FY2004 3Q conference call notes (February 12, 2004)
Kevin's Comments: Revenue up 14%. Fifth consecutive qtr of sequential growth. The best quarter in terms of revenue for the company. NCharge sales accounted for about 90% of 3Q revenue, an increase of 22%. Seeing a steady growth in demand for battery products and accessories due to their increasing power to support more devices. Net loss of $10.9MM for the qtr. Costs of closing the NI facility are included in this quarter. The closing of the NI facility is an important step in the road to profitability and will result in significant cost savings over the coming quarters. Ended the qtr with $7.4MM cash, out of which $1MM is held by our FengFan JV. In addition, they have $14MM available from Berg who has agreed to fund through equity transactions at the market price of VLNC stock just prior to funding. VLNC will have the funding needed until they reach cashflow breakeven.
Henderson facility sold for $2.7MM as filed in 10Q, Dec 17, 2003. Successfully moved the polymer film production from the NI facility to ATL in China. Looking for buyers for the NI facility. There is a lot of interest for the property.
Currently producing cylindrical cells at PETC, Taiwan. End of in-house production and the related costs. 4Q FY 2004 ending March 2004, will be a product transition quarter. Over the next week at Demo 2004 and over the next few quarters, they will be releasing several new products that will fuel revenue growth throughout FY2005. One of these products will be a direct replacement for the current NCharge system. Potential retailers are waiting for the new NCharge product to be released at Demo 2004. Expect the Q4 revenue to increase about 10-15% over Q3 in FY2004.
Stephan's comments:
Q3 marks the end of Phase I of the biz plan. Objective of Phase I was to:
- demonstrate the NCharge product viability,
- VLNC to become a credible battery vendor in the industry and
- launch multiple products using the Saphion lithium battery technology across various sales channels and customers.
This objective has been accomplished.
1. With the launch of the cylindrical product and Gen II Saphion technology, they are officially entering Phase II of their biz plan. Will roll out new products and new product families with great market potential.
2. During the last 3-5 months, we have completed the transition of NI production to Asia, from the in-house production to a leveraged production model that will lower the manufacturing costs and increase profitability. This move will help them achieve cash flow breakeven during FY2005.
3. Got positive results from biz development efforts and an impressive growth in their sales channels due to the increasing awareness of the Saphion technology. Expect sales of their cylindrical cells and Gen II products.
Growing sales funnel seems to indicate awareness in the market place that VLNC Saphion is being recognized as the only safe lithium ion technology for large format applications.
Stephan Detailed Comments:
Product -
started mass production of Gen I cylindrical cells (at PETC, Taiwan) this quarter, primarily for the K Charge product designed for power backup for the telecom and utility industries. (Tyco and AEP orders expected?)
Last month, delivered samples of Gen II cylindrical cell for use in consumer applications (power tools?), expanding the total battery market opportunity for VLNC.
Next week they are launching the second generation NCharge power system which integrates the cylindrical cell Saphion technology and the smart technology from Mobility electronics. (Re.: Mobility electronics collaboration and their cordless battery recharging technology). The new product will serve as a universal battery system, first product of its kind in the industry, to be used not only for powering the notebook PC but also for charging cell phone, PDA, DVD player, Digital camera, mp3 player, etc. Modular design for greater flexibility. It includes a base battery system that provides 5 hours of additional PC run-time but also includes a snap-on expansion pack to double the energy capacity. The new NCharge will be fully compatible with the new 90Watt and 120Watt notebook PC's introduced recently. New national retailers as well as the existing retailers will offer this NCharge product after April, 2004.
Later this Spring, they'll launch a new family of products, called U Charge, using the cylindrical cell construction of both Gen I and II technology. The U Charge product family will be a direct replacement for the existing NiMH systems in large format battery applications, with performance and safety. U Charge offers a new array of applications currently being served by the lead-acid battery systems such as wheel chairs, scooters, marine vessels, etc. The U Charge uses the same form factor or package of the existing lead-acid and NiMH battery systems so that the U Charge will be a simple "drop-in" replacement into existing customer applications. Expect much faster VLNC product adaptation by customers.
Expect a significant impact of the U Charge family of products in military and vehicular applications that now heavily rely upon NiMH and NiCad battery systems.
Gen I and Gen II products will coexist to meet different performance requirements. Gen I has demonstrated an unprecedented cycle life of 1500 cycles at 90% capacity compared to the current Li-cobalt oxide systems from competitors offer 500 cycles at 80% capacity. Gen II has demonstrated a high rate capability never imagined by Li-ion manufacturers in the past. Gen II in cylindrical construction expanded their sales funnel dramatically with more consumer applications. Both Gen I and II will target multiple markets.
