FY 2002 year-end, fourth quarter conference call
Stephan Godevais and CFO - Valence Technology
Highlights:
(1) Have enough cash on hand (plus credit line) to last a year, assuming zero revenues
(2) Second half of FY 2003 (Winter 2002) to achieve $9-11 MM revenue and cashflow breakeven in FY 2004 (calendar 2003)
(3) Prediction of $50MM revenue was downgraded to $9-11MM for FY 2003, due to changes in market demand. Revenues from licensing will be realized over the licensing period which decreases the license revenue per year - according to their accounting guideline.
(4) N Charge product - Currently mass-producing at NI plant. First shipment to HP delivered on schedule, product qualification tests are favorable for their education bundle. 65 Whr battery.
(5) N Charge products will be available in the next two weeks from their online store on the web. Advertising by VLNC will commence in July in "in-flight" magazines and web sites targeted at the travelling executives. OEM's advertising will add to VLNC marketing effort. Two sizes: 65 Whr and 130 Whr
(6) Working with Dell, Compaq, IBM, HP, Acer, etc. on incorporating VLNC Saphion battery in their products. This is a major shift for VLNC working with smaller companies like Bluefin, etc. An end to "small company syndrome". Uncertain as to who will be the big customer and for what product. Tier 1 customers want teh validation of VLNC Saphion product and a reliable supply in order to consider VLNC battery as part of their product. Validation is good so far.
(7) Amperex OEM agreement announced today is for small cobalt cells. The small format Cobalt cell capacity is shifted to Amperex. NI plant will produce only the N Charge Saphion product. Profit margin for the cobalt cells is smaller than N Charge product. Takes advantage of the cheap labor in China and the Asian market demand for small format cobalt cells. In the future, they may produce the large format Saphion product.
(8) Accelerating the development of cylindrical cells. The first-round of testing was successful. Now going through a second-round of testing, preliminary results look good so far. By Fall 2002, the cylindrical cell development will be finalized.
Three topics covered:
(1) Past Performance, Accomplishment, and Future Outlook (CEO)
(2) Financial Performance (CFO)
(3) Discussion and Questions (CEO)
(1) Past Performance, Accomplishment, and Future Outlook (CEO)
Last year priorities and accomplishments were:
(a) Assembling a good management team - achieved or exceeded. Dr. Skoohi joined the team as CTO.
(b) Achieving operational excellence - successful transition from R&D to customer-focused business
(c) Strengthening the balance sheet - equity financing, extended maturity date of loans, paid off some loans, etc.
(d) Industiral acceptance of VLNC product - Largely Saphion product now
(e) Customer funnel filled with Tier 1 customers for VLNC products - working with Dell, Compaq, IBM, etc. on incorporating VLNC battery in their products.
(f) Decreasing expenses - down from $10-11MM to $7MM/qtr
(g) Growing revenues - missed short term target, underestimated ability to raise revenues.
Business plan has not changed. The overall plan is still in tact. The strategy is to focus on three main areas:
small format cells, large format cells, and demonstrate reliable supply to customers, initially in the mobile computing market, later, moving to teh automotive, telecom and utility markets. Current battery storage technology based on lead-acid technology is antiquated and the fuel cell may take longer than expected. Cycle life with safety attracts customers.
Some changes in licensing strategy: Will not insist on the phosphate powder production at VLNC facility. Will license the technology to supplier. That will reduce the need for capital investment for VLNC.
Priorities for 2003 (Stephan)
(1) Find additional Tier 1 customers
(2) Multiple applications for cylindrical cells
(3) Improve OEM agreements
(4) Phosphate licensing
Revenue target $9-11MM for FY 2003, mostly for N Charge product and assuming that customers sign a PO.
Questions and Answers:
Question 1: Assumptions for the $9-11 Million revenue prediction for FY 2003?
Answer: Revenue mostly from N Charge product. Today, NI plant can produce 2 MM Whr/month or $40-50 MM revenue/year. The Amperex OEM agreement is for small cobalt cells and get access to competitive market in China. Licensing revenue will be realized over the licensing period - accounting guideline. Cells to be produced by Amperex are not Saphion-based product. All Saphion technology products will be produced at NI plant for now.
