Quanergy Systems, Inc.

Good afternoon and welcome to Quanergy Systems' first quarter 2022 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone keypad. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, today's conference is being recorded. At this time, I would like to turn the call over to Ryan Gardella, VP Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to Quantity's first quarter 2022 earnings call. Today, we'll be discussing the results announced in our press release issued today. Joining us from the company is Chairman and CEO Kevin Kennedy and CFO Patrick Archambault. Today's call will include a review of the company's business fundamentals, key differentiators, and operational progress and financial results during the first quarter of 2022. We will then open the call to participants for questions. Quantogy has also posted a presentation to the investor section of its website that accompanies today's call. We encourage investors to access this presentation as management will reference the content of today's call. As a reminder, this conference call contains statements about future events and expectations which are forward-looking in nature. Statements on this call may be deemed as forward-looking and actual results may differ materially. For a full list of risks inherent to the business and the company, please refer to the company's annual report in Form 10-K and other reports filed with the SEC. Quanergy undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that occur after the call. Today's call and webcast will include non-GAAP financial measures, but in the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release presentation. And now, I would like to pass the call over to Kevin Kennedy, Chairman and CEO of Quanergy.

Thank you, Ryan. and thank you all for tuning in to our first earnings call as a public company. Before I begin going through the results and milestones of the first quarter, I would like to give a little background on Quantogy for those who are new to the company. From the perspective of the overview, on page three of our presentation materials, we have provided a snapshot of Quantogy. We are a leading provider of LiDAR sensors and 3D perception software. Founded in 2012, we have built a leading set of solutions a strong IP portfolio of 30 issued patents, and a base of business that spans nearly 400 customers and 50 partners. Our portfolio includes a variety of LiDAR sensors, both mechanical and solid state, paired with an intelligent 3D perception software platform called Cortex. The combination of 3D perception software and sensors enables the intelligent detection, tracking, and classification of objects. Our solutions are designed for a wide array of applications that span two major markets, the Internet of Things and automotive. Within the IoT market, we are focused on use cases within security, smart cities, mapping, and industrial. Our goal is to enable our customers to automate business processes, increase productivity and efficiency, and deliver actionable insights across major industries around the world. Now to differentiators. Turning to page four, there are a number of publicly traded LIDAR providers, so a brief summary of factors that differentiate quantity is provided as a guide. First, we have a balanced focus on two major end markets, the Internet of Things and automotive. Of course, automotive is seen as the largest long-term market opportunity for LIDAR. However, timelines for autonomous driving continue to slide to the right. And LiDAR sensors available today do not meet the price, performance, and reliability requirements needed for mass market production. This is not our own view alone. It's a view confirmed by our automotive partners. One thing that is truly unique about Quanergy is that from the very beginning, our founders recognized the significant potential for LiDAR in non-automotive markets, markets that we collectively refer to as IoT. These are sizable markets. that exist today that are ripe for disruption via the automation and intelligence that our solutions enable. Some of these markets have been served by 2D LiDAR or 2D camera-based systems that we are actively working to replace with our 3D solutions. Our strategy is driven by a mission to engage the markets of today while building scale, improved price performance, and greater reliability as a bridge to the demands and potential of the automotive market in the future. A second differentiator of Quanergy is our proprietary solid-state LIDAR platform based on optical phase-to-ray technology, or OPA. This approach is true solid-state, meaning it has no moving parts at either the macro or micro scale. Our OPA-based solid-state LIDAR harnesses the power of silicon photonics leverages mature CMOS silicon processes, and utilizes software-defined techniques to detect, track objects, and much like phased array radar, but in the optical domain rather than in the radio frequency domain. If we are successful executing our roadmap, our OPA-based sensor will deliver ultra-high reliability and robust and flexible performance at disruptive mass market price points. In short, we believe our OPA-based sensor is the only LiDAR that can truly scale economically for the mainstream automotive market. A third differentiator of Quantigee is our software capabilities. Within the IoT market, we pair our industry-leading M-series mechanical sensors with our proprietary Cortex 3D perception platform. Based on more than seven years of development, Cortex is a flexible, scalable software platform that uses computer vision technology and 3D perception algorithms to enable smart awareness of the 3D world to identify, track, and classify people and vehicles in real-time in security and smart cities applications. We believe our 3D perception software capability is unique in the industry and further differentiates us from our peers. Our fourth differentiator is really the culmination of the prior factor. resulting in what we deem to be a superior business model. We're able to generate commercial revenues in IoT markets today, not from prototypes or services, but from sales of sensors and software into production environments. Customers in these mission-critical markets are willing to pay for the best product, so despite supply challenges, we generated positive non-GAAP gross margins during our first quarter of 2022, and three out of the last four quarters. We have a completely unique solid state architecture based on OPA technology and mature CMOS process technology that we believe will allow us to reach the price point needs for mass market automotive, while also yielding healthy gross margins for quantity. Finally, because much of our solid state development costs are behind us and we are taking a more measured approach to the auto market, we have a lower cash