Operation -
Transition from an internal (high-cost) to a leveraged (low-cost) mass production in Asia has been completed - the most crucial step toward profitability.
- Li polymer film production has been moved from NI to ATL in Asia, with 3X savings on production costs.
- partnership with PETC will result in 2X improvement from a $/whr standpoint to the production cost.
- Moved the system manufacturing operation from Mexico to a new partner, Sinbon in Taiwan, gives additional cost savings. (no wonder NCharge prices are heading lower?)
Partnerships impact positively on VLNC's working capital requirement. VLNC now has all the elements in place to be successful: highly differentiated Saphion technology in cylindrical construction which is integrated into the main-stream consumer applications. Markets include telecom, utility, vehicular, and consumer appliances.
Expanded sales funnel and serious engagements with OEM's are expected to result in transactions during the year. Many of these customers have started qualifying VLNC's products and some of them have requested anonymity.
The new N Charge will be the main driver for revenue growth starting FY2005 (April, 2004) and the large format battery systems will become the primary revenue driver in the later part of FY2005 (Sep 2004-Mar 2005).
Q1: You now have two contract manufacturers: ATL and PETC. If you get a large order, can you fill the order with these two manufacturers or you will need additional contract manufacturers?
Ans: Yes, they can fill any sizable order. VLNC is also looking for other contract manufacturers for additional production capacity and second sources for both cylindrical and large format cells.
Progress you are making with the automobile industry for hybrid EV applications?
Ans: Currently engaged with USABC. It is going as planned. But VLNC also decided to directly engage some of the large US auto manufacturers. In Europe, VLNC is engaged with every single, top auto manufacturer. Their European engagement proceeding smoothly and everyone expressed a strong interest in VLNC technology. VLNC is engaged with one Japanese auto manufacturer. (Great strategy - Europe being short of transportation fuels - gasoline, diesel, etc.)
Q2: Gross margin trend - sharp or gradual? Now that you have closed facilities in Henderson and NI, what margin you expect for your production in Asia?
Ans: Margin improvement will be gradual. Currently working through the final bit of their inventory at NI, Incurring expenditures for cleaning up and closing down the NI facility. New N charge has a better margin and it will be the primary revenue driver next qtr. Its production at ATL will show cost savings.
On the Opex side, you expect steady R&D costs?
Ans: From the fixed cost standpoint, the closing of NI facility helps tremendously. The swing you will observe over the next few qtrs will be dramatic compared to where we are today. Gross margin will grow as our production volume grows and the production cost goes down.
Q3: Can you go over the cashflow details for Q4? How much cash neede to get cash flow positive?
Ans: You mean cash flow for Q3? (CIBC: "sorry..")
Used $7.3MM in Q3, which includes expenditures for closing the NI facility. Have over $20MM cash available now. Cash expenses will go down quarter over quarter due to NI plant closing and transition of working capital funding through our partners. Cash burn will go down throughout FY2005.
Do you expect a negative cashflow drop as a step function? How rapidly?
Ans: Not a step function but a gradual drop off until the middle of FY2005.
Basis for your expectation to cashflow breakeven and profitability
Ans: Expecting revenues from licensing and product sales. Cylindrical construction offers both licensing and sales opportunity. Stephan (sales opportunity are very real.)
Q4: How are you planning for the Wall Street coverage and for meetings with institutions to increase the awareness of VLNC stock?
Ans: You bet we are! Beginning to talk to folks on Wall Street. Visited the analyst community last December. Planning a conference in March in New York, another meeting in May in California and other meetings throughout the year. Noted a slight up tick in the institutional purchase of VLNC stock in the past couple of quarters.
Q5: When you first joined VLNC, you believed there was a very, very, large market for VLNC batteries. Do you still believe that the same market potential exists as of today?
Ans: Absolutely! I never want to advertise the numbers because they are very large. Something like far in excess of $10 Billion for the large format battery applications and consumer markets.
With the Gen II rate capability you stated you were going to start attacking the lead-acid applications in coordination with automobile companies. Are you talking about start-up batteries for automobiles?
Ans: No. The U Charge product family to be launched this Spring will include cylindrical cells (Gen I or II) that will have a form factor and an enclosure to meet the direct replacement for the existing lead-acid battery systems: wheel chairs, scooters, marine vessels, etc. For the electric vehicle application, both U Charge and K Charge product families will be used. Gen I is more suitable for electric vehicles due to its long life cycle. Gen II with more rate capability (more power) is suited for the hybrid electric vehicle applications.
Q6: Comments on progress with FengFan JV?
