Enovix Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 14 speakers on the call.

Operator

You for standing by and welcome to today's program, the Innovix Corporation's Q2 2023 Earnings Call. After the presentation, there will be a Q and A featuring Inovix Management. With that, I'd like to turn it over to your host for today's program, Charlie Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Speaker 1

Thank you. Hello, everyone, and welcome to Innovix Corporation's Q2 2023 financial results conference call. Session. With us today are President and Chief Executive Officer, Doctor. Raj Taluri Chief Financial Officer, Farhan Ahmad Chief Operating session.

Speaker 1

Raj and Farhan will review the operating and financial highlights and then we'll take questions. Session, we'll conclude our call. Before we continue, let me kindly remind you that we released our Q2 2023 shareholder letter after the market closed today. Session. It's available on our website at ir.anovix.com.

Speaker 1

A replay of this call will be available later today on the Investor Relations page of our session. Please note that the shareholder letter, press release and this conference call all contain forward looking statements and are subject to risks and uncertainties. Session. 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 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.

Speaker 1

All our statements are made as of today, July 26, 2023 based on information currently available to us. We can give no assurance that these statements will 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 prepared in accordance with generally accepted You can find a reconciliation of the GAAP financial measures to non GAAP financial measures in our shareholder letter, which is posted on the Investor Relations page of our Web I will now turn the call over to Raj to begin. Raj?

Speaker 2

Thank you. Thank you, Charlie, and thank you everyone for joining us today. I'm going to kick off with a few high level remarks and then I'm going to introduce our new CFO, Farhan Ahmad, who will make a few comments. After that, we have a very special treat for you all today. Our COO, Ajay Marathe, is in Asia today at our Gen 2 equipment vendors.

Speaker 2

And we're hoping to get him to show you a video of our latest machines and how they're progressing before our factory acceptance test next month. After that, I'll make some closing remarks and then we'll take your questions. Now, first, we had a very productive second quarter that included some very key milestones along our journey to scale. First, we produced 22,502 batteries in Fab 1. This is exceeding the forecast we made last quarter that we're going to make 18,000 sales this year.

Speaker 2

So we exceeded that. Secondly, we delivered on the commitment to secure the $70,000,000 non dilutive financing funding for the in Malaysia. As a result of that, we're going to lower our CapEx guidance for the year. I'll say a little bit more about that in a little bit. Thirdly, I'm super excited that we actually received a purchase order for our brake flow enabled cells for the U.

Speaker 2

S. Army. Now this is a great testament to the quality of our product, the reliability of the product and it's a critical step for us towards our mass production and high volume production. 4th, I visited several customers in Asia in the last month. I'm super excited and really happy to report that we now have secured engagements with some key smartphone manufacturers, session.

Speaker 2

Now Xiaomi and Vivo are the top 5 global OEMs. Lenovo is a Motorola's brand. They're number 3 in the U. S. Session.

Speaker 2

And lastly, I do want to bring out that we have built out our leadership team, Tamar, with a group of individuals that I worked closely in the past session at Micron and Qualcomm and I'm super excited to introduce them to you. On the last note on that last note, I'd like to let everyone know that Ralph Schmidt, sitting at the stage here with me, has chosen to retire and he'll be leaving the company effective August 11th. Session. Now after a recent career as CEO of multiple tech companies, Ralph did Innovix a great favor in revisiting his roots in sales and setting up the commercialization engine at Innovix over the last 2 years. I want to thank Ralph for all his support Innovix.

Speaker 2

In order to continue his work, we have recruited some world class talent to commercialize to the commercial and product organization. This includes Vice President of Product Management, Sameer Naraghi and Vice President of Sales, Dave Chek, who recently joined us from Qualcomm where we used to work together. With that, I'm going to let Ralf say a few words. Ralf?

Speaker 3

Session. Thank you, Raj. I want to thank you, Raj, TJ and the Board for having me as part of the leadership team for such an amazing company. I have Been lucky enough to work with TJ for over 15 years and been involved in ramping businesses with him, including Cypress and SunPower and a few others. But Innovix has been the most exciting business opportunity that I've had in my career.

Speaker 3

And frankly, I've run some pretty interesting tech companies. But, I believe there's just amazing opportunity here. The team that I have put together has positively, I think, impacted the long term prospects of the company, but I've never been involved in a business situation where there's an insatiable demand session for a product that has a clear market leadership, and we're engaged with every market leader in the consumer world. So for me, it's a difficult decision to leave, but sometimes Kind of life throws things your way and thus I sort of need to stop and prioritize my health at this point. The go to market stewards that Raj mentioned, Dave and Samira are very experienced and talented.

Speaker 3

I've known Dave for 20 years. His session. And it was an absolute honor to work closely with Raj, Ajay and the entire executive to progress Innovix to the next stage, essentially the second phase of the company after the technology base was established by the founders. Session. Our customers have validated the technology as sound and have audited actually our business and that it's scaling properly, session.

Speaker 3

So it's been an honor to be a part of it and I'll continue to cheer from the sidelines. So thanks, Raj.

Speaker 2

Thank you, Ralf. Now for my remarks today, I'd like to spend a little bit of time actually Talking about the Innovix value proposition as it relates to the mega trends we are witnessing in the market today. Now if it wasn't session. Clear already, news and events in the last few months, kind of driven home the point that session. There's ton of investment being made and directed towards AI, artificial intelligence in AI.

Speaker 2

We've learned also learned in the past couple of months, there are many, many Revolutionary computing platforms that are enabled by high performance cameras, high performance memories, image processors, sensors, But it's also kind of revealed a dirty little secret in our industry. Session. None of these new devices that are being launched will really deliver on the promise to the end consumer till they have a much better battery. And I want to substantiate that today with a little bit more data and the kind of performance in battery that AI needs. And this is literally why I joined Enomix.

