Enovix Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 15 speakers on the call.

Operator

Thank you for standing by and welcome to today's program, the Innovix Corporation First Quarter 2023 Earnings Call. After the presentation, there will be a Q and A session featuring Innovix Management. With that, I'd like to turn it over to your host for today's program, Charles Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Speaker 1

Thank you. Hello, everyone, and welcome to Inovix Corporation's 1st quarter 2023 Financial Results Conference Call. With us today are President and Chief Executive Officer, Doctor. Raj Tulare Chief Financial Officer, Stefan Pitska Chief Operating Officer, Ajay Marathai and Chief Commercial Officer, Ralph Schmidt. Raj will give an overview and then we'll take your questions.

Speaker 1

After the Q and A session, we'll conclude the call. Before we continue, let me kindly remind you that we released our Q1 2023 shareholder letter after the market closed today. It's available on our website at ir. Anovix.com. A replay of this video call will be available later today on the Investor Relations page of our website.

Speaker 1

Please note that the shareholder letter, press release and this conference call all contain forward looking These forward looking statements are based on our current expectations and may differ materially from actual future events 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 discuss non GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles, you can find a reconciliation of the GAAP financial measures to the non GAAP financial measures in our shareholder letter. I'll now turn the call over to Raj to begin. Raj?

Speaker 2

Thank you, Charlie, and thank you, everyone, for joining our call today. I'm delighted to communicate to you that at Innovix, we are executing really well and it's been a solid quarter. We did hit a lot of key milestones this quarter. Firstly, we produced 12,500 batteries in our Fab 1 here in Fremont. This is ahead of our forecast of 9,000 batteries that we talked about last time.

Speaker 2

Now, we also completed A rigorous design approval of our Gen 2 auto line and we did this ahead of schedule. We completed the purchase orders for both the high volume Gen 2 auto line and also the Agility line, which we will use for sampling our customers for qualifying their products. Now we also chose a site in Malaysia for our Fab 2 and we did this also ahead of schedule. Now I'm super excited also to tell you that We hired a leadership team there and 25 engineers already. And we see a path for non dilutive financing of our first production line.

Speaker 2

Now I'll expand on that in a moment as we go through the presentation. Then after the quarter, we closed $172,500,000 Convertible debenture, which is intended to fund our Gen 2, 3 and 4 other lines. We did it at very minimum dilution to our shareholders. Super excited by that offering that was that we closed. Lastly, this quarter, we made a number of leadership additions.

Speaker 2

I'm very excited by some really strong people that joined our teams from our previous associations. And now I believe we are totally set up to scale. Now we are already seeing the impact of the people that we have hired With strong progress in all our R and D programs and also in the manufacturing that we are making. Now, Form advice, I really wanted to cover 2 topics today and then we'll have into Q and A and answer quite any questions you have. Firstly, in the last 3 months that I've been here, I received most number of questions about 2 things and I'm going to Get to those.

Speaker 2

The first question was that I've received many times is, why do we believe that our Gen 2 line will be successful and we'll be able to produce Millions of batteries and do high volume manufacturing, given that we had some early missteps of our Gen 1 production line. So I'm going to talk about that now. Now I've been here a little over 3 months and Ajay has been here about 5. And I can tell you both Ajay and I have tremendous for many, many decades in the semiconductor industry. And drawing from that, we have come to the conclusion after looking at our At Innovix Manufacturing Process, that these can absolutely scale.

Speaker 2

And actually, they have some inherent advantages Even to making chips, and I'll tell you why here in a few minutes. Now in semiconductors, if you look at manufacturing chips, Really, there are 2 processes. There's a front end process and a back end process. The front end process is where you make the wafer fabrication, Which is a very complicated process where we use very expensive machines to make the wafers. Then there's a back end process, which is basically assembly and test.

Speaker 2

Here you take the dies that are cut into small pieces and the small dies and then you put them in a package. The front end is Deep submicron manufacturing and the back end process is actually a lot more forgiving. Here, the mechanical tolerances to which we have to do are actually in single digit microns. Now if you apply that analogy of semiconductor manufacturing to how Inovix makes batteries, the front end process of the semiconductor manufacturing It's very similar to the materials that go into the battery. These are the anodes and the cathodes and the electrolytes and so on.

Speaker 2

Now we at Inovix don't manufacture those. We actually buy them from the best suppliers in the world. They come in big rolls of coated electrodes. What we do then is with laser pattern them, We stack them, apply mechanical constraint and that is really similar to the back end process in semiconductors. Now there's one big difference, one big difference.

Speaker 2

The tolerances to which we have to make these batteries, the tolerances to which we have to design our machines Execute this manufacturing is in the 50 microns range. As I mentioned, in back end semiconductors, typically, it is in the 5 microns range. So that's kind of a long way of saying it's an order of magnitude simpler problem in mechanical tolerancing. This is why Ajay and I believe is absolutely We'll be able to do this and we'll be able to manufacture at scale. Now the proof of that is what you're seeing In the operational improvements that you're seeing from us, you can see how we're executing on Fab 1, continuing to produce thousands of batteries.

