Enovix Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 14 speakers on the call.

Operator

Thank you for standing by, and welcome to the Innovix Corporation Third Quarter 2023 Earnings Conference Call. Currently, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program will be recorded. And now, I'd like to introduce your host for today's program, Charlie Anderson, Senior Vice President of Investor Relations and Corporate Strategy.

Operator

Please go ahead, sir.

Speaker 1

Thank you. Hello, everyone, and welcome to Innovix Corporation's Q3 2023 Financial Results Conference Call. With us today are President and Chief Executive Officer, Doctor. Raj Taluri Chief Financial Officer, Farhan Ahmad and Chief Operating Officer, Ajay Marathai. Raj and Farhan will provide an overview, and then we'll take your questions.

Speaker 1

After the Q and A session, we'll conclude our call. Before we continue, let me kindly remind you We released our Q3 2023 shareholder letter after the market closed today. It's available on our website at ir.inovix.com. A replay of this video call will be available later today on the Investor Relations page of our website. Please note that the shareholder letter, press release and this conference call all contain forward looking statements that Subject to risks and uncertainties.

Speaker 1

These forward looking statements are based on current expectations and may differ materially from actual future events or results due to a variety of factors. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, November 7, 2023, based on information currently available to us. We can give no assurance that these statements Prove to be correct, and we do not intend and undertake no duty to update these statements except as required by law. During this call, we will also discuss non GAAP financial measures, which are not You can find a reconciliation of the GAAP financial measures to the non GAAP financial measures in our shareholder letter, I will now turn the call over to Raj to begin.

Speaker 1

Raj?

Speaker 2

Thank you, Charlie, and thank you all for joining us today. I'm going to kick it off with a few high level remarks, And then I'll pass it to Farhan to cover some of our financials and the outlook. After that, I'm going to make some closing remarks and then we'll take your questions. Now as you can see from the recent announcements that we've made that we've been making, we've been super busy in this quarter. We started the factory acceptance testing or the FAT as we call it of our Gen 2 equipment on time.

Speaker 2

And we have the 1st equipment landing in Malaysia in November, and we remain on track to go into production in April next year with 1st batteries from that line. Now, a little bit earlier today, we posted a video of Ajay on-site at one of our Gen 2 vendors. Please go check out that video. It's very exciting to see the new machines coming online and how everything looks everything is going on. Now in Paddle, we achieved our strategic objectives in the Fab 1 here in Fremont during this quarter, Which allowed us to transition from this expensive 20 fourseven manufacturing in Fab 1 Converting it into a more of a center of innovation focused on R and D and customer qualifications.

Speaker 2

This allowed us to shave off $22,000,000 of our annual burn. Now this quarter, we also completed the acquisition of Raujed, a company in Korea, Which vertically integrates our manufacturing process from electrode coating all the way to making battery packs. Now owning our own coating, As I mentioned before, it's a highly strategic thing for us. It reduces our CapEx, increase our margins, enhances our manufacturing capability, Speeds up access to the new materials so that we can bring new products to the market much faster. Now we also gain Complimentary business from Raujed, who are shipping products into leading IoT and military customers.

Speaker 2

This gives us cross selling opportunities to be able to sell Inovix current Inovix silicon battery is also into those customer base. We announced that Inovix enabled a product in the market, An FDA approved portable, multi vital sign monitor. This will be sold in CVS, Walgreens and Walmart next year. And last but not least, we shipped brake flow enabled batteries, which is our proprietary technology for keeping batteries safe To the U. S.

Speaker 2

Army under contract, which drove this quarter's revenue. Now before I pass it to Farhan, I'd like to take a few minutes to make some big picture comments on How we are positioning the company to see this tremendous opportunity in batteries that's in front of us. As I mentioned In my first call as Enelink's CEO, it's almost 10 months ago now, that my management philosophy is to really start with the customers, Their products, how our products enable their products and move backwards to making great products on our side. This is exactly what has happened during the last many months. We have rebuilt our management team.

Speaker 2

We have driven much deeper relationships with the key decision makers and customers and now we understand their unique product requirements. Now we received consistent feedback from some of the leading smartphone OEMs that the NOVX architecture offers industry's best path To high density, high energy density batteries matched with cycle life and fast charge. All three care abouts are very important to our customers. If anything, what I noticed over the time I've been the CEO here is our Competitive position in energy density in consumer electronics is actually even better than when I joined the company. I'll talk a little bit more about it in a few minutes.