Speaker 2

Session. Now first, let's talk about AI a little bit deeper. For those of you who don't know, I did my PhD in computer vision and AI and, I've spent quite some time in that area. Session. I asked my team here to test what the power budget that's needed If you actually run a true generative AI application on a battery operated device, smartphone or laptop, session.

Speaker 2

Once it's running it on the cloud, because a lot of people want to run these device these applications on their device natively because cloud costs a lot of money and there's latency issues and so on. Session. Now we ran stable diffusion, which is a very popular text to image generating program. And we found that session. In 68 minutes when we ran this program to produce images, the laptop and the laptop died.

Speaker 2

Now if you just landed on the cloud, session. You could go for 11 hours, but it costs a lot of money to run it on the cloud. You need a subscription, there's privacy issues, the resolution is not high as you want. You already paid for this expensive laptop, you'd like to use it. But the problem is you can't use the hardware very well because the battery goes down.

Speaker 2

So, AI at the edge is where the industry is going but the AI at the edge will not happen like how we all want it till there's breakthrough in the battery technology. We tried another application, a popular application in for photography and for image processing is Adobe Lightroom. Adobe always had a great noise filter where you take a picture in a low light, which happens a lot of times when you're shooting And then you try to filter the noise out. They had a standard noise filter. And a few months ago, Adobe released an AI powered noise filter.

Speaker 2

I was actually amazed by how much better the AI powered noise filter was in terms of clearing up the noise. But when we ran the AI's noise filter and we measured the battery draw, session. It's actually pretty compelling why the world needs a much better battery session to be able to realize these great AI innovations that are coming. I've written a blog on this and you can look at it, innovex.com/ai. And I really encourage all of you to check it out so that you can see this data.

Speaker 2

Now let's talk about mixed reality, another application that's becoming very popular. We had some great mixed reality products session announced and soon to be in the market. Now I go into much more details on this and other blog that's also at enovix.com. I'd like you to I'd like to encourage you to lead it. But at very high level, we've now seen tremendous advances in processes, tremendous advances in memory, session.

Speaker 2

[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Displays, sensors, camera technologies that are enabling use cases we've always dreamt of. I mean, having a true mixed reality devices is really amazing. But unfortunately, the battery has not kept in pace. Now at this point, as actually was far less solidified to me recently When I was in Asia and I was visiting all these customers and I visited some of the customers and I talked to them about Enamex battery and asked that is there a way we Actually start working with them on this. And the interest level I saw from them for advanced battery was amazing to see Because they also know that AI moves to the edge into phones, into laptops, into wearable devices, you just need a better battery Because the next generation use cases, it's very hard to support them with the current use cases.

Speaker 2

Now I also visited a lot of investors in the last many months. And one of the questions I get many times is, Enervek's business model assumes that we will get a premium for our battery technology when we session. Actually, I'm even more convinced now with all these new devices that come out that are actually not delivering on their performance because the battery that When we deliver this battery and battery is no longer the barrier for the performance, the supplier who makes the breakthrough in this He is the one who will have the right to command the premium price with strong margins and I truly believe that Enavix has an opportunity. Session. Now this is not that different from what I've seen in my past life.

Speaker 2

Over my 30 year career in semiconductors, I watch the price of session. Processors that we sell into phones go from $15 to $65 And they did that because they delivered a better user experience to the end user. Phones built in cameras, phones could do video, phones could session. GPS phones could play audio and the processor got more and more value as it provided more end user experience. I experienced the same thing with displays and cameras and memories.

Speaker 2

At Innovix, similarly, as we increase our value in energy in cycles, in charge rate, safety among other things. Our customers will be able to take that technology and deliver much more compelling products into the market which the end users will pay a premium for the performance, which is the premium we believe we will be able to realize. Session. Much like I've done throughout my career, I spent a lot of time with customers, understanding what their needs are, understanding what the key parameters are. And session.

Speaker 2

Simply put, when they win, we win and we provide a better battery, they can make a better product, you know, and we get the premium and they make they sell it better. As I mentioned before, I was super excited by the fact that we are now able to start programs with leading phone OEMs while continuing to advance our design ins in wearables and in IoT and computers. Session. This collaboration we're establishing with the customers will actually help us understand all the different ways we to architect the battery to really deliver the great value. With that, I'd like to introduce our new CFO, Farhan Ahmad.

Speaker 2

Farhan, would you

Speaker 4

like to say a few things? Farhan, would you like to say

Speaker 2

a few things?

Speaker 5

Farhan Thanks, Raj. I'm thrilled to be here at NOx. And I would like to thank the entire NOx team Thank you for the warm welcome that I have received so far. I was really attracted to Innovix by its highly differentiated technology that delivers leading energy density across the industry and a team that has a strong track record of operational excellence. The addressable session.

Speaker 5

Market opportunity here is large. Breakthrough innovation with silicon mindset can help deliver increasingly differentiated products. And like Raj said, I also strongly believe that we can command a premium price and deliver strong margins. I'm looking forward to connecting with the investors and sharing the NOx story with all of you, and I think it is highly compelling. Raj will touch on the guidance, but at a high level, I aim for Envix to be a careful steward of shareholder cash session and to make the investments to grow this into a great business that delivers strong growth and attractive margin profile.

Speaker 5

With that, I'll turn it back to Raj.

Speaker 2

Thank you, Farhan. It's great to work with you again. As I mentioned earlier today, session. Ajay is going to join us from Asia. He's going to give us an update on our Gen 2 auto line As it is getting ready for factory accept and testing, we're actually going to stream this live from Asia and we'll see how that works.

Speaker 2

But Ajay,

Speaker 4

Thank you, Raj. I hope you guys can hear me okay. It's exciting time here. Session. I'm sitting here at one of our suppliers.

Speaker 4

As you can see in the background, there's a lot of equipment. You're wondering what is this equipment? What is it doing? Why am I excited? 6 in the morning, I'm talking, you know, with a lot of energy, but there's a reason for it.

