Maxwell Technologies, Inc. (NASDAQ:MXWL)
Q2 2016 Earnings Conference Call
August 02, 2016, 05:00 PM ET
Amy Wakeham - IR
Franz Fink - President and CEO
David Lyle - SVP, CFO, Treasurer and Secretary
Alex Potter - Piper Jaffray & Co.
Noah Kaye - Oppenheimer & Co.
Craig Irwin - Roth Capital Partners
Jeff Osborne - Cowen & Company
Good day, everyone and welcome to today’s Maxwell Technologies’ Second Quarter 2016 Conference Call.
At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note today’s call is being recorded, and I will be standing by should you need any assistance.
It is now my pleasure to turn the conference over to Amy Wakeham. Please go ahead.
Thank you. Lisa. Good afternoon, everyone. Thanks for joining us and welcome to Maxwell's second quarter 2016 conference call. This call is being webcast live and together with the earnings release are available on the Investor Relations section of our corporate website.
The results and data we discuss today reflect the consolidated results of Maxwell Technologies. During our call, we will discuss some non-GAAP measures. For a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please see the notes to the financial statements in today’s earnings release.
Statements about expected future events and financial results are forward-looking and subject to risks and uncertainties. Our actual results may differ. Please refer to the risk factors detailed in our SEC filings and in today’s earnings release for further discussion. For anyone listening to a taped or webcast replay or reviewing a written transcript of this conference call, please note that all information presented is current only as of today’s date, August 02, 2016. The company disclaims any duty or obligation to update any forward-looking information whether as a result of new information, future events or otherwise.
On the call today to discuss our second quarter results are Dr. Franz Fink, Maxwell’s President and Chief Executive Officer; and David Lyle, Maxwell’s Chief Financial Officer. Following our prepared remarks, the call operator will come back on the line for the Q&A portion of the call.
I’d now like to turn the call over to Franz.
Welcome and thank you for joining us this afternoon. On today’s call we will review our second quarter 2016 financial performance and discuss our business outlook, which as you have seen from our earnings release earlier this afternoon, reflects near-term revenue challenges facing the business.
We will also discuss initiatives we began and we will continue to implement over the next 18 months to help us more effectively navigate through this transition period.
Furthermore we will discuss the progress we're making on diversifying our business and we will provide you with new information about our dry electrode technology that we believe has the potential to expand our market opportunity even further.
Starting with our second quarter results, we achieved revenue of $34.1 million, non-GAAP gross margin of 30% and made an incremental improvement in our operating expenses to $13.4 million all in line with previous guidance ranges.
As we have discussed in recent calls, revenue and profitability remain a challenge during the transition of our business in the near-term. In particular, we're feeling the impact of continued uncertainty in the China bus market, as our customers continue to wait for the Central Government's decision regarding contemplated changes to the China bus subsidy, in addition to short-term changes in the Chinese Government's deployment strategy for wind turbines, which is affecting our wind market revenue.
Regarding initiatives to address these current challenges, we already completed all aspects of the worldwide organizational restructuring we announced last year, which better aligns our cost structure and positions us to navigate more effectively through this transition period.
Additionally, we have identified manufacturing and supply chain actions that will further streamline our business and improve our cost structure in the future. As I will touch on later, we are also diversifying our bus and wind product lines and we are working on establishing a strategic partnership to better position us in China.
We are also expanding our portfolio of strategic development partnerships to ensure that we can leverage the support of our partners to invest efficiently in our innovation engine and to sustain our business through the transition to a very large future market opportunity.
With regard to the mid and long-term prospect from Maxwell, we continue to make progress towards optimizing our product portfolio and diversifying our revenue base, working with both new and existing customers on future designs and design ins.
Through these efforts, we are building an expanded ultracapacitor sales pipeline primarily in the areas of rail, wind and truck in the mid-term and in automotive and grid energy storage over the longer term.
Additionally, I will also share more about the new technology we have developed that we believe has the ability to drive further business diversification and if successful has the potential to unlock new applications, address a significant market opportunity and change the technological landscape for new target markets as we move rapidly forward into a more electrified world.
Later in the call, I will provide a deeper view into this technological development and highlight a strategic partnership, which will better enable us to invest in an extension of our core and proprietary technology.
As you can tell from my remarks, we remain steadfastly committed to our diversification strategy and believe they are significant future growth opportunities for Maxwell. As our strategy unfolds, we are convinced that our served available market is large and growing.
Let me now update you on the progress we're making in our key addressable markets. First, let me give you an update on to China bus market. As we have shared with you on the last quarterly conference call, the Chinese government is contemplating additional changes to its subsidy programs for buses as battery-alone bus solutions coupled with more difficult governmental established range requirements are creating issues for bus manufactures to develop and deliver reliable and economical solutions.
