Maxwell Technologies, Inc. (NASDAQ:MXWL) Q3 2017 Earnings Conference Call November 8, 2017 5:00 PM ET
Soohwan Kim - Blueshirt Group
Franz Fink - CEO
David Lyle - CFO
Noah Kaye - Oppenheimer
Jeff Osborne - Cowen and Company
Craig Irwin - Roth Capital Partners
Good afternoon. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Maxwell Technologies Q3 Earnings 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. Mr. Soohwan Kim you may begin your conference.
Good afternoon, everyone. Thanks for joining us and welcome to Maxwell’s third quarter 2017 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.
Statements about future expected 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, or reviewing a written transcript of this conference call, please note that all information presented is current only as of today’s date, November 8, 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.
During our call, we will discuss some non-GAAP measures including non-GAAP gross margin, non-GAAP operating expense and adjusted EBITDA, that when viewed in combination with GAAP results provide us with additional analytical tools to understand our operations. We believe that these measures provide useful information to management and our Board of Directors and investors about our operating activities and business trends related to our financial condition and results of operations.
These non-GAAP measures are intended to supplement GAAP financial information and should not be considered in isolation as a substitute for or as superior to financial measures calculated in accordance with GAAP. The company's financial results calculated in accordance with GAAP and the reconciliation to those financial statements should be carefully evaluated. For a reconciliation of non-GAAP measures to the most directly comparable GAAP measures please see the notes to financial statement in today's earnings release, a copy of which is posted on the company's website.
On the call today to discuss our second quarter results are Dr. Franz Fink, Maxwell’s President and Chief Executive Officer, and Dave Lyle, Maxwell’s Chief Financial Officer. Following our prepared remarks, the call operator will come back on the line for the question-and-answer portion of the call.
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 third quarter 2017 financial performance and business outlook, touch on the latest progress in our strategy and provide an update on our dry battery electrode technology in each of our key markets.
Starting at a high level with the Q3 financial results, we closed the quarter with $35.8 million of revenue and adjusted EBITDA of negative $2.1 million, both beating our previous guidance range. Dave will provide more details of the financial results and outlook later in the call. With our balance sheet now solidified following our recent convertible debt offering, which netted to company $43 million in cash, our business transformation progressing and with 2018 inflection point on the horizon, we are now well positioned to deliver on the long-term value of the company.
The steps we have taken in the past three years have created operational efficiencies and improvements that resulted in the lower quarterly operating expenses in six years and the most robust customer pipeline and strongest portfolio at Maxwell to-date. As we move into 2018 we're becoming increasingly confident that the progress we’re making has positioned us well to intersect three fast approaching disruptive megatrends, which we anticipate will advance us in delivering long-term value to our shareholders.
These disruptive megatrends are in renewable power generation, vehicle electrification and the battery electric vehicle revolution. As these disruptions shown here, we are beginning to experience increasing levels of engagement from our customers indicating that initial ramp phase of these megatrends has begun and that's a true acceleration of tipping point of these global transformations can be expected to begin in the early 2020s.
Now let me provide some color on these megatrends. First, as costs for renewable power generation continue to fall and converge on those of traditional forms, renewable penetration on the grid is increasing at an exponential rate. This increase in penetration requires that land, energy, storage and power delivery technologies for successful integration and to stabilize the grid as this moderation takes effect.
Second, as the use of premium features such as e-active suspension, autonomous driving and other power hungry applications continue to penetrate the automotive market, high power and rapid response energy storage in power delivery solutions are being increasingly required to address the new technological challenges that these advanced features will create.
Lastly, as global emission policies continue to tighten and the cost for lithium ion batteries continue to fall, the automotive industry is on the verge of an electric vehicle revolution, which will fundamentally change the industry and how automobiles are made and used. Advanced lithium ion battery performance and reduced costs are at the center of this fundamental change and leadership in this area will be a major factor in determining the winners and losers in a future of the highly competitive automotive industry.
