Maxwell Technologies, Inc. (NASDAQ:MXWL)
Q4 2016 Earnings Conference Call
February 28, 2017 05:00 PM ET
Soohwan Kim - Blueshirt Group
Franz Fink - CEO
David Lyle - CFO
Shivani Sood - Oppenheimer
Craig Irwin - Roth Capital Partners
Jeff Osborne - Cowen & Company
Good afternoon. My name is Mariana and I will be your conference operator today. At this time, I would like to welcome to the Maxwell Technologies Fourth Quarter 2016 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. Thank you.
I would now like to turn call over to Soohwan Kim from Blueshirt Group. You may begin your conference.
Good afternoon, everyone. Thanks for joining us and welcome to Maxwell’s fourth quarter 2016 conference call. This call is being webcast live and together with the earnings release is 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 including non-GAAP gross margin, non-GAAP operating expense and adjusted EBITDA that when used in combination with GAAP results provide us with additional analytical tools on understand our operations.
For a reconciliation of 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 recorded or webcast replay, reviewing a written transcript of this conference call, please note that all information presented is current only as of today’s date, February 28, 2017. 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 fourth 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 a question-and-answer portion of the call. I would also like to note that Maxwell is scheduled to participate the ROTH Conference Dana Point, California on March 14th, we hope to see many of you there.
I would 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 fourth quarter 2016 financial performance and business outlook. Recent significant announcements and our progress with our strategy. First, let me give you an overview of our Q4 financials. Revenue came in at $26.4 million at the high end of our guidance. Gross margin were 22%, lower than historical levels due to lower utilization in our ultracapacitor factory and one time charges, and our non-GAAP operating expense came in at $12.3 million at the low-end of our guidance. As we have discussed in recent calls to continued uncertainty in China bus has been putting significant pressure on our top-line revenue and profitability.
We have taken a conservative view that this pressure will continue into near-term. To that end, we have implemented new planning and business models, which discount China bus revenue into short-term and implement several critical initiatives to right size our ultracapacitor business to matched current revenue levels and manufacturing utilization. We have been working diligently on three key metrics addressing business diversification scale and cost structure.
First, we announced a worldwide organization restructuring, which includes a 10% reduction in force, cost containment actions as well as manufacturing and suppling chain consolidations to further optimize our cost structure and position us to better withstand near term headwinds.
Second, I'm happy to announce that we have agreed to acquire separating entities of Nesscap which I will discuss in detail later on the call. The restructuring combined with the Nesscap acquisition accelerate the diversification of our business, provide additional economies of scale and drives revenue growth and gross margin expansion in the near term. This will increase our ultracapacitor revenue by approximately 35% from today's level and will drive gross margins back to historical levels nearing 30% over the next few quarters and lower our combined cost by $6 million plus effectively enabling Nesscap's gross margin to fall to the bottom line. As a result, we expect to approach breakeven adjusted EBITDA by the fourth quarter of this year.
As a third key measure, we announced on January 31, that we will localize the manufacturing of ultracapacitor based modules targeted for the hybrid bus market in China with our strategic partners CRRC-SRI to mitigate our dependency on China governmental policy. We expect to bring up the factory and ready our products for Q4 production and given our new planning model this collaboration represents a meaningful revenue upside opportunity, further improving our scale and accelerating our profitability. We remain fully confident in our strategy and expect the combination of these measures and the coming inflection point in the second half of 2018 to position us to achieve our mid and long-term growth objectives.
Dave will discuss our fourth quarter financials, our first quarter 2017 outlook and additional commentary on 2017 and beyond including the Nesscap acquisition and our restructuring later in the call.
Let me now discuss where the spend with the strategy we begin implementing three years ago that will allow us to elaborate our differentiating proprietary dry electrode technology platform to diversify our business and to ultimately our position our business for accelerated profitable growth to create shareholder value. In light of significant recent announcements and the tremendous progress we have made in the last 90 days, I believe it is important to reemphasize our strategy for which there are three major parts.
First, we maintain our leadership position and market share with our high-voltage product line which provides foundational cash flow and the opportunity for steady long-term growth in the solid $150 million addressable market by 2021. Second, to narrow our ultracapacitor market focus and optimize our portfolio investments. Ultracapacitors have required our most significant investment to date and we are focused on markets which will deliver the required diversification and scale to transition our business to higher growth opportunities in a large and growing $1.4 billion addressable market by 2021.
