QuantumScape Corporation (NYSE:QS) Q3 2022 Earnings Conference Call October 26, 2022 5:00 PM ET
Company Participants
John Saager – Head of IR
Jagdeep Singh – Co-Founder, CEO and Chairman
Kevin Hettrich – CFO
Conference Call Participants
Chris Snyder – UBS
Wendy Dong – Deutsche Bank
Jordan Levy – Truist Securities
Ben Kallo – Baird
Operator
Good day, and welcome to QuantumScape’s Third Quarter 2022 Earnings Conference Call. John Saager, QuantumScape’s Head of Investor Relations, you may begin your conference.
John Saager
Thank you, operator. Good afternoon and thank you to everyone for joining QuantumScape’s third quarter 2022 earnings call. To supplement today’s discussion, please go to our IR website at ir.quantumscape.com to view our shareholder letter.
Before we begin, I want to call your attention to the safe harbor provision for forward-looking statements that is posted on our website as part of our quarterly update. Forward-looking statements generally relate to future events, future technology progress, or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected.
There are risk factors that may cause actual results to differ materially from the content of our forward-looking statements for the reasons that we cite in our shareholder letter, Form 10-K and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be QuantumScape’s Co-Founder, CEO and Chairman, Jagdeep Singh; and our CFO, Kevin Hettrich. Jagdeep will provide a strategic update on the business, and then Kevin will cover the financial results and our outlook in more detail.
With that, I’d like to turn the call over to Jagdeep.
Jagdeep Singh
Thank you, John. We’re pleased to share an update on our progress since our last call. I’d like to start with progress towards our 24-layer A-sample. This sample is our next major milestone, and is intended to demonstrate our commercially relevant battery cell format and a meaningful increase in layer count relative to previous generations of customer samples.
As we discuss on our Q2 earnings call, earlier, we encountered a contaminant in our material. Over this summer, our team focused on identifying the root cause. And as a result of these efforts, we’re pleased to report we’ve dramatically reduced the level of this contaminant in our film.
In addition, we’ve also worked in a number of other process improvements that we believe will produce better performing cells. This progress has allowed us to freeze the major design parameters of the film itself and turn our full attention to building 24-layer test cells.
Before we deliver a new generation of battery cells to customers, we run what we refer to as a sample campaign, involving several successive phases designed to build the necessary confidence and quality to ship cells to customers.
We’ve kicked off our 24-layer sample campaign, and frozen major design parameters, and are now ramping field production to enable larger volumes of sales to test and collect data on performance and quality. It’s important to note that while we have frozen the major design parameters, other parameters may still change, as we learn more from our testing process, and address any knock on effects resulting from these improvements. So, much work remains to be done.
We will not begin shipping cells for customer sampling, until we’ve gathered data that establishes confidence in the performance of finished cells. We’ll report progress on this front on our next quarterly earnings call.
One key aspect of the A-sample design is the cell architecture. On lithium metal batteries experienced uniaxial expansion and contraction during charge and discharge. And we believe existing cell formats are not well equipped to handle this expansion.
To address the requirements for A-sample cells, we’ve been developing a new hybrid cell architecture. In our shareholder letter, we’ve shared the first public renderings of this architecture, which is in certain respects, across between a prismatic cell and a pouch cell.
We progress through multiple iterations of the design with the goal of improving its manufacturability and long-term robustness and expect to continue iterating on this design.
Next, I’d like to provide an update on our customer engagement. We continue to see strong interest in the automotive sector. In addition, on previous earnings call, we’ve described potential markets for our technology beyond the automotive sector, including consumer electronics. We believe a key selling point for consumer electronics is the ability of our battery cells to run with zero externally applied pressure, since volume constraints within the consumer device make it difficult to apply significant pressure.
We’re engaged with some of the leading global consumer electronics companies and pleased to report we’ve shipped dozens of zero externally applied pressure signal their pouch cells for customer testing within this sector. Sister cells made with the same design and tested under the same test conditions in our own labs show the meeting cells have achieved over 500 cycles.
While we remain focused on the automotive sector to drive our long term growth, and demand from this sector remains robust. We believe the consumer electronics market represents an interesting opportunity that could potentially provide additional revenue and feel validation of our technology.