Speaker 2

And we're also hitting all the key milestones on getting the Gen 2 up and running. Now Gen 2 compared to Gen 1 is really all about adding speed, Adding speed and automation and parallelism, so that we can handle more tasks at once. To give you all a feel for what Gen 2 looks like Compared to Jan 1, we made a short video where Ajay describes how this works and there's a link to the video In the shareholder letter that you received, and it shows you IJ presenting side by side how these work of GEN-1 and GEN-2 machines. I'd encourage all of you to please click on that and take a look at that. It's a short video, but it does really illustrate the point that I'm trying to make here.

Speaker 2

Now, what is this advantage that Inovix batteries have compared to semiconductors? One of the moments for me in the last quarter since I've been here at Innovix is realizing that We can produce higher density and much better capacity batteries with the longer cycle life Without having to change our manufacturing process. Now, this is actually very important to understand. Now, in my experience in semiconductors, let's say, you wanted to make a High performance processor or a higher density memory. You pretty much most of the time have to buy brand new machines And go from one process node to the other.

Speaker 2

And again, these are deep sub by ground lithography machines that cost 100 of 1,000,000 of dollars. And sometimes the fab has to be kind of upgraded and rebuilt to really house these machines. What we find at Innovix Is that the manufacturing lines we're building, since they're akin to the back end manufacturer, as we make advances In getting better electrodes, better cathodes, better silicon based anodes, better electrolytes, which we have, Our electrochemists are working on sourcing them and making experiments with them. We can use the exact same machines that we are building to make those batteries. In other words, as we make advances in electrochemistry and we make advances in higher energy density, our manufacturing footprint totally scales.

Speaker 2

It's not like we have to build completely new batteries in new manufacturing facilities every time you want to improve energy density. This is a fundamentally So that is what I believe will make this business ultimately very profitable in the long run. Now the 2nd major topic I want to talk to you about is the capacity build out. Now I've gotten a lot of questions on this As I talked to investors over the last quarter, I mentioned last time that we will have multiple options to Raise money or build get the financing we need to build our capacity. Now we are now executing towards that.

Speaker 2

This quarter, we got a non binding LOI or a letter of intent from our manufacturing partner, YBS International in Malaysia. This LOI has YBS working on giving us an existing building space in Penang Science Park to house our high volume manufacturing lines up to 4 lines with dedicated personnel to staff that line. This is very similar to how we would use a Semiconductor Backend Assembly Subcontractor. Now YBS, in addition to this, is working with a syndicated local banks to make a significant investment in our Gen 2 auto line. This is subject to some purchase commitment from Innovix.

Speaker 2

Now, while we are negotiating all the details, what I can share with you is that we are seeking at least $70 plus 1,000,000 of non dilutive financing to fund the first line. Now as I said earlier, this funding is not secured yet, but we are very encouraged by all the discussions we have to date with them. Securing this funding now would elevate us from spending the $120,000,000 full year CapEx forecast I gave you last time. Now we'll provide an update for you on this in the next quarterly call. Now beyond that funding, we recently closed the private offering of the $172,500,000 convertible senior notes, that gives us the CapEx the capital we need to make the Gen 2 Auto Lines 2, 3 and 4.

Speaker 2

So in other words, we are now set up to be able to build 4 auto lines in Malaysia in terms of CapEx that we need. Now let me close with our outlook with a few remarks here. For the full year of 2023, We continue to expect to produce the 180,000 cells that I mentioned last time, including 18,000 cells in 2nd quarter. Now once again, we're not forecasting any service revenue at this point, because this tends to be episodic and based on milestones. Now I want to reiterate our full cash guidance of $240,000,000 of spend, half from CapEx and half from operationally running the company.

Speaker 2

We do plan to revise this guidance in our next quarterly call as we get more visibility on the YBS transaction, in addition to Our own efforts to internally operate a lot more efficiently. In closing, we're off to a fast start. We are making substantial improvements in Fab 1. We are hitting all the milestones we set for ourselves and that I communicated last time to you In our journey to scale in Fab 2 in Malaysia, we are working to fund our capacity build outs while we are protecting while protecting our cash and limiting our dilution. Now I really want to thank all the Innovix employees for their hard work this quarter, along with the investors who actually are supporting us in our efforts.

Speaker 2

Now we have a busy year in front of us, but I'm even more confident today than I was when I joined that we have the right product and the right team to achieve our goals and enhance the shareholder value. With that, I will turn it to Q and A.

Operator

We will now begin the Q and A session. Please note that this call is being recorded. Please ask one question and one follow-up question at most. We will now pause a moment to assemble the queue. Our first question comes from Bill Peterson from JPMorgan.

Speaker 3

Yes. Hi. Thanks for taking my question. I noticed you said you sampled to 106 customers. I don't recall what the number was in the Q4 or even if But I look back and it was like 25 in the Q3 of last year.

Speaker 3

So I guess based on that, how many Our customers here qualified, how many do you expect to be qualified later this year?