Last month I was in China with my team, visiting with many of our customers and Chinese government decision makers. During these meetings, we learned that the government might be considering an additional requirement for energy storage solutions to have more localized content including both batteries and ultracapacitors in order to qualify for the new subsidies.
More recent feedback is indicating that the government might loosen this stringent requirement and may even consider ultracapacitors as a complimentary device and therefore ultracapacitors would be exempt from any specific purchasing limitations.
Unfortunately, this uncertainty has further compounded in already challenging environment and our China bus customers have said they will not order from us until a formal announcement is made.
This has put pressure on our top line revenue that will likely continue through Q3 and create some additional uncertainty for demand in Q4. Our customers have validated that ultracapacitors combined with batteries remains a superior solution to enable buses to achieve the desired government emission output and our customers have said that they want to buy from us.
As we expect the Chinese government is going to release a public statement regarding changes to its China bus subsidy sometime this quarter. We believe China bus revenue will start to gradually come back in Q4 and recover in 2017 with a traditional seasonal pattern we have become accustomed to in recent years, seasonally soft in the first half and seasonally strong into second half of the year.
In order to best prepare and position ourselves for continued success in China, we have been working expeditiously with a large local partner to expend the strategic relationship, which we believe will enable us to address potential localization needs and to further strengthen our position into China new energy power and storage market.
To that end, we recently signed a MOI or Memorandum of Intent that is set up to provide for product localization and stronger local presence in order to reach a wider variety of marketing customers ultimately creating much larger demand for our product and solutions. We will see more details about this partnership after we finalize agreement later this year.
We are optimistic that an extended partnership combined with our technology leadership and new 3 volt based modules position us very well to capitalize on the growing Chinese energy storage market for bus, real wayside in other markets and applications.
Looking to the auto market, we still believe this market holds the greatest growth opportunity for our ultracapacitors over the long term. The electrification of functions in internal combustion engine cars such as powering electric turbo chargers, eActive suspension, start, stop, and emergency backup systems has created increasing power demand many of which cannot be supported reliably by batteries alone.
We continue working closely with OEM and Tier 1 suppliers developing solutions from multiple platforms. Our current auto design wins continue to contribute meaningful revenue for Maxwell. We are working closely with our partner Continental on to development of a next generation system that will enable further technology enhancements to support increasing power demands and new vehicle electrification requirements.
Additionally, the production ramp up of our eActive suspension design win with a lower volume luxury car platform is performing well and we continue to see increased interest in our technology for this very power demanding applications from additional customers.
This underscores our confidence that Maxwell is poised to realize additional design wins in the automotive space and we continue to expect this will drive additional growth beginning 2018 and beyond.
Turning to Truck, in addition to our ongoing relationships with Kenworth and Peterbilt, we have completed five season testing with a third major OEM and expect our engine stub module to be available as a post delivery installation option with this new OEM soon.
We're excited to have further validation of our product and technology; however, due to the fragmented and diverse truck market, we continue to believe the revenue contribution from truck will be small until a significant number of fleets have gone through the independent qualifications until half the market is sufficiently penetrated.
With the further global increase in solar and wind electricity generation and the decommissioning of fossil fuel and nuclear generation, we continue to see increased demand for ultracapacitor energy storage to improve power quality and reliability, as well as to reduce system complexity and cost and grid and micro grids.
With many pilot projects commissioning and operational, including the hybrid energy storage system with Win Inertia and Duke Energy announced earlier this year, we will continue to highlight our ultracapacitors can provide multiple grid services and benefit to energy generators, utilities and consumers alike.
In June, we commissioned an ultracapacitor energy storage system at the University of California, San Diego, UCSD to demonstrate voltage fluctuation mitigation on UCSD's campus micro grid, which contains a high concentration of intermittent solar energy generations.
We are pleased to say that the system is performing as anticipated with early data indicating a 75% improvement in power quality. We intent to commission a larger version of this system on a utility micro grid in California in Q3.
As our opportunity pipeline grows we look forward to bringing some technical and financial benefits of ultracapacitor energy storage to commercial reality. Likewise our systems integration partners are continuing to design in Maxwell ultracapacitors for high efficiency energy recovery in real wayside storage systems across China, North America and Europe.
Turning to our rail market, we are making good progress here and continue to expect the rail market to be one of our largest year-over-year revenue growth drivers. Last month we announced that Maxwell Ultracapacitors are being used for regenerative braking energy storage in the Beijing Subway System.
This is the first commercial subway wayside project for CRRC-SRI and Maxwell in China. Additionally, our partnership with CRRC-SRI to go develop solutions uniquely designed to address the rapidly growing Chinese rail market continues to progress in other areas as well.