Speaker 2

Our relationship with our smartphone OEMs is strengthening and I've managed to now understand exactly where our competition is and what kind of batteries our customers are currently using. Based on this belief, I believe that Innomix is capable of delivering multiple 1,000,000,000 of dollars of revenue with strong margins similar to the businesses I've been associated with Qualcomm and Micron. With the superior product that we are going to make here in the portable electronics market, which the market size exceeds over 20,000,000,000. Now we're also seeing strong interest from the EV OEMs, where the market is much larger than the consumer electronics market. But the question to us, how do we get there most efficiently?

Speaker 2

And how do we live up to that promise? Now I first want to today show you The reason why we are so focused on smartphone market. I want to show on this slide What has happened in the smartphone market from 2025 to 2023? Now I've been involved in this market very intimately From my time at Texas Instruments and Qualcomm and Micron. If you look at 2025, the smartphones had a 2 inches TFT display, Close to couple of 100 megahertz CPU, 3 gs modem, single megapixel camera, maybe had like a 900 milliamp hours of battery, Which was about 8 milliliters, if you would say.

Speaker 2

Now as you transition to the right, what has happened is the CPUs got much more powerful and there's Multiple CPUs now. Now today in 2023, there's octacore processors in multiple gigahertz shipping in these phones. The displays have gone from the 2 inches to 6.8 inches HDR10. I'll talk a little bit more about the displays in a minute. Multiple cameras, 5 gs cellular, and you can see the transition along the way.

Speaker 2

Now the phones themselves have got increasing capability. You can now take great pictures. You can watch 4 ks videos. You can Your GPS based navigation with maps, you can make purchases and so many other things, Which has really helped the smartphone market grow because of these innovations that have been launched with the processing power and the displacement cameras from to almost 1200,000,000 units. Now the battery, what has happened to the battery?

Speaker 2

During the same period of time, you can see the battery capacity. If you talk about the capacity of battery in milliamp hours Has gone from 900 milliamp hours to almost 5,450 milliamp hours in a few of the very, very, very high end devices. However, an interesting thing to note is that as the battery milliamp hours grew, The size of the battery also grew, which means this increase in energy has been achieved by making the battery bigger and bigger. So the battery grew 7% CAGR. The battery capacity grew 11%.

Speaker 2

But if you actually think of the energy density of the battery, which is how much has the capacity grown per liter, it's only grown 4%. This is clear if you look at the most recent batteries how little increase they got. Now why is this a problem? This is a problem because now The increase in energy capacity in smartphones has been achieved by making the batteries bigger and bigger with a little bit increase modest increase in energy density. The problem is now you can't make the phones any bigger.

Speaker 2

If we make the phones any bigger, they don't quite fit in your pocket anymore. Now we have a problem. How do we continue to increase and supply the demands of these increasing smartphone applications without increasing the size of the battery. Now if you look at the next slide here, it's going to show you That the emerging use cases haven't stopped. I talked a little bit about the AI and machine learning use cases that are happening at the edge, Talk about multiple displays, larger displays, foldable phones.

Speaker 2

And if you look at the mixed reality headsets, if you look at All these new applications that are coming and recently you've seen announcement from other chip makers and the much even much higher performance processors and much higher performance memories And better displays, but the battery is not keeping up and the phone cannot get any bigger. So there is a problem. That's why customers are very interested in working with us at Enavix because our technology is one of the few ones that can actually enable Smartphones to continue that growth curve of this insatiable demand by increasing the energy density. This slide shows you our battery technology. On the leftmost side, I show the average capacity Of conventional batteries, which is the graphite batteries, of select leading smartphones that are actually shipping in 2023.

Speaker 2

If we use it as a baseline, Our EX1, which is actually the currently shipping product that we have, has over 18% increase in capacity over that. Now it only goes up to 500 cycles and starts at a standard rate. So it's used in some IoT applications, but not at the smartphones. To be able to be used in smartphones, you need to get to 1,000 cycles and be able to charge much faster. Our EX2 has that capability.