burn rate than most of our peers. Now to key results. For a review of Q1 2022 performance, as I look back at the quarter, there are really four key themes that stand out, and these themes are highlighted on page five of the presentation. First, our revenue performance represented a positive start to the year. Our $1.4 million of revenue slightly exceeded the high end of our guidance range and represented 257% year-over-year growth off a modest base in 2021. In the quarter, revenue attainment was limited not by demand, but rather by the supply chain. More generally, we saw a demand environment in Q1 that was more favorable than what we saw in the fall of last year. How do we measure the demand environment? Well, our sales pipeline has grown steadily. We are seeing projects move from proof of concepts to deployments to expansions. Deal sizes are increasing, and the number of large deals is also increasing. That brings me to theme number three. Given the positive demand environment, we are investing for growth in a responsible manner. We've had healthy success bringing on additional talent. In fact, we grew our headcount 38% year over year in Q1, with 76% of the new hires within R&D and operations in order to align with demand trends. We are making investments across the organization to ensure that we can capitalize on the substantial opportunity in front of us and also support Quanergy as a publicly listed company. Speaking of becoming public, we are pleased to complete our SPAC merger with CCAC on February 8th. This transaction was important as it allowed us to repay or convert our outstanding convertible debt, and we also secured a fully committed equity line of $125 million. Finally, theme number four, we continue to manage through some risks and uncertainties. The biggest challenge we are facing is the continued supply constraints for electronic components. This is impacting our ability to convert bookings to revenue on a timely basis, pressuring our gross margins and leading to additional R&D costs. During the quarter, we expended considerable effort and deployed resources towards supply chain remediation and redesigned work in response to supply chain discontinuities. At the moment, we have not seen any improvement in the supply chain environment But we are using every tool available to us to help mitigate this challenge. These steps include investing in parts procurement for future quarters, extending the lead times of our deliveries, and moving to full sensor assembly in three locations, including two low cost Asian sites, in addition to our facility in Sunnyvale. Now to operational highlights. I'd like to review several of our accomplishments from the first quarter. On page six of our presentation, you'll note a few of our recently announced customer wins with Vecna Robotics, DigitalMotor, and the SFMTA. In each of these cases, our IoT solutions are helping customers solve real-world business challenges and achieve measurable benefits by enabling greater automation through accurate object detection, tracking, and classification. For example, with the addition of Quantigy's solutions, the SFMTA was able to demonstrate a 16% reduction in travel time. Imagine the potential economic benefits of this type of time savings if it were extrapolated across major population centers of the United States. Turning to page 7, we highlight our continued traction in the security vertical. This is clearly a big opportunity, a nearly $500 million TAM, according to analysts' estimates. And we possess clear advantages in terms of detection range, accuracy, total cost of ownership, and plug and play integrations with third party video management systems. False alarms are a major drawback and source of expense and annoyance with traditional security systems. With Quanergy, our customers have been able to reduce false alarms by 95% while delivering 98% accuracy when identifying intruders. It's for these reasons that our solutions have been deployed at some of the largest data centers in the world, as well as major airports, prisons, military bases, and other high security locations. It's also why leading security partners are increasingly embracing partners such as Genentech, Milestone, Mirasys, Surveil, Securitas, and Quantum IT. One of the themes we talked about at our analyst day was the level of innovation across our IoT portfolio. On page eight, we show how this level of innovation continued in the first quarter. We introduced three new products targeting the IoT market, a new version of the MQ8 PoE sensor, the latest version of our Cortex automated ID handover, and a new version of the M1 Edge sensor. Taken together, these options offer our new and existing customers enhanced performance and intelligence for use cases, including flow management, object detection, and collision avoidance, for indoor and outdoor navigation. Next, I wanted to provide an update on our solid state development roadmap. As shown on page 9, our OPA-based sensor platform has achieved a major milestone by detecting objects in bright sunlight at an unprecedented range of 250 meters, another industry first. Not only is this type of range in line with automotive OEM expectations, but it also strengthens our ability to enable other advanced mobility applications like mobile robots and HVOR vehicles. During the remainder of 2022, we will characterize prototypes across various combinations of range and field of view while assessing product market fit and improving supply chain deliverables. Page 10 shows members of our senior executive team standing outside the New York Stock Exchange on the day we listed publicly. This milestone was the culmination of a lengthy process, and I would like to personally thank all the Quantogy team members who made this possible. The closing of this transaction, along with key hires across the leadership team and organization, positioned Quantogy well for growth moving forward. To a conclusion, in summary, our first quarter was a positive start to the year. The demand environment is quite healthy, and we are delivering robust year-over-year growth. We are facing some headwinds related to the supply chain, as many other companies are experiencing, and doing our best to mitigate these effects. We are unique versus other LiDAR providers, given our balanced focus on both the IoT and automotive markets, our OPA-based solid state architecture, and our 3D perception software capabilities, enabling what we believe is a superior business model. We are now in the public markets with a growing, talented team and an even stronger foundation to support our growth initiatives. We have a lot of opportunity yet to tackle, but I'm pleased with our start to the year. With that, I'd like to introduce our CFO, Pat Archambault, who will review the financial results for the quarter. Pat?