We have developed the next generation cost efficient energy storage solution with a power characteristics of an ultracapacitor combined with enhanced energy storage capacity that we expect to see deployed for the first time later this year. We should be able to say more about the progress we are making later this year following its first development.
Second quarter was one of our strongest quarters ever for revenue from the wind market. A number of new designs utilizing ultracapacitors have come to market and we are seeing an increasing trend for large offshore and remote wind turbines that require extended life and reduced maintenance.
This requirement is ideal for ultracapacitors and to commercial value proposition is clear. In particular China's wind industry is expected to remain strong over the five-year horizon within an average yearly installation of over 23 gigawatts. However, we've recently learned that Chinese government initiatives will put pressure on our wind revenue in Q3 and Q4 due to grid capacity constraints and the need for improved infrastructure to support and deliver power where needed.
Additionally some local governments have taken specific measures to limit the use of wind power to compensate for the excess coal firing capacity. We believe that even though China will not approve new projects in certain regions the scale of existing wind power installations remains large.
We continue to expect the wind market to remain one of our most material revenue contributors in 2016 and we are expediently pursuing new opportunities and designs with global leaders outside of China to diversify our wind business and to drive additional growth in 2017 and beyond.
Lastly our high voltage revenue has picked up momentum and we saw strong sales throughout the quarter, largely driven by its increased infrastructure investment by the Chinese government that was announced as part of its new five-year plan back in March. We expect revenue from our high voltage capacitor products to continue to be a material revenue contribution to our business.
Let me now discuss exciting news around our dry electrode car technology that we believe can provide a foundation to open up a new market and drive growth. While I have touched on this topic briefly into past earnings calls, the recent developments now make it possible for us to share more details on this project.
Over the past two years we have identified a path to adopting our core technology for amplifications in energy storage, which could significantly expand our total market opportunity beyond already large ultracapacitor market.
So a great deal of work that our R&D and business development teams we're becoming increasingly excited about our progress on new applications for our proprietary dry electro technology, focused primarily on next generation batteries for electric vehicles and plug-in hybrid electric vehicles.
We're seeing new prospectus on our intellectual property, we spend the past year ensuring that the value of our current eletro property portfolio is highly protected via patents and trade secrets. We believe that our fundamental dry electrode technology when applied to a lithium ion batteries can bring significant performance and cost benefits.
Based on our findings, we believe batteries manufactured with our technology and leveraging advanced battery materials could significantly extend the range while savings OEM as much as $200 to $1,000 per electric vehicle with between $3 million to $5 million electric vehicle and plug-in electric vehicles forecasted to be produced in 2025, this represents a significant growth opportunity.
With the automotive industry on the verge of a paradigm shift towards electrification global players in the automotive and battery industry are seeking differentiators to set them apart as leaders in this new frontier. Several of them have been evaluating our technology and their preliminary findings seem to confirm our belief.
To that end I’m excited to announce that we have achieved our first milestone towards commercialization. Last month we signed a 12-month joint development agreement with one of the world’s leading automotive OEMs to develop a proof-of-concept that if successful could lead to the world’s first electric drive train based on our technology targeting at 2021 automotive platform launch.
We're working on this jointly funded program as our partner to complete proof of concept around electric vehicle design and expect to enter into a broader collaboration and commercialization agreement if the concept is proven in 2017.
Before I turn the call over to Dave, let me reiterate that our focused effort to advance our business diversification strategy into to transition to higher growth opportunities is progressing value even as we sustain significant near term revenue challenges. We have taken steps to develop and expand key partnerships to positioned us for assumed revenue growth into second half 2017 and beyond.
We believe that we have the right new product, innovations and partnerships that will deliver significant value for our customers and our shareholders in the years ahead.
I would now like to turn the cal over to Dave to discuss our financial results. Dave?
Thanks Franz. Second quarter revenue was $34.1 million within our guidance range of $34 million to $36 million. Sequential revenue growth from our high voltage products more than offset a sequential decline in contribution from our microelectronics product line, which we sold on April 27.
Ultracapacitor revenue showed a small overall decline as pressure from China bus continued into Q2. However, seasonally stronger wind market revenue helped to offset much of those declines. Ultracapacitor revenue was $21.2 million, high voltage capacitor revenue was $11.8 million, and microelectronics revenue was $1.1 million reflecting the 27-day period in April.
Non-GAAP gross margin in Q2 was 30% an increase from 28.4% in Q1 and within our guidance range of 30% to 32%. Q2 non-GAAP gross margin excludes $260,000 of stock-based compensation.
