when we became a public company, we were showing that the chemistry worked on a single layer since we've taken that to well over 20 layers, started automotive A samples, which we shipped at the end of 2022. After about a year of data, VW released that in January of this year, the cells performed great. We are marching towards B sample qualification. If we're successful, we'll start that this year. I think we'll probably talk about where we are more. Over the summer, we signed a big milestone agreement with Volkswagen to do a collaboration and a license initially at 40 gigawatt hours expandable to 80, that's strategically important to us. It does great things for our capital requirements. It's a nonexclusive license with great IP terms for us. And we're very excited about the progress we're making on how that part is made. It's not enough just to have the world's highest performing battery in terms of power and energy. You also need an ability to make it at scale, at quality, at the right throughputs and cost. And we have a process to do that, the first stage of which is called Raptor. It's already up and running. And the next stage is called Cobra. And if we're successful, we'll land the equipment for that this year, so we can start making parts off of it the next year. So it's been a good summer so far.

Great. Thanks, Kevin. So -- maybe you can comment on your development in customers just to help inform the audience. How is it split between auto and non-auto, cars, drones, eVTOL, CE?

So this is one of the interesting things about having a strongly -- a battery of such high performance, energy, density, charge, safety, life, costs, these are things every application that has a battery would want. The applications that don't have a battery, if you put a battery on them, would probably be better. So amazing product market fit and long-term kind of TAM spins your mind. That said, we are automotive focused. Automotive is a huge market. We have a very excited customer. We have sampled the As, which to VW's own press release earlier this year, performed way above expectations, especially on life and capacity. If we're successful this year, we start the Bs, we have the commercial agreement in place. Like that is our focus. We are very motivated to make that first licensing agreement successful. We think it could be a template for others. So that's our focus. To your point, there are applications outside of it. Our choice of the QSE-5, which is approximately a 5-amp power cell is in the wheelhouse of automotive. Their automotive market is bifurcated in the small and large cells and there's religious passion on both sides. We plan to make both cells and not engage in the religious passion to sell to both churches. That said, the 5-amp-hour cell was a strategic choice because it was -- it's in the form factor and layer count that we already shipped the A samples. So it's the fastest path to market, and it's in the Venn diagram overlap with consumers. So we can take those same cells, give them to consumer companies, let them evaluate it. It's a bit of a free option. Last year, aligned with that, we talked about a breakthrough in pressure where you don't need pressure for ourselves, which we think is important for consumer, if not required for the applications that require volumetric energy density, and on the backs of that, we signed a tech and evaluation agreement with one of the leaders in that space. So there is a market out there, but we are focused on automotive.

Okay. On the automotive side, no secret. The electric vehicle market has been kind of in a bit of a reset of expectations and growth -- still growing, but nowhere near as fast as folks thought just a few years ago. So how that kind of changed your discussions? Has it concentrated your efforts more with VW. And you said it's not exclusive, of course, but -- and I'm wondering if you see any change in competition as you've seen the supply-demand move from super tightness on EVs to...

To the opposite -- there's -- even excluding China, there's more capacity than the world needs, which is interesting. So from us, we're in a different market segment and on a wavelength that is different than those macro trends. I'll kind of explain both. So our -- our goal is low-volume B samples this year, high-volume B samplers off Cobra next year. We have a launch customer for the QSE-5, very small program, but a program nonetheless, we're working towards. And in parallel, you get that gigawatt hour scale collaboration license with VW. We've talked about that being towards the end of the decade for that scale. So whatever the supply imbalance is pricing, that's fine. That, I think, will play out over the coming years, hopefully, resolve itself by the time we're in market. Even when we're in market, we wouldn't consider ourselves competing against a lithium-ion cell. We're in a class of performance that is far removed where we're not competing on costs, we're competing on performance. And there's -- the automotive market is large and diverse enough where there's an awful lot of market in that premium space. And as a reminder, because we get these performance advantages by eliminating 1 of the 2 electrodes as manufactured, once we hit scale factories, once we have mature processes, we actually think we'll be cost advantaged. So that's -- that's really the knockout punch for the technology.

Now again, going back a few years, I mean at the time of the IPO, you would present investors with charts showing your energy density targets at a cell level versus the prevailing EV technology at the time -- and I mean from memory, I think it was something you were approaching maybe a kilowatt hour per kilogram or hundreds of watt hours per kilogram. And it would have been maybe at least 2x, maybe 3x where we're competing technology is any closer to 3x. Has that changed a bit as we've seen like the industrialization and just kind of continuous improvement, even if there's asymptotes there, kind of where would we stand now in terms of your the arc of where you're -- your line of sight or where the technology energy density, either volumetrically or gravimetrically and how it would compare now to the 2024 T+2...

