Q4 FY2004 conference call notes (June 14, 2004)
Valence Reports FY2004 Fourth Quarter and Year-End Results; Announces Additional Back-Up Financing Commitment
AUSTIN, Texas, Jun 14, 2004 (BUSINESS WIRE) today reported results for the three- and twelve-month periods ended March 31, 2004. The Company also announced it has secured an additional $20 million, subject to adjustments and standard commercial terms, equity back-up commitment from Mr. Carl Berg.
FINANCIAL RESULTS
Revenue for the fiscal 2004 fourth quarter increased to $2.8 million, up 143 percent versus revenue of $1.2 million reported during the same three-month period a year ago. The company reported a net loss during the fourth fiscal quarter of $9.3 million or $0.12 per basic and diluted share, versus a net loss of $10.1 million or $0.13 per basic and diluted share in the fourth quarter of fiscal 2003. For the twelve months ended March 31, 2004, Valence reported revenue of $9.4 million versus $2.6 million for the twelve-month period ended March 31, 2003. The company reported a net loss for fiscal year 2004 of $56.1 million or $0.77 per basic and diluted share, which included one-time charges of $17.6 million related to the termination of manufacturing operations at the Northern Ireland production facility. This compares with a net loss of $37.9 million or $0.65 per basic and diluted share in fiscal year 2003.
ADDITIONAL BACK-UP FINANCING COMMITMENT SECURED
Valence also announced today that it has obtained an additional $20 million, subject to adjustments and standard commercial terms, back-up equity commitment from Mr. Carl Berg, a director and major shareholder in Valence.
Highlights for FY2004 ending March 31, 2004:
- Generated a record total revenue of $9.4 million, a 269 percent increase over fiscal 2003
- The transition of manufacturing operations to Asia lowered product and fixed overhead costs and dramatically improved gross margins from year-ago levels, ending the fourth quarter of fiscal 2004 at negative 25 percent versus negative 187 percent in the fourth quarter of fiscal 2003. Gross margin improved from -330% in FY2003 to -69% in FY2004 and -25% in 4Q2004. This trend is expected to continue as VLNC expands production volume and as transition to Asian manufacturing continues.
Further cost savings are expected in fiscal year 2005
- Progress in cylindrical cell construction and the development of the second generation Saphion technology resulted in an expanded product portfolio, including the launch of the second generation N-Charge(tm) Power System II, currently shipping samples of cylindrical cell K-Charge(tm) Power Systems, and the initial development of the U-Charge(tm) Power System family of products for motive applications.
Have $2.7MM cash of which $900K is held as restricted cash in the FengFan JV and $11MM funding in various forms from Carl Berg.
NCharge sales are expected to grow moderately in the next two quarters at a rate of $2-3.5 Million/qtr and expanded sales in 4Q 2005 (Jan2005-March2005 period) as sales of KCharge and UCharge in commercial quantities kick in producing a "revenue spike" or "inflection point" in the final quarter FY2005.
Incurred charges of $258K for shutting down the Henderson, Nevada facility and $17.6MM in restructuring charges for shutting down the NI plant.
VLNC has requested for an extension for the 10K filing. The numbers released on June 14, 2004 have been audited and approved by auditors.
Stephan's review of FY2004 accomplishments:
(1) Technology development - both on sales and systems levels - expanding the product portfolio for revenue potential.
At this time last year, VLNC completed the large-scale production of Saphion cells in the polymer construction. Today VLNC has achieved the large-scale production of Saphion cells in the cylindrical construction. As a result VLNC was able to launch NCharge II in Feb 2004 and began shipping cylindrical cells of KCharge systems.
In 2004 VLNC also completed the development of the second-generation cylindrical cell design and started the delivery of cells. With these products VLNC is expanding the market potential from niche to mainstream applications.
