QuantumScape Corporation (NYSE:QS) Q4 2023 Earnings Call Transcript
QuantumScape Corporation (NYSE:QS) Q4 2023 Earnings Call Transcript February 14, 2024
QuantumScape Corporation misses on earnings expectations. Reported EPS is $-0.23082 EPS, expectations were $-0.23. QuantumScape Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to QuantumScape's Fourth Quarter 2023 Earnings Conference Call. John Saager, QuantumScape's Vice President of Capital Markets and FP&A, you may begin your conference.
John Saager: Thank you, operator. Good afternoon and thank you to everyone for joining QuantumScapes's fourth quarter 2023 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; our CFO, Kevin Hettrich; and Dr. Siva Sivaram, President. With that, I'd like to turn the call over to Jagdeep.
Jagdeep Singh: Thanks, John. Since our founding, our mission has been simple, revolutionize energy storage and enable a more sustainable future. Reflecting on this journey, we've made remarkable progress towards commercializing solid-state lithium metal batteries, from the single-layer pouch cells we showed in December 2020, all the way to our 24-layer A0 cells shipped in December 2022. The best performing of these have now yielded impressive cycle life performance, over 1,000 cycles with 95% capacity retention as reported by Volkswagen's battery arm PowerCo based on testing in their own labs in Germany. In 2023, we set out to turn these A0 prototypes into a commercial product. And with advances in cathode loading, packaging efficiency, and process quality, we now have our first commercial product, QSE-5 in our sites.
When it comes to the combination of product development, customer engagement, and financial strength, I believe our leaders in next-generation batteries is stronger than it's ever been. When we begin shipping QSE-5, it will mark a world-first for automotive solid-state lithium metal battery technology, representing the culmination of years of development on the part of the QuantumScape team and further solidifying our leadership in next-generation battery technology. But starting low-volume production of our first product is not the end of the journey, it's just the beginning. To truly fulfill the promise of our breakthrough technology, we will need to increase production by orders of magnitude from where we are today. For that reason, early last year, I set out to recruit a leader with extensive experience in high-volume manufacturing of sophisticated technology products.
Such a candidate would need to have extensive experience bringing complex emerging technology into high-volume production. A proven track record of operational discipline, and an appreciation for the significance of QuantumScape's mission and the scale of our ambition. I believe our company is closer than ever to having a profound impact on the automotive industry and the wider world, while delivering exceptional returns for shareholders. I was looking for a leader who both shared that vision and had the tools to make it a reality. I'm pleased to say we found the ideal candidate in Dr. Siva Sivaram. He has decades of experience taking groundbreaking technology products into high-volume production, building factories, establishing partnerships, and scaling production across the world.
Since coming on as President, Siva has impressed the team with his operational skills, strategic vision, and ability to drive results, as well as his connections within the broader high-tech manufacturing industry. Most importantly, he fits in perfectly with the culture we've worked hard to build and the values we all hold. Respect, curiosity, integrity, and passion to solve the problem of building a better battery. That's why, as Chairman, I'm thrilled to announce that with my recommendation, the Board has agreed to appoint Dr. Siva Sivaram, as Chief Executive Officer. I have total confidence that he's the right person to take on the challenge of bringing our transformational solid-state battery technology to market, driving this next phase of growth, fulfilling our mission of revolutionizing energy storage, and delivering exceptional returns for shareholders.
There's no doubt in our minds that Siva is the right person at the right time to lead us on to the next phase of our journey. With that let me turn it over to you, Siva. Congratulations.
Siva Sivaram: Thank you, Jagdeep. I'm proud and excited for this opportunity and very grateful to you for entrusting me with this mission. I'll begin with a look back at our achievements in 2023, give some insight into our manufacturing process roadmap, and close with a look at our key goals for the next year. 2023 marked the beginning of a transformational period for QuantumScape, starting with the shipment of our first A0 prototype cells in late 2022 and continuing in 2023 with the development and demonstration of key component-level improvements needed to go from prototype to product. Higher cathode loading, an efficient commercial packaging design, and an improved and far more scalable separator process. The A0 prototypes were intended to demonstrate the core capability of the technology ahead of achieving the reliability and other characteristics expected of a commercial product.
One of the customers that received the A0 prototype cells was our long-standing partner, the Volkswagen Group, whose battery manufacturing arm PowerCo confirmed the results we reported in our Q3'23 shareholder letter. Our best-performing cell achieved over 1,000 cycles with over 95% capacity retention. With respect to cathode loading, we reported performance results from higher loading cells in our Q1 2023 shareholder letter. This increase in cathode loading means our new cathodes offer 60% more capacity per unit area. This improvement has been integrated into our baseline cell builds, representing a key step forward towards achieving our target energy density for QSE-5. Improved packaging efficiency is another enabler for high energy density, and the FlexFrame packaging of QSE-5 is more efficient compared to our A0 prototype cells.
