Enovix Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 20, 2024

There are 15 speakers on the call.

Operator

you for standing by and welcome to the Enovix Corporation 4th Quarter and Full Year 2023 Earnings Conference Call. And now, I'd like to introduce your host for today's program, Charlie Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Speaker 1

Thank Hello, everyone, and welcome to Innovix Corporation's 4th quarter and full year 2023 financial results conference call. With us today are President and Chief Executive Officer, Doctor. Raj Dalluri Chief Financial Officer, Farhan Ahmad and Chief Operating Officer, Ajay Murathe. Raj and Farhan will provide an overview, and then we'll take your questions. After the Q and A session, we'll conclude our call.

Speaker 1

Before we continue, let me kindly remind you that we released our Q4 2023 shareholder letter after the market closed today. It's available on our website at ir.inovix.com. A replay of this video call will be available later today on the Investor Relations page

Speaker 2

of our

Speaker 1

website. Please note that the shareholder letter, press release and this conference call all contain forward looking statements that are subject to risks and uncertainties. These forward looking statements are based on current expectations and may differ materially from actual future events or results due to a variety of factors. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, February 20, 2024, based on information currently available to us.

Speaker 1

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 accounting principles. You can find a reconciliation of the GAAP financial measures to the non GAAP financial measures in our shareholder letter, which is posted on the Investor Relations page of our website. I will now turn the call over to Raj to begin. Raj?

Speaker 3

Thank you, Charlie, and thanks to everyone for joining us today. I'm going to kick off with a few high level remarks and then we're actually going to show you some new video of our Fab 2 featuring Ajay. Ajay is actually now in Malaysia, and he's going to show you some update on manufacturing there. After that, Farhan will cover some financials and the outlook before closing, and then look forward to your questions. Okay, we had a strong finish to 2023.

Speaker 3

And now we have laid the groundwork on how to scale up in 2024. First, we reported record revenue of $7,400,000 in Q4, well above our expectations. Secondly, we are in the process of completing our factory acceptance testing. And a good amount of our Gantoo equipment is now in Fab 2 in Malaysia ready to produce the 1st batteries in April. It's very exciting to see that progress.

Speaker 3

3rd, we made significant progress with our customers, both in smartphones and in EVs. Last quarter, we hosted the executive management teams from 2 of the top smartphone OEMs from China at our Fremont headquarters, and very good discussions on how to collaborate on making batteries for their phones. Additionally, we entered into a development agreement with a leading automaker to validate the advantages of the Inovix cell architecture for an EV battery. Now this significantly increases the addressable market for NOx technology, and we have a strong pipeline of additional opportunities in this space. And last, we've gained significant confidence in reaching the 1,000 cycles on a smartphone class battery, and we look forward to sampling it next quarter.

Speaker 3

As I look back at our accomplishments last year, which were substantial, we began the year as a new management team, operating at an expensive, low yielding California factory with a product portfolio that frankly was not very well aligned to the key large customers and the end markets that we wanted to go after. Now in contrast to that, we exited this year with a manufacturing base in Malaysia, ready to produce industry leading batteries, a seasoned team in Korea that has shipped batteries over 20 years that we acquired, and close alignment with our customers that led us to gain a really in-depth knowledge and detailed product specifications that is helping us build category leading products targeted at the largest portion of the market, which is the smartphones. Now we are engaged effectively with the world's largest smartphone OEMs at various levels. These companies are eager to harness our architecture to keep up with the demand for more and more power hungry applications by this AI megatrend. I'll show some data and touch upon this in a minute.

Speaker 3

But first, let's take a look at our goals. What we need to do this year is to position ourselves for the large inflection revenue with smartphone launches is very simple. First, we need to demonstrate high volume manufacturing on our Gen 2 equipment in our Fab 2 in Malaysia. Now, I know seeing is believing. So we're going to show you a video of the Fab 2 featuring Ajay and that we just made in the last couple of days that speaks to our progress.

Speaker 3

And of course, Ajay will join us for Q and A from Malaysia. I think it's pretty early for him there, but he's online there standing by. So operator, go ahead and let's roll the video.

Speaker 4

I'm here in Fab 2, as you can see in Malaysia. We are standing in the class 10 ks clean room. And right here, which I'm going to show you right now, is a zone 1, one of the lasers in zone 1, which is anode laser. And now I'm going to give you a closer look. As you can see, there are 4 laser sources here, 2 for cleaning and 2 for the cutting.