Each of these disruptions is anticipated to fundamentally reshape the respective industries and will drive significant growth, particularly for the automotive and grid energy storage markets, which are at the center of our strategy. We are confident that the work we have done to transform our business to solidify our portfolio to extend our technology platforms and to strengthen our financial foundation have positioned us to capitalize on these mega trends and on the accelerated growth that is expected to result in the mid to long term.
Moving on to our current business, I'd like to first give you an update on dry battery electrodes and then provide a progress report on each of our key markets. Starting with dry battery electrodes, we have been very focused on completing proof of concept work with our partners as a precursor to establishing broader scale up and commercialization, which we hope will bring our breakthrough to market in a timely fashion and unlock its value for our customers, partners and shareholders.
We are happy to announce that we have materially completed the proof of concept phase with our initial partners. We have proven that our technology has merit and that we have a platform to build upon. Last quarter, we shared that using lab-scale manufacturing or dry electrodes yielded cell-level energy density with nearly 20% improvement over existing state-of-the-art wet electrode performance. This quarter we took another step and demonstrated consistency and reproducibility in pilot scale dry electrode raw manufacturing and performance characteristics.
In addition, we also have begun demonstrating our dry electrode process using other advanced materials and technologies. Given the positive initial results, we expect to achieve even higher levels of energy density in the near future. In anticipation of the next steps and the road to productization we have begun to shift investment into this area and expect to grow our investments in the next 18 months as we ramp up our pilot manufacturing in technology enhancement capabilities.
Results of our proof of concept work have created a springboard effect in advancing discussions with potential partners regarding broader collaborations. As stated in the past, we have received increasing interest from several global leaders in the automotive and energy storage industries. As the forecasted ramp of battery electric vehicles continues to increase year-over-year, efforts are accelerating in the automotive and energy storage industries to prepare for this coming paradigm shift.
We have long believed that our dry battery electrode technology could be a central enabling technology for the battery electric vehicle market and as a result of our proof of concept. We believe that our partners are beginning to share this confidence. Through that end, we are encouraged by the progress we're making in discussions with potential partners in establishing broader strategic scale up in commercialization partnerships.
Additionally, we had initiated discussions with potential partners in industrial markets, which could enable not only an expanded market reach, but also market entry as early as 2020, two years earlier than expected in automotive. While much work remains to be done, we expect 2018 to be a year focused on attaining broader scale of agreements with our current and prospective partners.
Shifting to our key the markets, I will start with wind. I mentioned in our last call that we anticipated continued strength in Q3. Due to strong seasonal demand in China, along with business generated by our acquisition of Nesscap, in Q3 we recorded our largest single quarter of wind revenue ever.
Looking into 2018, we anticipate a more balanced geographic growth in wind. We expect continued strength in China due to the ongoing development of offshore wind resources, but we also anticipate a robust pipeline of opportunities in the US for new Wind Pitch retrofit system with pilot project in fixed commercial wind farms to-date.
So these pilot projects we are seeing evidence of considerably increased reliability in life as well as reduced cost of ownership for operating turbines. As these benefits are further validated in the field, our traction has begun to increase and we expect deployment of retrofit models to ramp into commercial wind farms beginning in Q1 2018.
While we expect a typical Q4 seasonal softness in China wind, we expect overall wind market to remain stable with modest revenue growth in 2018, but with upside opportunities in the mid to long term due to strengthening market conditions in the China offshore and wind retrofit markets.
Moving onto grid energy storage, we remain on track for our first product commissioning in second half of 2018 for transmission level utility scale power stabilization project with leading global OEM. As we have stated in the past, we expect multiple follow-on project with this OEM in 2019 and beyond.
Additionally, with an increasing penetration of renewable in the grid, in early 2018 we are moving towards a launch of our first product designed specifically for grid energy storage in small to mid scale deployment at the micro-grid level. Our new products will allow us to focus on additional market opportunities that represent a very different grid market segment that has a significantly larger number of available projects with shorter sales cycles.
