LILM - Lilium's Turbulence: eVTOL Commercialization Competition And Cash Crunch

2023-08-14 11:00:35 ET

Summary

• Lilium has achieved important milestones in its eVTOL development, but it is still years away from commercial operations.
• The company has secured new financing and expects regulatory approvals from EASA and the FAA.
• Lilium faces significant financial challenges and looks to need at least $2 billion to begin selling its eVTOLs on a larger scale.

The eVTOL sector has long fascinated me, and in my side-bets portfolio, I even have a few shares of Joby Aviation (JOBY) that have provided pleasant surprises over the past few months. However, Lilium ( LILM ) is one of the eVTOL manufacturers that I find most compelling and most likely to succeed. The company has consistently demonstrated an impressive ability to adhere to its timeline, constantly achieving the results promised to shareholders.

The issue is that the milestones achieved, while important, are only a small part of the entire journey needed to begin selling Lilium Jet, the company's main product, on a commercial scale. Judging by the rate at which the company burns through cash and the anticipated timeframe to reach full-scale commercial operations, I reluctantly believe that now isn't the right time to buy the stock.

Lilium's current state is years and hundreds of millions of dollars away from the scale at which the company aims to operate. All this in an already highly competitive market, even though it hasn't even begun to serve the end consumers yet, with uncertainties tied to regulations and the actual market demand that eVTOLs will generate. For this reason, I remain convinced that one day I'll start building a significant position in this company, but that day isn't today and won't be anytime soon.

The Situation Post Q2 2023 Data

In the Q2 2023 business update , Lilium provided crucial insights into the company's current state. The most significant updates include:

• The company has closed a new financing round of $192 million and has agreements for another $100 million in financing to be received in the coming months.

• By the end of the year, the Design Organization Approval (DOA) is expected from EASA, the European agency for air safety that certifies aircraft and their manufacturers.

• While progress in the U.S. is lagging, the company has secured the G-1 certification from the FAA, laying the groundwork to advance the approval process for the Lilium Jet.

• The assembly of the first Lilium Jets should commence by the end of the year, with component supplies already beginning in the first half of the year.

While these are all positive developments, there's an underlying issue: they came at a cost of another $123 million spent during the first half of the year. Lilium forecasts an additional cash spend of $185 million in the second half. Although they have decent liquidity on hand ($385 million), there are still significant losses to be faced before they can start selling eVTOLs on a commercial scale.

Commercial Operations Insight

Overall, Lilium has pre-orders for 745 eVTOLs. However, these are not binding agreements. Only 31 aircraft have actually received a deposit from customers, and all negotiations are "subject to finalization of commercial terms."

A significant update from Q2 2023 concerns the company's expansion into China. The Bao’an District of Shenzhen signed a Memorandum of Understanding to evaluate operations in the Hong Kong-Guangdong-Macao area. Lilium also entered into an agreement with Heli-Eastern for the potential supply of 100 eVTOLs, contingent upon various factors ranging from license acquisition to an agreement on the price.

The Point on Competition

The eVTOL market is unique: these vehicles are suitable for distances of 30-150 km and target customers with a medium to high spending capacity. They're convenient in urban areas where high-speed rail is inefficient or non-existent, and where heavy traffic makes car journeys impractical. This means there aren't endless routes to cover via eVTOL, so the first companies to achieve mass production could dominate the market within a few years.

Currently, Joby Aviation is the furthest ahead in terms of regulations, especially in the U.S. The company expects to commence commercial operations in 2025 and has so far proven capable of adhering to the timeline shared with shareholders.

Moreover, major corporations like Airbus ( OTCPK:EADSF )have already been working on their eVTOLs and can allocate vast resources to their projects. Additionally, as they're already approved to operate as aircraft designers and manufacturers, they bypass much of the bureaucratic process leading to commercial operations.

Navigating Lilium Jet's Bureaucratic Journey

It's highly probable that the first authority to authorize the Lilium Jet for commercial operations will be EASA. Based in Germany and with a significant portion of the management hailing from Airbus, Lilium is further along in its European certification journey.