Lastly, we are leveraging our revolutionary dry electrode battery technology to establish significant partnerships with industry leaders in automotive and energy storage. This technology platform represents a massive and revolutionary paradigm shift towards vehicle electrification, and has the potential to unlock new applications forms as well, which could generally significant revenues beginning in 2022. We believe this market opportunities is in the billions of dollars by 2030. Starting with our high voltage product line, our strategy is to intersect the paradigm shift happening now into global high voltage market particularly in the United States, China and India.
Leveraging our clear market leadership, we intend to grow revenue of the next five years by capitalizing on new products introduced last year and for which we are now seeing increasing demand. In fact, the Q4 2016 revenue was $13.7 million was the highest quarterly revenue ever and we are currently sitting on our highest bookings in the 114 history of this brand. To meet this growing demand, we have recently embarked on a factory expansion which will come online by next year. Capacity constraints have limited our revenue potential for high voltage products to both $50 million annually in the current $120 million addressable market.
Our effective expansion will enable an increased revenue potential in 2018 and supports of our $70 million in revenue annually in the $150 million addressable market by 2021. To continued foundation of cash flow from this product managed critical for us to sustain and grow our investment engine, which is required to reach our inflection point in ultracapacitor and to officially invest in the evolutionary dry battery electrode opportunity. The second part of our strategy is our ultracapacitor product line. Over the last year, we have made steady progress leveraging our core competencies in diversifying our product line as we transition to higher growth market opportunities in automotive, grid, rail and wind.
Our auto business has contributed a modest, but historically consistent revenue stream, but has the largest growth potentially with a key inflection expected in late 2018. Our grid and rail market are in nascent stages of growth and are expected to become more significant contributors to our revenue growth in the 2018 to 2019 timeframe. The wind market were highly dependency on China government subsidy program changes continues to be a major revenue contributor, but with a modest growth opportunity. For China bus, we have established a manufacturing partnership with CRRC-SRI to eliminate our dependency on China government influences thus positioning us for future revenue upside.
Additionally, we have been relentlessly focusing on optimizing our ultracapacitor product portfolio strengthening our financial foundation and working to accelerate our time to breakeven. We believe the acquisition of Nesscap combined with the global restructuring are significant steps in achieving greater operational synergies, strengthen our portfolio and diversifying revenues, this puts the ultracapacitor product line on the solid foundation and scale to sustain necessary near term technology investments and to begin generating cash flow as we move towards our inflection point allowing us to shift and gradual increase investments into our breakthrough dry battery electrode technology.
Which brings me to the third part of our strategy that focuses on our dry battery electrode technology which is the most exciting because of its potential to be a game changing revolutionary technology with the massive multibillion dollar market opportunity, particularly in electric vehicles beginning in 2023. By applying our proprietary and fundamental dry electrode manufacturing technology and trade secrets to lithium-ion batteries we can produce electrode much thicker and deploy advanced materials and methods not feasible using state-of-the-art red processed electrodes.
Preliminary results indicate that our thick electrode has the potential to increase energy density by more than 20% using new advanced materials and methods. This benefit provides our partners with the flexibility to either extend the range of an electric vehicle by up to 20% or to reduce battery content, content cost and rate. Additionally because no drying is required on production line, technically equipment expenditures are substantially lower, electricity consumed far less, the manufacturing footprint approximately 75% smaller and the factory out throughput greatly increased. The net benefit of these manufacturing efficiencies is cost savings of up to 10% which is considered a very large savings in the automotive market.
Finally, thick dry electrodes have a natural uniformity that cannot be achieved with the red process. This improves durability plus significant extending the cycle life of the device. Based on these preliminary findings we believe batteries manufactured with our breakthrough technology will reduce the need to replace batteries, significantly extend pricing range and save between $200 to $1000 per electric vehicle. It is critical to note that this innovation is only viable because of our leadership in ultracapacitor innovation as well as our proprietary dry electrode manufacturing experience and evolution over the past 17 years. With the automotive industry on the verge of a paradigm shift towards electrification, five large global players in the automotive and battery industry have independently evaluated and approached us about our dry battery electrodes technology.
In 2016 we signed a joint development agreement with the leading global automotive OEM as well as a global Tier 1 automotive supplier on the proof of concept or POC to develop and validate pilot volume dry battery electrode performance targeting a specific electric vehicle platform in 2022. Significant performance and cost benefits have already been verified versus wet electrodes and we are on track with the remaining key milestones.