Non-GAAP operating expense for Q2 was $13.4 million, $370,000 lower than Q1 and within our guidance range of $13 million to $13.5 million. Q2 non-GAAP operating expense excludes $1.2 million of stock based compensation expense $230,000 in legal fees associated with the ongoing SEC and SCPA investigations. $1.3 million associated with the release of a foreign tax liability that has surpassed the statute of limitations and $280,000 in restructuring related charges.
Other expense was $80,000 not including the gain on sale of our microelectronics product line during the quarter. Note the benefit from the $6.7 million gain on the sale of the microelectronics product line was excluded for non-GAAP purposes.
Q2 adjusted EBITDA was about negative $700,000 and unadjusted EBITDA was positive $5.2 million. Q2 GAAP tax expense was about $600,000, non-GAAP tax expense was $840,000 excluding the tax benefit on the release of the foreign tax liability.
Q2 non-GAAP net loss was about $4 million resulting in a net loss per share of $0.13 based on a basic share count of about 32 million shares. GAAP net income was a positive $2.2 million for the quarter and GAAP net income per share was $0.07. This reflects $0.21 per share of gain on the sale of our microelectronics product line.
Our Q2 cash balance was about $36 million a $14 million sequential increase reflecting $19 million in net cash received during the quarter for the sale of the microelectronics product line somewhat offset by changes in working capital.
As a reminder the sale price was $21 million with $1.5 million held in escrow for one year. Transaction related expenses totaled about $1.2 million.
DSOs for the second quarter were 68 days and inventory turns were 2.9 times. Now I'd like to provide guidance for the third quarter of 2016.
In Q3 we expect Maxwell’s top line revenue to be in the range of $24 million to $27 million. This guidance range assumes no revenue contribution from China Bus in Q3 as our customers are still waiting to receive formal guidance from the Chinese government.
In the case where a positive statement has issued in Q3 we could expect to see up to a $3 million upside to our guidance range from China bus revenue. But we are taking a conservative stance at this point and have not included any China bus revenue in the guidance range.
We expect to win revenue in Q3 to be the single largest contributor to a sequential decline in revenue due to the Chinese government's temporary slowdown in wind turbine installations as Franz discussed earlier in the call. We expect high voltage revenue to be flat to slightly down sequentially.
We expect non-GAAP gross margin for Q3 to be between 29% and 32% depending on product mix approximately flat with Q2. We anticipate excluding from Q3 non-GAAP gross margin about $300,000 in stock-based compensation expense.
We expect Q3 non-GAAP operating expense to be $12.5 million to $12.9 million depending on variable expenses associated with the proof of concept joint development agreement for our dry electrode investment opportunity. This guidance range to is sequentially $500,000 to $900,000 lower in Q2.
We estimate our Q3 non-GAAP operating expense will exclude about $1.3 million of stock-based compensation expense. We expect our tax expense in Q3 to be about $800,000 mostly associated with taxes on income of our Swiss subsidiary.
At the midpoint of guidance, Q3 adjusted EBITDA is expected to be about negative $2.4 million and non-adjusted EBITDA is expected to be negative $4 million. At the mid-point of guidance we expect our Q3 non-GAAP net loss per share of $0.18 based on a basic share count of about 32 million shares. GAAP net loss per share at the midpoint of guidance is expected to be $0.23.
With regard to our cash balance at the end of the third quarter, we expect cash to be in the range of $32 million to $36 million depending on working capital changes, particularly if we begin to see China bus ordering for Q4 deliveries, which we have not yet seen.
In addition to our guidance for Q3 2016, we thought it would be appropriate to comment on some general expectations for Q4, given the uncertainty around the near-term situation with our revenue out of China.
In Q4, we believe we can grow sequentially from Q3. We believe China bus revenue could be in the range of the $0 to $10 million depending on the final outcome of the Chinese Government’s decision regarding the bus subsidy this year.
We expect to see a sequential decline in our wind revenue from Q3 to Q4, resulting from the near-term issues in China that Franz discussed earlier and as we enter the seasonally soft period when inclement weather limits access to wind turbines high off the ground.
On the positive front, we believe our rail product revenue could see upside in Q4 given recent design win activity particularly with our partner, CRRC-SRI but we don’t know yet if this would be large enough to offset seasonal softness in wind.
Taking a high level look at 2017 we believe that we will continue to feel pressure to the first half of 2017, primarily driven by continued challenges in the wind and bus markets that have a dependency on China as well as typical seasonal softness in both markets.
We expect that our agreement with a large local partner coupled with customer adoption of our new products, will drive revenue growth in the China bus market in the second half of the year.