Speaker 2

And I guess how many will

Speaker 3

be waiting for post, I guess, Line 2 readiness before the qualification

Speaker 2

Yes, absolutely. The question is about the customers and customer sampling and qualification. I think Ralph is on the call and he's closest to this. So Ralph, if you want to take that?

Speaker 4

Thank you for the question. So yes, we've seen even a bigger acceleration of the number of customers looking at our product and evaluating the technology. We haven't laid out the exact numbers as you asked for them, Bill. But as you saw in the release, Both the active and the design category that we have in our funnel has increased to about $718,000,000 All the cells we've been shipping over the last few quarters are now in qualification and Take numerous quarters till those qualifications are done, but we're still on schedule exactly how we thought that In the back half of this year, we'll start seeing customers put products into the market with our batteries in them.

Speaker 3

Okay. Thanks for that. My follow-up question is related to new product development And somewhat related to the prior question, I guess when do products such as the EX1.5 and EX2, When do those intercept and I guess get moved to Fab 2? And I don't think you mentioned brake flow, but similar type of question, when do these get qualified in Fab 2 And then sent to customers for either qualification or I guess ultimately most importantly for high volume production and revenue.

Speaker 2

Yes, sure. I can talk about that. As I mentioned in my opening remarks, it's really exciting Our manufacturing strategy that we can continue to improve our process technology and continue to improve the energy density with as some of you may or may not know, EX1, EX1.5, EX2 are our various precipitates or process technologies that actually improved energy density and cycle life and so on. We are on target on all of those. EX1.5, we expect to sample towards the end of the year.

Speaker 2

And we expect To run all those in our factories in Malaysia. Malaysia factory, as I mentioned, will produce samples like in April next year And get into high volume manufacture towards the end of the year. We will continue to run as we make progress In our process technology, we will run them through our Malaysia factory. And as for BrakeFlow, I'm very excited by BrakeFlow. It's a phenomenal piece of technology where As we as you put more and more energy density into batteries, safety is just paramount importance and brake flow is a technology that Innovix has That really provides great safety by not allowing the battery to go into thermal runway.

Speaker 2

And Our line in Malaysia will have brake flow integrated when we make these batteries. And in fact, we are sampling batteries with brake flow now.

Operator

Our next question comes from Colin Rusch from Oppenheimer. Please go ahead.

Speaker 5

Thanks so much guys. Separate From the engagement and design activity, can you speak to the incremental specificity that you've been able to gain on customer needs and adequacy of the current Product roadmap to meet those needs as you've gone through the last, call it, 4 months or so.

Speaker 2

Yes, I'll make a few comments and again I'll ask Ralph to comment on this because he's just a lot closer to it. One thing I found as I visited a lot of customers as I've been spending more and more time here And as you guys know, the customers we are now talking to are the same customers that I've shipped for many, many years when I was at TI and Qualcomm and Micron and so on. I've got solid feedback from many of them that the battery technology that we have is superior and produces higher energy density than anything they have today. The more now the requirements we're getting are actually a lot more specific. I didn't mention that We hired more people.

Speaker 2

I hired Samira, who's actually used to work at Qualcomm before, who's the Head of Products reporting to me. Now she is able to along with Ralf and his team, meet the customers and get more precise requirements on how is the battery Charge, for example, what voltage is it charged at? What are the different waveforms that we used to charging? Cycle life versus energy density trade off, Getting more specific on the shape and size of the batteries that fit in wearables versus computers versus phones. So we are getting a lot more Detailed specific requirements, that is really helping us drive a much stronger product roadmap.

Speaker 2

Ralph, do you want to add more to it? Please do.

Speaker 4

Yes, I think you covered it well. But what I'll say is our expectations has been that the current technology that we have in the line that we're running It's really meant to be targeted towards the IoT space and the wearable products. And so we're very, very well aligned with that because we're way down the path. The other markets that Raj mentioned, both mobile and laptop, we've been engaged for multiple almost years at this with those customers and have their needs as well and their requirements. And we continue to add Or slightly change things as we move forward to better address those market requirements.

Speaker 4

But It's still the same strategy and we're very well aligned with the market needs in each of those kind of in different stages. Wearables were frankly close to the production stage. Mobile and laptops are just after that.

Speaker 2

Let me just add a little bit more to that. Maybe I'll just add a little bit more to that. The fact that we're able to sample and give a lot more batteries now Is really helping us get much better feedback too, because now they are running hundreds of they have hundreds of batteries from us that they're testing. So the feedback is just much, much stronger. So it's so important to be able to make these batteries now and sample customers.

Speaker 5

Excellent. And then just looking at the ecosystem of equipment suppliers, as you start playing for lines 2 to 4, can you talk about how much opportunity you're seeing for CapEx reduction, optimization, second suppliers, things like that, So that there's you're derisking and churning the timeframe on the ramp and the install of that equipment?

Speaker 2

Yes. Let me ask Ajay to comment on that. He's right here.