Speaker 4

Gen 2 equipment, which we have been working on, session. As you have heard, we have reported, we have made a lot of progress on the gentle equipment. I want to show you personally what progress we have made here on the line, session. So you can see it for yourself and hopefully can get the same confidence that I have now built in terms of where we are right now. Session.

Speaker 4

Okay. So let's first go 3 or 4 important steps in what I'm going to show you right now in the battery making, right? So one of the first steps is laser patterning, but that's done in other equipment. Here what we have is session. Equipment which takes the laser pattern roles puts them on these what are called the stackers.

Speaker 4

We have 7 stackers here on the line, 5 of them stacking mid stack electrodes, and 2 of them doing the end stacker. So all of these Are in a debug mode right now as we speak and we'll show you the next important step. So you can see this machine session. It's becoming more and more real and soon we'll be in the debug mode. You can see in between here as well as session.

Speaker 4

Some of the overhead stuff, the transportation and access from machine to machine, these machines or this equipment, this line It's made for very high UPH, 13.50 UPH to be precise and has very little labor content in it, session. Roughly 25 people per shift running and making 9,000,000 barrels in a year. That's the kind of rated speed that we are working on. Each of these machines is built with a in line metrology, session. Very low human touch, making sure what we produce is at a very high yield.

Speaker 4

The next equipment I wanted to show you here, I take a glimpse of it. Session. It's in the debug mode, and cycling, as you can see, the parts are moving. This is really the AO print, very important step session. In attaching aluminum oxide film on the side of the cells, which basically insulates the cathode anode.

Speaker 4

The next step is to measure the cathode to anode offset, making sure that's within the tolerance session of what we need. This equipment right here is what is called the AO or the constraint attached. So So you can see now we're going to open it. Again, it is cycling. You can see it's in the debug mode.

Speaker 4

And again, all built with linear motors, Granite block, inline metrology, very low human touch and very high UPH. And you can see session. This is the in line baking or curing. The next step I want to show you is the constraint attach session. As you know, the constraints in our battery are the most important And then this card, this card right here rolls docs into this machine and now you can see what's going on inside this machine.

Speaker 4

This is a constraint attached, attaches on one side, goes to the other side, attaches the second, very highly accurate, session. Very highly precise placement and again in line metrology. So this is the constraint attached to. And the last one I want to show you again, which is again very exciting for us. Here we can see the again, the cycling going on from the other side of the machine.

Speaker 4

But the busbar insert tool, which has been in Gen 1 has been a problem. We're learning from the Gen 1 which basically inserts the buzz bar at a very high speed, clips it and completes the cell. So this again, session. All this equipment will show you in a panoramic view now. It's ready for it's completely in a debug mode and ready for what is called a factory acceptance step.

Speaker 4

Factory acceptance steps is the most important step in the equipment, procurement equipment process. And after this, it goes and ships to Malaysia where we have announced today session. So that's the glimpse. This gives me the confidence that the equipment is real. Session.

Speaker 4

It's working for people who wanted to actually get this was a good idea for me to just come here since I'm spending the time here anyhow session to do this live and show you what's going on with the Gen 2 equipment. Okay? So over to you, Raj.

Speaker 2

Thank you, Ajay. I hope that was useful for all of you and you share The excitement that we all have and you can see the excitement in IJ's face and the team's face there. We've been working super hard to actually build these machines. And the last time when I went up there a month ago, I gave a small glimpse of it. But now you can see they're real.

Speaker 2

We're building them up. And factory acceptance is on track. Session. So, we are super excited by that and looking forward to giving you more updates as we continue to make our journey to scale. Session.

Speaker 2

Now, I want to talk about our outlook. For the Q3 2023, we are forecasting that we will to produce approximately 36,000 units from our Fab 1. Our plan for the rest of the year is to make as many small cells as needed to support the commercial launches of the customers and also qualifications of the customers that have designed in our product from Fab 1. But we also want to focus on higher value projects and higher value opportunities that we have recently come across that have come to us from building larger cells and with Breakflow, a technology that's very, very important and provides safe batteries session to U. S.

Speaker 2

Army and the other customers. Now we noted that the total size of the U. S. Army order for preproduction cells, these are preproduction cells that that they're going to put into early prototypes of their VAS is nearly $600,000 for this year, predominantly in Q4. But this is just the first step in what we hope will be a very significant business in the multiple tens of 1,000,000 of dollars in the years to come.

Speaker 2

And that's why we are super excited by this opportunity and we are working on making these things happen in our Fab 1. Now let's talk about our cash use. For the full year of 2023, we're now going to lower our full year cash use guidance from the $240,000,000 to $190,000,000 This is mainly because of lowering our CapEx forecast from $120,000,000 to $70,000,000 due to the Malaysia transaction and YBS. And this some more benefit of the Malaysia of the YBS transaction will realize next year. We've entered into a manufacturing agreement with YBS and they are our assembly subcontractor.

Speaker 2

At a high level, YBS is financing $70,000,000 towards the first Gen 2 auto line, the one that Ajay just talked about and there with funding they're obtaining from the OCBC Bank. Now in closing, we are preparing for our high volume production in Malaysia session. As the facilitation of Fab 2 is underway, we hired a lot of strong team in Malaysia and that team members have come here to Fab 1 and under blown out training on the equipment in Fremont. Now we are really looking forward to updating you on the progress over the rest of the year. With that, let me open up for any questions.

Speaker 2

Operator?

Operator

We will now begin the Q and A session. Please note that this call is being recorded. Before we go to live questions, we're going to read the 2 most highly voted questions submitted by shareholders ahead of this call during the call registration. The first question is, out of the 180,000 batteries being produced this year, what percentage is for testing and what percentage is made for end use?

Speaker 2

Yes, absolutely. When we as I mentioned, we are guiding to another 36,000 batteries in the next quarter. When we make these batteries, these go into our customers for basically testing into new products that will come out next year. Session. Some of them are used by our customers for products we expect to launch later part of the year.