Question 2: Relationship with Amperex?
Answer: One of the milestones was to sign an OEM agreement in China. After reviewing several manufacturers as potential partners, VLNC selected Amperex because of their ability, equipment, manufacturing flexibility, etc. Small cell production is labor-intensive. China's labor rate is cheap.
Question 3: Status of cylindrical cells?
Answer: Development is on track. First round of development and testing is completed. Waiting for the results from the second round of development and testing.
Question 4: Relationship with IBM, Dell, Compaq?
Answer: No details are allowed for public release. The key point is VLNC has transitioned from the product awareness building phase to working with Tier i customers on various products using the Saphion product.
Question 5: Status on the Memo of understanding with Acer and Wistron? Current manufacturing capacity at NI plant?
Answer: Work with Acer and Wistron is progressing as planned. Current capacity at NI plant for the Saphion product is 2 MM Whr/month. Equipment has been already assembled for boosting to 5 MM Whr/month. In two months, full production will target at 2 MM Whr/month for an expected revenue of $40-50MM.
N Charge products - both 65 and 130 Whr models will be available in 2-3 weeks at their online store.
Question 6: Balance sheet: Depreciation and amortization charges?
Answer: Depreciation charges from writing in Q3 about $500-600K. Current cash burn rate at $ 7MM/qtr, reduced from $10-11MM/qtr. Cash on hand (plus credit line) to last five quarters (until June 2003?).
Question 7: What are you doing to boost the stock price?
Answer: Stock price is affected by many factors that are not under his control. All he is doing to (a) set milestones and meet them and (b) keep up the momentum on communications with shareholders. VLNC has a seasoned person handling the investor relations. They have accepted the invitation to CIBC conference to present VLNC. In July, they have a shareholder meeting at Austin.
Question 8: How can VLNC take advantage of the Utility Industry problems of black outs/brown outs?
Answer: Using VLNC products for this application will be very exciting. That potential was what attracted Stephan and his management team to join VLNC. Dealing with power shortages during peak demand periods are a great opportunity. Lead acid technology is antiquated. Fuel cell technology is taking longer than expected.
Question 8: Having spent a year with VLNC, are you still excited about VLNC potential as you were last year?
Answer: Yes. This company has transformed a great deal since last year: from R&D to customer-focused business.
Question 9: Last year you talked about a market potential of, not $1 Billion/yr but 10-15 Billion/yr for battery.
Answer: Yes. We continue the ramp up in the next 2 to 5 years. The first year - building product awareness and laying a solid foundation. Those have been accomplished. The second year - in 2003, we ramp up production. The end game will be large format cylindrical cells. We see three phases. The first phase - (FY 2003) Transition. The second phase - (FY 2004) small format cell sales and licensing revenue. Demonstrate to Tier 1 customers that VLNC technology is valid and that VLNC is a reliable supplier for large quantities. Five years from now, VLNC sales will shift to large format product, similar to PC market transition to high-end server market which made several millions for Compaq. Small format cells have low profit margin like PC market and they sell like commodity. VLNC Saphion technology has differentiated itself from other technologies.
Extensive search of patents and public trade journals has confirmed the uniqueness of the Saphion technology. As of today, no one has a battery technology that will beat VLNC large format Saphion technology. In the future, fuel cell or some other technology may become more competitive with VLNC. Fuel cell may not reach the mass production in the next 10 years.
Question 10: In your previous conference call, you predicted $50 MM revenue, now you say $9-11 MM. Why?
Answer: A big portion of our $50 MM prediction had to do with licensing revenues. Our accounting guideline requires us to realize the licensing revenues over the licensing period. We can not recognize licensing revenues upfront.
Question 11: VLNC marketing efforts for the Saphion product?
Answer: As soon as our online store goes into operation, you will see banner ads on web site where traveling executives book tickets, travellers, in-flight magazines (July issue), etc. In addition, our OEM's may start advertising.
Question 12: UL Certification of Saphion product?
Answer: VLNC has UL certification and other certifications. They carry the product on flights with no problem.
Caution: watch out for errors in transcription. Ram |