Speaker 2

So we're now In our EX2 roadmap technology roadmap, we will be able to increase the capacity by 30 plus percent Over the baseline, but actually still and also gave the 1,000 cycles in fast charge. That is super exciting for all the smartphone OEMs That's an area where people really need this and it changes the game on how smartphones will be used when we get to that. This product is extremely well received by customers and we plan to sample this next year And ramp to high volume production in Malaysia in the millions of units. With the changes we've made, Innovix is now a vertical business, which means it's focused on a few large customers with our products are aligned Informed fit and function to what they need. This contrasts with how our previous strategy at Enavix was, we are making a horizontal business Primarily focused on standard sized batteries to hundreds of customers.

Speaker 2

The beauty of the Vertical First strategy is that The majority of the industry's volume happens to be concentrated in 6 to 12 large customers, 5 to 6 to 7 smartphone customers, A few PC OEMs, a few variable customers. So by being successful there, this results in a large business By meeting the demands of these high volume customers, but our product portfolio can be a lot more focused and our operation expenses can be a lot more a lot less and much more targeted in delivering value and performance to markets that need it most. Now we are very well suited for this vertical strategy because of the tight customer relationships we have, Forged over multiple decades, me, myself and many members in our team have been working with these industry leading OEMs for a long time. We are well positioned in smartphones. That is a market that we are going after really with a lot of intent because of the requirements there.

Speaker 2

From then, clearly, we will move from smartphones into PCs. Along the way, with the RoutJoint acquisition, We'll also continue to sell into the IoT and wearable markets. And I'm confident that with this EX2 type technology, We will be able to launch smartphones in 2025, 2026 time frame and that will help us scale into multiple models of smartphones NPC is in 26, multiple lines with a solid path to profitability. Now with that, I will turn over to Farhan We'll discuss our financials and give some guidance for next quarter.

Speaker 3

Thanks, Raj. So I'll keep my comments at a high level And just talk about the quarter and the guidance. And most of the details of the Quarter and the guidance can be found in our shareholder letter and the press release. So first, talking about the quarter. We delivered record product revenue in the quarter On the strength of the Army contract and the shipment to Army for that.

Speaker 3

And we continue to manage the OpEx tightly and Keep control on our spending and ended the quarter with $370,000,000 of cash and equivalents. We plan to Continue to manage our spending tightly. And as we disclosed previously, the strategic realignment of Fab 1 Will lead to annual savings of about $22,000,000 And as a result, we are lowering our cash use for the year Operational cash flows for the year, dollars 210,000,000 Now looking ahead to the Q4 of 2023, We forecast revenue to be in the range of $3,000,000 to $4,000,000 driven by partial Quarter of ROUT J revenues and continued strength from the Army contract. And I'll now turn it back to Raj for closing comments.

Speaker 2

Thank you, Farhan. In closing, we had a very productive Q3. We accomplished quite a few things as we talked about in the beginning. We remain on track to begin high volume manufacturing in Malaysia next year, While bringing industry's leading batteries to our customers to allow their products to differentiate and excite the consumers who ultimately will be the ones buying these products. We made significant moves to lower our cost structure, as Farhan mentioned, while at the same time, we're also speeding our technology development and enhancing our manufacturability.

Speaker 2

Now we put in place the right go to market strategy, I feel, to deliver on the promise of getting our leading edge technology to the market most efficiently. Now with that, I'll open up the questions. Operator?

Operator

We will now begin the Q and A session. Please note that this call is being recorded. Before we go to questions, we are going to read the 2 most highly voted questions submitted by shareholders ahead of this call during the call registration. The first question is, when can we expect Innovix to start generating meaningful revenue?

Speaker 2

Yes. The question about meaningful revenue. I think as we mentioned, with the Route Weight acquisition, Our revenue is already getting to grow nicely. We guided to $3,000,000 to $4,000,000 in the 4th quarter, and we expect that to continue to grow next year. And as we start producing millions of batteries from our own Malaysia factory in 2024, 2025 Is when you'll see the ramp and 26 it will continue to grow faster.

Operator

The second question is with Fab 1 closing, how will the Novix satisfy the contracts with the Army and the medical device maker?

Speaker 2

Yes, the question on Fab 1. So as I mentioned, we've made quite a few batteries, doubled our production every quarter for the last Few quarters and we now have enough inventory of batteries to support the manufacturing, support the production Needs of our current customer base and we are still continuing to make batteries here for the Army contract. So we do Have a line on which we can make those batteries, and we will continue to do this through next quarter. And then and that also gives us a very good We had to make larger batteries because our previous line was mostly making small batteries. The Army batteries are larger batteries that have also the brake flow enabled in them, and We feel pretty confident that we can meet the requirements.