Speaker 4

And then the web goes through. As you can see, the rollers, the ones which come from the sole quarters get loaded on this machine, go through these lasers. And here we can show you the little bit closer look in terms of the lasers firing. This machine is operating at 13.50 UPH or close to it. And we are producing actually cells for SAT.

Speaker 4

The cells as you can see the electrodes getting patterned, as you can see from here. When it finishes all the process here, it goes through what is called the in line inspection system, which is really the camera which looks at the 27 different critical parameters, critical to quality parameters, which then get logged SPC and a closed loop correction system, which gets triggering the lasers for position and tolerating. And this is anode, what we call ALSR, which is anode laser. Next, I will show you the other 2, the cathode and separator lasers. Now I'm standing in front of the SLSR, which is a separator laser, where I can show you the rolls that get loaded here, as you can probably see on the film.

Speaker 4

And 2 laser sources, 2 pico lasers, which are basically creating the pattern and cutting the separator. It goes through the same type of system. And we can do a little bit more close-up here in terms of how the patterning is being done. Again, this one is running at 13:50 UPH in the middle of SAT. And the in line inspection system again is very similar to one which I just showed you on the anode.

Speaker 4

It captures roughly 38 different parameters, out of which 25 are critical to quality and the others are more for productivity, OEE, speed, etcetera. That's all captured here in line again, feedback loop back to the lasers, adjustments for position and tolerancing, and you get pattern separators at the end. Now I'm standing here in front of the stacker zone 2. This is the zone 2 room. There's going to be 11 stackers here total or 8 stackers for the HVM.

Speaker 4

And you can see the stacker in action here now. It is merging and then the 4 layers as you can see. And it is stacking, creating 6 stacks at a time, punching, marking on the fly, vision systems right there, making sure that the stack is accurate and properly positioned in the SKU. So this is the output of the stacker. We have 6 beautiful looking stacks which were created by this machine.

Speaker 4

Now we are standing in front of the final formation cabinets, which is also called zone 4. And we're going to show you now you can see I've changed into a class 100 ks downing protocol, which is just a smock and not the bunny suit, which I wore in the class 10 ks. And you can see now the loader, automatic loader, which is going to which is loading the trays directly into the final formation cabinets. And you can see how that is working. Okay.

Speaker 4

As you can see, we are standing here in the zone 4 area. Again, I'm dressed for, gown for class 100 ks. And this is the final step. After the cells go through the final formation, they go through an OCV test. And now the batteries are coming in these trays, being fed to the sorter, fully done automatically.

Speaker 4

This will be a merely lights out operation where the trays are loaded from the all the way from final formation OCV into the sorter. This is the sorter area, which is the final step of sorting and putting batteries in bins to be sold to the final customer. So that's this operation, as you can see. Thank you for watching. Keep following our journey to scale at enovix.com for updates as we post them.

Speaker 3

That was awesome. As you can see, our confidence is very high around Fab 2, And we accomplished a great deal in a very short amount of time, and I'm really proud of everything the team has done. In addition to proving our manufacturing, this year, we will need to deliver samples of batteries around tailored to the smartphone specification for fast charge and very high cycle life. I'm happy to report that our global R and D teams have made significant progress in the recent months and we're looking forward to sending our first samples of what we call EX1M for mobile next quarter. By the end of the year, we'll have an enhanced version of this technology called EX2M, which will also be ready to sample.

Speaker 3

Now these 2 will be truly revolutionary products and they will be the 1st smartphone batteries in the world that we are aware of that will have 100% active silicon anode, while also delivering 1,000 full charge and discharge cycles along with the ability to really fast charge and increased energy density over the batteries that are shipping in the market today. The need for high energy density is critically important to smartphone industry. It's a huge $10,000,000,000 plus addressable market. Now to give you a greater appreciation for why smartphones need a higher energy density battery. Last quarter, we asked a tedious research.

Speaker 3

It's a team I'm familiar with from my days at Qualcomm to analyze the impact of the looming AI applications on smartphones. The results of the study are actually staggering. I want to show this to you in a slide here. What I what you see here is on the left side, the global Gen AI output forecast of the amount of video and image frames in billions. You can see in 23, 15, 24, 59 to 'twenty eight, we expect it to be a staggering 2,500 and billions of frames generated.

Speaker 3

And these are going to be on mostly battery operated devices on phones, PCs, laptops, and so on. And what you see in the middle is actually very interesting data. What we did here is actually profile how much battery consumption in terms of how much capacity is used per hour in milliamp hours for different applications. On the left side, you see non AI based conventional applications and the right side, you see the AI based applications. So things like 4 ks video.