While the objective of the POC development efforts still requires further validation of the viability and scalability in a fully commercialized electric vehicle system, the development achievements thus far have been very positive. development achievements thus far have been very positive. We are seeing increased traction with three additional large brand name global players in the energy storage and automotive industries for future joint development and commercialization efforts.
We expect to have more exciting news related to dry battery electrode technology into coming quarters. Without question unlocking the massive value of this technology for our customers, our partners and our shareholders has become a priority from Maxwell. Given the recent successes and the proof-of-concept work and its increasing interest from global leaders in automotive and energy storage, we have begun to shift more investment towards dry battery electrode and we expect to enter into broader collaboration and commercialization agreement as we complete proof-of-concept towards the end of 2017. While our dry battery electrode represents exciting prospects for the long-term, I want to now discuss more details regarding our recent announcement of our acquisition of Nesscap’s operating subsidiaries and the impacts it will have on our business in the near and mid-term.
Nesscap’s innovative small cell form factor ultracapacitor technology complements Maxwell's large cell ultracapacitor product portfolio by leveraging broader research and development capabilities, as well as operations mainly in Korea Maxwell expects to capitalize in synergies between the two companies that will strengthen our product portfolio, extend our addressable market and customer based and ultimately accelerate top-line growth and earnings. Let me now talk more specifically about how this acquisition solidifies and extends our market position into automotive, wind and industrial markets.
In automotive the acquisition brings pre-existing design wins and revenue in backup power and extends Maxwell’s reach and leadership position. With respect to Wind Pitch Control, the transaction creates a leading edge product portfolio including a full range of competitive small and medium cell offerings and provides additional opportunities for growth outside of Asia. The combination of our product lines enables a cost effective integrated wind solutions portfolio, which fully addresses market needs regardless of how our customers wind turbine size and features change overtime.
Moreover, small cell-based product solutions also broaden opportunities in the rapidly growing industrials market like sample robotics and metering [ph]. Nesscap solid position in this market with a strong base in Europe in the large portion of the historical revenue coming from outside China will improve our over running diversity and stability and creates further opportunities for growth. Moving upon strong customer attraction and product launches by both companies in 2016, the combination increases scale and leverages R&D to deliver more new and differentiated products faster to a global customer based.
Further the acquisition strengthens our manufacturing footprint for new operational capabilities in Korea and will deliver increase efficiencies in China. We have identified a number of manufacturing synergies that will enable margin expansions through economies of scale and material cost savings, the streamline supply chain and gains in operational efficiency which internal benefit our customers. We will all leverage the vast benefit to further expand our revenue pipeline and identify untapped medium and long-term opportunities across key markets.
From a financial perspective, the transaction is very attractive and is expected to be immediately accretive following close anticipated in Q2 of 2017. Maxwell expects acquisition of the Nesscap business to deliver positive adjusted EBITDA in 2017.
Now I will discuss a few brief business updates focusing on just a few key items. Let me start with automotive. We still believe this markets holds the greatest long-term growth opportunity for our ultracapacitors and we remain confident that the market inflection point is in the 2018 timeframe. We have identified four major application categories that drive our pipeline opportunities, start-stop e-active suspension, electric turbo and backup solution for numerous functions.
Last quarter we discussed that we had a total of 11 car model designs at various stages of progress and in several different applications. This quarter we are pleased to reveal that we have added additional model designs to our list bringing the total confirmed and under evaluation to 14 exhibiting the excellent progress we are continuing to make with our automotive design and activities. We will continue to provide updates as we move throughout for the year.
Moving to grid and rail, the strategic programs we discussed in previous calls are progressing to plan. In grid we have been working on closing a long-term agreement with the major global OEM to launch the first large scale project in the growing pipeline with the first major project been deployed in 2018 and the number of deployments beginning to increase in 2019 and beyond.
In rail our lithium capacitor development partnership with CRRC-SRI is progressing well. The first demonstration tools using this solution successfully completed important tests in the second half of last year and initial volume shipments are expected to gradually ramp throughout this year. We will share more details about these important projects later this year.
To recap, we are making general progress to advance our business diversification strategy and our business transition to higher growth opportunities. Our acquisition of Nesscap's operating subsidiaries and our China localization partnership drove revenue and improved profitability in the short term and our restructuring will enable us to more effectively bridge to our inflection point in 2018 with growth continuing thereafter. This quarter we demonstrated excellent progress by expanding key technology development partnerships, increasing our opportunities pipeline and advancing business diversification. We will continue to very closely monitor and manage our expense structure and operational efficiency.