So, we have this nice chart in our investor deck that shows the frontier of energy density versus power. On the upper edge is a Porsche Taycan cell [indiscernible] exactly it would be Taycan Porsche cell a little over 600 watt-hours per liter, charges in say 70 minutes thereabout. I don't have the chart, so give me brackets everywhere, yes. And then Rivian has the most energy dense cell on the chart, a little over 700 watt-hours per liter, but it takes about 40 minutes of charge, 10% to 80%, and then there's some Tesla cells kind of in the middle, which are kind of the sweet spot balance. That's gotten a little bit better. You actually see Tesla kind of bouncing around, actually optimizing what we think is for cost without really changing those metrics. But actually, LFP wouldn't even be on the chart. It actually leaves the chart that we plot because it's so much lower of energy density. So we -- our QSE-5 would be a 800-watt hour per liter product, 15-minute charge time, making that -- those parts bigger and increasing the layer account gets you to 1,000. So those things haven't change that continues to be compelling. In terms of T+2 where the market is focusing is to put as much silicon as you can into the anode to make the anode more efficient. What we've seen of folks working on that, that's still at performance levels that are south of what our QSE-5 is. And they are working on 2 challenges primarily. One is life, silicon has a lot of expansion to it. When you're cracking those materials, you reform this interface layer, it chews up the active materials in the cell. And second is some approaches there are very, very expensive. One is to take the graphite anode, you flow silane gas through it. You literally do chemical vapor deposition to create the material. That's very expensive, can be higher performance, it's suitable for consumer, yes, automotive, TBD. So those would be the 2 nuts for those technologies to crack. But even if they're successful, 2 comments. One, we'd be beyond it. And two, the market is so big, you probably wouldn't see each other in the market anyway.

Remind us your target for commercialization and kind of some of the [indiscernible] enable factors?

So we've -- there's not too much more beyond what I mentioned there, low volume Bs in '24, high-volume Bs in '25, and then we'll reserve more about that launch customer for a period in the date. We did say at the -- towards the end of the decade for the gigawatt hour scale with...

Reverse revenue, remind us what would be?

It would be associated with those different events.

Okay. I mean, interested in seeing in our discussions with clients, not just in autos, but other sectors, -- the AI theme so pervasive. We were trying to find some overlaps and surface area between industrial story or manufacturing story in AI. So open ended, how -- where -- what's the AI business case for QuantumScape, and then I got a couple of follow-ups.

At a product level, it's not important as a tool for -- as a tool for development and process maturity, it can be. The major applications, there are some standard ones, like can you give it to your software development, your business systems teams to reduce the time of coding, Microsoft pilot -- Copilot types of things. I'm tracking them in my finance function. Standard thing -- taking the first pass through things [indiscernible].

How do that work?

They're interesting. We would be an adopter once it comes through like a Microsoft or an SAP. We're more on the classic stuff, have the ERP up, have the automation work, great control. So we're in like a wait and see, let's see it mature being used, let's let the orders figure out.

It's not going to be like make-or-break for your company or other things?

Well, so that's the exciting part where we see the use more kind of machine learning and some AI is we have a unique understanding of what's required to make solid state with lithium metal work. In a manufacturing context, you want to be able to understand that continuously for your parts that go through. You tend to use vision for quality control. And as soon as you use vision, a picture is not that useful, but a number share is. So to have a computer software identify what you're looking for and put a number to the image and to do that effectively, we have a partnership with LandingAI. We have internal machine learning. So we use it a lot on metrology as a part of in-line kind of quality control. That's our main kind of machine learning type application. But at the product level, at the end of the day, the chemistry has to robust. It has to be robust. It's got to work. It's got to be compelling. So not so much at the product level.

Aviation?

Very interesting, if you put something in the air that weighs less and is more safe, wow. So there's surprisingly a lot of batteries on anything that flies in the air, and you can very quickly monetize that by just how many times are you taking off and landing? What's the weight of that thing? What's the risk to the aircraft and passenger safety and like the suppression systems you need to do fire. So very interesting. I put that in the category of very interesting things that you'd have to jump over a high bar for compelling to stray our focus. In the interim, very focused on automotive.

All right. Who's your biggest competition? Other than yourself.

CATL is who we watch. They set the bar for basically everything [indiscernible]. They have been surprising with the speed, which they fit both scale and quality, I think, to the whole world, credit on them. So they are the bar and over which we need to significantly jump over as a new technology. So a lot of credit to them. That's what we watch the most.

But they're more like conventional?

Purely on the conventional, have yet to produce data on solid-state lithium metal. Within solid-state lithium metal, we don't see anyone near us, yes.

Okay.