Wind market revenue should seasonally resume in the second quarter of 2017. However, we expect that annual wind revenue maybe down. Revenue pressures may be offset by continued growth in rail as we make progress co-developing solutions through our partnership with CRRC-SRI.
Additionally, auto will continue to remain a meaningful revenue contributor as we prepare for additional growth in 2018 and beyond.
To sum up our 2017 revenue prospects, our Board is very early to predict. We believe the first half of the year may continue to see pressure before we resume growth in the second half.
All that being said, we have a taken the right steps, necessary steps to right size the business as we work through these challenges and the initiatives we're working on today, particularly with regard to our core technology present significant growth opportunities for Maxwell in the years ahead.
Now, I’ll turn it back to Franz for closing comments.
Thanks Steve. We have made good progress optimizing our portfolio and narrowing our focus to critical growth markets, while we address revenue challenges in our bus and wind market.
We have taken correct steps to sustain our business to the near-term and enable us to invest in extensions of our core technology in order to deliver on Maxwell’s long-term potential.
We are expanding our strategic partnership through our recently signed Memorandum of Intent, which is expected to help as we resolve current challenges in the China bus market and provide broader access in China, our largest revenue market.
If successful our joint development agreement is major orient to develop the proof of concept could become significant long-term market opportunity and could lead to deeper penetration into our target market as well as into market and applications as world continues to electrify.
We remain confident that mid-term momentum will continue to build in market such as Rio and that our long-term prospects for diversification and growth are excellent. We're building on our established relationships with current customers as well as developing relationships with new customers and business partners to design, develop and deliver new leading edge product and solutions for longer-term success and the growing transportation in good market.
As we discussed we're working on commercializing a new application of our dry electrode core technology, focused on next generation batteries that if successful should allow us to significantly expand our business and create value for our customers, our partners, our company and our shareholders.
We have a focused and motivated team in place here at Maxwell and I remain very excited about the opportunities ahead. I look forward to working with the team as we execute our strategy with the ultimate goal of maximizing value for our shareholders.
Operator, we're now ready to open the call for question.
[Operator Instructions] Our first question comes from Alexander Potter with Piper Jaffray. Please go ahead.
Hi, guys. I was wondering if you could elaborate a little bit on the local partner you were talking about in China. What exactly is it that, you think they will be able to do to help you I guess capitalize on China bus market? Is there -- you mentioned localization; I am just interested if you could maybe elaborate on what exactly the structure of that partnership is and what type of partner that is?
Yes Alex, in view of contemplated changes like I indicated in my call, it includes for energy storage capability meaning basically batteries and ultracapacitors also, so later on might be a little bit less stringent to basically provide this locally, meaning, it has to be manufactured locally which we do, but it either - it either might has to be owned locally.
And in that context, we are looking here to a partner that is obviously a Chinese company, that has very good relationships, not just to the markets and customers in the Chinese markets bus and others, but also very strong relationships to the government itself.
And so few here would be to have this partner basically take on some module localization, meaning the module manufacturing while we continue to deliver ourselves into those module and in doing so has basically clearly localized and local owned module content, but more importantly a partner that has very strong relationships in a variety of markets and customers in those markets.
And in doing so, will not just help us to address the bus market and segment, but for that matter also other markets in future like for example grid.
Okay. So in this context would it be structured as a supplier-customer relationship or is your end customer would it still be considered say in the case of a bus manufacturer, would the bus manufacturer be providing revenue to Maxwell or would it be a revenue sharing, profit sharing arrangement, how would -- how exactly would it be structured?
So Alex, MOI, Memorandum Of Intent we signed has here clearly some elements that could be taking very different approaches from very simple ones like you just pointed out selling ourselves and it will mean revenues to something that is basically a much closer collaboration.
But I really would like to point back here to that we'll be sharing here more details about this partnership as we finalize this agreement here over the next six months.
Okay, very good and then the last question, I wanted to see what I could get from you on this proof of concept? Obviously we're looking out to 2021 for a potential production deadline here. So it's something that’s quite far in the future, but from your tone it sounds like it could be a pretty significant development.
I’m just interested in knowing what exactly between now and sometime in 2017 you'll be looking for in terms of milestones to determine whether this relationship will go forward. You mentioned maybe there are some trying to determine whether it’s commercially viable opportunity anything you could elaborate on that would be interesting and helpful.
Yeah, very good question Alex and we're very excited about this opportunity. So the joint development agreement is really focusing on performing a proof of concept in order to proof our fundamental core technology that we basically already have proven fundamental performance and capability of is meeting the stringent requirements of next generation plug-in hybrid electric vehicles and electric vehicles.