Many of these projects are in the sub-five megawatt size. These types of opportunities are ideal for our ultra capacitors and many players have already recognized that batteries cannot fulfill the voltage firming requirement. These smaller scale projects typically range from $20,000 to $1 million per project and can be closed faster than a larger transmission level infrastructure opportunity such as a utility scale deal with our global OEM partner. We continue to expect our revenue ramp to begin in late 2018 and become more meaningful in 2019 and beyond.
Next, let's move on to automotive. We are pleased that our 14 design wins in various applications and at various stages are continuing to progress according to plan. As momentum from digital electrification builds, we continue to see increasing interest in the use of ultra-capacitors, particularly in e-active suspension and backup power applications where we are currently working on a couple of large opportunities.
There is no doubt that we have work to do to close on these, but if successful in closing just one of these opportunities, the result will be a positive revenue impact beyond the initial 2018 inflection point. As our pipeline of opportunities continues to grow, our confidence that he could see an accelerated automotive inflexion in the late 2019 or early 2020 timeframe is increasing especially as we begin to see initial signs of the upcoming vehicle electrification megatrend.
In rail, demand for our lithium-ion capacitor product has been driven by light rail onboard systems in China. In 2017, we have been shipping pilot skill volumes and we are now working through the transition to commercial manufacturing capability with our partner in China CRRCSRI. To that end, supplier agreements and production equipment specification has been finalized, equipment procurement has started and we are on track to achieve full scale production in the second half of 2018.
As our production capabilities improve and the commercialization of generation two lithium-ion capacitor technology advances. We have begun to see increasing opportunity in the light rail onboard energy storage market in China, driven by a significant light rail infrastructure build out over the mid-term to support continued organization. As our partner CRRCSRI is the leading player in this market, where system integrators play a large role in the promotion and adoption of the technology. Our excitement is growing as the market for our lithium-ion capacitors opens up and we see new future potential beyond 2018.
Let's now move on to high-voltage capacitors. Our strategy is to intersect the paradigm shift in the global high-voltage capacitor market, particularly in China, India and North America, with a goal to grow revenue and cash flow over the next five years. We are currently deploying new products with short-term focus on the designing of our ultra-high voltage DC circuit breakers with global OEMs which we believe is a technology leading solution in the market.
In 2018, we expect to complete a factory expansion which is on track to be ready for production in the second of the year that in turn is expected to enable delivery of continued foundational cash flow to our business moving forward.
Finally, I would like to provide an update on the Nesscap integration, which continues to move forward as planned. We have optimized our product portfolio and we are seeing strong growth in small and medium sales driven by the wind, auto, and industrial markets. Our Korean factory utilization remains at 100% and we are investing to expand production capabilities in 2018.
We are leveraging the talent of our newly combined R&D teams and plan to launch several new products to meet the needs of our wind and small-cell industrial customers. In 2018, with the factory expansion and the transitioning of customers to our now optimized portfolio, we should begin to capitalize on the manufacturing synergies we identified early on in the deal, specifically by increasing scale which will lead to margin expansion.
In summary, we continue to build momentum and validate our strategy and we have made consistent progress each quarter of transform our business. Our investment is well aligned with the three automotive and grid megatrends that are driving growth in the energy storage market, which will have pave the way for us to accelerate our time to profitability and to maximize shareholder value. We feel we have sufficient capital to deliver on our strategy. We have said that now it’s all about execution and we are laser focused on just that.
I would now like to turn the call over to Dave to discuss our financial results.
Thanks Ron. Today I'll discuss our Q3 results, our outlook for Q4, some thoughts about 2018 and where we are targeting investments of the proceeds from our convertible debt issuance. Starting with Q3, our revenue was $35.8 million, within our previous guidance range of $35 million to $38 million driven primarily by strong ultra-capacitor revenue in the wind market.
Ultra-capacitor revenue was $27.6 million and high-voltage product revenue was $8.2 million. Non-GAAP gross margin in Q3 was 22.5% which was at the midpoint of our previous guidance range. Q3 non-GAAP gross margin excludes approximately $271,000 of stock-based compensation expense and $375,000 of Nesscap related intangible amortization and inventory step up expense.