(2) Strong relationships with Tier I customers, across multiple industries, realizing record revenue potential: VLNC is selling products at national and regional levels - Best Buy, Brookstone, CDW, Datavision, PC Connection, Dell, and others etc. as well as direct sales. NCharge has demonstrated the need for this product but also it can be mass-produced. VLNC's technology has generated interest in the computer, telecom, utility back up, and motor vehicle markets. VLNC sales channels include both national like Best Buy, Brookstone, etc., and local retailers like Fry's. Expect resellers and distributors to be the primary sales channels.
(3) Established the manufacturing operation in Asia that has yielded both reduction in production costs and working capital requirements.
Moving the polymer production from the NI plant to ATL in China cut down production costs by over 70%.
Partnering with Taiwan's PETC on the cylindrical cell production saved additional 30% in costs/wHr basis.
Transfer of the Mexican assembly contract to Taiwan cut down system assembly costs further. Achieved a total reduction of $2MM/qtr in fixed costs by moving from NI to Asia.
Business Strategy: The rate at which battery technologies are developed and adapted by the industry is unpredictable. The industry changes slowly. In light of this, the progress we have made in the last two years is very significant.
Concluded that VLNC's business strategy and financial plan have to be viable to accommodate the slow adaptation of new battery technology by customers. When Stephan joined the company their quarterly burn rate was $15MM/qtr. Today it has been reduced to $6-8MM/qtr. Their goal is to cut down to $3-4MM/qtr over the next year.
Three years ago, their production cost was $7.75/wHr at the Northern Ireland plant. It has now been reduced to 75-90 cents/wHr. It is expected to go down to 30-45 cents/wHr in 4Q2005 as transition to Asian manufacturing is completed.
The lowest production cost is made feasible if other operations are also moved to Asia.
Established a JV arrangement with Fengfan to manufacture polymer, powder, cells, etc.
Currently negotiating for the termination of the FengFan JV initiated in 2003. The Joint Venture with FengFan is to be terminated due to: (a) timing delays, (b) management differences, and (c) concerns regarding the sharing of VLNC's intellectual property rights. The termination will be more positive to VLNC and help move the manufacturing even more aggressively to Asia.
Over the last year VLNC understood the economics of doing business in Asia. For example, one business employing 3000 people only spends about a $2MM/qtr. VLNC needs to move other manufacturing operations to Asia to lower production costs and, at the same time, maintain control over their intellectual property as well as operations management for the long term success of the company. VLNC Board thinks that this next transition is critical for VLNC's success. Carl Berg agreed to an additional funding commitment of $20MM (subject to adjustments and commercial terms) to fund the next transition. The benefits offered by the Saphion technology in the large format configuration have generated interest across a broad spectrum of industries for large format solutions. In a large format solution, Saphion provides kilowatts of safe Li ion power - long lasting and maintenance-free. It offers an excellent cycle life and run time. As a result it attracted customers like TYC, APS, Renault, and others. Some of these customers have proceeded with negotiations with VLNC for "exclusive battery supply arrangements" for their respective industry.
Signed the first, one such "Exclusivity Agreement" with Tyco Electronics for three years for a total sale of KCharge power systems worth $38MM. TYC will resell VLNC's KCharge power systems under their own private label Elite to telecom and utility customers worldwide. It is not a licensing agreement. To maintain exclusivity, TYC must meet minimum quarterly volume targets. The TYC agreement validates Saphion technology for the large format battery market. It also demonstrates an industry leader like TYC has faith in VLNC's management and operational capability. It also allows TYC's great resources of sales and service support (for the new Saphion technology) to expedite the introduction of commercial Saphion technology to the market place. VLNC will manufacture the KCharge systems for Tyco.
News: "Valence and Tyco Electronics Power Systems Enter Three Year Exclusivity Agreement for Telecommunications and Utility Markets (Tuesday June 15, 9:30 am ET)
AUSTIN, Texas--(BUSINESS WIRE)--June 15, 2004--Valence Technology Inc. has signed an agreement granting Tyco Electronics Power Systems Inc., the exclusive right to resell Valence's K-Charge(tm) Power System, a Saphion® technology based back-up power solution, to Tyco Electronics' telecommunications and utility customers. The K-Charge system will be privately labeled for Tyco Electronics and marketed by Tyco Electronics under its company's brand, ELiTE RK(tm). (ELiTE: Energy Lithium ion from Tyco Electronics?)