Speaker 6

Okay. So very good question indeed actually. As we start our ramp, As we go into higher volume production, even here in Fab 1, in Q3, Q4, we have a lot of second sources lined up Under qualification right now, but that's just for the 180,000 batteries. But going forward, for the Malaysia factory, we have yet Big list of second, third sources, which we have lined up actually, which we will be qualifying, Going through a rigorous qualification process. And then for equipment, you mentioned equipment as well.

Speaker 6

Equipment, what we are doing is we are relying really on the Semiconductor value chain, if you will, rather than just a battery value chain, again, bringing in that mindset. And we localize a lot of that in Malaysia as we set up the high volume operation there. So both are in the works.

Speaker 2

Thanks so much, guys.

Operator

Our next question comes from Derek Soderberg from Cantor. Please go ahead.

Speaker 7

Yes. Hey, guys. Thanks for taking my questions. Raj, I wanted to start with you. Maybe this one is for Ralph.

Speaker 7

But I'm curious whether or not you guys have funding now in place for the 4 production lines with a more or less certain timeframe in place. Does having that allow for certain customer orders or negotiations to move forward that otherwise wouldn't have?

Speaker 2

I mean, I think what actually has always been in the path of customer orders has been getting enough samples them to qualify, getting them to be able to test it and say, yes, it looks good in our product. And then getting feedback from them on the right sizes Of the batteries, right, dimensions, if you will. And that's really been what's in the critical path. And again, that, As I mentioned, we have the Agility line coming in November this year, November, December is when we will be able to sample them. Then we get samples from our high volume manufacturing And that will go through the process of qualification of our customers.

Speaker 2

And we expect those products to go to manufacture late 24 through 2025. So in that sense, that's really the timeline that we have laid out. This fundraise and getting the capital is to for us to Make sure that we are ready and we have the funding in place to meet that rather than accelerate anything else. The timeline will be the natural order of things.

Speaker 7

Got it. That's helpful. And then as my follow-up, Stefan, you guys have put out a range of Estimates for battery production up the four lines, you got an agreement with your manufacturing partner. I'm wondering if you can update us on how we should about the longer term gross margin outlook.

Speaker 8

So Derek, thanks for the question. We really don't think it has Changed on the long range outlook. We still think the 50% high profitable business, that is what we are aiming for.

Speaker 2

Yes. Just to add a little bit more color to that. If you and I mentioned this last time, I think it's worth mentioning it again, because I get this question quite often and I want to add a little color. The cost of the battery, 60% to 70% is actually in the materials. I think it's important to understand.

Speaker 2

And as Ajay mentioned, as we get multi sourcing in place, as we get To scale where we're making millions of batteries, we see that cost coming down. The cost of the constraint we add on top of that is actually a small piece of it. But with local manufacturing capability in Malaysia and so on, we'll bring that cost down too. And another very important thing, I think, For everyone to see, as I mentioned in my talk is that the factories we're building will last for quite a long time because we can amortize those Over millions of batteries because it is like the back end and test and I've seen people run the back end test machines for 10 years even. So it's important to understand that This will be a profitable business.

Speaker 2

And as Stephan said, we're not changing our outlook on that. It's just really a question of getting to scale.

Speaker 3

Great. Thanks guys.

Operator

Our next question comes from Gabe Daoud from Cowen. Please go ahead.

Speaker 9

Thanks everybody. Thanks for all the remarks so far. Maybe just going back to the mobile phone and laptop batteries, You noted in the shareholder letter, the focus or go to market strategy for majority of this year and next year is On the wearable side in the IoT market, so just curious when could we expect first revenue being generated by mobile Laptop Batteries, and could you just remind us where we are on the tech roadmap in terms of cycle life? I think maybe the larger Phone and laptop batteries had higher cycle life requirements?

Speaker 2

Yes. So I think the most important thing to remember here is The timeline, which I laid out, which is we will get samples end of this year from our Agility line in the right form factor, The current batteries we make don't fit into laptops or phones in form factor. The small ones and the big ones that we make, they really fit in the IoT space. As we make the batteries that are more specific to phones and laptops, we will get that capability by end of this year and sampling again in April next year And then starts the process for our customers to actually start validating them in their own product lines, in their own phones and laptops and so on. That will take us through that will be end of next year.

Speaker 2

And 25 is when we expect to see revenue from those kind of high volume applications, Because that's the time it takes to actually make these batteries in the right form and get the validation and get the qualification from our customers. Now we will to improve our energy density will continue to improve our cycle life and that will naturally intersect with the latest technology we have in 2025 when they get to production.

Speaker 9

Thanks, Raj. That's helpful. Okay. And then if we could just maybe or Just for my understanding, make sure I'm thinking about the timing correctly. So Gen 2 Auto Line begins to arrive in Malaysia November this year.

Speaker 9

So I guess with factory acceptance taking maybe a quarter or 2, start of production is 2Q 'twenty four And then still expecting 4 lines at Fab 2 by 4Q 2024, is that how we should be thinking about the ramp?