Non-GAAP operating expense for Q3 was $12.4 million, $300,000 better than the lower end of our guidance range of $12.7 million to $13.1 million, driven by continued optimization of the organization post acquisition and our heavy focus on spending discipline. Q3 non-GAAP operating expense excludes approximately $2.5 million of stock-based compensation expense, approximately $1.3 million for restructuring charges associated with the early execution of an organizational optimization following the Nesscap acquisition, about $258,000 in acquisition related cost and intangible amortization, and approximately $4.3 million in costs related to certain legal matters including $761,000 in conjunction with the [indiscernible] agreement amendment, $3 million for fees and settlement of the FEC [ph] case as well as $503,000 in fees associated with FDIC investment agreement that were previously capitalized.
With regard to the 2011 and 2012 financial restatement matter, Maxwell and the SEC agreed in concept to a $2.8 million settlement fee which is subject to review by the SEC commissioners. We expect that Maxwell will have no requirements for an independent monitor or additional remediation and that the issue will be settled on a without admitting or denying basis, thereby concluding the investigation.
We expect to pay the settlement fee once the definitive settlement agreement has been finalized and approved, expected sometime in early 2018. This issue has been unresolved for close to five years beginning well before both Franz and I arrived and we will be happy to put it behind us.
Finishing up on Q3 results, non-GAAP interest expense was $128,000 which excludes approximately $24,000 of noncash amortization of debt issuance cost and discounts related to the convertible debt issuance. Q3 tax expense was approximately $527,900. Q3 non-GAAP net loss was about $4.9 million resulting in a net loss per share of $0.13 based on a basic share count of approximately 37 million shares.
GAAP net loss was $13.9 million for the quarter and GAAP net loss per share was $0.37. Q3 adjusted EBITDA was negative $2.1 million and unadjusted EBITDA was negative $10.7 million. DSOs for the third quarter were approximately 59 days and inventory turns were 3.6 times.
We ended Q3 with cash balance of about $52.9 million which includes approximately $37.3 million in net cash generated from the initial issuance of the convertible note but does not include the additional net $5.7 million in cash received from the exercise of the overallotment option that closed in October. Excluding proceeds from the note, the ending cash balance would have been $15.6 million which is within our previous guidance range of $13 million to $16 million.
Now I'd like to provide guidance for the fourth quarter of 2017. In Q4, we expect topline revenue to be in the range of $31 million to $33 million as we expect to see typical seasonal softness in the wind market and no revenue contribution from China bus as we have been consciously shifting our business away from low ROI China bus opportunities. We do however expect that high-voltage product revenue growth will somewhat offset win softness.
We expect Q4 non-GAAP gross margins to be in the range of 26% to 29%, with sequential growth driven mainly by a product mix shift towards our high-voltage products and higher utilization across all of our factories. We anticipate excluding from Q4 gross margin approximately $200,000 in intangible amortization and inventory step up related to the Nesscap acquisition and $270,000 in stock-based compensation expense.
In Q4, we expect non-GAAP operating expense to decline again sequentially in the range of $11.9 million to $12.3 million as we continue our focus on operational efficiencies and discipline as well as the benefit from the early execution of our organizational realignment following the Nesscap acquisition.
We estimate our Q4 non-GAAP operating expense will exclude approximately $2 million in stock-based compensation expense, about $350,000 in acquisition-related intangibles amortization and other costs and $100,000 associated with certain legal matters. We expect non-GAAP interest expense to be about $620,000 which excludes the non-cash amortization and debt issuance costs and discounts.
We expect our tax expense in Q4 be about $200,000 mostly associated with taxes on income of our Swiss subsidiary. At the midpoint of guidance, we expect Q4 non-GAAP net loss per share to be $0.11 based on a basic share count of roughly 37.5 million shares. At the midpoint of guidance, Q4 adjusted EBITDA is expected to be nearing breakeven at about negative $1.1 million.
In regards to cash, we expect our cash balance at the end of Q4 to be in the range of $46 million to $50 million depending on working capital changes. We expect capital expenditures to be roughly $3 million in Q4, primarily related to the factory expansion and lab upgrades in Switzerland and capacity expansion in Korea.