Under the terms of the agreement, Tyco Electronics will purchase privately labeled back-up power systems from Valence for resale to telecommunications and utility customers world-wide for a period of three years. Tyco Electronics' obligation under the agreement is conditioned upon the product meeting specified acceptance criteria, and Tyco Electronics' right to exclusivity is contingent upon Tyco Electronics achieving specified quarterly volume targets. Additionally, under the agreement, sales and marketing, technical assistance, and customer support functions will be provided by Tyco Electronics."
Q1: Review R&D and SG&A expenses for the qtr?
Ans: Kevin - R&D expense for the qtr stayed at $2.3MM for the qtr, marketing at $1.4MM/qtr, and G&A at $3.1MM/qtr, pretty much the same as the last qtr.
Revenue was a bit lower than what was guided last qtr. Any product transition issues?
Ans: Yes. Product transition from NCharge I to NCharge II caused slower than expected sales. Old NCharge channels are still carrying NCharge I (polymer) product.
Is the new NCharge filling up all sales channels now? No excess inventory of "old" NCharge I left over?
Ans: Best Buy carries the new NCharge II product. Other channels carry the old NCharge. It is not a question of "old" vs. "new". There is customer interest for both products. The old NCharge (thin polymer construction) and the new NCharge (compact modular design) are both used by vertical integrators for different markets. However, NCharge II for the notebook PC is compatible for the new notebook models with 90W and 120W AC adapters.
Q2: Regarding manufacturing capabilities, is VLNC going to manufacture KCharge batteries for Tyco or Tyco is going to manufacture batteries themselves?
Ans: VLNC will manufacture KCharge product for TYC. This is the core of our next transition we just talked about - moving other operations to Asia with $20MM funding from Berg. VLNC has evidence that they will see great cost savings by moving to Asia - both at the expense and product cost levels. VLNC will be manufacturing the product for large orders from TYC.
From the manufacturing capability standpoint, VLNC will be able to manufacture for large orders for TYC?
Ans: Yes.
A lot of longs have supported VLNC for years. With the Tyco agreement, longs can say that this is the ultimate validation of Saphion technology. Is this a licensing agreement?
Ans: It is NOT A LICENSING AGREEMENT. It is basically an EXCLUSIVITY AGREEMENT, stipulating minimum battery volume per quarter for the next three years, for a total of $38MM worth of product. TYC wanted a three-year agreement since TYC is committing a lot of resources from their side to push the technology to the large format market place. TYC wants to get the full benefit($) for their effort and the initial investment TYC will make. It is good to have an industry leader like TYC pushing Saphion technology into the large format markets - worldwide. The level of effort by TYC is far greater than what VLNC can do alone. It is also an endorsement of VLNC's operational management and production capabilities.
Last but not the least, VLNC is working on similar "exclusive supply" agreements with other Tier I customers. Most of those agreements are in the final stages of completion.
Q3: Are you going to announce the TYC agreement?
Ans: The press release will be out tomorrow before the market opens.
Which technology is covered under this TYC agreement? Is it predicated upon any improvements in the technology over time?
Ans: The agreement is based on KCharge product and the Saphion technology. It includes any product improvements VLNC makes during the course of the agreement. As part of the agreement, VLNC has to meet certain product acceptance criteria set forth by TYC. TYC also accepted to a one-year exclusivity on their end, not to sell any other Li ion technology (from VLNC competitors) in their product portfolio.
Q4: Cash and receivable?
Ans: Have $2.7MM in cash and $1.5MM in receivables plus $11MM from Berg and Berg.
Can you repeat the guidance?
Ans: Product revenue for the first three quarters in FY2005 (Jun 2004, Sep 2004, and Dec 2004) to remain flat at around $2-3.5MM/qtr. As we look to the TYC agreement and other agreements like TYC in the Q4 FY2005, there will be an "inflection point" and the revenue will bump above the $2-3.5MM level.