In that context let me give you a little bit more color on where we stand with our core technology and what their proof of concept really means. Over the last year we have been building in our lab small cells using our battery dry electrodes technology and as we analyzed it and have basically been starting to look out for potential partners and source partners like I said in the call being OEMs and key batteries suppliers that are looking for differentiations for themselves.
We have been providing these type of smaller cells that we have build in out labs with our electrode and they have independently analyzed them and essentially confirms the fundamental performance and capability of our technology meaning that if so cells are being built with a dry electrode versus of that, it has very significant performance cost and other reliability advantages.
Now as far as the proof of concept is concerned, it's really now based focusing on two main areas. On the one hand to bring this core technology to commercialization and volume production and there I am actually very confident that with the progress we have recently made that this is pretty much down to mainly complex and hard but engineering work. So we just have to work through it, but I’m very confident that this is something that can be done.
Secondly it's to build larger cells as used in plug-in hybrid vehicles and electric vehicles and to prove that these cells meet the performance quality and reliability requirement of electric vehicles and in that context, the work is really to put lots of cells into a system environment eventually into a vehicle and test out here as a performance quality and reliability, but this is obviously larger sales and a broader system context to adjust our technology to the system environment and in this context I consider this to be long pole of this project.
As I've pointed out if we're successful in our joint collaboration with our major OEM and as I pointed out we have here other interested parties with one of them by the way we are expecting to join also in the near future, clearly we already have a technology platform for 20 car platform for 2021 identified.
But to come back to the two key main areas we are working on, as I've said early in the call, we expect proof of concept to take along 12 to 15 months and then could move towards real next commercialization steps with our partners.
Hey, very good. Thanks a lot for the color.
Thank you. We’ll go next to Noah Kaye with Oppenheimer & Company. Please go ahead.
Thank you. This is Noah Kaye. So just to pick up this trend here on this joint development agreement, if we can first understand you did say the agreement is within auto OEM not the battery manufacture.
I clearly stated that it's a leading auto OEM. Yes.
Okay. So if I look back, with the history of the company this is very valuable dry electrode process, I believe in the past was tested out production of lithium ion battery electrodes, but that was I think around eight years ago.
What has changed about the core technology or is it more what’s changed about the market's dynamics in and around lithium ion battery space that give you more confidence now give the partners that are working with more confidence that this can be not only viable but a significant change in the industry.
Yeah, very good question Noah. Actually both things have changed, let’s start with underlying technology, the team when I joined here a few years ago had been working on this but when I looked into what the team was working on and I saw the potential of this technology, I clearly put immediately some additional emphasis.
So as a team, it’s a R&D team into a business development team have done an remarkable job over the last two years to really further enhance this dry electrode to the point where again as we build small cells into lab and share them with by the way not just auto OEMs but also battery manufactures that are really leaders in that field who as I said, confirm the fundamental performance and capability of our knowledge.
So clearly the technology has been gotten to a point where it's no question as we would commercialize that have significant performance and other advantages.
Additionally as I point out, particularly on the commercialization and the volume production, we have made excellent progress such that really bringing that to high volume production just similarly to our ultra capacitor electrode is work, but I consider this to be a disappointing time engineering work.
And as we are talking about the landscape, what has changed it that over the last 12 months driven by some events in the marketplace towards electrification is clearly accelerating. And I shared in last calls, we have been talking to other OEMs who are clearly telling us if they don't have -- if they do not have a significant percentage of their fleets by 2025 being plug in hybrid electric vehicles they will not meet the stringent extension emissions regulations and would get significant finds.
So we have seen a trend not just in internal combustion engine powers, that we can separately discuss, but really a clear push towards plug-in hybrids and electric vehicles and then the question is going to be as follows. What are you going to put is a leading auto OEM into one of those vehicles to differentiate because today one of the differentiators obviously is the engine. And in that context the energy storage system that drives electric drive train and in differentiating this obviously is very, very important.
Now talking about the battery suppliers in that market, they are a challenged through ever higher volumes to get cost down to house costs, but to also improve range and while still improving range to still significantly reduce costs and someone will be looking at our technology and also have evaluated and that have come to a similar conclusion that’s a dry electrode process has that can lead to significant fundamental performance reliability and quality advantages.
And so in summary auto OEM to differentiate as well as battery suppliers into quest of providing this next generation lower cost, higher energy guaranteeing further range solution are looking for the next technology that could have accomplish this.
So in summary, our technology has matured and have battery suppliers and auto OEMs are really looking for the next generation capability to really differentiate in electric vehicles and plug-in hybrid electric vehicles.
And I think you mentioned that you believe savings of I think you said $200 to $1,000 per EV, it could be possible, could you just give us the broad bushes of how guys get to that conclusion?