In Q4 we also planned to file a shelf registration statement on Form S3 with the SEC. Although we have no immediate plans to raise additional capital and we believe we have sufficient cash to execute on our strategy, this filing will enable a faster execution for any of the strategic opportunities that arise from our current dry battery electrode discussions.
Looking a little farther out to 2018, we expect that we will see year-over-year revenue growth as well as an inflection point begin to take shape in late 2018. We have narrowed our focus to the markets where we see the greatest potential for growth and good quality revenue and margins and hence we anticipate revenue growth in 2018 in auto, grid, rail, wind, high voltage and non-China bus.
With regard to how the year will play out by quarter at a high level, we believe we will see typical seasonal softness in Q1 and Q4, and typical seasonal strength in Q2 and Q3. Lastly, I'd like to discuss where we plan to target investment with the proceeds of our $43 million net cash raised from the convertible debt offering.
Let's start with our factory expansions where we've already begun executing on two factory expansions for our Swiss and Korean factories. We have earmarked about $4 million in capital expenditures for each site and are on track to complete the expansions by the end of Q3 2018.
Next with the initial phase of our drive battery electrode proof-of-concept concluding, we now have enough confidence that our technology will meet and even potentially exceed the requirement for battery electric vehicle applications and we are planning to invest more heavily in capital expenditures in 2018. Further, as Franz discussed earlier, we remain focused on establishing scale up partnerships in 2018, which we expect could provide an offset to some of the capital expenditures and accelerate our time to market.
Lastly, now that Nesscap integration is well underway, we believe there are additional opportunities to further optimize our global manufacturing infrastructure that may require some capital expenditure and we are currently in the process of developing plans to further enhance our capabilities and to improve our gross margin profile. All in all, we expect to target the funds towards capital expenditures which we expect to be higher in 2018 than we have historically spent in the past, although we will very tightly manage cash outflow for these projects.
Now, I’ll turn the call back to Franz for closing comments.
Thanks, Dave. Over the last three years, the team at Maxwell has been working hard to transform the business and to position it into center of disruptive megatrends that are expected to drive more rapid growth and energy storage in the years to come, particularly in the auto and grid energy storage months. In the past nine months, we achieved additional significant milestones by solidifying our financials, migrating the most complete and strongest portfolio in the industry and by building the most of our custom opportunities pipeline to date. We remain very focused to leverage these strengths and the megatrends to drive sustainable profitable growth.
In particular, we remain laser-focused on establishing strategic partnerships to accelerate the commercialization of our dry battery electrode technology in order to unlock its value for customers, partners and shareholders. Second, the fundamentals of our ultracapacitor business are gaining strength. We have enhanced our product portfolio through the Nesscap acquisition and we are securing more design wins in markets such as auto and grid energy storage that are on the verge of compelling acceleration.
Lastly, our management team is determined to continue to achieve operational efficiencies. We have demonstrated improvement in operating expenses. We're expecting to be nearing adjusted EBITDA breakeven in Q4 and we expect to further strengthen our business foundation and performance in 2018 with the year-over-year revenue growth and the focus on reaching profitability in the mid-term. I am very pleased with the progress the team has made over the last three years and I am more confident than ever that we are all well positioned to leverage our business transformation into three megatrends to deliver shareholder value. I'm looking forward to sharing our successes with you as we move through 2018 and beyond.
Operator, we are now ready to open the call up for questions.
[Operator Instructions] Your first question comes from the line of Noah Kaye from Oppenheimer.
Franz, maybe you could just mention out the size of the pilot plan for the dry battery electrode, how much CapEx are we talking about and what equivalent battery capacity could that support?
Yes. So thanks Noah for the question. As we are moving from the initial pilot to really scale up, we're looking here in building capability that of course brings more advanced equipment, but particularly for automation regarding powder delivery for those advanced lithium ion battery chemistries and materials and directionally, we're looking at a pilot line that then would take scale up to hundreds of megawatts, could be as high as [indiscernible], but probably short of it, as we want to make sure that we're not just taking that with a partner here to scale up, but also could basically support the initial ramp into production while then in parallel as we finalize the design of real production equipment that most likely would get installed here with a partner that we would obviously closely collaborate with.