Thank you, Kevin, and thank you all for joining us. As I go through our results today, I will reference both GAAP and non-GAAP figures. Our GAAP results for the first quarter of 2022 include two sizable charges related to the closing of our business combination with CCAC. including 51.6 million of non-cash stock-based compensation expense and 36.7 million of non-cash net interest expense recognized on the conversion of our 2023 notes to equity. Turning to page 11 of our presentation, revenue for the first quarter was 1.4 million, an increase of 257% year-over-year, and just above the high end of our previously communicated guided range. Growth in the quarter continued to be driven by our solutions targeting security, flow management, and industrial applications. We saw 54.4% of our revenue coming from Asia Pacific, 25.4% coming from Europe, Middle East, and Africa, and 20.2% from the Americas, so a nice balance there with strong year-over-year growth from all regions. Our revenue performance in the quarter could have been even stronger had we not faced the supply chain constraints that Kevin has already mentioned. Next on page 12, we highlight gross margins. On a GAAP basis, gross profit for the quarter was a loss of $486,000, implying a GAAP gross margin of negative 35.6%. Our non-GAAP gross profit in the quarter was $197,000, implying a non-GAAP gross margin of 14.4%. Despite supply chain constraints, we have generated positive non-GAAP gross margins in three of our last four quarters. As noted, we are currently ramping manufacturing at three locations to enhance our capacity and supply chain agility. Turning now to page 13, our gap net loss for the quarter was 104.7 million, which includes two significant non-cash items mentioned previously. Gap net loss was 14.7 million during the first quarter of 2021. Adjusted EBITDA performance for the quarter was negative 10.5 million. compared to negative 6.9 million of adjusted EBITDA that we reported in the prior year quarter. The greater loss is attributable to increased investments in both R&D and sales and marketing to support our growth plans, as well as higher G&A expense to support Quantigy operating as a public company, partially offset by higher revenue gross margins. Net cash from operating activities was negative 22.7 million for the first quarter of 2022. which includes 9.3 million of accrued interest paid off on our 2022 notes versus negative 6.6 million in the first quarter of 2021. Free cash flow for the first quarter of 2022 was negative 22.9 million, which includes the same 9.3 million payment of accrued interest compared to negative 6.6 million for the first quarter of 2021. The year-over-year change in free cash flow was driven by the same factors that drove the change in EBITDA plus a large prepayment for public company D&O insurance that was made in the first quarter of 2022. We ended the first quarter with cash, cash equivalents, and restricted cash of 21.2 million. We maintain a fully committed and untapped 125 million share subscription facility. Turning to page 14, we are providing the following financial guidance, which reflects the strong customer demand that we are seeing for our solutions. but also the supply chain challenges that are constraining the conversion of bookings to revenue. For the second quarter of 2022, we expect revenues of 1.1 to 2.1 million. And for the full year of 2022, we expect revenues of 14 to 18 million. I would note that we are currently managing a business to operate at the upper end of this full year range. And with that, we would now like to open up the call for questions.