Yes, this data is actually confirmed by a partnership, a partnership we have so I just would like to make sure we have of course initially assessed our technology and its capability, but as I've pointed out several of the partners and our partner I'm talking here about has confirmed just the capabilities. So how do we look at this? You need to look at this in various fashion.
One, is of course an energy aspect and then there is a cost aspect. The cost aspect comes from two main areas. You can easily see that if you have a wet electrode that you quote on with wet, there is a material wet to have faith in this energy, you need to dry it. And as you make electrode as longer you need to dry it, that more costly it's going to be and as faster and more throughput you want as more often you need to drive it. So clearly there is a cost advantage.
But more importantly as sector and of course as a sweet spot, you can make the electrode as more energy a cell will have and in that context, our strength is that as we process we can make it a fit almost as you want and with a wet electrode, we believe that one of the barriers that is difficult to overcome is around 110 microns.
Now is it 110, 115 or 118 we can debate. But believe me that's not sweet sport to deliver that increased energy that's a fixed electrode. And now as you would look into putting cells in that even with existing materials have a 8% to 10% energy advantage and that if you can make it fixed with new materials would even have more energy advantage.
You can easily come to conclusion if I have cells in there that have significantly higher energy at the same time lower cost you're going to save either initially you have more range ultimately as you achieve the range you save significant cost and width by the way and in doing so it's a $200 to $1,000 is dependent on how big the energy solution required is going to be to either drive small electric vehicle, plug-in hybrid or a premium luxury electric vehicle and so it's anywhere in between.
Thank you very much for the color.
Thank you. We will go next to Craig Irwin with Roth Capital Partners. Please go ahead.
Good evening and thank you for taking my questions. So Franz it appears according to the German trade press that another OEM has probably developed a vehicle, a pre-production vehicle using the same energy storage system for an active suspension system.
Can you maybe frame out for us the breadth of OEMs that are looking at potentially adopting the system? And where you would score things as far as the ones that haven’t been visible yet as far as how they could potentially materialize as customers for Maxwell?
Yes thanks, Craig for the question. As I've mentioned electrification in internal combustion engine cars has continue to accelerate too but as I have already said in our last call, the eActive suspension system that has launched with a premium car platform has a significant momentum and interest and from other parties.
And the reason is we believe it's obviously a pretty much differentiator as it helps to drive over bumpy roads not noticing that the roads are bumpy in the first place. So now how do we look at that potential from the momentum we are seeing.
With the current OEM that is launching, we feel very confident that it will proliferate into further initially further premium car platforms, but there is indications that as we are moving towards premium car platforms and additionally system cost come down that is critical also into next level of car platforms.
Now as far as other OEM is concerned we see clear interest in the context that they are saying well if this premium brand is launching those cars can I hold back with my car platforms, and I think some of them have concluded no and that's where the increased momentum is coming from.
Now again just to put here the right context from a timing perspective, as some of them are looking into this we're talking here of course automotive designing cycle time of let's say three, I would say I am not talking to new ones.
Certainly it's the one that is already launching, we believe will continue to launch over the next two, three plus years and then also going to go broader. So once who are now showing significant interest we're talking I would say 3.6 to 4 years design in cycle time.
Nevertheless, it's an exciting opportunity as we should not read into luxury car platform while that there initially could be small that could be not millions, but hundreds of thousands of cars as it proliferates over the next years to come.
So, yes, we believe this is one of the reachable application. It has increased momentum and we feel very good about what that will do here over the five year horizon for us.
Great. My second question is about the Chinese rail opportunity, obviously and again you said as many times that Chinese rail market is a very important market for Maxwell to offset the volatility we're seeing on the bus side. Can you maybe share with us what helps you from your perspective with visibility on this market ramping for Maxwell?
And friends of mine in China had pointed out that there is another ultracapacitor provider that's actually working in partnership with CRRC. I know customers often have multiple vendors if you could comment about that as well?
Yes. So there is two really application, one is rail wayside and then is onboard rail. But before I go into those let me just briefly touch on why we think we have very, very good insight.
We have a local partner CRRC-SRI, which is former China Northern Rail and of course as you're pointing out there is China Southern Rail which they combined sometime last year. And they historically clearly have been working with a different partner. But as I am coming to CRRC-SRI former China Northern Rail, we have very good insight in that market because that's what they do.
First of all they are government based company so they know all the policies everything that's going on. But they have been building trains and all sorts of different trains and have set out the mission to go into the new energy storage capability for rail initially, but then ultimately beyond.
So we know exactly from them as urbanization continues how many underground, but also over ground lines need to be build, how many trolleys where there are no power lines and hence they need energy storage.