In that context, you're looking here probably at the capital expenditures that are in the mid-teens of millions of dollars, let's call it, anywhere from 15 to 20, could be a little bit lower, could be a little bit higher. However, having said that, we are very, very strongly focused on establishing strategic partnerships that bring significant investment here to the collaboration and of course we would look at what I just told you from that investment that the investment would be significantly lower. Hopefully would be zero, that's our goal, but clearly it would be very significant contribution from at least one, if not a few of the partners we're looking for.
I don't want to get confused here, so just so I can clarify the 15 to 20 million, that's not sufficient to support hundreds of megawatts of battery capacity, is it or is that way?
Well, actually from a footprint standpoint from dry electrode manufacturing, you will be surprised how smaller our footprint is and how much you can support with just 20 million of investment in dry electrode manufacturing capability. It’s one of the advantages. It’s very, very significant smaller footprint with higher throughput, but again that’s what I’m saying, we're probably not going to put as much in as [indiscernible], we are certainly looking for hundreds of megawatt to make sure that we can supports the initial -- initial production ramp ultimately.
And then maybe one quick follow-up from me, you mentioned kind of the retrofit with the opportunity in the US, is that kind of coming in the context of repowering some of those wind plants with new turbines and if so, are you kind of leveraging any commercial partnerships or channel opportunities to get a better line of sight to those projects, those repowering projects?
Yes. So they’re essentially coming from that the US has, as you might know, a very large installed base with battery driven wind turbines. Source batteries have to replace in the lifetime of a turbine being 20 plus years. Maybe at least four times, if not more often and so what we have been doing is working with big corporations, but also associated wind farms and with a partner to develop those retrofit modules to basically do initial pilots and evaluations to show that once they replace a battery for the rest of the life of the turbine, essentially, there's no further replacement required, in doing so, significantly lowering operating costs.
That has, over the last six to nine months, led to attraction where we see really very, very encouraging momentum with the partners we started, but also know in working within the partner, we're working with here developing those solutions to gain momentum with respect to proliferating it further out. So in summary, yes, we're working with a partner developing it and we’re working from a push pull with big corporation, owning these wind farms, but also with smaller ones that naturally have a shorter cycle of evaluation and decision making and we see really very encouraging momentum.
Your next question comes from the line of Jeff Osborne from Cowen and Company.
Just a couple of questions. With pulling the SDIC funding, is there still a working relationship with them to leverage their connections to battery companies in China, can you just talk about that despite the failed investment returns? What your relationship is with them now?
Yes. We are closely in contact with them. We are talking to them regularly and as you can imagine, with respect to one of -- multiple but for sure one of the megatrends was the battery vehicle revolution, one of the single largest markets to be in China and hence interest in differentiating here future batteries. We are discussing with them on what areas we are putting broader collaborations in place that could mean to address ultimately some markets in China and they remain very excited about the opportunity to work with us and help us not adjust on this front, but clearly that's one of the key areas we're working with them on. So in summary, we are still closely collaborating and discussing on how they can help us and how we can come together here to capitalize on this technology.
And just on the China bus opportunity, so you sounded somewhat dire on that for the fourth quarter going down, but was there any China bus in the third quarter? I'm just trying to get a sense of the focus on -- or the lack of focus on the low ROI opportunities which I’d certainly get, but just as we look at the guidance, is that something that came to the forefront this quarter that you’ve just selected not to focus on that market going forward that maybe there was some revenue in the third quarter, just trying to get a sense of apples-to-apples comparison of the two quarters?