Thank you. If you would like to register a question or comment, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. One moment, please. And the first question comes from Mark Delaney of Goldman Sachs. Please go ahead.

Yes, good morning, and thank you very much for taking the questions. The first one is on customer demand and supply chain. You mentioned a very good long-term demand opportunity. I'm wondering if you can speak at all about whether or not the supply chain issues have impacted your ability to work on customer design and customer demand, or is it only a near-term shipment issue?

Yeah, sure, Mark. It's Kevin, and thanks for the question and joining us. You know, I think the supply chain issue is not to be diminished in scope. I think as we laid out in the script, we're expending resources on finding alternative parts, just chasing parts and supply chains. In some cases, designing out one part and designing a new part, so that was one of the reasons that we mentioned, you know, an increase in R&D activity. All of that being said, so far, every indication is that the hurdles are ones that we're able to mobilize on, sort of get through the transient in the near term, and I don't see a discontinuity at this point, but I think the real message is that we could be converting quicker if things were better and we're spending more R&D resource just sort of dealing with the surprises along the way. Is that helpful?

Yeah, I had a follow-up on that topic, if I could. Do you have any perspectives about how long the supply chain issue may last? And for the steps you talked about quantity taking in terms of extra OpEx and some of these new facilities, which I think would take CapEx, what sort of total cost might there be for the company in order to try and mitigate these issues?

Yeah, I think we... Right now, our plan, I believe, comprehends that... We will be through the majority of this transition by the end of the calendar year. Could the supply chain constraints and dynamics continue to be tight through 2023? I think they could, but I think we're dealing with sort of the storming and forming of the problem right now. And I see that on other boards that I sit on as well. So I think in terms of our rapid response to the issue, uh were more intense at this moment in time and through 2022 probably the next two quarters than um you know uh that i would expect in 2023 i think by 2023 we'll be dealing with things in a more deliberate and programmatic way um i don't see it impacting demand as much in fact uh if anything sometimes you know as lead times go out people begin to uh become more thoughtful about how they order, the length of time that they put orders in. So I think we're getting deeper conversations with customers and probably more visibility into end market demand. Pat, any thoughts on the expense side of this?

Yeah, I mean, I would just couch it in a more general statement that we do expect OpEx to continue to creep up this year. Mark, and certainly, you know, just putting the resources in place to manage this, you know, within operations and R&D is certainly part of that. You know, regarding the variable impacts, you know, certainly it is very much there, but we do expect gross margins to improve. you know, mostly driven by the operating leverage, right, as we get better absorption from our fixed operations spend. But there is an impact, certainly, on the variable cost side from this that's factored into that outlook.

One last one for me, if I could. If you wouldn't mind, if you could remind us about the longer-term financial target model that the company has, and is there a certain – revenue level you think you need to achieve in order to get to EBITDA breakeven? Thank you.

You want to take that one?

Um, sure. Yeah. I think that, uh, um, again, we're, we're, we're focusing Mark, uh, more of the discussion around the quarterly guidance, uh, and, uh, and annual guidance that we're providing today. You know, if you do look at some of what we've provided historically, right, it would have implied breakeven late in 2023. But, you know, I'd kind of keep it at that and just, you know, today we're kind of focused on the quarter and the full year 2022 in terms of our outlook comments. Understood.

Thank you.

Thank you. As a reminder, if you have a phone line, you may press the 1 followed by the 4 on your telephone to register a question or comment. Once again, that is the 1-4. And the next question comes from Brian Casale of Raymond James. Please go ahead.

Hey, good morning, and thanks for taking my questions. I'm wondering if you could put a little bit of color around the demand environment that you talked about, maybe talk about what the orders look like and your backlog and how much visibility you have into this revenue build throughout the year.