Speaker 2

No, the way I mentioned that is we ordered one line and that's the line that will be there. As you said, actually the first two pieces, we ordered One line, but we are at one part of that line in 2 twice. So what is called the Agility line, which will come here to Fremont in November, December And the same stuff will go to Malaysia too. The agility line here will help us sample our customers with custom sized batteries. Meanwhile, the Malaysia build out happens in parallel And the Malaysia build out happens in such a way that April next year, we'll be able to get samples in the Malaysia line.

Speaker 2

Now we only commented on building one line through 2024. We have the ability to build more now that we have the CapEx stuff sorted out, but we will pull the trigger on those as and when we see The right customer demand come in. And the most important thing in running a manufacturing company is to match the supply and the demand. And as the customer qualifications progress, we have better and better visibility into when to build that. Now the one thing that Ajay and team have done is to make sure that the facility that we are doing in Malaysia With YBS has the ability to host all four lines and has the facilitation to run them.

Speaker 2

So we have set up and we also talked to Our suppliers that, hey, we will probably need much more than one line and so please be ready for it. But we're not making any commitments on when exactly we'll pull the trigger on that.

Speaker 9

Okay, got it. Got it. All right. Thanks a lot, guys.

Operator

Our next question comes from Alex Potter from Piper Sandler.

Speaker 10

Perfect. Thanks very much, guys. So I had a question, regardless of how long it takes to ramp, I guess once we're up and fully scaled in Malaysia, I know that there is some nuance here about what exactly a unit is, In the shareholder letter from today, you mentioned between 38,000,075,000,000 batteries per year in the aggregate Coming out of Fab 2 in Malaysia. If you divide that by 4, right, it's between 9,500,000 cells and almost 19,000,000 cells per line. So this could be semantics I know because there's there are small cells, there are big cells.

Speaker 10

But to me, when I first saw those numbers, it seemed like an upward adjustment versus your Expectations for per line output versus what you've historically said. Is that correct or am I reading that incorrectly?

Speaker 2

Yes, I'm going to let Ajay answer

Speaker 6

Again, good observation and good calculations. But let me just direct you towards the small the way we are designing our lines The first line is more of a universal line because we have so many engagements with multiple customers. First line would be able to do small and large, both FormFactor. In other words, the corner cases are pretty wide in terms of what can be done on the first. So we for that, we give up a little bit of capacity on the first line.

Speaker 6

But second line onwards, they'll be highly optimized towards a narrower window of the dimensions and therefore, we'll have a lot more Capacity per line, which is why when Raj said it in the investor letter, it's between 9,500,000 to 19,500,000 batteries per line. So you can Depending on, again, the demand and how we match the supply to the demand, that's how you'll get to the number of lines required for the volume that you just stated. That's how I would look at it.

Speaker 10

Okay. That's very helpful. And then maybe the follow on question to that then, if I wanted to take those unit numbers And translate that into revenue capacity to the extent you're comfortable talking about this, right? I don't know. I know that $5 I've always historically assumed $5 for a wearable and maybe $10 for a cell phone size battery or something like that.

Speaker 10

Could you take those $5 to $10 unit ASPs and multiply it by the range of those unit numbers and get to something in the neighborhood $375,000,000 $380,000,000 of annual revenue capacity out of Fab 2, is that in the ballpark?

Speaker 2

Yes, that's a good first order approximation. Again, it just depends on which ones we sell how much, but that's a good first order approximation.

Speaker 10

Very good. I appreciate it. Thanks a lot guys.

Operator

Our next question comes from Gus Richard from Northland Capital Markets. Please go ahead.

Speaker 8

Yes. Thanks for taking my questions. What run rate do you have to hit in manufacturing before 1 of your customers commits to production?

Speaker 2

Yes, I mean, it's not That's simple as run rate. That's not the only factor that decides. I think the most important thing for our customers is that we be able to well, let me remind a little bit. There's a lot of customers today that are actually Ralf is sampling that are comfortable going to production with our small cells and big cells and we'll see revenue from them this year and next year. So in that sense, We already have customers who are comfortable going to production with what we're producing.

Speaker 2

The key was to give them enough samples and show that we have enough backlog, enough inventory that we can actually meet their demand As I start ramping the product. Now it depends on the volume of the product. If the product goes in millions of units, we clearly don't have the capacity this year. But next year, we aim to be able to produce millions of units. So I think then customers are more comfortable.

Speaker 2

So it really large volume customers are more comfortable. So it really depends upon the Run rate of a particular product, right? If the product run rate is in the millions, we need to have that capability. If it's the tens of thousands, we are ready today. So that's kind of like how I look at it.

Speaker 2

And the other variable is we need to give them the battery in the right form factor and shape that they can test it in the product that they're putting it in To be able to come to be able to say, okay, you know what, I think we should go with this, right? Those are the 2 big variables.

Speaker 8

Okay. I got it. And In the first half, you can produce 30 ks batteries, if I can add two numbers together. And for the full year, you can do 180 Hey, batteries. It's a pretty big jump in the second half.