Speaker 2

And then when we transition to Malaysia, we'll make what's needed from there.

Operator

We will now go to the queue. Questions will be answered in the order that they are received. Please ask one question and one follow-up question at most. We will now pause a moment to assemble the queue. Our first question will be from Colin Rusch of Oppenheimer.

Speaker 4

Thanks so much, guys, and congrats on the progress. As we've seen folks like CATL introduce 4 C batteries with 1,000 cycle life performance into the market. Could you talk a little bit about the competitive environment and how important the BrakeFlow technology is and other attributes? Obviously, the volume is in part 1 from a competitive perspective, but what you're seeing from your customers in terms of what they want and what's Continuing to keep them engaged with you guys.

Speaker 2

Yes. Thanks, Colin. Thanks for the question. I think The main reason that our customers are super excited to work with us is the increased capacity and energy density we provide. If you look at the batteries in the market today, even if you take all the batteries out there that actually producing the 1,000 cycles or fast charging, Our energy density that we can provide is still much, much higher than anything on the market.

Speaker 2

Now we Our current product doesn't hit the 1,000 cycles that they need and doesn't hit the fast charge. As we add those two features to our products while maintaining energy density, That's where we see a clear differentiation from our products from our customer products. That is the hardest thing to get is the Amount of energy density and we feel like we can accomplish all three of those. And of course, safety is very

Speaker 5

important

Speaker 2

And we'll continue to work on the safety aspect also.

Speaker 4

Okay. And then just with the factory exceptions testing, any surprises either positive or negative In terms of what you're seeing in that first sound of testing?

Speaker 5

No particular Surprises, we are doing quite well actually. We have begun all the FAT work as we said in the letter And the video showed all the work going on. No particular surprises. There were a couple of changes, which is what is typically expected during this rigorous Acceptance test that had to be made, which were already done on the Zone 2 equipment, which I ended up showing in the video. So no particular Surprises.

Speaker 5

Things are on track.

Speaker 4

Thanks so much guys.

Operator

Our next question will be from Derek Soderbergh of Cantor.

Speaker 6

Yes. Hey, guys. My congrats as well on the progress. Ajay, I want to start with you. In the shareholder letter, it says you guys see a clear path to industry leading yields As you move to high volume manufacturing in Malaysia, curious if we should be thinking about a specific number for yield With that commentary, be it 90%, 95% or what have you.

Speaker 6

And then just given what you're seeing in factory acceptance Testing, what's the path look like for Gen 2 as it relates to overall equipment effectiveness?

Speaker 5

Right. So good questions And I'll answer them in 2 parts. So the first part is our yield learning that we did here in Fab 1. Now I've been here 8 more days and I'll be here for a year and the yields have significantly climbed or did climb in Fab 1 and all the learnings of where the Yield losses are happening and that type of thing was done very nicely. We are now Gen 2.

Speaker 5

We will start where Gen 1 We chose to stop the Gen 1 line, as Raju mentioned already, and Gen 2 begins there and the ramp begins from there. FAT has very rigorous requirements of CPKs, which means process capabilities and achieving the Enough distance away from the spec so that the yields are very predictable and manageable. And yes, you can imagine in the high 90s is what We are targeting for the yield for the line to be, but it will take a little bit time to climb. But the good news is that we are starting For Gen 1 ended and climbing from there.

Speaker 6

Yes, that's great. And that was my follow-up, Raj. You've sort of said the plan is to optimize the deployment of Gen 2 lines to sort of match the timelines with demand. You clearly have a sizable revenue funnel. It seems like Gen 2 is on track.

Speaker 6

Have you determined exactly How many lines do you feel is optimal to add during 2024? And if not, what sort of are you waiting for? I know there's a lot of variables that kind of go into that decision. Just would love to hear your thoughts. Thanks.

Speaker 2

Yes. I mean, look, The demand is very strong. I mean, I mentioned in the previous Comments I've made, we are working with multiple smartphone OEMs. We're working with multiple Laptop customers and wearable customers and each of them need a cell of slightly different form factor and shape and our line is capable of producing them. What the variables we're looking at now are to get the first line up and watch how it goes.

