QuantumScape Corporation (QS) Earnings Call Transcript

Good morning. My name is Kevin Hettrich. I'm the Chief Financial Officer of QuantumScape. I'm joined here today by George Hart on the far side, our Vice President of Operations and Strategy, who's here to talk about our QuantumScape Advanced Solutions vertical as well as Shahar Noy, who leads our QuantumScape data center vertical. I do have a word on forward-looking statements. Basically, there may be some, and I would encourage investors to read the disclaimer as well as our SEC filings where we talk about the risks where the actuals may differ. And that would take us to the agenda. I'll kick things off with some brief context before handing it over first to George from a QuantumScape Advanced Solutions perspective to talk about target application areas, product differentiation as well as go-to-market strategy before George hands it off to Shahar to do the same for the QS data center vertical. So to set the stage, QuantumScape began in automotive, where we work with today 10 -- 4 of the top 10 global OEMs, including Volkswagen and Honda in various stages of customer engagement. Our OEM partners are attracted to the higher levels of performance that our solid-state cell technology enables, notably including energy density, power and safety. Those qualities appeal, of course, beyond automotive. And so in 2026, taking advantage of our Eagle pilot line and its additional sampling capabilities, we set 1 of our 4 annual goals to enter adjacent high-value markets adjacent to automotive. On our July earnings call, we announced those 2 verticals, namely QuantumScape Advanced Solutions and QuantumScape Data Center. And so it's with our pleasure together with our partners at Cowen to talk in more depth about each of those areas. So George, I'll hand things over to you.

All right. Thank you, Kevin. All right. So maybe I can start with just a brief overview of what we see as the opportunity. I think the battery industry in general, tends to focus on the largest segments. Automotive really is the dominant segment and stationary storage is probably the next one. It turns out that while each of these, what you might call emerging applications are comparatively small, in aggregate, they represent a very large market opportunity. So on the order of 250 gigawatt hours per year of batteries going into these nonautomotive markets, that's excluding data center, which Shahar will speak to in a moment. And then for many of these applications, the battery is, first of all, critical to the performance of the device. And also, comparatively speaking, a relatively small component of the bill of materials for that device. And so the result is that I think you see a lot less price pressure in these markets than you would in, say, traditional ESS or in mainstream automotive opportunities. So the net of that is that 250 gigawatt hours per year opportunity in 2030 corresponds to a very significant market size as well on the order of $75 billion per year with average selling prices significantly above what you see in automotive. In some cases, the prices are extraordinarily high for very specialty applications. But even in some of the more familiar things, consumer devices and so on, we do see significantly higher willingness to pay if you're delivering something that's really creating value for that end application. So speaking about creating value, there's really 3 things that we bring to the table. I think Kevin alluded to the company's history in automotive, and we remain very focused and engaged in automotive. But it turns out the technology that we built for the automotive world also brings a lot of value to these nonautomotive applications. So what resonates with the customers that we're speaking to are performance, safety and supply chain. Within performance, it's the usual suspects. I think our core strengths, energy density, power density, long cycle life and so on. Those are things that allow -- first of all, you can fit more energy into a given volume and that enables a robot or a drone or pick your device to run longer on a single charge. Power density is very important for fast charging, but also for certain applications that require extreme burst of power, things you see in robotics, for example, and cycle life is, of course, important as well. We also, I think, see a very attractive safety profile in our cells, in our testing to date relative to what you could see in a typical lithium-ion cell. We've demonstrated very compelling thermal stability and reduced flammability and abuse tolerance. And those are things that obviously matter for every application. But if you're thinking about a worn device where someone, for example, has a medical device that's attached to their body or you think about a military application where a soldier is wearing a battery pack, safety is not only important, it's really critical to that application. And we think our profile here creates a lot of value as well. And then I think finally, on supply chain, many of our customers are focused on ensuring that they have access to a reliable source of batteries as they think about the future. Clearly, in the military, U.S. policy is focused on developing domestic sources of supply. And we didn't set out when the company was founded to address that problem. We set out to create really a dramatically better battery. But in the process, we ended up developing a material, our solid-state separator that's proprietary to us. We obviously had to make that. And it enabled a cell architecture that entirely eliminated graphite, one of the materials that is hardest to source outside of China. And of course, we make our cells. And so the net effect of all of those things is that we have a supply chain that is less reliant on foreign sources. We make our cells here in the United States. And we have focused on developing a partnership ecosystem with world-leading players that can help us scale. And so all of those things, I think, collectively present a pretty compelling picture to people who are thinking about supply chain resilience and supply chain independence and making sure that they have access to world-leading technology without being dependent on sources of supply that could be disrupted in the future. I've mentioned at the very beginning of this session, many of the segments. I think we are actively engaged across all of the application areas that you see here on the slide. So drones in aviation, space and robotics, medical devices, the military, wearables and traditional consumer devices. I've been really quite pleased with the amount of interest and inbound interest that we've received from leading companies across all these spaces. I'll just pick on maybe 1 or 2 examples here to give you a sense for it. I think where we can add value. So aviation, of course, there's eVTOL, 100% electric vertical takeoff and landing aviation is one area that's emerging. There's also traditional commercial aviation that's exploring concepts like hybrid flight, where you have both traditional turbines and then supplemented with electric propulsion. And there, what matters is, well, weight is very important because you have to pay for every kilogram you lift off the ground, that really is critical, but so is safety. You need the battery to perform -- to deliver this extreme performance, but you need to do it safely. And I think often in the battery world, there are trade-offs, right? You can achieve maybe exceptional energy density, but it comes at the cost of safety. And so I think we are trying to develop a technology here that eliminates those trade-offs and delivers really strong performance while simultaneously delivering safety. And I think that message has resonated with customers. As we talk to them, they're very encouraged and excited about the combinations of performance, safety and supply chain all in a single product. We see the same thing in wearables. People are very excited about, for example, in medical devices, having a lower profile device that is less of an encumbrance for a patient. But of course, the patient is wearing that device. It absolutely has to be safe. It absolutely has to perform. So it's a very demanding application where one of our core strengths, volumetric energy density really enables the end product to shine. And it's critically important that we deliver that performance safely. So I think overall, the engagement has been very strong. We have a lot of inbound interest. We are working with many customers across these areas in sampling. And yes, I'm quite excited about the future prospects. Briefly, I'll just talk about our go-to-market strategy. I mentioned sampling just now. We're really focused on this activity right now. So we're engaging with lots of customers across many different verticals, providing them with cells, understanding their requirements, evaluating how our cells stack up against those requirements and beginning to think about system integration. That's sort of how you ultimately bring the benefits of this technology to life. And so we're engaged there. Going forward, where we expect this to develop is focused more on customizing our platform. We've talked publicly about the QSE-5 technology platform. That's the core of what we're bringing to market here. But in many of these applications, there may be small differences in form factor or configuration that we want to accommodate and take into account. And then there's system integration, developing a pack or a module that fits the particular application. And that's an area where we see a lot of opportunity for joint development funded with our partners to create something that they can use directly into their system. And then as we progress through the commercialization and qualification process, of course, then we turn our attention to scaling up. Ultimately, we want to build a big business here, shipping large volume of cells. And so we have to establish the capacity to do that. And finally, we would end up in mass production.