I’d like to end with look at the big picture. While the world is currently facing macroeconomic headwinds, and geopolitical disruptions, we believe the fundamentals driving the demand for energy storage remain unchanged. In fact, we believe the need for better batteries have never been more urgent.
We’ve taken important steps forward over the past quarter. And our progress is thanks to the incredible work of our team to overcome challenges, solve new problems, and deliver results as we build momentum towards commercialization.
On that note, I’ll hand things over to our CFO, Kevin Hettrich.
Kevin Hettrich
Thank you Jagdeep. In the third quarter, our operating expenses were $121 million. Our GAAP net loss for the quarter was $118 million. This level of spend was in line with our expectations entering the quarter. Cash operating expenses, defined as operating expenses less stock based compensation and depreciation were 79 million for the quarter. For full year 2022, we reiterate our cash OpEx guidance of $225 million to $275 million.
CapEx in the third quarter was approximately $54 million. The majority of Q3 CapEx was directed towards facility investments. Other large payments went towards our Phase 2 engineering line medium scale continuous kiln cell assembly and testing equipment and QS-0 coding equipment. In terms of full year 2022 CapEx, we expect to be on the lower end of our guidance of $175 million to $225 million.
We continue to try to maximize capital efficiency at our ongoing build out of the QS-0 pre pilot line. For example, a significant number of tools that we will use as part of our Phase 2 engineering line can also be used for initial low volume production as part of our QS-0 line. Including these tools, we continue to target year end delivery of the majority of equipment needed for this early production on our QS-0 line.
With respect to cash, we spent $110 million on operations and CapEx in the third quarter. And we now expect to enter 2023 with over $1 billion in liquidity above previous guidance of over $950 million.
With that, I’ll pass it over to you, John.
John Saager
Thanks, Kevin. We’ll begin today’s Q&A portion with a few questions we’ve received from investors. Jagdeep, we’ll start with you.
What was the impact of the contaminant discovery to your timeline this year?
Jagdeep Singh
So that in fact, it was it required a cross functional team to identify a root cause and fix the issue, all in a highly compressed schedule. The team was able to do all this while not giving up on the goal of delivering a 24 layer cells by year end, is we think a testament to the quality and commitment of the team.
Resolving this issue did, however, require additional work that took time away from our sampling campaign. So it does increase the degree of difficulty of achieving our A-sample goal on schedule. They also put more work ahead of us, even though we believe we resolve the contaminant itself, because anytime you make a change like this, you have to validate the fixes you implemented that can take time.
I like to add that, this is the kind of challenge the team has overcome repeatedly over the years. Making a lithium metal anode cell is not easy, if you’re worried would already be on the market. So this is not the first time we face a challenge like this, and I’m sure it won’t be the last.
John Saager
Okay, that leads us into our next question. We have roughly eight weeks remaining in the quarter. How confident are you in your ability to hit the A-sample goal by year end?
Jagdeep Singh
So John, as we laid on the Shareholder letter, we have a plan that we’re executing to, under what we believe that remain is possible to deliver on A-sample by year end. However, it’s not a slam dunk. The timeline is now tight, things need to go right and there’s not a lot of margin for error. If a normal issues come up, it will present a challenge relative to the near term timeline.
Having said that, when we do deliver 24 layers cells, it’d be a massive milestone.
John Saager
Okay, great. Turning over to you, Kevin. How does the continued macroeconomic uncertainty and challenging capital markets environment affect QuantumScape plans and strategy?
Kevin Hettrich
We can’t control macroeconomics or the health of capital markets which continue to be challenging and uncertain. What we can control is our cash use. There are two classes of opportunities there to spending, near term and long term, and we’re exploring both.
Near term on OpEx, things like flattening headcount growth relative to plan or interesting services we were previously outsourcing and given greater internal capabilities. On CapEx, it’s looking at ways to be more efficient with our spend. An example we gave in the letter is finding ways to utilize our Phase 2 engineering line equipment for the initial low volume production on our QS-0 line.
Long term, a substantial opportunities include the evaluation entry into other markets and more capital efficient business models. We do plan to end the year with over $1 billion in liquidity, we’re not taking that for granted. And as our letter references, we are continuing to look for additional opportunities, both near term and long term to reduce these cash expenditures.
