QuantumScape Q2 2024 Earnings Call Transcript

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July 24, 2024

Key Takeaways

  • QuantumScape announced a landmark licensing agreement with PowerCo that includes a $130 million royalty prepayment and rights for 40 GWh/year of production, extending its cash runway by 18 months into 2028.
  • Under a capital-light model, PowerCo will invest approximately $1 billion to industrialize QuantumScape’s solid-state platform, allowing QS to focus on innovation while scaling to gigawatt-hour production faster.
  • The company is on track with its two-stage separator production rollout—completing the ramp of the Raptor process and taking delivery of COBRA equipment—to support QSV-five prototype manufacturing.
  • Prototype cells demonstrated thermal stability up to 300 °C, significantly surpassing conventional lithium-ion cells (174–185 °C) and potentially unlocking new markets such as heavy-duty trucks.
  • In Q2, QS reported $18.9 million in CapEx, a GAAP net loss of $123 million, an adjusted EBITDA loss of $72.5 million, and maintained full-year adjusted EBITDA loss guidance of $250–300 million, ending the quarter with $938 million in liquidity.
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Earnings Conference Call
QuantumScape Q2 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good morning. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the QuantumScape Corp. 2nd Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. I will now turn the call over to Jan Zager, Quintin Escape's Vice President of Capital Markets and FP and A. John, you may begin your conference.

Speaker 1

Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape's Q2 20242024 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, 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.

Speaker 1

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, the reasons that we cite in our shareholder letter, Form 10 ks and other SEC filings, including uncertainties noted by the difficulty in predicting future outcomes. Joining us today will be QuantumScape's CEO, Doctor. Siva Sivaram and our CFO, Kevin Hetrick.

Speaker 1

With that, I'd like to turn the call over to Siva. Thanks, John. I'm excited to provide an update on our activities since our last earnings call. 1st, we recently announced a landmark agreement with Powerco, the battery company of the Volkswagen Group. This deal reflects the value created by consistent execution on our development roadmap and customer validation of our technology.

Speaker 1

We forecast that this capital licensing arrangement lengthens our cash runway into 2028, an extension of 18 months relative to our previous guidance. Upon satisfactory purchase of this, the deal allows for $130,000,000 prepayment of royalties to QuantumScape in exchange for a non exclusive license, covering an initial production volume of 40 gigawatt hours per year with an option to expand to 80 gigawatt hours, NS for approximately 1,000,000 lasers per year. The license covers the technology platform leased in our upcoming CLC5 product. This agreement is a major step in our global scale of strategy to bring our solid state lithium metal battery technology to market for electric vehicles. By joining forces, we can combine our cutting edge technology with PowerCore's capabilities in industrialization and manufacturing.

Speaker 1

Under this licensing model, we can leverage our partner with investment of 1,000,000,000 of dollars to industrialize our technology while maintaining our focus on innovation and development. We believe that this capital light model will enable us to reach gigawatt hour scale faster and when combined with financial prudence will allow us to extend the cash runway into 2020. We see this collaboration and this intellectual property framework as potential template for future deals with other customers. In addition to the deal with Powerco, our customer engagement continues to be robust. We have shipped Alpha 2 prototype sales to multiple customers in the automotive and consumer electronics sectors.

Speaker 1

We also continue to work closely with our prospective launch customer for the QSV-five cell. The core innovation that will allow our solid state lithium metal battery technology to be manufactured at gigawatt hour scale is our fast separator production process, which we are rolling out in 2 stages, Raptor and COBRA. We are on track to complete our ramp of the Raptor process, one of our 4 key goals for the year. The Raptor process has also been the important best day for key elements of COBRA. And our progress on the assets has allowed us to begin shifting increased resources towards COBRA development.

Speaker 1

We are starting to take delivery of COGRA equipment in line with our annual goal. Next, we published an update on safety testing of our prototype battery cells. One noteworthy research from prototype cell testing was demonstrating thermal stability up to 300 degrees centigrade. For reference, we tested energy lithium ion cells, which burst into flame between 174 and 185 degrees C. In our discussions with our customers, safety is a differentiator, A cell that can offer a fundamentally safer chemistry not only adds value to existing applications like automotive and consumer electronics, but also potentially opens up new markets that current technology is unable to serve effectively.