Speaker 3

When you go to 8 ks video, a lot of upsampling is done using AI applications. Things like YouTube that you're all familiar with on the left side. But on the right side, things like chat GPT or llama 2 chatbots. It's staggering that chat GPT actually consumes more battery than running YouTube on your phone. It's pretty amazing.

Speaker 3

And this is just the beginning. And this is very important because this is what we are hearing from all our customers that they just need a much higher energy density battery. In fact, I just saw a couple of new phones launched by some of our, the Chinese OEMs and actually the flyers for the phone is actually all about the AI applications that run. You can also see something similar for Samsung Galaxy advertisements. So the trends are clear.

Speaker 3

With our product roadmap and our customer relations, we are well positioned to enable the smartphone industry to really usher a new era of mobile computing. In addition to that, we are now thrilled to have our first deal done in EVs. And with that, I'm going to turn over to Farhan, who will provide a recap of our financials and then the outlook. Farhan?

Speaker 5

Thanks, Raj. So all the relevant financials are in our quarterly reports. I won't go into the details, But I'll just do a quick recap of the results and the outlook. For Q4, we delivered revenue of $7,400,000 well ahead of our expectation. We ended the quarter with about $307,000,000 of cash and equivalents.

Speaker 5

Q4 capex was about $29,000,000 About $27,000,000 was used in operation, and about $10,000,000 of cash was used in acquisition of RouteJade, net of the cash that we acquired as part of RouteJade. As a reminder, we are accelerating the depreciation of Fab 1 equipment post our decision to stop manufacturing in Fab 1, and as we decide to convert it for product development purposes. Our Q4 results included $18,500,000 of accelerated depreciation, dollars 6,200,000 of this was in COGS, dollars 12,200,000 of this was in R and D and $100,000 was in SG and A. In Q1, we expect a similar amount of accelerated depreciation, but most of it will be in R and D expenses. Now turning to our guidance.

Speaker 5

For the Q1 of 2024, we are expecting revenue in the range of $3,500,000 to $4,500,000 Now there is some impact, a meaningful impact to our Q1 guidance because of the water in Middle East, which is causing a longer time for the ships to go from Korea to Europe. We expect for Q1 an adjusted EBITDA loss of $24,000,000 to $31,000,000 dollars and expect non GAAP EPS between $0.29 loss $0.35 loss. I would like to note that our non GAAP EPS loss does include the impact of the accelerated depreciation that I talked, which is about $0.10 And with that, I'll now turn to Raj.

Speaker 3

Okay. Thank you, Farhan. In closing, I'm super excited by all the work we've done in 'twenty three. And we set the framework for our business to scale in the years forward. And we have significant proof points to deliver in 'twenty four and I'm super excited by, as you can tell, by all the stuff we have going on in our manufacturing fabs and executing to these key milestones.

Speaker 3

So with that, I'll open up for questions.

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 are going to read the 2 most highly voted questions submitted by shareholders ahead

Speaker 2

of this call during

Operator

the call registration. The first shareholders ahead of this call during the call registration. The first question is, will management address the current and future status of government contracts for batteries? Is there still a near term 8 digit revenue opportunity or has management totally abandoned this?

Speaker 3

Yeah. So very good question. As we did last quarter, we continue to deliver batteries to the Army contract that we have, which these are break flow enabled safe batteries that the Army will use in vests and so on. And we expect to continue to do that through this year. As we do that, these batteries are put into different kind of tests by the Army and there are a lot of qualification process and so on.

Speaker 3

Once that's done, we do expect that they will end up in higher volume production and we will have a good business opportunity there. Also with the acquisition of this company, Raujed, they have very good batteries that are actually being sold to the Korean military and we see opportunities to actually market those batteries to the U. S. Army also. So yes, we do expect to continue to do that.

Operator

The second question is, what is happening with the former production space in Fab 1 now that the Gen 1 line has been shut down?

Speaker 3

Yes. Thank you for that question. So Fab 1, we are not doing high volume manufacturing Fab 1, but we are using it right now to make samples to give like EX1M and EX2M and so on to give it to our smartphone customers to sample, to validate the technology before our Fab 2 is ready. And as I mentioned, we expect to produce cells from Fab 2 in Malaysia in April timeframe. So we are actually using the current fab in Fremont for that.

Speaker 3

Also with this new EV opportunity, we have which we expected that we will need a clean room and a dry room and a facility to make those cells here, which we are going to do here in Fremont. So, it continues to be a good R and D facility for us.