Speaker 8

Could you just talk about what's going to accelerate that volume, just What needs to happen?

Speaker 2

Yes. I'll have Ajay comment on that. He leaves it every day.

Speaker 6

Absolutely. Again, very good question. And yes, As you saw in the Q1, we did 12,500. You're saying we'll do 18,000 in Q2, the quarter we're in already. And the ramp is pretty steep.

Speaker 6

The ramp is driven mostly and the confidence that we are going to get to that ramp is driven by a couple of things, right? One is The yields. And while we don't talk in detail about our yields, which nobody really announces their yields, All I can say is we are making significant improvements in yields throughout the year. And it is the proof points are sort of behind us, so that gives us confidence about the second half. That's one.

Speaker 6

2nd is the uptime and mean time between failures of the equipment, right? So essentially, is the equipment getting a little bit more predictable? And both those things, we are making good solid progress day after day after day, which is what it's giving us. So between now and end of the year, we feel very strong that our assumptions are actually fairly accurate And we are going to do the 180,000.

Speaker 8

Got it. Thanks so much.

Operator

Our next question comes from George Giancarikos from Canaccord.

Speaker 8

Hey, everyone. Thanks for taking my question. I'd like to ask about the slides that TJ presented in January that talked about They had red, yellow and green in terms of just the issues that were needed to be fixed Going from Gen 1 to Gen 2. Some of those included like I see a red line here for busbar insert, Slot Phil, and I'm curious if there's any update on any progress that you've made And turning those reds to yellows and those yellows to greens. Thank

Speaker 2

you. Yes. I mean, I'll give a high level color. We are We made significant progress on those. And in fact, I was looking back at that presentation the other day when someone asked my question.

Speaker 2

And we're actually on track To almost everything that was said there. And that's the reason why we were able to get the approval to make the purchase order For the Gen 2 equipment because we made solid progress in each of those. And so I think clearly, the team has worked really hard. Ajay, with all his experience and the team he has brought in, we're able to solve most of this those issues. So we feel pretty confident about that.

Speaker 2

Ajay, anything else you want to add?

Speaker 6

Yes. Just very quickly, the way we kind of test that, are we making progress? Are we solving real root causes of what was stopping us from Feeling a whole lot more confident. What we are doing is we are building proofs of concept, right? We introduced that last time in the January 3rd meeting Call the POCs.

Speaker 6

There are several POCs in upwards of 3 dozen POCs, which were in motion all the way from January literally January 4 Until yesterday, I can give you the update. Most all those POCs are doing extremely well, showing us That whatever we have assumed to confirm the UPH that we're expecting are all being met. So that's how we progress. It's a pretty rigorous way of approving the next step and the next step, etcetera, in the approval cycle, as Raj mentioned. So we are feeling pretty good after the POCs.

Speaker 8

Thank you. And then just next question, just on the I noticed that you have these 2 silos that you have in your revenue funnel and one of them is engaged opportunities That was slightly down sequentially. Is that because engaged opportunities moved into active designs? Is that the right way to think about it?

Speaker 2

Yes. Ralph, you want to take that? That's kind of my understanding, but Ralph can comment.

Speaker 4

Sure. Yes. Thanks for the question. And yes, That's the simplest way to think about it is that we're trying to progress these customers into more active and real design wins. And that was moving faster than getting new customers into the front end of that funnel, the engaged part.

Speaker 4

Really exactly what you want to happen in order for us to get them to a revenue state.

Speaker 8

Thank you.

Operator

Our next question comes from Ananda Baruah from Loop Capital Markets.

Speaker 11

Hey, guys. Yes, good afternoon.

Speaker 2

Yes, just a couple if

Speaker 11

I could. I guess the first is on Sort of processing getting Gen 2 and mobility lines stood up. Will you be giving us any updates on Equipment delivery, any updates kind of through the year on the way to getting them to where you want to be around particular metrics or anything of that nature? Then I have a quick follow-up. Thanks.

Speaker 2

Yes. We will continue to give you updates in these meetings as we move forward in the different stages and where that is. I think that's a big milestone for us is the factory acceptance test, which will come up like in August, I believe. And then after that, we'll have site acceptance when it actually be delivered to our site. So we'll give you updates on both those milestones.

Speaker 2

But so far, we are very pleased with the progress and we get Our teams are visiting our suppliers. The suppliers come here. IJ and I see this all the time. And even yesterday, I saw a video of 1 of our Gen 2 machines, The newest one working. It's pretty exciting, very exciting to see the progress being made by the team.

Speaker 11

Awesome, Raj. Thanks. That's helpful. Yes, we look forward to that. And then I guess the follow-up question is, what like how would you like us to think about Incremental capacity, look, I know you just got Malaysia, right, like in place And you're just starting to get sort of get the purchase orders in waiting for the equipment.

Speaker 11

But I'm sure we'll start all getting asked as we move forward about incremental capacity plans and at some point incremental funding plans You know like that. So anything you can help us out with context wise around that, we'd be grateful. Thanks.