It's going to be over the next years to come hundreds of hundreds of hundreds of trolleys that need an on-board new energy storage capability that’s because its on-board has to be higher still sufficiently enough power, higher energy but very, very light and that’s a specialized solution we are developing and as we develop it, we feel very good about that they will be the first project coming towards the end of this year and as I've pointed out we’ll share that with you the public as it's commercialized
As far as again CSR is concerned, our strategy is very simple. I trust our partner, we have a very strong partner. They have demonstrated it several times, our partner with us is set out to develop some most innovative differentiating capability that finally this capability might even make it into the other portion of the newly formed CRRC.
Now just as far as the data point is concerned, CRRC is basically China with that company combined is 60% of the world market if not 70% and in China Northern rail was 51% and CSR is 41%.
So while we clearly go after that half of the market with our partner, we think as we differentiate together there is an opportunity to finally get into an approach and attack that other portion of that market to, that’s our strategy.
Excellent. Thank you for taking my questions.
Thank you. Our final question comes from the Jeff Osborne with Cowen & Company. Please go ahead.
Hey, good afternoon guys. Thanks for squeezing me in. I was wondering I might have missed it, but could you give an update on the accounting arrangement and the inventory with them and then also on the -- assuming that the dry electrode process will start after the 12 to 15 months or so intense engineering work, just can you update us on the Arizona facility in terms of manufacturing what tweaks would be need to made for that and what it would cost?
Yes, so Corning can provide you a very brief positive update as the program is progressing according to plan. We're working on two main programs like we shared last few times. One is clearly going towards a higher temperature as well as higher capacity material in carbon.
So latter came to both provide higher performance, but also as you need less carbon and electrode essentially to provide a cost reduction. It's well underway and I do not like today to get your timing beyond what I already said in the last call.
We are in a phase where it's a question of anywhere from the next 9 to let's say 15 months, I feel confident that you will see here some additional technology we're working on being announced and initially coming to market launch.
As far as the dry electrode is concerned, in my comment that we have made here, very good progress and I consider it to be engineering work, you should read into that, that test, particularly test where so active material goes in is heavier electrode versus ultracapacitor electrode.
At the same time we have been proven that it has much higher potential strength and read into what I'm saying is that while it's a slightly different electrode that is heavier clearly it's a equipment we're using for manufacturing ultracapacitors, electrodes needs to be upgraded to support that heavier stone or electrode.
And that is entirely taking some of the knowledge we have with our equipment and basically now in the proof of concept make sure we define an equipment that is best suited to take on that heavier electrode and still run it as fast as we are running it today on the ultracapacitor side as obviously cost and stupendous key.
Now from an investment standpoint, assuming we would have to do that on our own, we are talking upgraded equipment and basically an electrode equipment line that we are talking into $5 million to $10 million range, but again takes it really very carefully with a grain of salt because we have not defined that equipment yet, but just to give you a ballpark.
That’s helpful, Franz. I appreciate it. And then just two quick financial question, you give some hints about 2017 and a very preliminary outlook there which is certainly helpful, as the transition to some of these new applications takes effect, but I wanted to get a sense of the OpEx run rate for the remainder of the year and through 2017 should we assume that a similar level of expenses for '17, should be in play versus the Q3 guidance?
And then trying to piece together the segment is a little bit of a challenge because you no longer break those out but I guess when you net it all out is 2017 a moderate growth year kind of single digits top line growth, based on what you see now or is it a flattish here, down here it was just difficult to assess that?
Yeah the top line is difficult to assess, this is Dave, Jeff. The top line is difficult to assess at this point. We draw the characteristic of it throughout the year on purpose to say, hey, first half is going to be -- its typically seasonally softer that issue could be compounded by the issues we're having with China we don’t know yet.
We do believe that if we're able to execute on with our new products for China bus that the second half we have an opportunity to grow back into market that’s got some pretty heavy demand and needs for buses in general.
On the operating expense line, I guided Q3, 12.5 to 12.9 that’s actually down from first half of the year descent amount. I think we are into Q4 or do at least that maybe even better or improved OpEx and then going into 2017, typically first half we have what everybody has on FICO tax reset which puts upwards pressure on OpEx before goes back down in the second half.
That being said, we're looking pretty hard on ways to minimize cash burn and trying to keep OpEx as low as possible. So in terms of forecasting for next year although it's early at this point we got to get their annual operating at the end of the year. That process has to be completed. I think we are going to be hanging out in this kind of range where we at today into next year.
Appreciate it. That’s helpful. Thank you.
I want to thank you for your time and that we don’t have any other questions I would like to thank you all for joining and looking forward to talking to you in the very near future. Thanks for joining today. Bye-bye.
Thank you everyone. This does conclude today’s conference. We appreciate your participation. You may disconnect at any time and have a great day.
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