John Saager
Okay, thanks, Kevin. Our next series of questions coming from José Asumendi, of JP Morgan. He writes, when comparing the product development between automotive and consumer electronics and products, what are the commonalities in the product development or the synergies in the product learning curve for both products and end markets?
What are the largest differences in the terms of the end product, size of cells, charging time, charging, discharge, intensity, cycle time, et cetera?
And then finally, do you foresee a larger chance to obtain commercial success earlier in consumer electronics products versus auto? Or is it more or less the same? So to summarize, is really asking the three questions, what are their commonalities? What are the differences? And then what does the timeline look like?
Jagdeep Singh
Yes, this is a great question is about the consumer market. So in most ways, the consumer electronics market has easier specs in automotive, for example, the charge rates are lower, the operating temperature requirements are not as stringent, and their counts are lower. So although they’re good things. Offsetting these benefits is I believe this application requires zero externally applied pressure, because physical space is limited in most consumer devices. And we believe this feature is hard to implement lithium metal anode, which in the past have generally required pressure to operate.
In fact, many groups over the decades have published papers suggesting that lithium metal intrinsically requires pressure to work. And so we see this as a scientific breakthrough. The fact that we’ve shown zero applied pressure in customer labs, is what gives us confidence that we can in fact add value in consumer electronics. And this is also why we believe we’re seeing strong demand pool from the consumer electronics companies.
Now the market size for consumer devices while it’s over $10 billion in size is somewhat smaller than the potential market for automotive batteries. But this is also offset by the fact that it might provide a more direct and as you point out, Jose, potentially earlier path to market.
Relative to commonalities, what I would say is that a lot of the things that we need to do, such as a more efficient packaging, cathodes and so on applied to both markets. So we don’t actually believe that serving this segment will take us too far off our long-term metric.
John Saager
Okay. Thanks so much, guys. We’re now ready to begin the Q&A for the live Q&A portion of today’s call. Operator, open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Chris Snyder with UBS. Your line is now open.
Chris Snyder
Thank you. And I appreciate all the updates today. So back in July, the company provided test results for the 24-layer prototype, which I think back to a bit over 100 cycles. Can you talk about what needs to be done to go from those results to the delivery of the A-sample to the customer? Is it kind of getting the results up to the gold standard test results, which the company has talked about in the past?
Jagdeep Singh
Yes. So first of all, every customer has a different set of tests that they plan to run on the A-sample, the 24-layer A-sample. So there’s not a single sort of test that covers all customers. Now the cells we reported on this summer were the very first 24-layer cells we have built, and we are very pleased that we’ll be able to assemble them and as we get cycling results.
But before we can deliver cells to customers, they need to obviously have a much higher level of confidence in terms of both performance and reliability and so on. And we have a process map up for how we get there, I mean, that process is as follows. While we’re in the development phase, we’re doing a lot of design tweaks to try to improve performance and overall behavior.
But at some point, when we’re ready to start making cells to shift, we do what’s called — we run what’s called the sampling campaign. And that starts by freezing many of the key parameters of the design itself because once we freeze the parameters, that’s when we can start ramping up production volumes internally of our separator films of cells.
As we make more films, we then build more cells with those films. We then put on test. We usually — we try and test the same under the same protocol that the customer will test the cells. Based on those test results, we assess whether we’re ready to ship or not. And once we say we’re able to ship, we build cells for customers and basically select the ones that we want to ship based on the data that we’ve generated through the previous testing internally.
So that’s the process that we have. And where we are in the process right now is we’ve — as we said in the letter, we have, in fact, frozen the major design parameters. I want to make clear that there are other parameters that we will continue to be improving based on these test results. As we put cells losses on tests and we learn things, we will, in fact, incorporate insights. So freezing doesn’t mean that there’s — there are going to be no tweaks at all being made, but the major parameters are already selected.
Then we will use those separator films to make cells 24-layer cells, which we will put on tests. And we’re in the process right now of ramping up film production. We’ve said before our goal for the year is to ramp up to around 8,000 films per week for the peak week. That still remains our goal, and we want to get to that goal because that’s what will allow us to make enough cells to test internally to get the confidence that we need.
And then finally, when we do all that, if the cells perform the way that we believe they need to be to give us confidence that’s what we ship to customers. That’s kind of the process and where we are right now in the stage where we’re frozen the major parameters and are ramping up production to start building these cells to test internally.