In the meantime, we want our shareholders to be assure that despite a challenging transition, we believe we have the right technology platform the right management team and the right strategy to maximize long-term shareholder value. from shareholder value. In fact, we have recently take additional steps to independently validate this field. We’ve engaged through independent technical advisors and experts on energy storage in power delivery solutions to the automotive industry to evaluate the prospect of our dry electrode technology, its applicability and its commercial potential. Those advisors independently confirm that we have a significant and revolutionary technology. We also engaged and independent nature offering with experts and technology patents to validate our dry battery electrode patent portfolio and they concluded that we are well protected from an IP standpoint.
Lastly, we engaged a well-known global financial advisor to evaluate strategic reductions. Our financial advisors have major recommendations which include the continued funding of our proprietary dry battery electrode at this a critical source to create significant shareholder value. Their recommendations are consistently and validate the plans already been executed by management and supported by our Board of Directors. We believe our strategy will deliver long-term value to our shareholders. So stay tuned for more progress report as we continue to execute our strategy that will take Maxwell to the 2018 inflection points.
I would now like to turn the call over to Dave to discuss our financial results.
Thanks, Franz. I'll first give fourth quarter 2016 financial commentary then our outlook including a view of 2017 and beyond, as well as recent announcements. First Q4 results, fourth quarter revenue was $26.4 million at the top end of our guidance range of $24 million to $27 million driven by higher auto bus and high voltage revenue offset by lower than expected wind revenue. Ultracapacitor was 12.7 million and high voltage capacity revenue was 13.7 million. Non-GAAP gross margin in Q4 was 22.4% below our guidance range of 27% to 30% and down sequentially from Q3 gross margin of 13.5%.
The sequential change in gross margin from Q3 to Q4 was about 8 gross margin percentage points, about 3 points were from one-time charges related to scrap yield in warranty on some of our new technologies primarily 3-volt and [indiscernible] that are just beginning to ramp early in the product lifecycle and we also add some year-end right offs and valuation adjustments. The 5 points were from a decline in utilization rates as we reduced production in our ultracapacitor factory driven by a mid-quarter shift and bus and wind customer product demand. Q4 non-GAAP gross margin excludes $211,000 of stock-based compensation expenses.
Non-GAAP operating expense for Q4 was $12.3 million at the lower end of our guidance range. Q4 non-GAAP operating expense excludes $1.4 million of stock-based compensation expense $680,000 in transaction costs associated with the acquisition of Nesscap’s operating entities and the $1.2 million impairment of fixed assets, but one of our manufacturing lines located in our module partner in China that we were no longer requiring. GAAP net loss was $12.2 million for the quarter and GAAP net loss per share was $0.38 based on a basic share count of about 32 million shares. Q4 non-GAAP net loss was $7.5 million resulting in a net loss per share of $0.23.
Q4 adjusted EBITDA was negative $3.9 million and unadjusted EBITDA was negative $7.4 million. Q4 tax expense was approximately $2.2 million a sequential increase driven by $1.2 million non-cash accounting charge related to Swiss withholding taxes. Our Q4 cash balance was about $25.4 million down $2.5 million sequentially from Q3 due to cash used in operations and a negative impact from foreign currency translation and our Swiss subsidiary following the U.S. election results in November. DSOs for the fourth quarter were approximately 63 days and inventory turns were 2.6 times.
Now I'd like to provide guidance for the first quarter of 2017. In Q1 we expect Maxwell's top-line revenue to be in the range of $25 million to $27 million as we expect to see some small sequential increases in auto, bus as well as rail for ultracapacitors offset by slightly lower high voltage revenue as we enter a seasonally softer quarter.
In Q1 we expect non-GAAP gross margin to be relatively flat sequentially at 22% plus or minus 200 basis points due to continuing low utilization rates as well as an unfavorable product mix shift towards lower margin ultracapacitor products and the away from higher margin high voltage products. We believe that low gross margin relative to historical performance is temporary as utilization rates as well as restructuring efforts and the contribute from Nesscap will begin to improve our gross margin in Q2 before return to historical levels nearing 30% in Q4 this year.
We anticipate excluding $200,000 in stock based compensation expense from Q1 non-GAAP gross margin. We expect Q1 non-GAAP operating expense to be in the range of $12.4 million to $12.8 million as partial quarter restructuring benefits are offset by vacation accrual increases and the payroll tax reset typical in the first quarter of each year and as well as deal cost related to the recent announcement of our extended partnership with CRRC-SRI. We estimate our Q1 non-GAAP operating expense will exclude approximately $1.8 million in stock based compensation expense, $900,000 in restructuring expense, and approximately $300,000 of transaction related cost associated with the Nesscap acquisition as well as other legal cost.