Speaker 1

Next, let me hand things over to Kevin for a word on our financial outlook. Thank you, Siva. Capital expenditures in the Q2 were $18,900,000 TC CapEx primarily supported equipment purchases in preparation for low volume QSE-five prototype production as well as the COBRA process and other equipment as we prepare for higher volume CSC-five prototype production in 2025. We expect to be on the lower end of our full year 2024 guidance for capital expenditures of between $70,000,000 $120,000,000 GAAP operating expenses and GAAP net loss were $134,500,000 $123,000,000 respectively. Adjusted EBITDA loss was $72,500,000 in Q2.

Speaker 1

We maintain our full year 2024 guidance for adjusted EBITDA loss to be between $250,000,000 $300,000,000 We ended the quarter with $938,000,000 in liquidity. As we mentioned previously, our long term capital requirements are a function of our commercialization pathway. We believe We an 18 month extension relative to previous guidance. Any additional funds raised, including under our ATM's prospective supplement, would further extend this cash runway. With that, I'll let Siva conclude with some closing remarks.

Speaker 1

Thanks, Kevin. I'd like to look at how the PowerCore deal affects our strategic outlook. The secular trend towards TV adoption continues, But despite decades of development, existing conventional battery technologies still cannot address the requirements of large segments of the automotive market. There's a clear need for a next generation battery to drive broad adoption of MEMS, And this need represents extraordinary market opportunity, potentially 100 of 1,000,000,000 of dollars annually. We believe that our solid state Lithium Asset platform is a clear leader in the next generation battery base And to seize this massive market opportunity, a global manufacturing ecosystem must be developed.

Speaker 1

This is where our collaboration with Power Coresystems. They can bring their industrial expertise and operational excellence to bear on the formidable practical challenges of producing our next generation battery platform at the gigawatt hour scale. This non exclusive deal also allows us to pursue additional opportunities while maintaining our tenacious focus on innovation and return on invested capital. Above all, we see this collaboration with our goal as an opportunity to quickly and efficiently get our battery technology into series production electricity. The inherent leverage of this industrialization model takes advantage of the investments being made by automotive OEMs such as the Volkswagen Group and our highly differentiated technology allows both partners to benefit from this collaboration.

Speaker 1

Moreover, under this model, our market share is not directly constrained by the size of our balance sheet or the bandwidth of our operations. Though significant work remains to achieve our ambition, we are excited to begin our collaboration with PowerCore. It is the first step in the next phase of our journey to revolutionize the storage and create exceptional value for our shareholders. We look forward to reporting on our progress in the months to come. Thanks, Siva.

Speaker 1

We'll begin today's Q and A portion with a few questions we've received from investors or that I believe investors would be interested in. Sivra, why is the PowerCo deal so significant for Florence here? John, in my mind, there are 4 powerful reasons why this deal is so important to us. 1st, this demonstrates the value we have created for our customers and shareholders with our solid state lithium metal platform. 2nd, by combining our unique technology with the global capabilities of the Volkswagen Group, we can get our technology to gigawatt hour scale and into serious production as rapidly as possible.

Speaker 1

3rd, this deal is non exclusive and it provides a template for future deals with other customers. And lastly, this capital light arrangement presents the most efficient allocation of our results. Thanks, Sridhar. Kevin, turning to you now. Sridhar mentioned the capital light approach.

Speaker 1

How is this agreement better for investors than the joint venture that I referred? This deal allows both Powerco and QuantumScape to focus on our respective strengths. Benefits of the licensing model for us included increased operating leverage, a reduction in our forecast capital requirements and an ability to utilize our partner's balance sheet. Additionally, an exciting benefit is that the potential scale of this deal is roughly 4 times the size of the prior JV. A legacy model that creates value for both parties has to start with differentiated technologies.

Speaker 1

Our QFE5 technology and its targeted benefits to safety, energy density and power, we believe achieved that strong performance differentiation, increasing opportunity for both QuantumScape and PowerCoat and an excellent financial return. In the near term, one of the benefits we discussed in the letter is that it helps extend our cash runway by 18 months relative to prior guidance. On that last point, can you talk in a little bit more detail about how the deal enabling cash runway extension? Our forecast 18 months runway extension now into 2028 is driven by the following. First, under the licensing agreement, Powerco will invest CapEx required for gigawatt hour scale production facility.