Speaker 2

And at the same time, we're also giving samples to all these customers and they're in various stages of validating them and putting into the phones and see how it works. And As we learn from them, what that ramp of their phone models and not the ramp of the laptops will be, we will be putting new lines in, Keeping into keep in mind the lead time that it takes to do that, I can't comment exactly when I'm going to do that, but We are looking now at exactly that kind of situation. And for example, we may not have to order the whole line at once. We may order more lasers, for example, to get that bottleneck out. We may order more back end capacity to make sure that goes out.

Speaker 2

So I don't want you guys to think of lines as holistic things we need to order like one at a time. So that's the kind of optimizations we are making, but we'll be ready for ramp in 2025 with our customers.

Speaker 5

And just to add to that to what Raj just said, building the fab tool as we have been sharing with you, Which is nearly ready now, ready to accept the equipment, Gen 2 equipment. That building in itself right now, it's ready for 4 lines, Right. So we have built infrastructure, power, a lot of details around how that facility has come up. It is ready for 4 lines and the campus itself is expandable all the way to 8 lines. That is consistent with what we have Shown and shared with you all right now.

Speaker 5

That goes in hand in hand with what Raj just said in terms of qualification cycles and Adding the equipment.

Operator

Our next question comes from Bill Peterson of JPMorgan.

Speaker 7

Yes. Hi, good afternoon. Thanks for taking the questions. Kind of want to follow-up on One of the prior questions about adding additional lines, lines 2 through 4, I guess, or even just adding to the first line. I guess the question is,

Speaker 8

Are you going

Speaker 7

to be waiting for Line 1 to be successful before you actually place orders? Or I mean, I assume there's pretty long lead times. So when would you actually Have to place orders for the subsequent lines, let's say, 2 through 4, in order for them to be installed next year.

Speaker 2

Yes. So like I said, I think it's not a simple answer of this is the whole line lead time. There are pieces of the line that have shorter lead time, The pieces that have longer lead time, so we are looking at those and figuring and making sure that we have the long lead time once covered, the short lead time times we can wait. Now we're also Improving these lines, as we start making 1, Ajay and his team have figured out how to even improve the performance of the lines more, reduce the cost of the lines more. So we want to take all that into account and order them carefully so that we don't spend too much money too soon, but at the same time meet the demand of the customers that are coming in 2025.

Speaker 7

Okay. Thanks for that. Actually, a follow-up on that. So Is $50,000,000 sort of the right way to think about a full line or is there opportunities to go lower from there? That's a follow-up to that last question, but actually I have a separate question related to EVs.

Speaker 7

You've been kind of talking about EVs for a while, at least in the context of Fast charging and some of the other attributes. I believe at least in the past, the team has at least had an idea to maybe have At least one JDA by the end of this year. Now, mind you, that was the prior management team. Just trying to get a sense for what is the optimal way you can work with OEMs? How many OEMs are you in discussions with?

Speaker 7

And when would you really want to, I guess, take this to another level with a partner?

Speaker 2

Yes, I'll take the EV question and then I'll have Ajay talk about the line question. Look, I mean, we our challenge honestly has been The demand has been so strong. My challenge has been to prioritize which one we do first and which one do later, right? We just had one Factory here and we were learning on the yields. We are trying to make small sized cells that we can get into the customers that had already early on signed up with us.

Speaker 2

We're trying to learn about we learned about how to improve the yields for the next generation line. Then we had the army contract that we've been satisfying. Then we got a lot of this demand from smartphones, which we had to make bigger cells to give them samples to work on. Then the EV opportunity is also still there and we had to make some cells for them. So it's just been a lot of things to do at the same time, and we've been prioritizing them and getting to them as quickly as we can.

Speaker 2

Honestly, Now that we I think we've said in our press release, now that we are not making high volume manufacturing in Fremont And now we are able to get our Malaysia facility up quickly. We should be able to now start working on those EV type cells because they need Clean room, they need a lot of different materials and so on. And that's where that is. The discussions are absolutely Going well with the OEMs. We've been in the bottleneck of making them and that's just on me because I prioritize making The smartphone cells and the largest cells were the army first because we felt that's where the revenue opportunity in the short term is And we absolutely get to the EV cells in the Q1 next year.