So do you think this would be a good chance to pepper us with questions you think would be helpful for investors?

Perfect. Well, first, Kevin, George Hart, thank you so much for doing this. Really excited to host this teach-in session with you. We already learned a lot so much, George, from your presentation. So maybe a couple of questions back to Slide 8 or 6. If you look at some of the verticals that you're participating in. I'm curious kind of which ones do you think are maybe most attractive for QuantumScape? And then on the flip side, which ones may be drawing the most interest right now from your customers?

Yes. Okay. Great question. I think one of the things that just jumped out at me since we began this effort is it's clear that the world needs better batteries. Like there are a lot of people who are not satisfied with what's available to them. They're trying to push the envelope of their own systems, and they need better batteries to accomplish that. I think some of the areas where I'm most excited are the defense engagements that we've had. I think it's clear that how we approach defense is changing. There's lots of new devices and systems coming into the market. I think we've seen really good traction with the services themselves, with the traditional primes and then also the start-ups and sort of challengers in the space. So I think that's one area where I think there's a lot of opportunity. And it's a great area for us because typically, the requirements are demanding, and it pushes us to figure out how can we push our technology to meet those requirements. And as a technology development company, that's sort of like what we get really excited about. So I would say that's one area that stands out.

Terrific. And maybe as we talk about through defense, I think last quarter, the company disclosed that it shipped QSE-5 cells to an American defense prime. I'm curious how that's going, initial feedback? Kind of what can you tell us about that initiative since last quarter?

Yes. The engagement is ongoing. We are very actively engaged with them, having engineering calls on a weekly basis, talking through results, thinking about the particular needs of their application. And so I think we're -- that's exactly the type of partnership that we want to have. And I think we see a good opportunity for us to fill an important void for them in their product strategy and hopefully, in the longer term, convert that into a real product line for us.