Speaker 1

The deal proves that $134,000,000 previously earmarked for our investment in CJV. 2nd, PowerCo will contribute resources and skilled personnel as part of the collaboration, which helps reduce our expected cost to industrialize our technology platform. 3rd, licensing agreements features an inflow to Quanscape, specifically a $130,000,000 royalty prepay contingent upon satisfactory technical progress. And separate from the PowerCo deal, we are continuing to make improvements to the efficiency of our operations. These improvements are now incorporated into the forecast.

Speaker 1

Okay. Thanks, Devin. Dhivva, turning back to you and summarizing a couple of incoming questions we received. Can you tell investors anything more about the joint collaboration team and the milestones that are part of this agreement? John, now that we have signed this agreement, work begins immediately.

Speaker 1

We are planning to ramp the joint scale of teams to around 100 and 50 experts. The initial team will begin the collaboration activities here in San Jose. As the technology transfer proceeds, we expect it to move to a power core facility with more of the resources coming from them as manufacturing ramps up. The project plan will address all the verticals of manufacturing: process, equipment, infrastructure and continuous improvement. In terms of milestones, these are related to QSC-five d samples, the COBRA process and finalizing the target design for the test.

Speaker 1

We will then grant the license and receive the royalty free payment. Okay, great. And my final question on the collaboration of licensing team. Was this meaningful intellectual property perspective? Yes, we believe we've built a strong IP portfolio in the next generation battery industry.

Speaker 1

We've always been incredibly careful about protecting our IP, and we'll continue to push the envelope on innovation to create more value for our shareholders and customers. We have and we will continue to protect all IP relating to the separator to its manufacturing, including the cobra process. QuantumScape and PowerCore will jointly own new IC V3s relating to automotive battery cells and their industrialization. QS will remain an innovation focused company and we will continue to develop new intellectual property and technical know how. For more information on the IT licensing, please do refer to our SEC filings.

Speaker 1

Okay. Thanks so much, Kevin and Sibra. We're now ready to begin the live portion of today's call. Operator, please open up the line for questions.

Operator

Thank you. The floor is now open for questions. Your first question comes from the line of Doug Dunn with Evercore. Doug, your line is now open.

Speaker 2

Thank you. Hi, team. Congrats again on the nice deal with PowerCo. I just wanted to ask about what your timeline looks like with that partnership now consummated. So does this make any change on the B sample timing, on other commercialization timing?

Speaker 2

Or is everything just the same sans the capital spending on Gigafactories?

Speaker 1

Thanks, Greg. To the first order, we have already told you what our big goals for this year are, getting Alpha 2 to customers, making sure B sample, low volume B sample production starts this year, ramping up Raptor and getting ready for Cobra. They don't change. For next year, getting ready for high volume B samples, that doesn't change either. So in a big picture, this deal has been signed and we will begin collaboration work immediately, but our goals and targets in the short term do not change.

Speaker 1

Okay, excellent. And then

Speaker 2

I'll just ask one more here on if more of these deals are likely to follow as the new sort of modus operandi or the approach that you're going to take or if you've opted for a more wait and see approach to understand how this first tie up goes. It sounds like yes from your prepared remarks, but wanted to give you the opportunity to expand on that. Thanks Dean.

Speaker 1

Yes, that's a very good question Doug. We are a very highly differentiated technology that adds a lot of value to the customer. So we expect to see a lot of interest in what we are offering. However, the model we are going with which is a high touch licensing model requires that we be very strategic and prudent in our customers. So there is going to be a level of careful inspection in matching our customers' needs and that we're going to be very, very picky and careful in the way we get to the next deal.

Speaker 2

Awesome. Thanks everyone.

Operator

Your next question comes from the line of Joe Spak with UBS. Joe, your line is now open.