Chris Snyder
We really appreciate that color around that process. I guess kind of just following up on potential tweaks to the parameters, would those come internally from QuantumScape as you’re analyzing the test results and your making or would they come — or could it also come from feedback from the customer after the A-sample of checks?
Jagdeep Singh
Yes. So initially, obviously, this will be our own testing that will allow us to determine whether anything needs to be changed or not. I mean ideally, there’s no tweaks at all. We freeze the design and exactly as it’s supposed to. But usually, in the real world, you discover things as you start to make larger volumes and so on.
Once we ship cells to customers, of course, they will test them in their labs and they will provide additional feedback. But the hope is that the cells we deliver to them will work as advertised and the feedback that they have will be largely in terms of longer-term maturity of the cells, things like the B-samples and C-samples and so on.
Chris Snyder
Thank you. I appreciate all that.
Operator
Our next question comes from the line of Wendy Dong with Deutsche Bank. Your line is now open.
Wendy Dong
Hi, thank you so much. I wanted to sort of on this contaminant issue. Could you just help us understand why sort of only appears, if that’s the case in the 24-layer counsel and that the earlier version of the cells, just technically, if that’s possible to explain?
Jagdeep Singh
Yes. So the contaminant appeared in our family material, and our film is based on a number of precursors that we get from suppliers. Now when our suppliers change things, the way they partner their materials, and they sometimes make changes to improve the behavior of the materials. Sometimes those changes have side effects. And sometimes, we don’t understand the side effects until we make films out of them, put them into cells, find themselves or having issues and then have to potentially reverse engineer what changed.
So in this particular case, actually, the team did a really amazing job. This particular contaminant wasn’t easily visible. So the team had to first identify that these issues were related to these other contaminants in the film. And they had to identify what the chemical composition of that was that identify which potential precursor material was the source of that contaminant. They had to work with the supplier to reformulate that source, the precursor material that has to get the new material, we make films, we make cells tested confirm that, in fact, those cells did not have a meaningful amount of that content left and that reducing that contaminant, in fact, delivered better performance.
All those things had to get done and we’re done. And that’s what we’re excited about the teams had a great job with that. Now obviously, that, as I mentioned earlier, resulted in our time as being a little tighter than we would have liked. But the fact that our goal of shipping 24 this year remains intact, is again a testament to just what the team did.
Wendy Dong
Thank you so much. I just have a follow-up. With regard to the JV pilot facility, the QS-1, it was mentioned in the shareholder letter that the position will be either Germany or the U.S. Could you provide us with some consideration of factors that would tilt your digital towards either way, either Germany or the U.S.?
Jagdeep Singh
That’s a great question. I think the decision there would be the ones that you would come up with operationally in terms of the cost and availability of inputs and also quite relevantly the prevalence and applicability of different incentive packages. As you know, recently passed was the IRA, which establishes incentives in the U.S. for closed loop domestic U.S. production to support a battery supply chain. That’s, of course, something that both teams are evaluating in that site selection decision.
Wendy Dong
Thank you for taking my question.
Operator
Our next line of question comes from the line of Lynn Jordan Levy with Truist Securities. Your line is now open.
Jordan Levy
Good afternoon, all. And thanks for taking my questions. Clearly, you’re all taking a strategic approach to the pace of the process. Can you maybe talk to the importance of doing the comprehensive internal sample campaign that you talked to? And what sort of flow through that could have through the rest of the OEM qualification process?
Jagdeep Singh
Yes. No, this is an important point. I mean, a company at our stage has to be very cognitive of the fact that A-cells, any samples we deliver to customers will be the basis of potentially lasting impressions that they get. And so we just need to make sure that the probability is very high that the cells we do deliver work as advertised. And so in order to do that, we’ve developed this campaign methodology that I took you through.
And what we found in the past with previous yes, this methodology allows us to really ensure a relatively high level of product quality that goes to the customer. And generally speaking, the product tends to work as advertised. So that is again the goal here. And the reason why is we report is because once this A-sample is delivered and the product works as it’s expected to work it does, in fact, turn the focus to subsequent milestones. And those will, in fact, include the things that you mentioned like the B-sample either C-samples.
But at this point, to be honest, our immediate focus in delivering A-samples don’t want to get distracted by the things that are beyond now. Especially all eyes on trying to deliver A-sample. And once we first to then work with the OEMs on particular months.