Ans: It is going very well. Hired the entire management team. The building has been erected. FengFan will be one of VLNC's several partners in Asia. FengFan will focus on large format battery and cylindrical cell production. VLNC will seek additional partners in Asia for their U Charge products and small format battery production. All of our partners in Asia are capable of meeting product demand in FY2005.
Q7: Can you give us a timeline of events or milestones we can expect in the next few quarters?
Ans: Yes.
1. Launch the second generation N Charge next week at Demo 2004. Later this Spring, launch U Charge (both Gen I and II) and two K Charge products (with cylindrical cells). That will be a product portfolio to meet all large format applications.
2. When the new N Charge product becomes available in large quantities in April, 2004, you will see new retailers coming on board with the existing national retailers moving to the new NCharge product sales.
3. Will announce orders for the large format applications in power backup for the telecom and utility industries. It takes time to qualify for large system applications. Some customers do not want to be identified for competitive reasons.
4. Expect Gross margin improvement, cashflow breakeven and profitability in FY2005.
Comment on licensing revenue potential?
Ans: Licensing revenue is a moving target. Some customers are interested in licensing. Currently negotiating with some customers. VLNC will use a different licensing approach: license to end-customers that are manufacturers of the end-product so that VLNC can charge an initial fee and get the royalty when products are sold. Licensing interest in the cylindrical cell (power tools?).
Heard you say on CEO Cast that cylindrical battery deal in next few weeks?
Ans: Did not mention so. Will use cylindrical cells in the K Charge products and in the new N Charge. They will start shipping K Charge products including the cylindrical cells to existing and new customers in the next few weeks.
Q8: Net proceeds from the sale of the NI facility, after repaying the note?
Ans: The facility is valued at $5-6Million after paying off the note.
Will the sale happen in the next 3-6 months?
Ans: Yes. It can happen in that time frame.
Comments on power tool company interested VLNC battery? One or multiple customers?
Ans: Can not give details now. Working with leaders in the consumer appliance sector.
Q9:Fully diluted share count after the conversion of the preferred shares?
Ans: Pfd will add 2MM shares, options will add 6-8MM shares, 75MM shares out. Refer to the 10Q. Expect about 85MM share count, diluted.
N Charge product sales revenue: gross profit margin? When will it turn positive?
Ans: Positive gross margin expected with the new N Charge product launch and shipping in April, 2004.
Q10: Operating expenses. G&A, R&D?
Ans: Depreciation will go down. R&D will stabilize. Up tick last qtr due to N Charge product launch. Marketing costs will go up with sales. G&A will stabilize.
Q11: When you expect positive cashflow?
Ans: Licensing revenue (cylindrical cells for consumer appliance, power tools?) may come first in FY2005 and as the basic product portfolio brings revenue, expect cashflow breakeven later in FY2005.
Head count in the company?
Ans: Cut by half. Do not expect to grow. They use a leverage model to reduce internal resources. Head count: slightly north of 100. May go lower.
Valence Reports FY2004 Third Quarter Results
Thursday February 12, 4:05 pm ET
AUSTIN, Texas--(BUSINESS WIRE)--Feb. 12, 2004--Valence Technology Inc. (Nasdaq:VLNC - News), the leader in the development and commercialization of Saphion® technology, the only safe large format Lithium-ion rechargeable battery technology, today reported results for the three- and nine-month periods ended Dec. 31, 2003.
Highlights for the third quarter of fiscal 2004 include the following:
Total revenue increased 14 percent from the previous quarter, with a 22% increase in N-Charge(tm) Power System sales;
Saphion Lithium-ion technology was introduced in a cylindrical cell construction and second generation cylindrical Saphion cell samples were delivered for customer evaluation;
Manufacturing operations were transitioned from the Company's Northern Ireland facility to partners in Asia, a key step in lowering product and fixed overhead costs.
"With the successful launch of our cylindrical cell technology and the transition of our manufacturing operations to partners in Asia, we are in a position to introduce a broader portfolio of Saphion-based products with much improved margins," said Stephan Godevais, chairman and chief executive officer of Valence Technology Inc. "We now have the ability to aggressively pursue sales opportunities in much larger markets, and we expect this to fuel consistent revenue growth during the next fiscal year."
FINANCIAL RESULTS
Revenue for third quarter of fiscal 2004 increased to $2.7 million versus $638,000 during the same three-month period a year ago, and was up 14 percent sequentially from the $2.3 million reported in the second quarter of fiscal 2004. The company reported a net loss during the third fiscal quarter of $10.9 million or $0.15 per share, which included a restructuring charge of $926 thousand related to the closing of the company's Northern Ireland manufacturing facility, versus a net loss of $8.6 million or $0.14 per share during the third quarter of fiscal 2003.
Disclaimer: The above note is subject to erros or omissions.
Please use SEC documents for verification. Ram |