We expect our tax expense in Q1 to be about $690,000 mostly associated with taxes on income at our Swiss subsidiary. At the midpoint of guidance we expect Q1 GAAP net loss per share to be $0.34 based on basic share count of 32 million shares, non-GAAP net loss per share is expected to be $0.24.
At the midpoint of guidance Q1 unadjusted EBITDA is expected to be negative $7.5 million and adjusted EBITDA is expected to be about negative $4.3 million. in regards to cash we expect our cash balance at the end of Q1 to be in the $20 million range plus or minus $2 million depending on working capital changes which are expected to stabilize in the quarter. Our guidance assume that the cash used in operations plus about $1 million in cash severance costs will be only partially offset by the collection of $3 million receivable from our partner CRRC-SRI per our China bus localization agreement.
Taking a high level looking at overall 2017, we expect organic revenue growth to resume in Q2 as we enter stronger wind market seasonality with customers and China wind markets indicating resumed buying in more traditional patterns. And we should also benefit somewhat from Nesscap's sub period revenue depending on when the transaction closes in Q2. We expect in our agreement with CRRC-SRI coupled with customer adoption of our new products, we’ll drive revenue growth in the China bus market beginning 2018. We may see some nominal China bus revenue in Q4, but don’t believe, it will be a material growth driver and SRI’s manufacturing build out and certification is expected to be completed in the fourth quarter.
Additionally, auto will continue to remain a solid and meaningful revenue contributor as we prepare for additional growth in 2018 and beyond. We expect grid and rail to both grow nominally in 2017 and begin an inflection point in 2018. To summarize, lower top-line revenue driven primarily to volatility and unpredictability in the China bus market that’s put significant pressure on our gross margins primarily due to factory underutilization even after we shut down one factory in early 2016. In order to significant reduce our reliance on the China bus market, we are taking actions to better align our business model going forward carrying out three key measures that we announced earlier and discuss today.
We believe that these actions plus further minor growth should restore corporate gross margins to a range nearing 30% and lowering operating expense. This is expected to allow us to approach breakeven adjusted EBITDA by the fourth quarter of this year and help bridge us through our inflection point next year. Just as important, these actions are intended to enable us to sufficiently invest in the large dry battery electrode opportunity thus maintaining the long-term prospects for the company. For your reference, we have included additional transactional details regarding the Nesscap acquisition on our Web site.
Now turn the call back to Franz, for closing comments.
Thanks Dave. As we transition our business through near-term challenges to higher growth opportunities. Our team has made great progress in executing our strategy announcing the completion of several initiatives that will bring long-term value for our shareholders. First, we announce the restructuring that in combination with the Nesscap acquisition, we expect to accelerate our time to profitability allowing us to approach breakeven adjusted EBITDA performance by the fourth quarter of this year.
Our announcement of securitization of Nesscap will expand our technology portfolio and accelerated the delivery of new differentiated products, which will increase scale expand our addressable market and delivering increased value to customers and shareholders alike. We also announced an expanded partnership with CRRC-SRI to localize ultracapacitor based model manufacturing for use into China bus market. In the auto market, we added redesign means across various applications and we remain confident that mid-term momentum will continue to build in the grid, rail and wind markets. Our refreshed high voltage product line is generating increasing demand in the continued steady revenue and cash stream that will allow us to sustain investment required to reach our inflection point in ultracapacitors and to sufficiently invest in our dry battery electrode opportunity.
In closing, we continue to make excellent progress with our revolutionary dry battery electrode which has the potential to significantly expand or business and create unprecedented value for or customer, or partners and shareholders.
Operator, we are now ready to open the call for questions.
[Operator Instructions]. Your first question comes from Noah Kaye with Oppenheimer. Your line is open.
Hi this Shivani. In the Nesscap press release you mentioned that the company has a number of design wins in the automotive space. Could you just give us a sense of to what extend this would broaden your automotive customer base? And how important of a consideration this was in the acquisition?
Yeah thanks for the question. Let me just more broadly start to summarize on where we are with automotive and our design wins and then in that context put what Nesscap here brings to the party. As we've shared over the last few calls, we have been making excellent progress in adding to our start-stop design wins with an announcement last year with General Motors. So e-active suspension design wins are ramping with global brand name OEM and are nicely proliferating with that OEM. This has also lead to increasing interest in their application and in their context we are making very very good progress.
