Earnings Transcript for QNGYQ - Q1 Fiscal Year 2022

Operator: 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. 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.

Ryan Gardella: Thank you. Good afternoon, and welcome to Quanergy’s First Quarter 2020 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. Quanergy has also posted a presentation to the Investors 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 on 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 within 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 and presentation. And now I would like to pass the call over to Kevin Kennedy, Chairman and CEO of Quanergy.

Kevin Kennedy: Thank you, Ryan, and thank you all for tuning into 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 Quanergy for those who are new to the company. From the perspective of the overview. On Page 3 of our presentation materials, we have provided a snapshot of Quanergy. 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 QORTEX. 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 actual insights across major industries around the world. Now to differentiators. Turning to Page 4. There are a number of publicly traded LiDAR providers. So a brief summary of factors that differentiate Quanergy is provided as a guide. First, we have a balanced focus on two major end markets

Patrick Archambault: 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 sizable charges related to the closing of our business combination with CCAC, including $51.6 million of noncash stock-based compensation expense and $36.7 million of noncash 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 a 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 GAAP net loss for the quarter was $104.7 million, which includes two significant noncash items mentioned previously. GAAP 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 Quanergy operating as a public company, partially offset by higher revenue and 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 million to $2.1 million. And for the full year of 2022, we expect revenues of $14 million to $18 million. I would note that we are currently managing our 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.

Operator: And the first question comes from Mark Delaney of Goldman Sachs. Please go ahead.

Mark Delaney: 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-in and customer demand? Or is it only a near-term shipment issue?

Kevin Kennedy: Yes. Sure, Mark. It's Kevin, and thanks for the question and joining us. 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, in some cases, designing out one part and designing in new parts. So that was one of the reasons that we mentioned 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 most -- 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?

Mark Delaney: Yes, it is and then 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 Quanergy taking in terms of extra OpEx in 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?

Kevin Kennedy: Yes, 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 Three, 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, we're more intense at this moment in time and through 2022, probably the next 2 quarters, then than I would expect in 2023. I think by 2023, we'll be dealing with things in a more deliberate and programmatic way. I don't see it impacting demand as much. In fact, if anything, sometimes as lead times go out, people begin to 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?

Patrick Archambault: Yes. 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, just putting the resources in place to manage this within operations and R&D is certainly part of that. Regarding the variable impact, certainly, it is very much there, but we do expect gross margins to improve, mostly driven by the operating leverage, right, as we get better absorption from a fixed operation spend. But there is an impact certainly on the variable cost side from this that's factored into that outlook.

Mark Delaney: That's helpful. One last one for me, if I could. You don'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.

Kevin Kennedy: Pat, can you comment on that?

Patrick Archambault: Sure. Yes. I think that, again, we're focusing, Mark, more of the discussion around the quarterly guidance and an annual guidance that we're providing today. If you do look at some of what we provided historically, right, it would have implied breakeven late in 2023. But I'd kind of keep it at that. And just today, we're kind of focused on the quarter and the full year 2022 in terms of our outlook comments.

Mark Delaney: Understood. Thank you.

Operator: The next question comes from Brian Gesuale of Raymond James. Please go ahead.

Brian Gesuale: Hey, good morning, and thanks for taking my questions. 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 in your backlog and how much visibility you have into this revenue build throughout the year?

Kevin Kennedy: Yes, 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. So number one, 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 1 LiDAR being favored by 2D and 3D LiDAR applications, but basically the same cost effectiveness as legacy technologies. The market environment has picked up sort of post COVID. And so I think what can be said is the market trends are good for the deployment of LIDAR as either an augmentation or 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 have -- we had a turnover in our sales organization and begin 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 energy that are very different than a year ago. I'd say second is our thoughts for the year are based upon the notion that we have roughly 100% year-over-year order growth from 2021 or 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 in our guidance. And -- 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 1s and 2s of a proof of concept to a deployable paid for land. And now we're into the expansion side of that. So going from one data center to the next order for 3 or 4 data centers and so forth. And so that dynamic of sort of the porosity 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.

Brian Gesuale: Great. I appreciate the color. Yes, that's fantastic. If I could just follow up. You hit a number of kind of tech milestones over the last 5 or 6 months. Can you talk about any upcoming ones that we should be thinking about or penciling in for '22 and then maybe tie soft some of your plans on product road map and how we might think of new products coming into the mix or influencing that revenue build as we move through the year?

Kevin Kennedy: Yes, 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 a vibrant new product introduction capability. And I'd say that we have staffed ourselves to do that. We -- 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 the 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 into robots, HVOR 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 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. And that's why I think it's reasonable to think that the verticals that we mentioned, the top 2 being data center and full 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 second half and 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 6 months. Is that helpful?

Brian Gesuale: Yes, that's right. You did an excellent job of answering 6 or 7 sub questions in my original set. Thank you very much guys. I appreciate it.