Speaker 3

Hi, this is Gabriel on for Joe. Thank you for taking my questions. Kevin, just want to go back on monetization of the PowerCo agreement. I know you can't disclose the specifics, but can you kind of give us a sense of what you'll be charging PowerCo for? Like, is it a percent of the ASP or the COGS of the entire battery cell?

Speaker 3

Or would you only be charging for the materials and costs specifically used for your ceramic separator process?

Speaker 4

Gabriel, thank you for the question. I have empathy that these are important inputs into your modeling going into the future. We'll just point you back to the contract that we attached to our 8 ks in Article 3 of the IP licensing agreement. It does have detail on the royalty rate and there's a section on outperformance sharing. Unfortunately, won't be going beyond the detail of what we already provided in that contract on this call.

Speaker 3

Understandable. I appreciate it.

Speaker 4

One other and then Gabriel, just one thing to add is just that not providing very specific detail in the contract is customary as it is in the best interest of both parties not to disadvantage ourselves in further negotiation and especially for QuantumScape as this deal could be a template for future such licensing deals. It's also in our shareholders' interest.

Speaker 1

No, that makes sense.

Speaker 3

I appreciate it. And just to clarify on the $130,000,000 of prepaid royalties, Do you get that immediately and now it's implemented into your cash runway forecast or are you unable to access it until the technical requirements are met?

Speaker 4

So the $130,000,000 initial pre payment of the royalty is contingent on satisfactory technical progress being made. Siva mentioned in his remarks, it's things like those B sample shipments, progress on COBRA, finalization of the final target cell design. To your question, it is an input into our cash runway that now extends into 2028.

Speaker 3

So it would be usable as of when you get it?

Speaker 4

It would be usable as we get it for cash runway purposes. We of course reserve the right in our methodology to be as conservative as we can realistically be. We like to issue guidance and achieve it.

Speaker 1

Great. Thanks. I'll pass it on.

Operator

Your next question comes from the line of Jordan Levy with Jovi Securities. Jordan, your line is now open.

Speaker 5

Afternoon all and congratulations again on the deal.

Speaker 1

Maybe you kind of touched around this, but if you

Speaker 5

could just help us understand a bit more how the work with the joint team at Powerco and the core QuantumScape team work will differ from what you're already kind of doing on Raptor and Cobra. I guess not to get too into the details, I'm just not sure I understand kind of the difference between the collaboration work and the work being done as you kind of push manufacturing or commercialization?

Speaker 1

Jarden, thank you. The basic work on QSC V, that platform is done by us here. That's what the B sample is. The small volume production that is starting this year and the larger volume B sample that is starting next year. We need to take that and we will agree on a target design and industrialize it to gigawatt scale.

Speaker 1

That work will be jointly done by a group of experts, approximately 150 people initially that would start working in San Jose. And as that work matures and we begin to transfer to a Powerco site, we will move from here into the PowerCo site and more and more and more people will join from PowerCo to ramp it up for production. So the intent here is this word industrialization, the core technology to be made to be compatible with high volume production in a gigawatt scale factory.

Speaker 4

Yes. And Jordan, if I could just put a little color around that. In Volkswagen Group and Powerco specifically, you have one of the most committed partners to electrification, a large balance sheet, strong leadership, like what more fantastic partner to combine with our differentiated solid state lithium metal technology and the benefits we'd like to bring to the cell and to the vehicle level in terms of energy density, power and

Speaker 5

safety. Totally agree and appreciate that. Maybe just a quick follow-up in the prepared remarks. You all talked to on the safety metrics, the possibility to open up some new markets that the current technology is unable to serve effectively. I just wanted to see if there's anything specific you were referring to there, if there's anything of interest?

Speaker 1

Yes. So before I go too far, I want to make sure that safety testing is never complete. We will continue to test and these were with prototype samples and we need to do the same thing with final product and we need to collect a lot more data. Having said that, we have a technology that because of the ceramic separator and the solid state nature of our technology, we are inherently safer. What this does is if you are trying to design a pack or a module, additional heat and thermal separation precautions that you need to take, you have advantages with our inherently safer device.

Speaker 1

Now you think of an application, I'm just using a fairly generic application as a long haul truck. A long haul truck carries more than a megawatt hour of batteries in it. Currently, making sure that megawatt hour of trucks can have the safety standards that you would want it to have is a very onerous technical problem. The additional safety precautions, the additional engineering, the additional safety technology that needs to be added. We now make that imminently possible.