In the last call we refer to several opportunities with the electrified Turbos. We are making progress in that area too. Lastly, I refer to backup solutions that are particularly important in autonomous driving but also in other applications as electrification increases in cars. And in that context Nesscap also had with their smarter portfolio both on the nice traction and our designs wins plus their awesome very small cell portfolio quite some nice traction and our design wins plus theirs all from very small cells to medium cell really compliments here, not just the customer base and to the design wins but provides clearly a broader portfolio to tackle all of those applications because it just like I pointed from really small cells to larger cells depending on the energy power required in some applications we are going after really the whole portfolio is required to be well positioned there.
So again it just it's nicely complementary from a portfolio design win and customer standpoint.
Great, thank you so much. And just one more from me, how should we think about the allocation of [indiscernible] from restructuring on a COGS verses SG&A basis. Are these, it sounds like these measures are independent of the Nesscap deal and would you contemplate further actions related to potential synergies. And thanks so much again for taking my questions.
Sure I can take that this is Dave. The majority of these savings we're going to experience are through OpEx costs both accounting and cost containment efforts, there is also through manufacturing operating efficiencies for creating additional savings. That being said, we are going to see some synergies in terms of savings on the OpEx front related to the acquisition of Nesscap.
Your next question comes from Craig Irwin with Roth Capital Partners. Your line is open. Craig Irwin, your line is open.
We were recently talking to someone that participates in the energy side of the automotive supply chain and they were telling us that Monty [ph] is talking about having something like 3 million units on the road now, I know you’re really going to see only ship a couple hundred thousand units through them this year. But what was most interesting to me is of the several years that you've been on the road in continental products, since you launched in the CT [ph] drive train. It sounds like there is really been maybe low-single digit failures in the field that the quality controls there are really impeccable.
Can you comment on whether or not this is information that’s auditable, that you can share with your dozen or so automotive OEM programs you’re pursuing? Is it something that they can see clearly in black and white when they’re doing their risk assessment for adopting your technology over something that maybe considered conventional. And does this factor into cost discussions with these OEMs as you’re looking at potentially ramping in some of these programs over the next two years?
Yes. Craig, thanks for the question. We have the structured our portfolio with focus on ruggedness and robustness for automotive applications. This is ultracapacitor that clearly has built in additional robustness versus lower cost ultracapacitors for example, for stationary applications like light and wind. And it’s indeed true that with all that millions of ultracapacitors we have shipped in automotive, there is non -- very -- I mean really, literally almost non-return. So it’s very, very robust cell. We have, of course in view of increased traction we are seeing there, embarked on a program for cost reduction.
Obviously naturally as automotive system costs comes down, all component cost needs to come down, but be rest assured, we have embarked on that cost reduction not making a tradeoff, a tradeoff on the robustness of our cells, because in all valuations that we have seen, we clearly see this robustness and this future of our cell is a very, very significant differentiator and hence, we will made no tradeoffs there. So yes, of course it’s part of the discussion, we have a plan to cost reduce, but we will may not with respect to quality and reliability of that type of product for automotive.
Okay. My next question is, I'd like to understand why do the Nesscap deal? So Nesscap just like another one of your larger North American competitors let's call them, has been trying to raise money for at least a year, probably more than two years on Nesscap's part. Nesscap had challenges and long-term participation in this sector of you're the competitors has -- a named executive on their Web site has actually been gone for year.
So when I look at the ability of your competitors to raise money, it's quite seriously impaired. Why would you go and acquire Nesscap, specifically to move into small cells? When most people that participate in the industry look at the Japanese and Chinese participation in small cells. With revenue volumes in the hundreds of millions of dollars, and scale that I don't think Nesscap will ever touch.
Why would you want to be in that market where there is pretty broad agreement that that's a commodity market that's going to see very difficult profitability over the long run. If you could give us some color, why not just watching them go bankruptcy? Is there something really exciting in there that we should be looking at, am I missing something? That's the bigger question.
Yeah more than glad to -- first of all thanks for the question Craig and more than glad to answer the question. We are actually very excited about the announcement into combination. I think what we need to here look into detail is, that there is obviously small cells and medium and large cells. And as we look at our target markets from automotive, industrial, wind, really as I've already pointed out, automotive has lots of different applications that requires medium cells, some of them large cells, but clearly also small cells.