No. It’s essentially zero. And it's also very small in China as such as with change in subsidy and what is being required. The cost and price pressure and then looking at ROI is really not great, is not great for anyone. So, there is very, very little, if it all, business in China, but independent of this, I just would like to reemphasize our strategy moving forward. We are very, very pleased with the progress we're making with our key technology platform, high voltage ultracapacitors and the dry electrode. We have consciously made the decision to narrow the focus to align and optimize our investment and now with the traction we're seeing in each of those areas to really focus on where we see the greatest potential for growth, but always return of investment and in doing so, are focused on maximizing with this focus and focus on the execution the value for our shareholders.
And the last question I had if you don’t mind is just as we look out to 2020 and beyond and the dry electrode process continues to scale, is there multiple revenue streams or business model that play here, is there -- it sounds like you're going down the path of being a powder company and selling to battery companies, but is there an opportunity that might have a lower CapEx longer term that maybe would be a licensed model, can you just talk about some preliminary discussions or how you envision what this potential opportunity could look like?
Yeah. Very good question. Let me just give you a little bit of flavor on how we look at this. We're looking at this with respect to our hybrid model. The hybrid model in really two distinct fashions. On the one hand, that’s clearly automotive, the single largest market with a longer design in cycle time and then there is industrial market where we believe with existing capacity that some players bring, there's an opportunity to intersect the market, just like we pointed out today earlier.
The other aspect of the hybrid model is that in order to stay in the middle of innovation, we are looking on the one hand for partnership where we would be very closely aligned with the partner. Let's call that an embedded manufacturing model, where we even would do the electrode manufacturing, sell it to the partner at reasonable margins and in doing so, really scale it up together and as we scale it up together, also work on the next generation technology and as a result, stay in the middle of innovation.
On the other hand, to really maximize market reach as well as maximize the value for our shareholders. We are also looking to transferring the technology. Of course, it's a right commercial terms to one or multiple partners still to be determined and in doing so transfer the technology and that clearly would be ultimately volume ramps, a royalty model from that perspective. So again, I hope it gives you a good feeling on how we look at this from what we call a hybrid model, maximizing, getting to market fast, but ultimately maximizing the reach into the market and the value for our shareholders.
Your next question comes from the line of Craig Irwin from Roth Capital Partners.
You’ve been talking about the battery electrodes for over a year now and really shared very little concrete information with investors. Now you've raised capital and plan on building out capacity to make this electrode, can you describe for us what's unique or different in this electrode versus the dry battery electric technologies that have been developed by Electrovaya, Johnson Controls, Gore and others who've all spent millions or tens of millions collectively on this technology in the market. What gives you the confidence that Maxwell has the secret sauce to justify a major investment that you think is going to lead to an exciting market opportunity for the company?
Very good question. Appreciate the question. So as I look over the last 12 months, eventually, what we have been doing is to take our patented dry electrode process that of course we have pioneered with our ultracapacitors and gradually of course, the last 12 months with strategic development partners look at enhancing it, advancing it both on the cathode and on the anode side of things.
We started more than a year ago, 1.5 half years ago with sheet only just to show the basic performance and performance characteristics and that over the last 12 months, has led to that we are today with non-optimized equipment and non-full automation in a position where we can produce cathode rolls, anode rolls with the performance characteristics and an efficiency that we, for most characteristics, match two days fast direct process, but in some areas, clearly outperform it like in energy density as well as in reliability and to some extent, of course, it will take time for us.
So as we have shown that, not just to partners we're working with and by the way, the progress here being that we are building here hundreds of hundreds of meters of rolls consistently and can reproduce it. In that context, we started to look into next generation materials going beyond NMC622, starting to look in to really leveraging the advantage of the dry electrode, things like as you know, all batteries out there have a first cycle of, last to the first cycle, they all lose 8% to 15% in energy and we already have shown in the lab that we have a commercial viable pre-litigation capability that we are now taking into pilot a scale over the next 3 to 6 months also with a partner that we can completely eliminate that cycle of.
So in summary, we have shown with an equipment that I would argue is not optimized for this technology that we already today can produce hundreds of hundreds of consistent meters of anode and cathode with performance characteristics that even today's best lead electrodes cannot outperform and that gives us the confidence that as we look into strategic collaborations and strategic partners that now obviously as we have seen this, are more and more coming to the conclusion to share our view. If we combine forces, if we combine knowledge, talent and investment that this technology can be scaled up and could very well be a key technology enables to provide energy density and differentiation for lithium ion batteries, depending on the market starting obviously in industrial early, about automotive in 2022 and beyond.