Speaker 1

That's the kind of opportunity we are talking about. Of course, in the existing applications, whether it is an automotive or consumer electronics, you can inherently see the value of better safety that it brings it.

Speaker 5

Absolutely. Appreciate that.

Operator

Your next question comes from the line of Jed Dorsheimer with William Blair. Jed, your line is now open.

Speaker 6

Hi, this is Mark Schutte on for Jed. You did mention the consumer electronics in the opening remarks and in the shareholder letter. I was wondering if you could explain or give any more color on that. Do you see that as a potential green shoot for revenue before an electric vehicle?

Speaker 4

Mark, I believe the reference was specifically to the Alpha-two shipments, which went to a number of customers, including those in the automotive and consumer electronic sectors. As you can imagine, a differentiated technology that has advantages in safety, power and energy density is very interesting to any application that has a battery in it. That's true of consumer. That's true certainly of automotive. We are very much an automotive focused company.

Speaker 4

You see that just in the sheer number of like with this release and the deep partnership with BW and PowerCo that is where our focus lies. That said, we do receive interest from those parties and we do continue to sample into them as we think it creates optionality. And on this call, there's nothing to add in terms of the timing of revenue.

Speaker 6

Understood. Thanks for the color. And just seeing with all the AI apps coming out and being pushed to on device, I can see that the battery demand on device could have a pretty big pull through from those customers. So looking forward to any updates in the future. One last one is, I know you are focused on the EVs, but in a similar vein, eVTOL companies, the electric vehicle or sorry, the vertical landing and takeoff, Do you see that as a potential as well?

Speaker 6

Are

Speaker 2

you talking to those customers?

Speaker 1

Clearly, we are in conversations. EBITDA uniquely have an additional requirement that they require a lot of power during takeoff and landing and they require lot of energy for the range. The uniqueness of our differentiated technology is that we are good with both energy and power. Now having said that, our initial focus is of course in the automotive sector and we have just entered this very big deal with Powerco. We are watching all of these other additional opportunities very carefully.

Speaker 4

I would just add that aviation is certainly an application that greatly appreciates differentiated safety as well, which plays into the whole system design. And then just as a passenger on airplanes from time to time, it is nice that they are robustly safe.

Operator

Your next question comes from the line of Ben Kallo with Baird. Your line is now open.

Speaker 7

Hey, good evening, guys. Congratulations on the PowerCo deal. Maybe just, you touched on trucks and just do you guys have you guys tested with any trucks or is that in the plans or any discussions? I think that was the first time I ever heard you guys say trucks.

Speaker 1

Ben, I'm illustrating the differentiated advantages of safety. We often take safety for granted, but for a cell to come back and say that we have thermal stability is checked up to 300 degrees C, opens up a lot of new opportunities. Having said that, our focus clearly remains with EV for now. We are working closely with Powerco. Powerco serving Volkswagen has a very, very broad brand portfolio that includes every segment of the mobility market.

Speaker 1

So, we are talking closely with Powerco.

Speaker 7

Great. And then for the remainder of your customers, do you think that this or has this changed your discussions with them and their desire to move faster or is it kind of a wait and see approach? I think you touched on this a little bit earlier. And then maybe what about any new customers approaching your new potential OEMs approaching you?

Speaker 1

Ben, once we announced the deal, we individually updated every one of our customers and there is a large continued interest from our customers. We have also sampled and continuing to sample Alpha 2s to multiple automotive and consumer electronics OEMs and we take their feedback into how we design and run the B samples. The interest from our OEM partners has been very, very strong. Having said that, the PowerCore model is a high touch intellectual property intensive transfer of our technology to customers. So we are very carefully evaluating every customer's need so as we can develop a model specific to them with us having the preference of the capital light approach.

Speaker 7

Okay. Thank you very much.

Operator

That concludes our Q and A session. I will now turn the conference back over to QuantumScape team for closing remarks.

Speaker 1

Thank you, Paul. With that, I'd like to thank you all for joining us today. We look forward to sharing more on our progress in the coming months. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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