Currently, the company is striving to secure EASA's DOA by the end of the year. This essentially confirms that the company possesses the skills and capabilities to undertake design activities in the aviation sector. Once this is achieved, there's still ample work before the design receives final approval.

2024 should witness the aircraft's maiden flight with passengers on board, albeit solely for testing and data collection purposes. Before achieving commercial readiness, the Lilium Jet still requires the Type Certificate, Production Organization Approval, Certificate of Airworthiness, and potentially other certifications depending on the specific operations envisioned for the aircraft.

• The Type Certificate ((TC)) ensures the aircraft design meets all safety standards.

• The Production Organization Approval (POA) confirms the organization can consistently produce items aligned with the certified design.

• The Certificate of Airworthiness (CofA) will ensure the manufactured Lilium Jet matches its initial design.

• Depending on the aircraft's design, its use cases, and onboard systems, additional less time-consuming and costly approvals might be required.

This means that before 2027, it's highly improbable that the Lilium Jet will be legally and commercially operational, considering solely the market where the company is closest to gaining the necessary approvals.

Cash Burn is a Serious Concern

The financial picture for Lilium isn't promising. Here are the company's Cash from Operations ((CFO)) figures over the past few years:

To the current financial scenario, we must add that the company isn't yet addressing the capital expenditure essential for mass-scale production. Such an operation could be worth hundreds of millions of dollars alone.

The Financial Hurdles Ahead for Lilium

Currently, the company boasts a team of 800, with a significant majority dedicated to eVTOL engineering and battery pack development, both of which Lilium intends to manufacture in-house. Given the company’s intention to assemble both its eVTOLs and battery packs, the capex before mass production will be significantly high. How high? Nobody can pin down an exact figure. As quoted from their 2022 year-end financial statement:

Our level of expenses and capital expenditures will be significantly affected by customer demand for our Lilium Jets and services. The fact that we have a limited operating history and are entering a new industry means we have no historical data on the demand for our services. As a result, our future capital requirements may be uncertain, and actual capital requirements may be different from those we currently anticipate.

Given the company's rising cash spend rate year over year, considering at least four years before obtaining all the necessary certifications, and taking into account the capex needed for the onset of mass production, it is straightforward to predict that Lilium will need at least $2 billion to begin selling its eVTOLs on a larger scale.

The Decision Against Dilutive Financing

In their Q2 2023 letter to investors, Lilium has stated a preference for investment firms that do not dilute shareholder stakes. However, as already highlighted, very few customer deposits match the total number of interested clients.

Unless the sales team can secure significant deposits from interested clients in upcoming negotiations, the only viable alternative is debt. But debt comes with its pitfalls: even after production begins, it's doubtful the company will be profitable in the first or even the second year. And this doesn't even take into account the current high-interest rate environment and the difficulty in accessing favorable credit terms for a revenue-less company.

I genuinely struggle to see how they can honor this commitment made to shareholders without seriously jeopardizing the company's solvency within the next 4-5 years.

Conclusions and Analysis Limitations

Lilium lags behind its main competitors in the process leading to mass-scale production and commercial approval. The company is technically competitive, with a product versatile enough to cater to various use cases and utilize existing heliports.

The primary concern remains the gap, in terms of time and funds, between the present and the day when Lilium's engineering potential translates into economic outcomes. In the meantime, uncertainties about the general eVTOL sector persist, with only nebulous estimates of future market demand available.

The main limitation of my analysis is the possibility of Lilium being acquired by a competitor. Such a scenario could lead to a significant jump in share value, given the company's intellectual assets: 62 approved international patents so far and 93 patent applications in total. A potential acquisition remains the only positive catalyst I foresee at this juncture.

Nevertheless, I remain an interested observer and plan to continue my coverage of the stock in the coming months. If and when the timing is right, I will seriously consider purchasing the stock.

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