Is there a timeline Dr. Fink where you expect that you would share technical information, technical data on what you’ve developed with the broader investing and I guess consumer community, the potential customers of these would want to see this presented in public at a lot of battery conferences. Do you expect to be doing that over the course of the next year? And when do you expect to name your partners. You’ve told us how impressed you are with the partners you've signed, but a lot of people on Wall Street are only impressed when they know the names themselves. Do you expect to come out with a lot more information over the next few quarters?
Yes. So as we are pretty much materially done with the current proof of concept and we started to look in one respect, what it takes to scale it up and in a second respect, what we need to do to take that even beyond with advanced method and materials. We are certainly expecting that over the next 12 months or so, we're going to start to share to reach out. As far as partnerships are concerned, as we mentioned today, very pleased with the progress on our discussions.
I don't want to give here a detailed timing beyond what I said that we expect really getting into broader collaborations in 2018 and the reason is that as we navigate through that hybrid model, we want to come up, of course, there is clearly a time to market and doing it earlier rather than later is important. So we understand that.
At the other hand, we remain adamant that this is a technology that besides high voltage and ultracapacitor traction really can unlock value for partners, customers and shareholders and maximizing that value for shareholders I think is the core of what we're trying to do here. In that context, we're navigating through a hybrid model where ideally we would have a partner that is non-automotive, let’s call it industrial that might have existing capacity and would be committed to transfer that capacity to a dry electrode and in doing so, we could intersect the market earlier than automotive.
With such a partner additionally, if we could be an embedded manufacturer of electrode, that would allow us to continue to innovate with the partner. On the other hand, we understand that automotive industry, electric vehicle is a single largest market. There is OEMs out there who are looking into this. There are sales suppliers, we fully understand that some of those big sales suppliers would need to control their own destiny and manufacturing. That is more leaning towards a loyalty model, but now coming with the right timing with both, obviously, we're not waiting with one for the other, but what I'm saying is it just might take a little time to make sure that we mitigate through this with one view in mind, maximizing value for our shareholders.
Last question if I may. It’s no secret that I'm a much bigger believer in lithium ion ultracapacitors, the competitors that you have in that market, the two that are very visible or I should say three, given one does contract work, do not have the scale or the in-house expertise that Maxwell does to execute and there's another competitor claiming that they're looking at multimillion dollar orders this year, but can you comment on how you expect the rollout to go with CRRC and whether or not the, all lithium ion ultracapacitors that you sent to Amazon have had a positive for you and if you expect follow-on orders from the work truck market as those are more thoroughly understory, looking into ’18 and ‘19.
Yes. So lithium capacitor development is progress very nicely to a plan with our partner. And I think we discussed previously Craig that of course on the one hand, we are very focused with the partner in China rail as this is, we believe, a very, very significant opportunity. In that context, we are very focused to put production -- volume production capability in place with a partner as we go to 2018. And of course that will bring the costs significantly down versus the pilot line we have been running here ceding initial market rail, but also beyond rail to your point.
And as you’re putting that manufacturing capability in place, not just support the China light on board rail market, but also started to cede other industrial applications. At the same time, we have been starting on second generation technology. You will hear about this technology more over the next, I would say, 6 to 12 months and that technology is further optimized, not just for rail, but also for other applications. So we are basically getting ready with continuous steady growth of, while small initially, revenue and in that context rail being for sure one of the growth areas in 2018 and also going into 2019, but gradually expanding the focus on rail into other industrial markets.
There are no further questions at this time. This concludes today’s conference call. You may now disconnect.
Yeah. Again, thanks for joining today. We really appreciate your interest in Maxwell and we are looking forward to talking to you and meeting with you in the very near future. Thanks for joining today.
This concludes today’s conference call. You may now disconnect.