Speaker 5

And just to Answer your other question, which is how many batteries per line, you should keep thinking 9,000,000 to 10,000,000 batteries in the on Line 1, which The universal line. And as Raj said, we are continuously improving the or increasing the UPH, I should say, and reducing and taking cost out. So Line 2 will be copy exact for most part, but then a little bit higher UPH, removing the bottlenecks And cost reducing the line. That's how we are thinking Line 2 onwards.

Speaker 3

Yes.

Speaker 2

And We would like to get to that $50,000,000 range that you talked about. Of course, I'm pushing the team to make even less cost, but

Speaker 7

All right. Thanks.

Operator

Our next question comes from George Janarikos, Canaccord.

Speaker 9

Hey, everyone. Good afternoon. Thank you for taking my question. Just very quickly, I watched the video with Ajay and I'm curious, it looked very automated, high parallelism. So when I'm assuming that you weren't operating at the full tilt in terms of UPH.

Speaker 9

So when that happens, What's your confidence level that you can continue with that level of automation with all the metrology happening? Is there what's the risk that those things Start to break down as you speed up the process. Thank you.

Speaker 5

Yeah, good observation. And yes, we were not Operating anywhere near full tilt. I just wanted to make sure that we are capturing videos of exactly what's going on per station. So we had Slowed the line down quite a bit. FAT will require yet to run what we call marathon run for a certain number of hours at the 13.50 UPH.

Speaker 5

So that's part of the buying criteria or qualification criteria for the line. We will continue doing that and only after that then We'll give a green light to ship that line. So that's what we were doing and my confidence in making sure that the line runs Without having to stop the MTBA, mean time between assists and mean time between failures, is exactly meeting the specs that we wrote, Which means the OEE has to climb up to that 85%, which is equipment effectiveness, the Equivalent equipment effectiveness. So, yes, so definitely not running at full tilt in the video.

Speaker 9

And maybe as a follow-up question, there have been recently been discussions from China Around export restrictions around graphite. I'm curious what you think that does to your long term business and also Actually to RoadChade, how confident are they that you can continue to get graphite supply to your existing business there? Thank you.

Speaker 2

Yes. Our cells don't use any graphite. So the you mean the silicon cells that we are making. We haven't seen any effect To the outjet sales on the graphite restriction so far. So as and when we know about it, we'll comment.

Speaker 2

I just read as much as you have. I haven't seen any restrictions. Thank

Speaker 7

you.

Operator

Our next question will be from Gabe Daoud of Cowen.

Speaker 10

Thanks. Hey, afternoon, guys. I was hoping we can maybe just start with Fab 2, hoping Raj, you can maybe just give us a bit more color around the smartphone launch. The sales coming off of those lines, would that be EX2? 2.

Speaker 10

And then with the second half twenty twenty four launch, I guess the qual period would only be a few months if you're B. Balaji:] Participating commercialization in 2025 with multiple ODMs, is

Speaker 3

that right?

Speaker 2

Yes. So I showed EX2 as a roadmap to what we can get to. We will be doing something in between the EX1 and EX2 to start, Where we will improve the cycle life and we'll improve the fast charge, but maybe not push the energy density all the way to where we need to because as you saw in the slides, Our EX1 energy density itself is much higher than what is shipping in the market. So we're actually pretty confident on the technology we have. So we'll probably get that to production first.

Speaker 2

That's what we are in the discussion with our OEMs on how quickly they want it, which one do we want it. We have programs running on that. We have programs running on EX2. So clearly, our goal is to get sales into the hands of the smartphone OEMs Next year, as soon as we are able to from our Malaysia line and then get ready for production by end of the year, so that we will be in Phones early 25.

Speaker 10

Okay. Okay, great. Thanks for that. And then I guess just as a follow-up, Noted the new vertical strategy, as you mentioned, could you though maybe just talk about if some of those customers that you're focused on now, Would that include the strategic accounts that was mentioned by the previous team? Those are the companies that are greater than $200,000,000,000 of market cap.

Speaker 10

I guess just trying to get a sense of the MOU with Samsung, like is that moving Are you pushing the field the ball down the field there with Samsung? Is there maybe anything that you could speak to there? Just curious again, If there's an update on specifically those 6 strategic state that you guys have previously mentioned?

Speaker 2

Yes, I mean, if you It's very consistent. If you think of strategics as having large market cap and shipping millions of units, that is what the vertical first Strategy is, we are actually focused on people who can buy millions of cells from us for each product, not aggregate. So that's very important Each product needs a custom sell of a certain shape and certain characteristics. So it's very important that every product we make Ships in the millions of units. That way, we get the right ROI on that.