Yeah, sure. Let me take a stab at that. And again, thanks for joining us and your questions. I think there's a number of things that are encouraging as we think about the year. as we laid out in the script. The dynamic in the three verticals, security being the strongest, flow management being probably the second and industrial coming on, probably better than we had anticipated as we see either camera technology or you know, 1D LIDAR being favored by 2D and 3D LIDAR applications, but at basically the same cost effectiveness as legacy technologies. The market environment has picked up sort of post-COVID. And so I think, you know, what can be said is the market trends are good for the deployment of LIDAR as either an augmentation or a displacement to camera technology. For us, we have more products and more products with clear fit than we had a year ago. Third is we have greater sales reach. We probably had a turnover in our sales organization and began to expand the sales team, so a stronger team, and then we have more partner reach. So big picture is we have four threads of sales energy that are very different than a year ago. I'd say second is our plots for the year are based upon the notion that we have roughly 100% year-over-year water growth from 2021 over 2020. And we continue to believe that all of these forecasts start with bookings or orders. And so we have a point of view on year-over-year growth. We have a point of view that as our bookings have been up year over year on a quarterly basis. They are lumpy, and that's really one of the reasons that we focus more on revenues than our guidance. But anyhow, a very strong sort of year in review in terms of order growth, and we continue to believe for the factors that I mentioned that order growth will continue at a healthy clip. And last is that when you look at the details of the deals, where we had a lot of proof of concepts and we're spending a lot of time with consulting engineering, testing the fit for an application, we've moved from sort of the first ones and twos of a proof of concept to a deployable paid for land. And now we're into the expansion side of that. So going from you know, one data center to the next order for three or four data centers and so forth. And so that dynamic of sort of the prosody of a vertical catching energy is really what sort of informs how we think this will go. And therefore, you expect to see deal sizes increasing, the numbers of deals increasing, and that's what we're seeing in terms of our book that we go out and chase each quarter. So those are lining up very favorably and are really the kinds of insights that inform our outlook.

Great. I appreciate the color. Yeah, that's fantastic. If I could just follow up, you hit a number of kind of tech milestones over the last five or six months. Can you talk about any upcoming ones that we should be thinking about or penciling in for 22 and then maybe tie some of the some of your plans on product roadmap and how we might think of new products coming into the mix or influencing that revenue build as we move through the year.

Yeah, sure. You may have asked several questions, but let me hit the commercial side of this one first, and then I'll vector over to a second one. I think as we had stated earlier, Number one, we think it's crucial to have vibrant new product introduction capability. And I'd say that we have staffed ourselves to do that. As mentioned, we announced three new products in the quarter. You should continue to think that we will continue to bring new products to market. I would say it's a little bit harder this year in the sense that we are moving more resource as necessary to deal with supply chain rework. And so I'd like to be moving faster on that front, but nevertheless, we'll have another strong year. I think as I say that, one of the areas that we will continue to focus on will be software that continues to allow us to have greater reach or suitability for whether it be data centers, flow management, the verticals that are active and humming. And then secondly, you should expect that we will continue to have more introductions on the industrial side, and in particular probably that help lower beam count applications. So introduction to, you know, robots, HVORs, and so forth. And the reason for that is one, we think it's a market that is part of this either camera or 1D LiDAR to 2D, 3D LiDAR transition. And secondly, it has many of the same traits as an automotive market in that you get a design win and then your volumes ramp vigorously on the back of a channel that is the go-to-market engine. And so we've secured an early double-digit number of sort of design slots in that front, and we're going to continue to introduce new products that will expand that dramatically. That's why I think it's reasonable to think that the verticals that we mentioned, the top two being data center and flow management, are crucial this year and make up the bulk of our outlook for this year. But industrial will continue to ramp. I think it will become noticeable in the The second half will become increasingly important in 2023. And as you know from what you do, that part of the market is very large. There's plenty of share to be shifted from cameras and other technologies. And there's a lot of money there to be made. So I think that would be the way to think about our product introduction for the next six months.

Is that helpful? Yeah, that's right. You did an excellent job of answering six or seven sub-questions in my original question. Thank you very much, guys. I appreciate it. Thanks.

Thank you. That was our final question. I'll turn the call back over to you, Mr. Kennedy, for any closing remarks.

Well, listen, thanks, everyone, for joining. It was great to get our first earnings call completed, and we look forward to staying in contact with you through the quarter. Thanks again.

you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.