Speaker 2

And for those products that actually go to the later part of the year, We need to build some inventory to make sure that the customers are comfortable when they go to production that we have enough supply. It's really hard for us to say session. What percentage is actually for the customers going to production and what percentage is for testing? Honestly, we've had so much opportunities session now coming our way, particularly with the new large sales opportunities that we are focusing some of our resources also on making sure that we can support that for the U. S.

Speaker 2

Army.

Operator

The second question is, What needs to happen for a qualifying customer to announce that they will be locking a contract to use Inovix batteries? Session.

Speaker 2

Yeah. Actually, Raj, do you want to take that? I know you're pretty close to that.

Speaker 3

Thanks, Haraj. Yeah, so I think Raj described session. Right now, we're going to market with customers where they're building some products early, and we're session. We're expecting some releases of lower volume products in the second half of this year based on the amount of products The amount of cells that we can produce. Most customers I should say some customers will allow us to announce, them using our batteries and some will not.

Speaker 3

So, it's, unclear exactly how many and in what timeframe,

Operator

We will now go to the queue. Questions will be answered in the order 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 comes from Derek Soderberg from Cantor.

Operator

Session.

Speaker 6

Yes. Hey guys, thanks for taking my questions and Farhan, congrats on the new role. A. J, I wanted to start with you. Curious, how many proof of concepts do you have left to complete?

Speaker 6

And then can you talk about some of the unique challenges that are associated with Factory acceptance testing compared to the proof of concepts. Like what's sort of the risk that parts of the equipment that passed the proof of concepts do not meet session. The requirements under the factory acceptance testing, can you help us understand some of that?

Speaker 4

Sure, absolutely. So we have actually run more than session. Most of them ran pretty good after 1, 2 learning cycles. Some of them do come back actually in the design session and then get redesigned like there were a couple of examples which I looked at yesterday, which were in the redesign mode which I have completed. To do proof of concepts, I would say under 10 are required, actually further session before the factory acceptance test is complete.

Speaker 4

And so, yeah, that's where we are right now.

Speaker 6

Got it. Got it. And as my follow-up, Ralph, session. And best wishes to you, but wanted to ask a bit more about some of the AI applications using of 30% to 50% times the battery capacity with some of these applications. It seems like potentially you might need 5, 6, session or more large battery cells.

Speaker 6

Is that the case for some of these applications and some of the inbound

Speaker 2

session. Yeah, I can take that. So, the points I wanted to make were number 1, I think customers realizing that the applications that are coming in that people want are so compelling that the current battery technology is not able to keep up. Session. I'll give an example.

Speaker 2

If you do the noise filter, like using some Lightroom and you use AI noise filter, it's almost impossible to go back to using the traditional I mean, you just there's no going back because you kind of see what's possible. And by the way, Lightroom also runs on smartphones. So you will see the same problem that when you start using it, you get used to it. There's no going back. So what this is doing is this is actually very early stages.

Speaker 2

I mean, it's probably the first time that I've actually Anybody has put a data out there that I know of, of what how much the battery is consumed when you run an AI application. So I think our customer is also realizing that. I think it's going to be it's going to happen in 1 of 2 ways. Either they're going to buy more batteries, like as you mentioned. But the problem with more batteries is the form factor gets destroyed.

Speaker 2

Session. It becomes bigger, heavier, fatter and so they don't want to do that. So that's when we have an advantage that we can either provide session. Increased energy density and keep the same form factor but provide more energy. I'll help them reduce the form factor and provide them same energy.

Speaker 2

So It's happening in 1 of 2 different ways, but it's hard to say exactly how many more batteries would be needed, but I can definitely say that It's going to be a lot more than what we expected just because of the applications that are coming down.

Speaker 7

Session. Got it. Thanks.

Operator

Our next question comes from Colin Rusch from Oppenheimer.

Speaker 8

Session. So the depth of customer interest and how that potentially impacts revenue ramp as some of your customers look at that standard cell gain out into the market?

Speaker 9

Session.

Speaker 3

Yes. So, we're trying to replicate what we see in some of the other battery customer interest across many different IoT applications that we see that as a viable way to go to market. Session. Typically, what you see when you do a general availability like that, it's usually smaller customers that can't afford or be able to drive a custom cell size. So we're seeing quite a bit of uptake on this standard cell that we're putting out there and you will see others session in the future that will be of different sizes, etcetera.

Speaker 2

Yes, maybe Okay. And then on the

Speaker 4

session. I'm

Speaker 2

just going to add a little bit more color. It's very similar to what I've seen when I was at Qualcomm when we ran the IoT business from a vertical business when I go When you go into something called a horizontal business where you don't really know the customer, they buy through a distributor, they buy a small number of units. What happens is they're a lot more willing to Adjust the form factor, to accommodate the standard cell we have. Whereas the very high volume application like a smartphone or like a, session. Like a watch, people would want to put the perfect size battery to eke out the maximum amount of energy they can get out of that.

Speaker 2

But unless you have a large volume, People are not willing to make a custom sell for them. So what we did with general availability announcement is to support all those session. Other smaller volume per socket opportunity, but still give them this higher energy to sell. That's kind of what the strategy was. And I think it's It's a popular strategy in semiconductors and people make DSPs or processors and so on.

Speaker 2

It hasn't been done as much in batteries, but I really felt that We have a great product and we should try to get more people to use that. And one thing I found is those customers may actually end up moving from there to a high volume opportunity as the products do well and they may come back to us and ask for more custom sell. Okay.

Speaker 8

Thanks so much. Session. On the material supply chain, we're seeing some dislocation, whether it's on the cathode side or even now with nylon gas and some of the Can you talk a little bit about how your customers are engaging with those supply chains and some of those material procurements and preparing for what Looks like a potentially steep ramp as you get through 2024 into 2025.