Our -- we produced this really nice chart of all the prototype data around the planet and plot it on all the dimensions and things like energy density and power and life and under the conditions. It's pretty neat chart until you show that your chemistry can work any size of prototype, where you can do automotive cycling, automotive capacity retention under reasonable temperature and pressure conditions and just put a dot there, we did that when we became public, since we become public, no other group has. So once somebody puts the dot there, like, okay, then we kind of know where you are and there's still some work to do, but we haven't seen anybody put it out there.

Okay. Let's talk about PowerCo and your agreement with VW. You mentioned it was -- it helped on the funding side. It helped on open up the licensing and kind of really, I think, enable a bit more of a capital efficient model. Have you focused on the tech and then work with them more closely. But any early takeaways? I mean we're a couple of months in. I know it's still early, but -- remind us how it impacts the long-term business model?

So it's structured, there's a royalty, and there's a section on outperformance sharing. So that's the economics to us. There's a royalty prepay, which we have to earn with -- with satisfactory technical progress and agreeing on the form factor. It's nonexclusive. And VW on their dime attributes personnel OpEx, CapEx to help industrialize whatever target form factor they agree. So it impacts on us, that is VW's wheelhouse, as that they're passionate about is global manufacturing and industrialization. We are a technology company. They have expressed a desire to go upstream with the founding of PowerCo, really works for both companies. It gives them an opportunity to have strongly differentiated cells in a fiercely competitive kind of commoditized market. And for us, makes it more capital light and lets us play to our strengths. On the earnings call, just shortly after, we talked about extending our cash runway 18 months, depending on what you assume for cash use. Some had talked about $300-plus million between kind of CapEx and OpEx, multiply that simply by 1.5 years, that's $0.5 billion worth of non-dilutive capital, where did that come from? a, we're no longer investing in a Phase 1 JV. That was $134 million. We had held back. Two, there's $130 million royalty prepay, which we have to earn, as I mentioned. Three, VW is contributing on their own dime, that skilled personnel and OpEx and CapEx with industrialization. That has a lot of overlap with what we were planning on spending. And fourth is kind of the catch-all category of we're being leaner and meaner with the plans, part of which is technology-enabled for example, with this process with Raptors, that's $0.5 billion ZIP Code. Going forward, again, making use an assumption, $80 million per kilowatt hour for a factory in North America or Europe, you talk about the size of this deal up to 80 gigawatt hours, that's like over $6 billion of CapEx for that facility under JV structure -- JV structure. You're taking billions of dollars off of our kind of balance sheet and capital needs. So it's transformative in both periods, the near term and the long term. And for investors, there's an opportunity for really high operating leverage, compelling product, massive market, relatively fixed cost to develop a technology platform. If you can get sufficient licensing volume on that, you get really high margins and the opportunity for -- to push a lot of products through.

But there's still -- has it changed? I mean you said it's nonexclusive, but -- has it changed your continuing discussions with other non-Volkswagen OEMs?

We got -- it's been positive. I think it's fresh credibility of VW's excitement for the technology. And effectively for VW, they're willing to take on more of the work, more of the capital to get it to market. And given that they're contributing their industrialization know-how a little earlier in the process, I think that also -- and the strengthening balance sheet, I think, is the validation, the success of getting there are good things. And because it's -- we co-own that industrialization IP, it makes us more attractive for that second partner. There's a richer kind of pool of IP that is closer to deployment for them that I think it makes it very interesting.

And what's the impact going forward on your CapEx and R&D spend, from -- like before or after?

Well, we were already -- we have buildings. We've Raptors installed, the key equipment for Cobra is on the way. We are already on a -- down certainly on the CapEx side. And then on the OpEx side, while we are producing more and more parts out of the facility, that's been offset by dramatically more productive processes, increasing focus on yield and liability. So that's a big...

So this is not so much that really reduces the order of magnitude, but it just prevents it from having to inflate as you get closer to commercialization?

I won't speak to the balance of those forces exactly, we'll get more into that. But I wouldn't -- that downward force between the VW resources, between the automation, between the efficiency game in the technology is a powerful one.

I want to just update us on the progress of QSE-5, other tech goals that you have for the year?

Yes. So we shipped prototypes that showed off the cathode loading and the efficient packaging. If we're successful before the end of the year, we'll ship our first -- we will -- let me correct that we'll produce our first B samples, which are 5-amp power versions of what we had shipped that incorporates the Raptor films. So we talked about tracking to that on the July call. So that remains a very important goal for us. The other remaining technical goals are to get Raptor all the way up to capacity and to land the equipment for Cobra to stay on the path.

So 5-amp powers is the single cell?

Yes, approximately.

And how many layers again? You said ...

We've -- the A samples were over 20 layers. We've kind of focusing -- which is consistent with that, but we are focusing more on the capacity, which is a more normal battery speak for the cell.