In Q4, we completed the integration of several packaging improvements, including tighter internal margins, thinner current collectors, and a slimmer frame design. Another focus in 2023 was to improve production quality and consistency. With respect to reliability, we have improved the interface between the cathode and the separator, which we have determined is one of the major drivers of reliability. We have reduced ambient and process-related particle contamination, improved the components and processes that go into cell assembly, and made advances across our entire production flow. These improvements have allowed us to integrate the higher-loading cathodes and more efficient packaging into the Alpha-2 prototype cells we plan to ship this year.
Our final goal was to introduce our new fast separator heat-treatment process. This goal is important because heat treatment is one of the most cost-intensive parts of ceramic processing and is often the main bottleneck in terms of throughput. This faster process also results in an improved separator, and we are rolling it out in two stages. Raptor, which we successfully deployed in Q4, and its successor, Cobra. On that front, I'd like to take a moment to offer some more detail on Raptor and Cobra and our process roadmap. When it comes to Raptor, the heat processing step is approximately eight times faster than our current generation process, cutting the amount of energy needed per separator and increasing throughput. Raptor also removes several other process steps entirely, allowing us to eliminate material inputs that would otherwise introduce particle contamination.
When it reaches its full planned run rate, Raptor will be capable of more separator starts per week than the combined capacity of every previous generation of heat treatment equipment put together. Thanks to this step-change increase in productivity, Raptor is capable of providing enough separator films to enable low-volume QSE-5 production this year. Cobra takes the innovations of the Raptor process and adds three more improvements. First and foremost, the Cobra heat treatment step is designed to be faster than Raptor by more than an order of magnitude, which dramatically improves throughput and energy efficiency. Second, the Cobra heat treatment equipment has a footprint an order of magnitude smaller than Raptor, while also increasing production capacity, which saves space on the production floor and further improves the process economics.
Third, the Cobra process consolidates or eliminates additional individual process steps compared to Raptor, reducing potential sources of variability from the process, as well as easing production bottlenecks and lowering cost. We believe these advantages make Cobra process the most attractive pathway to gigawatt-hour scale production, though such volumes will require larger configurations of Cobra equipment. Bringing online a disruptive improvement like Cobra presents a technical challenge, and significant work remains to develop a fully mature Cobra production process. We have prioritized bringing Cobra into production as soon as possible. Finally, I'd like to lay out our four key goals for coming year. In 2024, our focus is to take the improvements we have demonstrated at the component level in 2023 and integrate them into one design, QSE-5, the approximately 5 amp hour cell that we are targeting as our first commercial product.
Our first major goal for the year is to ship a round of samples designated as Alpha-2, which integrates the improved cathode and packaging that we have developed in 2023 into a multilayer cell design. Alpha-2 is an important milestone in de-risking many of the key elements of integration, and when combined with Raptor films and other refinements, represents the core of QSE-5. Our second goal for this year is to transition to Raptor production, going from initial deployment at the end of last year to its full planned run rate. To enable this transition, we must install and qualify upstream and downstream automation for Raptor. We expect it to provide up to three times the separator production capacity compared to our current generation process, enabling low-volume QSE-5 prototype production this year.
Our third goal for this year is to begin low-volume B0 prototype production for our first commercial cell, QSC-5. We define B0 prototypes as the near-final QSE-5 product design, a 24-layer cell integrating improving package efficiency and higher loading cathode using films produced by our Raptor process. It is important to note that the final designation of a B-sample by an automotive OEM occurs only after extensive testing of these candidate cells. We believe QSE-5 fills a unique high-value segment of the EV battery market, by combining high energy density with high power. The final goal for the year is to prepare for Cobra production in 2025. We are already operating prototype versions of Cobra heat-treating equipment, and in light of the promising data from our prototype equipment and the significant advantages of Cobra as a pathway to gigawatt hour-scale production, we have prioritized bringing Cobra into production as soon as possible to support higher volumes of QSE-5 in 2025.
Our goal for 2024 is to set the stage for Cobra by taking delivery of key pieces of Cobra equipment and preparing to bring them into production. These goals are challenging and ambitious and will require the focused effort on behalf of the entire team. We believe that achieving them will represent major progress along our industrialization roadmap. With that, I will hand over to Kevin, for a word on our financial outlook.
Kevin Hettrich: Thank you, Siva. Capital expenditures for the fourth quarter and full-year 2023 were $13.8 million and $84.5 million, respectively. Notable items of Q4 CapEx included QS-0 facilities investments as well as prototype equipment for our Cobra process. GAAP operating expenses were $124.6 million in the fourth quarter and $479 million for the full year 2023. Cash operating expenses were $73.9 million in the fourth quarter and $264.1 million for the full year 2023, consistent with our previously communicated guidance. In lieu of a cash operating expense metric, moving forward, we will provide guidance on adjusted EBITDA. Adjusted EBITDA is a similar measure we believe offers improved comparability with other companies, included in our shareholder letter is a reconciliation of adjusted EBITDA to GAAP net loss.