Speaker 2

You're talking about battery materials? Are you talking about

Speaker 8

Yes, exactly, both anode and cathode materials.

Speaker 2

Yes. I was actually I've been fortunate to spend a lot of time with a lot session. Battery material suppliers in the last month or 2. And what I found is that there's a lot of innovation going on And the number of people who are now coming out and saying we got a better silicon anode or we got a better cathode. And for us, it's super exciting.

Speaker 2

I mean, session. There's a lot of announcement coming up with the company in Australia I saw recently, company in England recently. So the supply chains of the material production in both anodes and cathodes It's diversifying a little bit more and a lot more innovation going on there. Of course, quite a bit because of the huge EV session. But for us, it's tremendous because we are able to take advantage of all the investment that's going in into those spaces session.

Speaker 2

And use those anodes and cathodes which are best suited for us in our battery architecture and take advantage of that and provide much higher energy density, much better cycle life, much better fast charge capability. So I think it's really exciting time for us and the diversity of the Supply chain is also helping us because we are not able to work with multiple suppliers and that helps us in our cost of goods too.

Speaker 4

Session. Okay. I've got a couple

Speaker 9

of follow-up questions, but I'll take them offline. Thanks guys. Thank you, Carl.

Operator

Our next question comes from Bill Peterson from JPMorgan.

Speaker 7

Yes. Hi, good afternoon and nice to see things are on track with that too. Session. Farhan, welcome to the team and good luck in the role and Ralph, good luck in your retirement. My first question is

Speaker 2

I wanted to

Speaker 7

session. Checking on the smartphone announcements, I'd like to get a better understanding by what you mean with the term engagements. I mean, do you have are these volume purchase agreements or is pricing set? Session. Could these be for new form factors?

Speaker 7

And I guess should we think of these large batteries for smartphones as custom parts? Are you looking to standardize these parts?

Speaker 2

Session. Yeah, a lot of questions in that. Firstly, most smartphone products will be custom products in the sense that session. Every smartphone maker's battery is a specific size, now close enough to the other ones, but specific. Session.

Speaker 2

One of the key areas that we are seeing a lot of opportunity is actually in an area called foldable phones and flip phones. Session. As you might recall, this has become a very popular category now, particularly in China, session because it just provides a much larger display that you can use. And the advantage is you can run multiple applications at the same time. With 5 gs, you can have different windows open running at the same time, different AI applications in different one.

Speaker 2

People love that. People love that form factor. Now that Flip gives you a smaller device that you can put in your pocket without compromising on display. Our Fold gives you session. A regular sized device, but with twice the display.

Speaker 2

So both the form factors are very popular. The problem though is that to support such a big display, you need 1 battery on each side. So Flip typically needs 1 battery in the back and 1 battery in the front and folds in the middle. A Fold needs 2 batteries, 1 on each side. The advantage we have with the Inovix battery technology is at At least what the customers were telling me when I met them was, hey, it's now possible to take 1 NOVX battery and replace 2 of those batteries.

Speaker 2

So now you can actually have a flip phone Where the top is really thin for example. Now it folds when you fold it, it's much smaller and much thinner. Or you can have a foldable phone. The problem with the foldable phone today session. You can now put 1 battery or 2 thinner batteries from NOx that can actually make that foldable phone session.

Speaker 2

So that's one example of where customers are using. In terms of engagements, typically the way this works is We are working on what is the form factor, what timeframe will they launch, what size battery do they need, how do they charge it, how do they discharge it, which process does it connects to, When do we need to give them samples? When we do to make the first demonstration? So it's kind of like an engagement that typically would happen with a processor, with a memory, which I'm very familiar with over the last many, many years. So super exciting and super exciting to see that they're all going on the same path of how I've gone before.

Speaker 2

And all these customers also make wearables. So the same battery technology can also be used in the wearables. And some of them also make notebooks. So It's kind of a broad brushstrokes opportunity for us across all of them.

Speaker 7

Great. Nice to see the interest there. Also, you mentioned that about your, I guess, confidence to get premium prices and you mentioned that there's a lot of investors asking about your ability to achieve that. Another thing we also hear from investors is how to think about your cost structure vis a vis competitors in Asia. Session.

Speaker 7

I guess today, how should we think about the current Gen 2 aligned with the current throughput, the current cost structure around $50,000,000 as well as the current material set? Session. How does that compare to high volume competitors today? And maybe more importantly, like what opportunities do you have in terms of driving down line costs, increasing throughput and material optimization in order to close the gap with your high volume competitors.

Speaker 2

Yes, absolutely. So I answered this question a couple of times on investor calls. I'm happy to go through it again. Typically, the cost in a battery making is majority of the cost like 60% or even higher is material cost. And these are session.

Speaker 2

Now currently, our cost structure is clearly not where it should be. And it probably won't be where we wanted to be even when we build like one line. So you have to get to scale, build batteries in the tens of 1,000,000 to really get those Purchase agreements to the part where the material cost is very competitive and we are finding that. Now as we start building our factory, Ajay and his team, session. He's got a terrific supply chain team and he's hired some very strong supply chain and also session.

Speaker 2

And so in that sense, the comment I want to make is as we ramp into volume, the material costs will come down and we are seeing a lot more competition as I mentioned now in the whole material stack. So we are able to dual source or even session. Multi source in some of these to get the cost down. The other one is the cost of the machines itself. Session.

Speaker 2

And Ajay and his team have done a lot of work in figuring out what aspects of the machinery we can further cost reduce. For example, when we talk about this first line, which is the line we are building, it's a universal line in the sense that you can make batteries from very small Watch batteries to much bigger smartphone or laptop batteries. But as we are making progress in design wins with our customers, We will be able to optimize those lines so that the line cost comes down, but the variability of the battery side it needs to make may not have to go all the way from very small to very big. It could be a big battery, maybe 10% variation of that. So we can support all the smartphone cells, for example, on that line.