So for example backup -- just to mean one, backup solutions not just for autonomous driving, which will be huge in the years to come, but backup for lot of other applications in automotive as electrification accelerates is in the really small and medium cell market. And us as a small company we need to focus. And in that context that brings a very very nice, very competitive portfolio that allows us be ultimate leader in automotive and basically win an any application that comes along here. Anything from start stop to e-active suspension to electrified turbo to backup solutions.
Wind is a very very important market for us. So wind market and pitch control design is shifting from low voltage to high voltage solutions. And in that context a portfolio from small cells, medium cells to large cells is required to really effectively address that. We are the undisputed market leader in Maxwell's combined portfolio, we are well positioned to maintain that leadership position and moderately grow in that market moving forward. Industrial market is a very, very broad market, again requires a portfolio from small to medium to up-cell and as we have said have been focusing our investments on the large-scale side of things. And in the context of acquisition brands, a very nice competitive portfolio in this more and medium cells.
So I guess, one of the key points, I would like to make is, Craig, we should not read into that just real small -- or small small small cells, but a real, very nice small medium-cell portfolio that is very, very good competitive in cost efficient. And the context, it now establishes very complete small to large-scale portfolio that allows us very effectively beyond anyone else who is out there to go after the market that we have shown that is going to grow from 500 million today to over 1.4 billion by 2021.
Additionally, it diversifies the customer based into revenue streams in those markets. It increases the R&D leverage, again we can put our team on focus on the larger cells and some Nesscap team on small and medium cells and in doing so bring more product faster in the market and as a result generate more design winds faster and in doing accelerating top-line revenue growth. It’s immediately accretive and from that perspective, also financially very attractive.
So quick question on clarification, it sounds like there might be something definitional here. So when I think a small cell, I think sub-10 farads cells really, sub 1-farad cells that are predominantly coin cells. Does Nesscap participated all in the coin cell market or all day sort of --.
We are talking that we are talking…
-- from 2 to 20 range?
So Craig that's a very good question, that’s what I tried to bring across. They are essentially not into 1-farad and those type of sales, we are talking to some extent 10-farads and 15-farads, but mainly in the 10 of farads, 100-farads, 700-farads. And so for example, if you recall, we have a 350-farads sales that is obviously in automotive and they do, so as medium sized cells too. So yes, we’re not talking really 1-farad type of cells. Okay.
That’s a relief, so I think all of your Asian competition we call at large cells. So very happy to hear that.
And Craig, just for clarification for everyone on the call. We don’t, because for us large sales is really thousands of farads. And so for us 600 is medium and then if it goes to a few hundred it is small. So we are not talking to real small ones, you are reference to here okay.
Yes. Excellent. That’s good news. So then my next question is, you talk a lot about the concept of the battery electrode. They’re now eight companies that I know, that are using very similar technology the ultrahigh moleculuoid PE as a binder, no solvent. One of these companies has been doing battery work for more than 15 years with the dry electrode and none of it is really broken through and been commercialized.
Yes there is broad consensus and the [indiscernible] work from couple of years ago, shows very clearly capital cost 20% of traditional lithium-ion facility production cost because of the lower energy less than 50% of that of a conventional electrode. But it seems there are some fairly significant challenges for adopting technology in lithium-ion. Why would you prioritize that over something like lithium ultracapacitors? And could you maybe give us an approximate breakdown or some color on how you spend your R&D dollars on carbon-carbon EDLCs, lithium-ion battery electrode opportunities and then obviously the lithium ultracapacitor opportunity where it's clearly you're already active?
So as again very good question, Craig. So first let me reemphasize the three key elements of our strategy. One it's clearly that we refresh our high-voltage portfolio and we are seeing very very nice traction there with record bookings and progress being made all around towards in U.S., in China, in India, of course in Europe, but with particular traction in China, U.S. and an India. So very very solid foundational cash and revenue contributor. So we have significant investment in that product line.
Secondly, the largest investment has been and has remains for that reason clearly a very very high even that's a highest priority from an investment standpoint, the ultracapacitor line including the lithium-ion capacitor, and hence also the recent acquisitions that is very exciting to build the most complete portfolio in the industry to go after automotive, rail, grid and wind, and of course industrial applications. In this, these also the lithium capacitors comes in for backup power as well as advanced guided vehicles and others.
As far as the battery electrode is concerned, all I can say is that we have been advancing this technology over the 12-15 months to a point where as we have shared designs to development partners for a proof of concept, that up to now has met every single milestone and without going into details as I'm not authorized to disclose all those details at this point in time, has proven and surpass validation by the independent partners, demonstrated that the technology work has to be done. That's what the proof-of-concept is all about, has characteristics and performance and cost that clearly as you compare it to red electrodes provide significant advantages. Again like I just pointed out earlier in the call, up to depending on materials and methods applied 20% higher energy, 10% lower cost all very significant in automotive industry.