And how is energy degradation after 1,000 or 2,000 charging cycles?

I can talk to the A sample data that VW put out in the spring. I recall that those cells did 1,000 cycles with about 3% capacity degradation. That blew their minds. Automotive spec is 20% capacity degradation over 800 cycles. So...

There was no pressure or...

That was under 3 atmospheres or less, now -- we have taken pressure down over time. We're now using about 0.7 or 0.8 applied atmospheres, which is right in the wheelhouse of what today's products do.

And remind us -- I mean getting hit up by investors over the last couple of days about silver -- like silver phosphate approaches as opposed to like lithium metal what's -- so I think it's like a kilogram of silver per car. It sounds other than costs, I don't know if there's other...

It sounds -- so it sounds expensive. What I can contribute is I don't hear a lot of discussion amongst our product companies about that appearing on the horizon. Lithium is really a pretty perfect material to use. It's the third element on the periodic table. It's the first solid, which blows your mind because hydrogen, helium, lithium. And everything in that first column, hydrogen above it has 1 extra valence electron that wants to give up, which is why it's so reactive. So you have one of the most reactive materials on the periodic table. It's the third one, so it's light. And it's relatively inexpensive. And it has a very developed set of materials around it, how you host it, what are the ion conductors, what's the method of making. I don't think there's any credible competitor to it. There's been some sodium used in grid. So I don't see anything in the applications that are -- that value high energy and power. And even if there was a thing, it would take so long, and I'd be surprised if it was silver, it sounds really expensive.

Right. Just for the record for the abide and silver carbon. I think Samsung [indiscernible]?

Better is nothing. We prefer nothing. As made, we have no anode there -- there's no -- nothing. It can get cheaper.

Nothing, that's a real Occam's razor there -- that's the thing -- if you can solve a problem with nothing.

Yes. So I would -- even better. Okay. So not down, but yes, so nothing is better.

Nothing is better. We're going to make a T-shirt out of that. Any questions for Kevin from the audience here? Any battery nerds, who want to show off your chops?

If the question is too extreme, I will hide behind the fact that I'm CFO?

I think -- you're multiple...

[indiscernible], but just in defense, I will [indiscernible].

No new OEM discussions to highlight?

We have 6 total agreements, including with WV. We know and talk to just about everybody. We have no shortage of demand. We need to deliver product.

Okay. The -- we talked about extended cash runway to 2028 because of VW. I think it means you can kind of help focus on the business. Where are your people now? Like how -- where are we in terms of people because you had some retrenchment and I guess it's now stabilized...

Yes, we're over 800, very heavily R&D currently, almost all in the San Jose area. We have a small development location in Kyoto, in Japan, close to some key material and equipment suppliers. I think it was strategic.

That's where we are. All right. And look, the stock -- it's part of the whole industry here, but the stock is back to kind of pull back to around where it was before the Volkswagen, PowerCo deal. So in your discussions with investors, including today this morning or later on, like what are the -- what's the catch? What do they -- what do they need to see? What's missing, you think, in terms of proof point for them to get involved?

It's a good question. The investors have focused on the validation through Volkswagen. I think with stock trading down, like we aren't really -- we tend to trade down with today's news in either automobiles or EV specifically, but it really doesn't impact our business. So I think that speaks to opportunity. If you buy the long-term thesis, we drink the Kool-Aid that lithium -- solid-state lithium-metal cells are fundamentally better. We're by and a far away the leaders. We are on the brink of shipping the first B samples. We have a commercialization agreement in place, the rest of the R&D road map, great team, like that's all still there. Strong balance sheet, way over $900 million of liquidity at the end of the quarter. We've got the cash to go do it. So it's there. I just think it's a more compelling entry point for the stock, but we'd be looking for people who are looking at those long-term thesis as opposed to the near-term trend.

And Kevin, just any other final messages or anything we didn't talk about, you want to emphasize what's getting you most excited? Kind of how are you spending your time, yes.

I -- that the licensing deal is pretty strategic. It's really a great move for both us and VW in terms of the value chain. As a CFO, I think a lot about making sure we have the right amount of funding to move forward. So that was transformative and a great fresh piece of validation. Siva has been fantastic at the helm, very -- the person for the moment to go from prototype to product with focusing on consistent sets of plans. Our meetings are on what is not going well and specifically, how do we get it back? And how does it impact others and just the execution focus. Getting a rhythm to the business like if we're an innovation business, get the QSE-5 platform up, get the larger up and then just keep that train going. So that focus on timely execution, cost effectiveness, satisfying our customers. He's been, I think, fantastic at the helm.

Awesome. Well, if you're too shy with the questions, we'll wrap it up here. You can catch Kevin before we leaves the room. But Kevin, thanks for spending time with us.

Thank you for having me.

Appreciate it.