Speaker 2

And another line could run much higher throughput and support the watch sales. So we are in the middle of that, of how to optimize the lines in terms of line cost and line throughput And also in terms of how to get the material costs down. I'm very optimistic that long term it's going to be very healthy gross margin business as we get scale and and as we get lines more and more optimized to the end products.

Speaker 7

Yes. Thanks for sharing insights and best wishes to Farhan and Ralph.

Speaker 2

Thank you, Bill. Thank you.

Operator

Our next question comes from George Gianarcas from Canaccord.

Speaker 7

Hey, everyone. Thanks for taking my questions. First, maybe to focus session. On anything new that's happening with the EV opportunity, you specifically mentioned in the release of fast charging session based on the structure of the batteries you're building. So any update there would be appreciated.

Speaker 7

Thank you. Yes.

Speaker 2

As I mentioned, we're making steady progress in that area. We now have we're able to further quantify, as we fast charge, what is the benefit of our architecture In terms of fast charging and, you know, as I mentioned last time, we are working with a couple of, session. EV OEMs in working with the material stacks that they would like and how we can put them in our architecture and get them some samples. Session. It's moving and I don't have any new milestones to share today, but I'm optimistic that we'll be able to give more data before the end of the year.

Speaker 7

Thanks. And maybe as a follow-up, just to focus on the capital structure, you lowered your session. Capital needs for this year. Can you sort of remind us what 2024 looks like and what the requirements will be for you over the 12 to 24 month period. Thank you.

Speaker 2

Okay. I'm going to get Farhan take the call as his first CFO.

Speaker 5

Session. So, yeah, we're not guiding to CapEx needs for next year. But what I can tell you is that we have a lot of things going on next year. Session. We will be completing the Gen 2 line.

Speaker 5

We also have the Agility line also coming in. Session. So, CapEx will be higher than this year, but not guiding to CapEx. You have to wait until end of the year, and then we'll probably be able to share more.

Operator

Our next question comes from Alex Potter from Piper Sandler.

Speaker 10

Session. Thanks guys. So maybe just a quick follow-up on that one. I know maybe you can't specify in terms of specific numbers here, but session. Maybe qualitatively, I know that you're focused initially on the agility line and then Getting the first lines up and running in Malaysia.

Speaker 10

But I'm wondering if you've begun sort of contemplating when you'll start building additional And like I said, I know you don't have to maybe put a fine point on exactly a dollar number there, but are you at least having conversations with customers about session. When they can expect deliveries from custom lines like that and in your mind, have you started thinking about what those will cost and when you'll start building those lines?

Speaker 2

Yes. So, I think we talked about this before. So, mainly, we Our customers are now in multiple, form factors, right? I mean, we have customers in smartphones, we have customers in laptops, we have customers in watches. And we have to optimize the line for each of those.

Speaker 2

Now again, we are now working at different models. Like when you talk about a line, The line has multiple zones. That's the other thing you got to remember. Some of the zones are laser machines, which maybe we can optimize for multiple ones. Some of the lines are more, as Ajay mentioned, constrained stuff.

Speaker 2

Then there's zones that do buffering and things like that in the back end. So we're now trying to figure out the right optimization where we leave most amount of flexibility for us in terms of satisfying all three of these markets. But at the same time, we're financially also optimal in terms of not making just universal lines for all of that. I mean, we so I think that's where it's going. I wish I had a more Precise answer for you, but I think you'll have better visibility as the year goes along.

Speaker 2

But rest assured, we're having all of those conversations you mentioned with our suppliers on which are the long lead term months which when we get sooner and which when we get later and so on.

Speaker 10

Okay. And then maybe just a follow-up to that, in terms of who will pay for these new lines and how those lines will be financed. I know that there's sort of multiple different options. You could get your customers to help pay for it. There might The price concessions associated with that or dilution associated with that, how far along are you in those discussions regarding how funding will be arranged for these

Speaker 2

session. Yeah. So I mentioned when I There are 3 options for us in capital raise. The first one session. We are going into Asian countries where people want us to be there and there is the ability to get You know, favorable funding options because those countries want us to put our factories there and bring the technology there and provide jobs.

Speaker 2

And as you can see from the announcement today, we were able to deliver on that. The second one I mentioned was that whenever opportunity arises and the capital markets help us, We will work on raising capital and we've done that and we've capitalized the company with the convert earlier in the year. The third one I mentioned is that Customers would like to fund some of our lines. And as I mentioned, that will come with some, session. I guess, things associated with margin, price and so on.

Speaker 2

All 3 are open. And honestly, at this time, we don't have to make one of those decisions because we have capitalized the company and with the most recent announced with YBS, We have some more runway. So Farhan is here now and he's going to figure out the right optimal path to get the CapEx for the next half.

Speaker 10

Session. Okay. Sounds like a perfectly easy job. Thanks very much and welcome, Fermat. Looking forward to working with you.

Operator

Session. As a reminder, if you have a question, you may use the raise hand feature at the bottom of the Zoom interface. Session. Our next question comes from Gabe Daoud from Cowen.

Speaker 11

Thanks, everyone. Thanks for taking the time. I was hoping, session. Raj, could you maybe give us an update on the MOU that was announced last November for smartwatch program? Is there Any notable progress that you could comment on, Suresh?

Speaker 2

Yes. I guess maybe Ralph can comment about it. I think he was involved in that MOU. Session.

Speaker 3

Yes. So, it wasn't necessarily specifically for smartwatch, but using our technology in multiple platforms moving forward. And we have made progress there where the customers have been qualifying the product, session and it's just an ongoing process for us. We should see some outcome of that either next next year, most likely into 'twenty four or early 'twenty five from a volume production perspective. But it's progressing along sort of as we

Speaker 2

Yes, one comment I'll make Gabe is that clearly that MoU is one thing that we talked about. But after coming back from Asia recently, session. It's just a tremendous amount of interest in our technology and products from many, many customers with in a large volume opportunities. So we just have to get the qualifications done and build our factories to satisfy the demand that's coming up.