So, $2-3.5MM for the first three quarters and revenue jump in the fourth quarter (Jan-Mar 2005)?
Ans: That's right.
Will the gross margin improve or we should use the current number?
Ans: The gross margin will continue to improve. Our focus has been twofold: overall cost and expense, and, on the product side. We are not going to stop at the -25%. We are going to move the number to positive and be in line with other products in this category.
Q5: You mentioned release of new product in March, 2004. What happened to those products and especially the power tools market?
Ans: Mentioned about NCharge II power system, in the last qtr conf call. Launched NCharge II system and completed the launch on time, releasing the product to Best Buy.
Also launched another new product concept called UCharge followed by an announcement regarding Graham-Field. They ordered UCharge for the wheel chair applications.
Received purchase orders from other companies who are testing variants of UCharge for their applications.
Throughout this summer, VLNC will be delivering those UCharge products. As we move forward during the coming quarters, the second generation of cylindrical cell production will ramp into NCharge or UCharge.
Are you expecting a major deal from power tool manufacturers?
Ans: Let us put it this way. Engaged with a large power tool manufacturer in the past. This market is going through iterative evaluation process of our technology. It is too early to say if one of these will come through. We are definitely engaged with some of the power tools manufacturers.
Q6: Military acceptance of VLNC products? How is it going with batteries for wheel chairs?
Ans: To date, the military has ordered small quantities of NCharge, KCharge and UCharge batteries for testing by various branches of the US military. Hope that these engagements with various branches of the military will bear fruit in the future. The VLNC technology has been qualified across multiple segments of the military departments: the army, the navy, the air force, etc. They are ordering various products that VLNC is commercializing right now.
With the Wheel chairs, we are making good progress. Graham-Field is a good one. Hoping that I'll look forward to say more about this in the next call.
Kevin - Keep in mind, that is the UCharge product we are looking at primarily. As we said earlier, commercial production will commence this summer.
It appears that you are engaged with a lot more Tier I customers. But you are not allowed to talk about all of the progress made?
Ans: The type of agreement we signed with TYC is the type of agreement we like to sign with others in selective markets. The answer is Yes. There is more going on, more than Tyco. I do not want to get into setting up raw expectations on the revenue numbers or anything. That is our strategy. By doing the exclusive agreements: (a) we gain recognition from a leader in the industry, (b) VLNC benefits from the resource pool provided by the industry leader and the established relationships with their own customers. The strategy is proving to be right at this point. Engaged with many customers like TYC, but it is difficult to say when or if those deals will result in exclusive agreements. Whenever that happens we'll let you guys know.
Q7: Revenue ramp for FY2004? Any guidance as to how much more of a jump in the Q4 FY2005?
Ans: We expect to have an inflection. Working on a number of relationships, new products such as KCharge and UCharge this summer. Hard to say how much of a spike in 4Q2005.
Can you guess the outstanding shares after the transition to Asia is completed?
Ans: Certainly concerned about the issue. We'll keep those concerns in mind every time we work out a transaction. Our goal is to minimize the share dilution effect.
Q8: Guidance going forward? $2-2.5MM for next three qtr and a revenue spike in the Q4 2005 (Jan-Mar 2005). Is it because it takes that long to ramp up the capacity to ship units for the Tyco order? Or some of the Tyco order shipments are already included in the $2-3.5MM number?
Ans: Most of the numbers given relates mainly to NCharge. There will be some sales from KCharge and UCharge (for customer evaluation purposes). But those K and U Charge numbers are the initial sales to customers that want to evaluate or develop their applications.
The important point we have discovered in launching a new technology like Saphion for commercial production, is that it is an iterative process. It is hard to predict how long it will take our Tier I customers to launch the new technology for their respective customers. Sometimes we have delays. Sometimes we are right on the mark. Sometimes they have their own delays in the way they incorporate Saphion technology into their own technology.
The bulk of KCharge and UCharge sales will occur in Q4 FY2005 (Jan-Mar 2005).