Terrific. And then maybe one more on -- I think back to Slide 8 or 9, I really like how you kind of frame this from kind of the scaling and the samples all the way up to the scaling. I'm curious, there we go, kind of how long do you foresee that process? And does it differ between different verticals within kind of the aerospace division that you're kind of working through? Are some potentially faster than others? And kind of even within a vertical, every customer very kind of individualized or once you sort of get through one particular vertical or one customer in that vertical, some of the others may be a little bit faster in how they go from sampling all the way to the scale up?

Yes. Yes. Okay. Good question. Yes. I think -- I mean, first of all, every customer is different. Of course, the applications are different. They have, in some cases, standards and other things that we need to prove that we can meet. One thing that's common across all of these that we're using the same core technology, the QSE-5 cell technology that we've developed here. We're thinking about how to deploy that across all of these applications rather than coming up with something that's entirely different. So I do think that there's a lot of work and development effort that we can do once and apply in multiple places. So that's great. I think also one of the things that I think is most exciting about engaging in these markets is that compared with traditional automotive time lines, people are generally able to move a lot faster. And so I think there's an opportunity here for us to get into these markets even ahead of our automotive time lines, and that's, of course, very exciting for us.

Yes. That's actually really interesting. And so maybe just lastly, where do you kind of see the business within 2 to 3 years? Kind of where would you want to see key milestones and different goals that you have? And how are the biggest challenges between now and then to kind of get there?

Yes. Look, I think there's no shortage of demand. I think that's been made very clear to us. I think there's a lot of interest in the technology we've developed. And so that's very exciting. I think our focus now is really on what we said publicly, which is the Eagle line, that's our scale-up development line here in San Jose that we spend a lot of time on refining processes and ultimately producing the samples that we use to engage with customers. I think 2 to 3 years down the road, we want to be shipping products to customers, and that requires capacity. And so a lot of our attention right now is focused on scaling up the Eagle line, completing the goals that we set out for the year there and then scaling beyond. That will be the key to building this into a large business.

Terrific. Great presentation. Thank you so much. I'm sure we'll come back at the end maybe for some more questions. But with that, certainly, Shahar, thanks so much for doing this. Great to see you as well. And maybe I'll turn it over to you for the data center side.