Speaker 11

Session. Got it. Got it. Great. That's helpful.

Speaker 11

That's helpful. Thanks guys. And then just a quick follow-up and I know this probably doesn't matter today, but If you shipped 10,000 cells in 2Q generated 42,000 in revenue, it implies a little over $4 in an ASP versus session. Previously, this goes $5 for the small cells. I'm just curious what's the maybe what's driving the delta there?

Speaker 2

I mentioned before, session. Sales are going into customers that actually will be sampling. Sometimes we don't charge for samples because we'd like for them to use our products and test and validate and then move forward. Sometimes we charge a lot for samples. And so you can't just session.

Speaker 2

Multiply the revenue number, take the revenue number, divide by the units and get an ASP that's probably wouldn't give you an accurate answer. This is early stage production And this is really customer qualifications. And so that's not a good time that's not a good way to calculate ASPs. But I can tell you this much, though. We feel very good about our ASPs because the value we provide and that's something I'm even more encouraged now than ever before.

Speaker 11

Session. Our

Operator

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

Speaker 12

Hey guys, thanks for taking the questions. Appreciate it. And, Barham, welcome. Looking forward to working with you, Ralph. Sorry to see you go, really enjoyed working with you.

Speaker 12

Hey, Raj and Ajay, how are you? Yes, just a couple, just real quickly. With regards to the Fab 2, Gen 2 and getting it going between now and I guess is it Raj, is it still April timeframe you're Expecting to have initial production project product out. Is should we expect from and then I have a quick follow-up.

Speaker 2

Yes. Absolutely. The date is still mid April to get samples from our Gentoo line in Malaysia that we can send to our customers. And the big next milestone is factory acceptance in next month. And session.

Speaker 2

IJ feels confidence is out there and we hope to be able to give you an update on that when that's done. Then we have milestones and when the agility line comes in, I think you'll see that And then we'll have milestones and when equipment goes into our Malaysia facility, now that we got the contract done, we have a site and we have people and all that. Session. That will be really good to see. Yeah, I think, lots of exciting things to report as the year goes by.

Speaker 12

Session. All right, awesome. That's helpful. And then just quick follow-up. How should we think about aspirations for EV MOUs session.

Speaker 12

As you move through the year, is this year still a goal that you have in mind? And do you need to I know I think there's been session about actually getting an EV battery sample made also. Is that something that's necessary for EV MOUs to occur? Session.

Speaker 2

Yes, I mean that is absolutely the goal. I mean honestly, I think our challenge right now is the number of opportunities we have. This army that's came up, the EV opportunity that is making good progress and then we announced the general availability of the cells. We have customers qualifying those things. We have the money share line coming up.

Speaker 2

Session. It's just really a question of sequencing all those things in the right time fashion, so that it's most profitable for the company. That's absolutely the goal, but We kind of have to balance all the stuff we got going on now.

Speaker 12

So Awesome. Thanks. That's helpful. Appreciate it. Thanks, guys.

Speaker 4

Our

Operator

next question comes from Sean Milligan from Janney. Session.

Speaker 12

Hey, guys. Thanks for taking my question. Session. First question is, how can we think about a Fab 2 ramp in terms of once you get session. This first Gen 2 auto line in and running and start to see some production orders.

Speaker 12

How should we think about the ability to add additional lines At a pace, like is it 1 per quarter, 1 every 6 months? What's the realistic pace for us to think about that Come 'twenty five, I guess 'twenty six?

Speaker 2

Yes. Look, I mean, if we wanted to, We could build 4 universal lines and build them as quickly as we can. But as I mentioned before, that's not a very good strategy because we want to optimize the line for the customer. And that's where we are spending all of our customer opportunity so that we get the most amount of margin for each product. We are working feverishly on session.

Speaker 2

What are the long lead poll issues so we can get working on those? We are working on how to optimize the line even more so that each subsequent line costs lesser. Session. So those are all things we are working through and I hope to be able to give you more color as the year goes by on how we plan to do that in 2024 and in 2025. So at this point, I don't have much more details than what I mentioned last time.

Speaker 12

Okay. And then with, since the YBS announcement is out, session. The $100,000,000 and that covers basically the facility plus the first line. Can you talk about How many lines do you think you can ultimately sit in that facility?

Speaker 2

Yes. That facility itself has space for 4 lines. And session. We are making sure the facility can hold in terms of electricity, dry room and all that kind of stuff up to 4 lines. And that is super exciting.

Speaker 2

So we got that worked out and we got the first line going in. Now we're just trying to figure out, you know, the sequencing of the next few lines, session as profitably as we can.

Speaker 12

Okay, great. Thank you.

Operator

Our next question comes from Gus Richard from Northland Capital Markets. Session.

Speaker 9

Yes. Thanks for taking my question. Can you talk a little bit about where you are with commercial

Speaker 2

session. Yes. We signed the manufacturing supply agreement. So I think it's nailed down, signed by us, signed by them. And session that puts in all the terms there in terms of exactly what the uplift is and how it comes and so on.

Speaker 2

So the terms between us and YBS are signed.

Speaker 9

Session. Okay. I appreciate that. And then, I just want to make sure the Agilvi line is still expected to be up and running session. In November of this year by year end and be able to produce samples for customers?

Speaker 2

Yes. That's still on track. Session. We believe by year end we'll have that, yes. So we are building on 2 lines really.

Speaker 2

We're building the Gen 2 line. We're also building the line 1 of the Gen 2.

Speaker 9

Right, right. And line 1 of Gen 2, the rated throughput is 9,000,000 units per year?

Speaker 2

9,000,000 of the bigger batteries or 18,000,000 of the smaller batteries, 9 point something, but roughly round numbers, yes.

Speaker 4

This, Raj, Just to clarify, the first line is a universal line, right? So we have given up a little bit on the UPH optimization.