Now we’re obviously has to be done and that’s proof-of-concept is going to be about. Now as we refer to shifting more investments, you should not read into that, but it’s ultimately the highest, highest priority from a total investment dollar today. But that we have been seeing in the proof-of-concept plus the interest in working with other partner's advancement in the technology that we believe, that gradually increasing it and capitalizing on it is the right thing to do for our investors and shareholders. And so I just would like to in summary position that correctly. We did want to basically say here that at this point in time it is the highest investment in looking at the overall investment on our portfolio.
However, it is advancing significantly, hence the increased interest and in the context gradually increasing investment. At the same time, let me also make an addition very important point. We remain extremely focused on leveraging our technology platform, particularly to dry electrode technology and focus establishing and solidifying further development partnerships to put the company even the broader foundation of a collaboration, let's call it a scaling partner that ultimately will help to being that technology to commercialization. Because one thing is clear, we are and we remain a fairly small company and we need scaling partners to bring significant and critical technologies to commercialization.
And this one in particular like to pointing out, obviously my take is more than bring in an ultracapacitor to commercialization, in one of the applications we talked early on the call. And in summary, the three priorities for us are very clear. But I would like to emphasize that we believe, that not just high voltage with playing its role and the key focus on ultracapacitors that remained key core and center to battery dry electrode, we believe is a very significant source to ultimately create increase shareholder value.
Your next question comes from Jeff Osborne, Cowen & Company. Your line is open.
I just have two questions. One was on the OpEx, you mentioned that post restructuring in the 2Q period, which sort of benefited the restructuring. Can you give us a sense of what the OpEx run rate, sorry 1Q would with other stuff benefit and 2Q would have a full benefit? Can you give us a sense of what the true OpEx run rate would be excluding Nesscap in the second quarter?
Yes. It depends on Nesscap, when that Nesscap deal closes. We think --.
I would say excluding Nesscap, if you could just give us a sense of the legacy Maxwell. Is that in high 11s or 11.5 frankly this of how much OpEx was cut?
Yes. It will be in the 11s more in the high-11s. And just to be clear there will be not impact in Q1.
Exactly. And then as it relates to the China bus market. Franz, you mentioned that you’re be conservative and assuming no growth or rebound or pick-up in that market over the next few quarters. I guess it’s a bigger picture question, why would it pick-up at all? What gives you confident that second half of 2018 is better just given how the governments looks at the program around and given our initiatives in fuel cells and electric buses, et cetera.
Right, very good question, that's gives us confidence well a few things. First of all the latest subsidy is based now on a dollar value per kilowatt hours and not on range and size and length of the bus, which obviously is clearly favoring what is most optimized energy storage system in that bus.
Secondly, in talking to our customers and to battery suppliers to the bus industry in China, everybody is telling us, as subsidy is going down overtime, batteries and the liability created by the warranty for batteries needs to be protected and the liability of warranty that goes with it needs to be dealt with. And in that context, integrated battery and ultracapacitor solutions every tells us of course in the context of the right system cost is for optimum solution. And so we are working with new products and our new partner not just to get on to the localization list as we pointed out, but also get our new product that are already ready for evaluation and in the hands of our customers evaluate it and qualified. But also started to work with our customers on next generation solutions.
And as recently as just 10 days ago, I met with several key people supplying into the industry that have reconfirmed that they are absolutely committed to partner to us, as they believe as subsidies goes down they need to protect the batteries, the cost, the warranty cost as the subsidy goes down is obviously very very significant. And they need to take care of that.
Got it that's helpful. And just quickly, is there any ability to port your dry electrode technology into the Nesscap portfolio overtime?
There is certainly an opportunity to do that, and as you know for example for small cells, again let's call it medium-sized cell just to be clear on terminology, to use their wet electrodes actually for products where very very thin electrodes makes sense is complementary electrode. So yes there is, but there is also the other way around. So it's actually very nicely and complementary too.
Excellent, thanks very much guys.
A - Franz Fink
So I think that was the last question. And again I would like to thank everyone for joining today. And we are looking forward to be in talk with you over the phone. And hopefully in the very near future at one of the next conference to share more. Thanks again for attending today and your interest in Maxwell. Thank you very much.
This concludes today's conference call. You may now disconnect.
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