Speaker 2

And they're all the top customers that we talked about. And by the way, these are the same customers That were in the funnel that we used and it's just that we are focusing more strongly on those and not on all the 100 100 because the opportunities have been So much that we need to pick the ones that can ship highest volume.

Speaker 10

Got it. Makes sense. Thanks, Raj.

Operator

Our next question will be from Gus Richard, Northland Capital Markets.

Speaker 11

Yes. Thanks for pronouncing my name correctly and letting me ask some questions. Could you guys give us Split of Army revenue and ROROGE in the Q4 and sort of A little bit of color on how you see Verite's business in 2024?

Speaker 3

Sure. I can take that. So in terms of the 4th quarter revenue, Army should be similar to Q3, plus minus some. And then the remaining should be Rajat. So Rajat, we have talked about 18,000,000 Analyzed run rate in the first half of the year.

Speaker 3

So think of it like $1,500,000 per month. And the 4th quarter tends to be a little bit stronger than that, So just a little higher maybe. So that gets to maybe $3,000,000 to $4,000,000 of guidance. So that should give you color that should give you 4th quarter revenue and the breakup. Talking about 2024, We should expect some growth from 2023.

Speaker 3

So we talked about $18,000,000 annualized run rate in the first half of the year. And so from that 24, we should expect more growth we should expect some growth in revenue from that number. As we have talked about it, this is a company With a very good cost structure, it's in a remote part of Korea. So the cost structure, what they're paying per employee is actually very good. And even at that level of revenue, the profitability is comparable to what you see with the large Companies in the graphite space, and so a very competitive cost structure there.

Speaker 11

Got it. Very helpful. Thank you. And then, in terms of production shipments at a Fab 1, Can you give us just the numbers for what you produced in the quarter and what you shipped?

Speaker 2

Number produced in the quarter and what shipped. I think we talked about what we produced and I don't know exactly how much we shipped and how much we did, but we kept quite a bit in inventory because as I mentioned, we have to make sure that these we're not making any more of those In Q3, so we need to make sure we have enough to satisfy the needs of the people that have already designed us in. So some of it is we are holding To satisfy that market and some also we are using to for our experiments quite a bit for our EX1.5, EX2, we need a lot of cells to do that. So that's where that majority of that sales went.

Speaker 11

Got it. Thanks so much.

Speaker 2

Sure.

Operator

Our next question will be from Ananda Baruah, Loop Capital Markets.

Speaker 12

Yes. Good afternoon, guys. Thanks for taking the questions. Really appreciate it. Hey, so on PCs, Raj, I think you had mentioned PC kind of volume revenue in 26.

Speaker 12

And so Is it 25 when you start volume sampling on the PC side? And then how does AI PCs Kind of play in as well. Like folks like HP have talked about, I think in 3 years they expect 40% Of their PCs to be AI enabled. And so does that play into the demand backdrop As well for PC TAM demand backdrop, and I have a quick follow-up. Thanks.

Speaker 2

Yes. Great question, Ananda. The key thing about the PC market is the time it takes to qualify at the customer It's actually much longer, even longer than smartphones, just in terms of the qualification process that they go through in that market. So we will be sampling them in 2024 actually, and then and also more in 2025. But by the time they get to production, Volume production meaningful millions of units of production, it will be 26.

Speaker 2

But some of the PC makers may actually go to production sooner, I'm hoping in 2025 Using our smartphone like cells. So that's kind of how I see that. But your point on AI PCS is actually clearly what has been Tremontously exciting for us because as you saw in some of the slides that in the slide that I showed, when you run Edge AI, It just hogs the battery like there's no tomorrow. So it's very, very and that's why we are seeing a lot of interest from PC OEMs actually wanting A higher capacity battery. The use cases are a little bit different.

Speaker 2

For example, how long they keep it, how many cycles it needs to charge. Fast charge is not a big requirement like in the phone. So we are optimizing our recipes to actually target those More precisely, so we can give them more energy density, maybe give them less fast charge and so on. But that's another super exciting market for us because of this Push of AI into the edge.

Speaker 12

That's super helpful. And then just quick follow-up. Ajay, you mentioned, I forgot the exact language on yields, but instead it would take just a take a little bit, I think you said to get to the 90s. Do you think you would be at the 90% yields when you're going to volume in 25% on smartphones? And that's it for me.