Jordan Levy
And just as a quick follow-up. You talked to the hybrid cell architecture. I was just wondering if that design introduces any additional things that need to be addressed in your collaborations with the OEMs? Or is this something that you work through kind of later stages that you get to be suitable?
Jagdeep Singh
No, that’s a good point. The design that we outlined in the shareholder letter is in some ways a template. It shows you what the architecture can do and what the cell might look like. Every OEM is going to have, to some extent, a relatively customized battery pack and therefore, customized needs relative to cell dimensions.
And so we may well take this architecture and implemented in a somewhat different size to accommodate the different module design that the OEM has — But those are relatively, I would say, all of these small changes continue to dimensions, but keeping the same overall architecture.
If an OEM has a brilliant idea or another way to package lithium metal cells while meeting the goals that we layout in the letter like dealing with this in metal expansion, dissipating heat, having an efficient package that’s manufactured and so on. Of course, we’d be very open to type. We welcome that input.
But based on the work we’ve done, we see this design as an innovative way to get all these requirements. And the customers we’ve spoken to have given us very encouraging feedback on it, recognizing that the specific for better may vary by the specific OEMs that needs.
Jordan Levy
Thanks so much for the update. Thank you.
Operator
Our next question comes from the line of Ben Kallo with Baird. Your line is now open.
Ben Kallo
Thanks for taking my question. Good afternoon, good evening. Just maybe along the same lines on the cell architecture Could you talk about how — I guess that applies to just the customers that you started working with on the auto side and how you prioritize them based on that architecture, if that changes at all? And then also on the consumer electronics, how does that cell architecture impacts consumer electronics and where do you have the total addressable market, if there’s a subset of that with — that can be REITs with the architecture needed? Thank you very much.
Jagdeep Singh
Yes, absolutely. So the beauty of this architecture from our perspective is it is an architecture as opposed to a point design. And what that means is that we believe this architecture actually applies across the full spectrum of applications for what we’re doing. And so for example, the A- sample could be a specific set of dimensions with the same design.
The C-sample or some production cell that a certain OEM needs could be a different set dimensions, but with the same basic design, a consumer cell, we believe also will be built in the same basic architecture. It would be a smaller cell, it wouldn’t be as big as one of these automotive cells showing in the rendering in the letter. But you can imagine the same basic design.
Remember that the key aspect of the design is that you take your cell stack, which is the active layers, the cathodes, the separators and so on.
And you have this metal frame that goes around the stack. The need to be metal, just to frame that rigid frame that goes around stack. And then you wrap the whole thing in a laminate that’s similar to pouch cell material. And with that approach, what happens is that as you can see the laminate, the offset between the frame and the pace of the cell itself becomes a region that can be filled as a cell expands.
So when the cell charge — when cell discharge, the pace of the cell is recessed a little bit from the frame areas in the left shows in the shoulder, and when you charge it up as the lithium comes out of the cathode and plates onto the end or forming the anode in situ, it essentially expands and the face of the cell becomes close to flush with the frame.
So that basic design can work independently of how big it is or what application is deployed. And that’s the part that we’re excited about. We think that this is a really innovative way to solve the issue of lithium metal expansion. We talked about this particular package architecture in this letter because we’ve got a lot of questions from investors over the last couple of years on how we will deal with — how we kind of deal with lithium metal expansion. That’s a unique — that’s a characteristic of lithium metal anode cells, if you want the energy density lithium metal can potentially offer, you have to address this expansion of the cell.
But because of the expansion of uniaxial it’s a lot of one dimension, it can, in fact, be accommodated through a design like the one that we presented here. So we believe this is an exciting package exciting architecture that should provide investors with a good idea relative to how we deal with the expansion.
Operator
There are no additional questions during this time [Operator Instructions].
Jagdeep Singh
So I just want to thank you all for joining today’s call. In closing, I’d like to thank our investors for their ongoing support of our mission, our forward-thinking customers for their commitment to helping us get the technology to market. And of course, our amazing team of incredibly talented and dedicated team members to overcome the high problems associated with bringing a new technology like ours to market.
We look forward to reporting on further progress in the coming quarters.
Operator
And with that, we will conclude today’s QuantumScape Corp third quarter 2022 earnings call. Thank you for your participation. You may now disconnect your lines.
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