Thank you, Itay. Excited to be here today. Thank you for your time. I think it's an exciting time to be in a data center right now. And it's even more exciting to be in a U.S. start-up that wants to innovate batteries that haven't been innovated for like 30 years, right? If you think about lithium-ion first commercialization by Sony in the 1990s, right? And then we do it, again, in a U.S. company that can manufacture in the U.S., which I think becomes very, very important for the supply chain nowadays in data center. So where I want to start, I want to start with some terminology and maybe educate the audience on the different applications, different battery and storage applications inside the data center. If we start from the left, the first phase is what we call the front of the meter. This is where the utility company comes with power, but they back up this power with BESS, with Battery Energy Storage Systems. And they use BESS predominantly to guarantee their SLA, their Service agreements, right? We need to guarantee 50 megawatts. If we need to shut down gas turbine for maintenance or whatever, the batteries can still sustain this level of energy. So BESS was there to augment, right, or maybe provide some backup for power generation. The interesting trend now is that as we move to a BTM, which is Behind-the-Meter, because utility companies cannot bring power fast enough, right? We all read the news and see the energy crunch or the power crunch in data centers. We see now a trend that a data center builder, a hyperscaler can build their own data center and bring their own power, right, BYOE, Bring Your Own Energy. Now in most cases, to deploy energy, let's say, in less than 3 years, you need to rely on renewable energy, right, solar, wind. So then at nighttime, where the conditions do not permit you to operate your main energy engines, right, you need to rely on battery. So this is where the battery capacity becomes a little bit bigger because in their case, they need to provide you energy somewhere between 8 to 12 hours, right, to again, to back up their main energy engines as opposed to the utility company that can need maybe 2 to 4 hours. And if we see -- if we look into this overall BESS market is quite fascinating. It's growing very fast. It's already in the hundreds of gigawatt-hours of deployment. But this market is right now very sensitive to cost, and they don't have any space constraints because you can put those massive containers anywhere in the field. Those data centers are being built predominantly in rural areas. So this is the market that we see kind of like growing the fastest from the storage -- from a data center storage application. Where we have a bit more interest is if you go one step further to the right is what's happening inside the data centers. Inside the data center, the first stop is UPS. UPS was designed decades ago, and UPS just needs to give you a backup. We call it like a spare wheel in your car, where you have a flat tire, then you activate it, which is like once in a while. And those UPSs haven't evolved in terms of technology throughout the last couple of decades. Like some of them are still using your old 12-volt battery that you can find in an old car, and they used to offer maybe data centers of like 20 megawatts at most. Those were the days of the Internet data center, the cloud compute data center up until recently. Average size like, I want to say, high-capacity data center would be 20 megawatts. Now as we go further to the right, as we now start talking about AI factories and AI data centers and everyone talks about gigawatt of facilities, those UPS cannot really scale unless you really increase the size of the data center, which is expensive, they cannot really scale, and we see a new trend of introducing BBUs. BBUs is a Battery Backup Unit. It's much more condensed. It can sit either at the bottom of the rack or it can either sit in a sidecar with the power supply units above them. That segment is actually booming right now. It's a segment that was introduced 2 years ago. And this actually fits our technology, much, much better than every -- all other applications that you see here on the screen because, as George mentioned, we have a very dense -- energy-dense technology, and we have a safe technology. So this is why we decided to focus on that area. Just to give you some numbers, all of us follow NVIDIA and Jensen in a couple of like recent comments argue that the cost of compute in a 1 gigawatt data center is anywhere between $35 billion to $50 billion, 1 gigawatt. Now think about safety of all of this CapEx investment, right? We hear now more also from insurance companies that for them to go and, let's say, insure a data center with UPS inside or BBU inside, the fact that they have lithium-ion technology doesn't make them very comfortable. And there are some cases that the big insurer will not even insure a big data center with lithium-ion batteries inside. So this is what we see as the emerging opportunity for us and the most exciting one. Now we have evidence, we'll see the next slide, we have evidence that this BBU now is being adopted by all the hyperscalers and is already on the NVIDIA planning to be included in their reference design as well. So if you go from the left, Google was the one that published a white paper about BBU, is the one that contributed a BBU spec into the OCP, which is the Open Compute Project, which is a big standardization -- big organization to support standards for data centers. They contributed to the spec and they're in production. Meta and AWS shared images of their data centers in the last 6 months. And you can see in the white boxes here that they already deployed BBUs as well. And NVIDIA started showing evidence of their planning in the last GTC, which was 6 months ago, where they plan to launch BBUs with PSUs in what we call the sidecar, right? You see the Kyber sidecar over there. So this is very kind of like exciting for us in terms of like seeing this technology. Now we typically get questions, you have battery at the BESS, you have a battery at the UPS, and now you have a battery at the BBU. There are too much duplications, which one will win. What we see is that data centers are being built in a modular way and being kind of like bulletproof. There is a term called the blast radius, right? What happens if a single component fails at the data center? How the backup will kick in? What is the implications of the blast? So when we talk to the hyperscalers, the fact that you can introduce more attractive energy solution into the data center. Now they can plan the rack. The rack is the -- I want to say the compute unit nowadays. It's no longer the chip. It's not the GPU, right? It's a complete rack. So now they plan and design those racks with batteries inside or batteries next to them, and they can scale, right, every rack unit with the exact energy that they need. With UPS, for example, it's more difficult to do it because you don't know what you would need for your next generation of racks, how you're going to retrofit the data center. So a lot of our discussions with customers also confirm that BBU might be the energy of choice in terms of like how you design within the data center. Now if we go to the next slide, we want to give you some view in terms of like how big is this market size. And what I find funny about