Speaker 2

Yes. I mean, as I mentioned, I have a lot of experience in high volume manufacturing businesses. So the most The important thing is to make sure your supply and demand are tied out and you don't have too much supply or too little supply and is aligned with demand, Which takes a lot of planning,

Speaker 11

by the way.

Speaker 2

It takes a lot of planning in the demand side with the customers, a lot of planning and when we are to the equipment, what are the long lead time ones And the facilitization, so it's a complex problem, both Ajay and have a lot of experience running this. So the way we're going to do this is, first, We secured the funds to make sure that we have the capability to buy them as we need them. 2nd thing and we now we secured the site and in the middle of set up for the first four lines now. And as we get to that stage, we will see the progress in the next couple of years, both on the customer side and both on Our machines are running and we will continue to optimize the machines and we'll continue to look to how to expand beyond those 4 as the demand shows up.

Speaker 11

Okay, great. That's great. I appreciate it. Thanks a lot.

Operator

Our next question will come from Mark Cohodes from Alder Lane. Mark, your line is open. Feel free to unmute.

Speaker 12

Okay. Thanks for taking my question. So Raj, you've been there for 3 months And A. J, a little more than 5 months. What gives you guys the incremental confidence that you can actually manufacture these batteries at speed?

Speaker 12

Because everyone constantly hears, it's hard to do, it's impossible, pie in the sky. But you guys are sounding more and more confident. So what has exactly happened that gives you that confidence? That's question 1. And question 2 is when are you guys going to start building Batteries for inventory to actually ship commercially for these new products.

Speaker 12

Thank you.

Speaker 2

Yes. Thank you for that question, Mark. Firstly, I think, as I mentioned, the reason that we are increasingly getting more and more confident the more time we spend here It's really because of a couple of things I mentioned in the call. The way Innovix manufactures batteries is really Like the back end semiconductor manufacturing, it is a back end assembly test kind of technology that we have to master and do. And that technology is been is there and many people have done it.

Speaker 2

And even then, the tolerances to which we need to make is an order of magnitude Less stringent than what's done in chips. And you can see The progress we're making in the number of batteries we're producing over the last few quarters, I mean, we went from almost nothing to 4,000 something to 9,000 Now 12,500 and we are committing to 18,000 next quarter. So progress we are making in producing batteries as we learned that, Our understanding of the actual mechanisms and the machines that produce this and the tolerances to which they need to do, I think those are two things that really give us a lot of confidence. And thirdly, all this proof of concept experiments that we've been running were targeted at what went wrong With the Fab 1 when we did it, where did we lose yield? Where did we lose the throughput?

Speaker 2

Where did we lose machine uptimes? And we did some we We created target experiments to make sure that those don't happen in Gen 2 and we those experiments proved out and we are confident now. We picked a new set of suppliers who are actually very capable of producing machines like this. And we are not paying them all the money upfront. So there's a lot of skin in the game on their side, because we only paid 10% on the first approval.

Speaker 2

And then incrementally, we pay the money As the yields come up and as the machine throughput comes up and there's different milestones that we use to check that. And we followed this well known process, the EPR process that actually helped us make sure that we are ordering the right machines. So all those things give us a lot of confidence and we feel fairly strongly that we can get this done. And as for your second question on inventory, We are now building. As you know, in this kind of consumer electronics markets, When you start giving units to customers, they want to make sure that if their product is successful, we have the supply to be able to support them.

Speaker 2

And that's kind of what we are doing through the year. We are of course sampling a lot of customers with the batteries we make, but we are also building In a reasonable healthy level of inventory, if the products that our customer wants suddenly starts selling really well, We don't want to be in the middle or we want down to the bottleneck to not be able to supply them with the batteries. So it's a responsibility we take seriously and we are Handling that. Ajay, anything else you want to comment on the machine?

Speaker 6

Yes. Very quickly on the Gen 2, I think Raj alluded to it, but just from my personal How I feel confident, I'm an operations guy. Data is the only thing that matters. So yield uptime of the Gen 1 is what is giving us the confidence, as I Told you earlier, but more so in the Gen 2, I personally have visited all the suppliers, all of them who are making these POCs, these machines, Spent good time with them, look through each of these suppliers, the methodology that they're using to build the machine, Looked at the POCs myself, that is what is giving us a confidence. And exactly as Raj said, this is all about back end of semiconductor, Type of technology, tolerances, etcetera.

Speaker 6

And now we are seeing the ramp up in the upswing of the ramp that we are producing. That gives us the confidence.

Speaker 12

Thank you very much.

Operator

Our next question comes from Sean Milligan from Janney. Please go ahead.

Speaker 13

Hey, guys. Thank you for taking my questions. First, I get asked a lot about Who is YBS and what is the background there? And so I know you touched on it earlier, Raj, in that they're used A lot in back end semi processing, but can you kind of maybe touch a little bit more on kind of how that relationship came to be about And what gives you confidence in YBS' ability to execute on financing?