When will you start shipping products?
Ans: Currently shipping NCharge and KCharge to customers. Shipped KCharge this month. Shipped KCharge previously. Will ship UCharge throughout this summer. By the end of this summer, we'd have shipped commercial quantities of all three products (NCharge, KCharge, and UCharge).
Q9: You mentioned that you are working with Renault. Is that in regard to hybrid cars?
Ans: Yes. It is actually Renault is leading an effort for seven very large European automakers to test new battery technologies. Renault has ordered KCharge from VLNC for evaluation. They are looking for EV's.
Are other auto companies looking at Saphion as a potential technology for hybrids?
Ans: Yes. But I feel uncomfortable disclosing their names. They requested to remain anonymous at this point. The answer is yes. Absolutely!
Q10: Could you elaborate on the resistance or inertia in the market to accepting new Saphion technology in various markets? Critical need to reduce costs (both at the operating level and in the manufacturing. Any insight into any relationships between the product cost and the product efficacy? Are we not there yet in the value proposition in terms of technology characteristics required in the market place? As a result, we are forced to reduce the price to make the technology package more attractive?
Ans: when we engage with customers we give them the pricing curve, starting with initial proto types to all the way to commercial production. Customers respond positively to those pricing curves. They understand that this is a new technology and it will take sometime to ramp production of commercial quantities. TYC agreement is a good example of this. TYC understands that the technology will follow certain price curve and the volume is expected to grow as a result of that. I mentioned earlier in the call. It is important to realize the magnitude of the transition made in the past few years when the new management team joined the company the product literally costs 7.75/wHr to manufacture. Today we are in the range 75-90 cents/wHr. Our goal in the next transition is to be between 30 and 45 cents/wHr which is the price level our customers have indicated to us that the volume could quickly ramp to large orders.
If technology attributes such as energy density of your batteries are twice as good as it is right now, they wouldn't be interested in cost reductions, would they?
Ans: That it true. But there is so much you can do. You have to address it both ways. (a) You have to make incremental gains in performance. We work on this on a daily basis. And we are. Try to raise the energy density. (b) And you have to address at the cost level. We are working on that step function with the next transition in order to reduce costs. Both efforts will make VLNC extremely competitive. In the aggregate, VLNC wants to offer a differentiated product with safety at the lowest cost in the world. It is a very powerful recipe.
Q11: Expecting any licensing agreements? How are those going?
Ans: It is too early to say when those licensing agreements would come forth. It depends upon the rate at which people (potential licensees) would test and validate our second-generation cylindrical Saphion technology. It is a bit too early to predict. It is something we are pursuing. The more we put products in the hands of our customers, the more deals we get and more interest we are going to see for our products. You can see from some of the agreements we are trying to do with TYC and other customers that we clearly want to have a dominant position or leading position in those market segments. But there are other segments in the industry where we think we have limited added value as a company, but our Saphion technology may have added value. Those are segments we'll target for licensing. The licensing deals will be linked to the progress we make on the second-generation technology. I think throughout the coming quarters, when more people will have the chance to test it, we'll see interest for licensing. It is too early to predict when that will happen.
Q12: Potential sales, potential domino effect? As you get customers like TYC that is in the battery industry, once your battery is accepted by TYC it is widely accepted by others, Looking a few years out, is it correct to assume that we'll have a multibillion sector if we had a wide range of acceptance, which will be exciting?
Ans: We expect a domino effect over a few years, after the TYC agreement. We have seen projections of $15 billion market in 2010, in aggregate. We hope the domino effect will happen. That is what we all came here to do. Wins like TYC and others will be critical for that to happen. We hope when the "inflection" takes place, not necessarily in Q4. The inflection WILL take place because as more testimonials come out, and as more customers will see the value, the inflection will be dramatic. Clearly the market we are targeting is $15 Billion in 2010. That is what we want to capture.
Caution: The above notes are subject to errors or omissions. Please check with the company and SEC documents for accurate information. Ram |