this slide, this slide changes every 3 months. By the time we speak, I can guarantee you that those numbers are continuing to shift to the right because there's so much investment right now in data centers for various reasons, right, whether it's like investment from sovereign AI initiatives, whether it's an investment from companies who are still exploring how they can monetize from AI or whether it's the LLM labs, right, the big AI players who continue to push the envelope, we see that their demand for power, which drives the demand for energy keeps changing on -- again, on a weekly basis. So based on our internal bottom-up analysis, and we've done some alignment with market research that's available for us, we estimate this market, a specific indoor battery market to grow at a 39% CAGR between now to 2030. So it's roughly from $8 billion to $30 billion in battery content alone. And this is kind of like a very interesting market for us, a market that is very thirsty to new type of chemistry, new type of technology. And this is where we spend most of our cycles in terms of like go-to-market, which leads me into the next slide, which is talking about the value proposition. And I want to emphasize 2 things that George mentioned as well, how our common building block, right, the cells that we manufacture here in the U.S. helps us across segments. So if we look into energy density and high discharge, I want maybe to explain it in a slightly different way. Energy density is like how much more liquid, right, I can push into a small tank, right? Because those BBUs are very small, right? We don't have tons of space around the GPUs and the GPU or the XPU guys ask us to see if we can cram even more. And then the high discharge is like the tap. How big is the tap? How fast I can pull current from this because those BBUs are going to be above 1 megawatt, right, by the 2028 time frame. So the attributes that we have in the cell in terms of performance is like a perfect match to their needs in terms of like energy density and how quickly you can start this energy outside of the box. Safety, I don't need to repeat what George said, but there was a very interesting case a few months ago that a data center in India, which is partially owned by Google, was caught fire because of battery. The implication were CapEx loss and then operation loss, which lasted, I think, for almost 2 weeks and cover also some telco companies in India. So the safety element, when we talk and we have some public information where we demonstrate that we will not go into a thermal runaway situation, right, all the way up to 300, 320 Celsius, while the incumbent, right, while the existing technology will catch fire at half of that temperature. Data centers are running hot at the end of the day. Data centers are becoming more dense. Data centers require more power. So our ability to come with a new chemistry and a chemistry that's safe also very, very -- is very enticing to our customers. Last but not least, the supply chain. We mentioned the domestic production. We mentioned the non-FEOC partners, which is becoming very, very critical for our customers. We already hear about trends that there are certain big guys that are not allowed to source batteries from a single country. And we think that this trend will only continue and intensify. So our ability to develop the technology here to productize it here is also very, very interesting to our customers as they try to help their supply chain. Ironically, today, the data center supply chain is more important than technology. We need access to build the data centers because if I'm missing the smallest thing like a capacitor, I cannot operate my rack. I cannot operate my data center. So the fact we're coming in with a solid U.S. story is also very, very interesting to our customers. And last but not the least is we keep talking about our anode-free architecture. So it simplifies the BOM, which means at scale, you can potentially be more cost effective than the incumbent technology. So those value propositions resonate very well with our customers, and this is where we get -- I would say we got a lot of love and a lot of attention those days. Now I think in the next slide, which is the last one, I want to talk a little bit more about the go-to-market. The go-to-market in the data center is very, very interesting because we have to start with the specification drivers, which is the second box to the left. Nowadays, you have to be blessed by NVIDIA and Google. They're like the rabbis of the industry, right? So that your technology can fit into the rack architecture because they want to make sure that when they spin their expensive chips and they build those expensive racks, no one in the supply chain, right, outside of NVIDIA can slow them down. So they have their AVL or semi-approved vendor list that they want every component that participate in enabling the rack to be on this list and to be blessed. So we have to talk to them, explain the technology, explaining production plans, explaining maturity to be spec-ed in to what they're up to. Now they ask us also to work very close with the guys on the left, which is the power electronic guys and the standardization bodies, which are either technical ones like OCP or the safety bodies, NFPA and UL. Because if we don't get their stamp of approval, even if we have the technology and we have the capacity, we're not legit players yet. So part of our go-to-market is that we do the system development through the channels that you see on the left. We get blessed by the big spec drivers to spec us in. And then we go to the ODMs or OEMs who actually build the power racks. You don't see here Dell, for example, you don't see here Supermicro because they build the IT racks, but Delta, LITEON and Magmeet, Flex, they build the power systems, which are adjacent to those IT racks, the sidecars or the power and energy boxes, which sit at the bottom of the rack. So they will do some of the buildup, they will do the integration. We will ship the battery to them. And then the last piece is the deployment inside the facilities, right? And we work with those guys on the right as well to basically create awareness of what we do from a safety perspective because what they care, I'm going back to my insurance company, what they care is that whatever I put in my data center, I cannot wait 9 months for the power department to give me a permit to operate my data center, right? I need the insurance company, FM Global, to allow me to do this and that. So this is why we interact with them as well as part of the go-to-market strategy. So it's very complex here, right? There's a lot of components that we have to interact with. But I can tell you that every -- like when we engage with any member in this list over here, I'm amazed myself that someone who's been around for 30 years and know how difficult it is to sell into customers is like the level of openness for new technology in the battery space because no one -- or I want to say there's not as much innovation as in other segments, for example, like compute, networking, data storage, tons of innovation. Battery, we're super excited with what we do. And apparently, there's not too many of us who are doing the same, and this is why we get a lot of love from the customers. And I think this was my last slide, then, correct?

That's right.

Yes.