Speaker 2

Yes. So Look, I mean, I think if you look at Southeast Asia, there's a lot of contract manufacturers. And we Ajay has decades of experience in Malaysia and I came from Micron that built the last factory in Malaysia on Assembly test of SSDs. So we understand that ecosystem. We understand who the people are that do it well.

Speaker 2

And YBS has got A good track record of actually supplying and manufacturing for many top tier OEMs. And they have that capability and again, they have the strong connections to the key people in Malaysia. And Ajay visited them and they came here, we talked to them and they're a solid company and we feel very strongly that they will be successful. And so we based on our experience and what everything we've done, I feel very good that this will get done. And it's not something that's obvious to everybody who doesn't live in that part of the world, but we spend a lot of time in Southeast Asia.

Speaker 2

So we feel good that that will get done. But maybe Ajay can comment a little bit more because he goes there a lot often than me.

Speaker 6

Yes, sure. So YBS is a company I've known now actually for quite some time. They are indeed exactly as you said in the back end manufacturing subcontracting business. I know the CEO and the team there, which he runs. So I've been kind of studying them actually for some time, even in my previous life.

Speaker 6

They have a very good the uniqueness about them is they have exactly the talent That we would need to localize some of our supply as in constraints, as in few other mechanical things. They're really good at that. So when I localize them to where I can make them right next door, that is when I'll get my cheapest Total cost and cost will be reduced. So YBS brings a lot more value than just being a contract manufacturer. They are also going to help us with our ecosystem of various components that go into the battery.

Speaker 13

Okay, great. No, that's great feedback. And then my follow-up would just be, Raj, I just wanted to clarify something you said earlier and it Kind of relates to Gen 2, Line 2, 3, 4, the execution on those. You mentioned that Where previously I think the conversation talked about those being there by ordered or delivered In Malaysia, by the end of next year, you were looking to line those up more with demand. Obviously, the Pipeline that you have is robust.

Speaker 13

So I just wanted to clarify, is that lining up making 1 all wearables to optimize margins of that line? Or is it Really just filling the demand funnel needs to fill to have those lines come in?

Speaker 2

Yes. I mean, again, if that's what we want to make happen, which is the trigger and get them all out next year, if that's what makes most business sense, we will do that. I'm not saying we won't do that. I'm just saying I'm just in general more of a supply demand matching kind of guy. So the way I look at it is, we have various customers that are actually Qualifying our product in IoT devices, they're qualifying it in smartphones, they're qualifying them in wearables, they're qualifying them in laptops.

Speaker 2

And when you pull the trigger on a line, you want to make sure you're pulling the trigger on the right line and that produce the right kind of batteries for the right customer. So it's not that It's not all I mean, this is beginning of this year. It's not all absolutely clear to me which one will be the first one, which will come next and what time frame it will come. As you guys know, the demand for batteries in the total TAM is huge. But we just want to make sure we build the right one at the right margin At the right thing that makes money for the company.

Speaker 2

And that's kind of where I was talking about matching supply and demand, right.

Speaker 13

Okay, great. Thank you for taking my questions.

Operator

And our next question comes from Chip Moore from E. F. Hutton.

Speaker 14

Yes. Thanks for taking the question. I actually wanted to go back to YBS real quickly. I imagine seeing the equipment orders and the recent financing We helped them in their discussions around localized finance and tax incentives and things like that. And based on your commentary around revising CapEx next quarter, it sounds like you should expect something fairly soon.

Speaker 14

So just curious anything to bear in mind there? And then my follow-up would be, Are you seeing any more interest in similar type of capital light arrangements or is it too soon for those type of conversations? Thanks.

Speaker 2

Yes, I didn't hear it fully well, but I think the question was on how are we feeling about YBS financing. And like I said in my prepared remarks, We talk to them constantly and they're making good progress. It's going through the approval process that they need to go through. They're a public company And it's going like how we thought it would. So no cost per concern on our side.

Speaker 2

We are in close contact with them. We're just going through the due diligence and we're going through the All the right step to make sure it's done right. There are other options like that and we thought this was the best one that we should pick now. And that's about all I want to comment at this point is that we do have what we need for the next four lines with this one once this one gets worked out. And I still reiterate the comment I made before, which is there's a lot of interest from customers as we begin to scale these batteries where They want a surety of supply.

Speaker 2

There's interest from other parties like we talked about YBS and so on. And we will explore all of them. And I also mentioned that we'll be opportunistic about capital markets And we were and we were able to accomplish that. So I'm just continuing to execute to what I told you guys I would last quarter.

Speaker 14

Perfect. Okay. Appreciate it. Thanks.

Operator

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

Speaker 2

Yes. I really want to take just a couple of minutes to thank you all for joining in and all the great questions. Phenomenal team at Innovix. We've done really well this quarter and we'll a lot of work ahead of us, but we are committed to executing this and really Appreciate all the support of our partners and investors to allow us to do what we are trying to do. Thank you.

Powered by Quartr
Earnings Conference Call
Enovix Q1 2023
00:00 / 00:00