Adjusted EBITDA loss was $60.7 million in the fourth quarter and $249.2 million for the full year 2023. For the full year 2024, we expect capital expenditures to be between $70 million to $120 million. Priorities for CapEx in 2024 include investments in certain process areas, notably cell assembly to better match the throughput of the Raptor tool, as well as CapEx for Cobra metrology to support improvements in film quality and reliability, and for facilities to support further scale-up of QS-0. For the full year 2024, we forecast adjusted EBITDA loss to be between $250 million and $300 million. Our 2024 guidance reflects efforts to maintain our commercialization timeline, while conserving cash and extending our runway, primarily by focusing on process improvements.
Raptor is a notable step-change process improvement, also important are steady, continuous improvement efforts targeted throughout the process flow. The net result is an operating plan that increases QS-0 output, while holding CapEx to a similar range as 2023. We ended the year with $1.07 billion in liquidity, strongly positioning the company as we transition from prototype to product and prepare for subsequent industrialization. We continue to be prudent with our balance sheet and optimize spending as a result of cost-saving initiatives and judicious planning. We now forecast our cash runway will extend into the second half of 2026, two quarters beyond our prior estimates. Any additional funds raised from capital markets activity, including under our ATM prospectus supplement, would further extend this cash runway.
Longer-term, our capital requirements will be a function of our industrialization business model, which we believe could reflect a mix of wholly-owned production, joint venture, and licensing relationships.
John Saager: Thanks, Kevin. We'll begin today's Q&A portion with a few questions we've received from investors or that I believe investors would be interested in. Jagdeep, I'll start with you. You've overseen QuantumScape's development since its founding. What makes you feel it was the right move to appoint Siva as CEO? And also what drove the timing?
Jagdeep Singh: So, John, the first point is that I believe we're in the strongest position that we've ever been in relative to the combination of technical progress, cash balance, and customer engagement. We've shipped our A0 samples to customers, seeing the best performing of these deliver category-leading performance in the customer lab over 1,000 cycles with 95% capacity retention, we have $1 billion in the balance sheet and our customer engagement is stronger than ever. Secondly, we're now in a period of transformation going from prototype to product, which we plan to achieve by combining the component-level results we announced last year, higher cathode loading, improved packaging, and more scalable film process with Raptor into an integrated cell, the QSE-5.
But the other critical part of this transformation is to put in place a leader that brings the high-volume manufacturing experience we'll need to drive the next phase of our growth. On that note, we were very fortunate to attract someone of Siva's caliber, someone who checks all the boxes in terms of having brought emerging technologies into high-volume production multiple times in his career, as well as having the cultural fit that's so necessary for a successful transition. We think his taking the helm as CEO, will be a huge value-creation move for investors over the coming decade. And finally, I continue to serve as Chairman to provide continuity and to provide any help Siva needs from me.
John Saager: Thanks, Jagdeep. Siva, turning to you now. You've had a remarkable career to date. What attracted you to QuantumScape at this stage of our development?
Siva Sivaram: Well, John, my career over the last four decades in the semiconductor and data storage industries has been one of taking revolutionary new technologies into high-volume production. Whether it is advanced microprocessors at Intel, or 3D flash at Sandisk, or high-volume data storage at Western Digital, I've been fortunate to be closely involved in solving complex technology issues, while simultaneously bringing up manufacturing capabilities. I have been part of building fabs and factories around the world, and in every case, it's a process of developing a stable baseline, delivering a product to the customer, get feedback, scale the production, and systematically improve productivity and reliability. Now, I wanted to do something more impactful and leave a mark.
Whether it is team, technology, market or impact, QuantumScape fits the profile perfectly for me. The impact touches every person on the planet. The technology is world-changing, the team is world-class, and the market spans the globe. My connection with QuantumScape is now almost a decade old. I was talking with Jagdeep and Tim about adhesion layered deposition in 2013. I was talking with them both again around 2017. When Jagdeep and I started talking about this current opportunity almost a year ago, last February. I was immediately intrigued by the possibilities of leading the company through this next phase. Since I joined the company last year, I've been very impressed with the purposefulness of the team, and the depth of the knowledge in all aspects of battery technology and production.
The focus on solving materials and chemistry problems at the fundamental level before attempting to ramp volume aligns with my experiences in successful manufacturing transitions.
John Saager: Thanks, Siva. A question for Siva that we received from an investor in our IR inbox. How can investors best track QuantumScape's progress against our commercialization timeline for low-volume B samples this year?
Siva Sivaram: John, this is a transformational moment for us. We have shipped our A0, defined the commercial packaging design, and we are targeting Alpha-2 shipments. This has all been necessary to get a well-defined product, the QSE-5. The next step is getting the QSE-5 B0 samples in the customer's hands as soon as possible so we can get the feedback from them and iterate. The goals that we have set up for ourselves this year directly track the industrialization of the technology. Delivering the Alpha-2 samples to the customers, getting Raptor ramped to high volumes, and starting the low-volume production of QSE-5 B0 samples, which are 24 layers with Raptor films are critical to our success. The fourth goal of preparing for Cobra production is essential for ramping the cell volume next year. Tracking our progress to these goals is the best way for investors to follow along on our industrialization roadmap.
John Saager: Okay, thanks so much. We're now ready to begin the live portion of today's call. Operator, please open up the line for questions.
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