Speaker 12

Thanks, guys.

Speaker 5

Yes, absolutely, Ananda. The plan right now to which we are tracking, we will get to the 90 plus percent closer to the high 90s before the actual good nice ramp begins On line 1. So yes, 25, yes, absolutely in the high 90s.

Speaker 12

Awesome. Thanks, guys.

Operator

Our next question will be from Chris Sautner B. Riley.

Speaker 8

Hey, guys. I just wanted to kind of get a little bit more color Around focusing more on specific kind of higher volume customers, does that mean there are specific You know, subsectors here that, you know, are very small today, but might become kind of volume that you might miss. Like, how do you evaluate Potential where some of the stuff is pretty kind of cutting edge, I guess you could say, as far as the customer base.

Speaker 2

Yes. So What I've seen in my history is the 30 years I've been doing this kind of consumer electronics chip business is that At this stage of the company, it's very important that we focus on a few customers that can drive very high volume And satisfy the requirements of those customers, fast charge, cycle life, energy density, form factor, How they are used, how the PMIC interacts with that, how they are charged, how they are discharged. Once we get that nailed and we are able to Have a few of those customers drive meaningful volume. We now will have scale and then those exact same cells will have the ability to sell them Into all the other markets, which may not take as many of them, but they are more willing to compromise on the form factor of the battery and so on. And those will be some new cutting edge markets that could come up, ARVR and a few other ones like that.

Speaker 2

But then we can then optimize to those as they get bigger. So the idea is to get your product ready for the vertical markets, get to volume, get to scale, get to the right yields, pay for our manufacturing lines, Then use them to see this broad market and then grow into those markets. So I expect in time 80%, 85% of our business will probably be in large verticals And 20%, 25% will probably be in broad market. So it's a vertical first, horizontal second strategy.

Operator

Our next question will be from Tim Moore of E. F. Hutton.

Speaker 13

Thank you. Question I had was just about the purchase closing of your recent transaction for the acquisition.

Speaker 11

When do you expect it to

Speaker 13

be fully integrated To achieve your forecast cost savings and separately, how many months maybe until you can beat up the battery development cycle there?

Speaker 3

Yes. So I want to be clear, the cost savings that we have talked about in They are dependent on the coding capacity and how we are utilizing that. So the shift to the coding capacity and the cost savings from that Related to how the manufacturing lines ramp up. So most of those cost savings, you will see it in 2025 And beyond that, we are keeping Raujid pretty much as a separate entity for their existing business. Where we are focused on is primarily on using their coating and making sure that all the innovation in coating that we wanted to drive for Cost reductions and also for yield improvement in our manufacturing processes that we are really executing towards That plan and so yes, like there are things there are going well and we are on track to execute towards Ramping with ROUT JIT in our manufacturing in 2025.

Speaker 13

Yes, that makes sense. Just out of curiosity for the Acura Meditech Mini, How many months in advance would you maybe start to recognize revenue before it starts selling in CVS, Walgreens and Walmart?

Speaker 3

So, look, like what I can tell you is that our revenue recognition is not contingent On their shipments, but when we ship the batteries to them and we get paid for it, we will I recognize revenue after fulfilling all our obligations. We do expect those to start selling sometime towards In next year, like I don't want to be too specific on that, but yes, like that's what we know.

Speaker 13

That's okay. Fair enough. And my last question is, a comment you had on the last earnings call was that Capital expenditure next year will be higher than this year, which makes sense given all the great strategic expansion and moves you're making. Is there any way maybe to give us a sneak peek maybe by how much higher the CapEx might be next year now that we're about 7 weeks away from the year end?

Speaker 3

So look, we are not guiding next year CapEx at this point, but we will control CapEx And are spending very tightly and spend as needed. Right now, we are not expecting CapEx to be Up year on year next year, and we will continue to manage it tightly.

Speaker 13

Okay. That's it for my questions. Thank you.

Operator

There are no further questions at this time. With that, I'd like to turn it over to Doctor. Raj Taluri for closing remarks.

Speaker 2

Yes. Thank you all for listening to our earnings call and thank you for all the great questions and looking forward to talking to you next quarter. Thank you.

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Earnings Conference Call
Enovix Q3 2023
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