Speaker 2

Session.

Speaker 4

This first Universal Land will build 9,500,000 of any kind.

Speaker 9

Thanks for the clarification. That's it for me.

Speaker 2

Thank you, guys.

Operator

Our next question comes from Chris Elder from B. Riley.

Speaker 13

Hey, thanks for taking my question here. Maybe on the production from Fab 1, came in ahead of the target in the 2nd quarter, targeting 36,000 in the 3rd quarter. Are we targeting 180,000 for the full year or does the acceleration of some of the larger laptop phone batteries change that target? Session. Just are there any specific things you'd call out we would need over the next few months to hit 180,000 if that's what we're still looking for?

Speaker 13

And session. Is there any significant expectation from the Agiloti line this year?

Speaker 2

Yes, great question. Session. We absolutely with the way the manufacturing is going on, Ajay and his team have done a phenomenal job. We can make those 180,000 batteries session. If you wanted to at this point, absolutely, that's the goal.

Speaker 2

But now that we have these opportunities for higher value session from both these larger cells for the Army and for laptops and other areas. And as the question was asked, what do we do about the EV stuff? We're getting a few other ones and we only have one fab here and the agility line is coming. So based on how quickly the agility line comes in and session. We're going to update you on exactly what we want to do for the rest of the year.

Speaker 2

But it's a good mix problem we have that we have more opportunities to work on and we have to make sure we want to build the right ones.

Speaker 13

Got it. Okay. Makes sense. And then On the customer side, I appreciate the color on some of the larger phone and laptop customer engagement. If we go back to the customer funnel plan for 2023 that you provided on the January 3rd presentation, I just wanted to see how you think you're tracking as far as accounts moving towards some of those later stages P1ks, P10ks, any metrics you could provide breaking down the $737,000,000 in active design and design wins by where we are in some of those milestones?

Speaker 2

Session. Yes. Ralph, do you want to take a shot?

Speaker 3

Yes. So, you know, we haven't really shown that graph again, but session. You've memorized some of the milestones very well. So, yes, we are moving customers from what was called kind of QS 100, which is sort of very always sampling stages into that P1 ks, which is the production 1,000 units or more. Session.

Speaker 3

And that's sort of, the path till we get to real revenue and high volume, which again, based on how many units we're getting out of the fab, happens, you know, later this year and then into next year as well. So we've got as Raj has pointed out, we've got plenty of opportunities stacked in that pipeline. It's a matter of us getting the right mix The right amount of product, which is why you're seeing us not ship all of our units that we put together as we build up a little bit of inventory for some of session. But the funnel is progressing well and even the front end of the funnel, which honestly, because we have So much opportunity we've spent less time on. We're getting, you know, a bunch of new customers coming in with new opportunities that keep increasing the funnel.

Speaker 13

I appreciate the details. Congrats on your retirement year.

Operator

Session. Our next question comes from Tim Moore from E. F. Hutton.

Speaker 9

Session. Thanks. And the equipment session. My main question is, you're clearly innovating and pushing the envelope on energy density and A battery is more than just the U. S.

Speaker 9

Army is going to appreciate that. Are you seeing session. Our next question comes from the line of Chris Worley with Barclays Capital. Please go ahead. Hi, But whatever it is compared to their technology that they've previously been using, I'm just wondering if the awareness by customers for the amp hour lift session from your offerings or even marketing accelerating by you, is starting to really shine through the last couple of months and accelerate?

Speaker 2

Yes. I mean, absolutely, the customers truly appreciate the fact that we're providing more energy density. And again, This is really driven by the new applications that they see coming that need much more battery. I think that is, you know, just a classic of, of what's happening. Session.

Speaker 2

I mean, I wrote in my blog, if you see, for example, the new Apple mixed reality headset, You can see 2 hour battery life. I mean, it'd be beautiful if you could get that to 4 hours or 6 hours or 8 hours. So we are seeing that across the board. Session. And also as AI moves from the cloud into the edge, you just need more and more because of the immediacy.

Speaker 2

So the energy density is totally appreciated. I think as our customer engagement is moving to the next level where we have joined programs to them, they're testing our batteries, they're putting them in a form factor. Session. We are also gaining a lot more appreciation for the various, how should I say it, the session. We also need to provide energy density.

Speaker 2

We also need to provide We also need to provide the ability to charge really quickly. We also need to provide the ability to get into the heat fast, charge and discharge at different voltages. So we're just Moving to the next level of the customer engagement where we are really able to work closely with them on how the battery fits in the framework, how it interacts with the processor, how it interacts with the OS. Session. It's just fascinating to see and we're able to roll that now back into our product road map.

Speaker 2

So our next generation batteries when they come out With the next generation technology, they will be even more optimized to all these different requirements in addition to providing higher energy density, which is really the transition of the technology.

Speaker 3

Session. Just to add a little more.

Speaker 9

I think

Speaker 3

I was just going to say, We shouldn't lose sight of what was sort of announced in this as far as this quarterly release goes. With the session. With Raj's involvement in some of these mobile phone customers, mostly out of China, being much more aggressive session. And actually allowing us to talk about them as being, you know, customers and being involved, they're the ones seeing the absolute need for this uplift session because to the points that Raj has been making all day is, they need to enable features and they just can't do it with the existing technology that session. So they are pushing very hard and want to partner with us to make that a reality and mostly in mobile platforms today.

Speaker 2

Session. Yes. Thank you, Ron. Thank you for that highlight.

Speaker 9

Yes. That's a terrific color. And I'll save my remaining questions for offline later today. Thanks.

Speaker 4

There are

Operator

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

Speaker 2

Session. Yes. Thank you everybody for listening to us and thank you for all your questions. Really exciting times and great quarter. Looking forward to speaking with all of you again next quarter.

Speaker 2

Thank you.

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Earnings Conference Call
Enovix Q2 2023
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