Operator

Our next question comes from Colin Rusch with Oppenheimer. Please unmute your audio and ask your question.

Speaker 6

Thanks so much guys. You know as you've gotten deeper into the customer conversations and testing on the smartphone side, can you talk about the number of SKUs you're expecting to have to make in the next 18 months to 24 months to serve those customers?

Speaker 3

Yeah. Thank you for the question, Colin. So what's happening right now, I'll give you a little bit of color taking that opportunity of that question. So what's happening right now is that we've got very detailed specifications from multiple customers. I mean, these are 20, 30 page documents on how the battery is tested, different temperatures, different size requirements, fast charge requirements, safety requirements and so on from multiple smartphone OEMs.

Speaker 3

So we are now building samples and sampling and we will be sampling them soon to these customers with the requirements that they've given. And what we do is we test the batteries to those requirements so that when we give them the cells, we are pretty confident that they will pass. It's something that I've always done in my past is to make sure we understand the customer's testing requirements, test them and then give it to them. And then what we expect to happen is after they pass the technology qualification, we expect to get different dimensions and capacities. So 5,000 amperes or 6,000 amperes based on what smartphone it's going into.

Speaker 3

And each customer has a slightly different size. Like if it's going to flip phone, it's one size. If it's going to candy bar phone, it's going to be slightly different size. And then we will make those particular form factor batteries from our Malaysia fabs, get them those samples, they go through the rest of the qualification and when you get to high volume production next year. And based on how quickly those, those, And based on how quickly those evaluations on their side go, it'll drive that.

Speaker 3

I'd say probably in the single digits is what I think. It shouldn't be too many because I do think that a lot of customers will try to use a similar kind of cell because the phone form factor is kind of very similar between customers.

Speaker 6

That's super helpful. And then given the opportunity in mobility, there's certainly a lot going on in terms of vehicle design, pack design and given the safety profile that you guys have and the potential for fast charge. Can you talk a little bit about your expected pack size and how that might look for some of these vehicles as they look to optimize both space and the energy density in the vehicles. Are we talking about 60 kilowatt hours per vehicle or are we talking something more like 80 or 90?

Speaker 3

Yes, good question, Colin. But, so what just to be clear, what we are doing now is working with what we talked about is 1 OEM that's interested and there's others we are talking to on proving out the value proposition, right, proving out that we can control swelling, proving out that we can charge fast. Exactly what kind of cells they would be, how many they would be, what kind of EVs they would be, it's too early to tell. We will continue to update you on milestones as we get there. At this point, we're just proving out the technology.

Speaker 5

Yeah. The only thing I would add is that they will have our architecture, our unique architecture. What's common is that all of these cells that we are working with are makers are with our unique architecture and will have fast charge as the unique differentiator.

Speaker 6

Thanks so much, guys.

Operator

Our next question comes from Bill Peterson with JPMorgan. Please unmute your audio and ask your question.

Speaker 7

Yes, thanks for taking the question. Maybe just to piggyback off that last question, it sounds like you said the key focus area will be fast charging. But can you just shed some light on some of the key milestones and timelines for this? What are the contribution and commitments from Innovix in terms of sampling testing? And I guess, is there further appetite for Innovix as well as resources as well to actually ink any additional agreements or just should we just think of this single agreement for now?

Speaker 3

Yes. I We hope to get samples out this year. That's our goal. We are working with other OEMs too, but I can't really comment much further than that. It's kind of early stage and we'll keep you updated as we make progress.

Speaker 7

Okay. The second question, so when we think about EX1 to EX1M and EX2, I guess what are the key changes you're making on the material side? I mean, are the formulations and process manufacturing process fixed for EX1 and EX2? And I guess, if not, I guess, formulations for EX2, if they haven't been fixed, what are the issues or performance gaps you're looking to address before locking in the materials choices and process? Just trying to get a sense for how mature these are at this stage.

Speaker 3

Yes, good question. So basically, if I look at EX1M, it's built on top of what we have done in EX1, which is adapt that technology to meet the requirements of the smartphone market. And when I say the requirements for smartphone market, there is a few key requirements. 1 is clearly safety. People really, really care about safety in phones.

Speaker 3

As you know, we have spent a lot of time on that and that's one area we address. The second area is cycle life. Our previous EX1 batteries ran up to 500 cycles. Our target in EX1M is 1,000 cycles, which is basically doubling that. And that's a significant increase.

Speaker 3

And the third one is the ability to charge really, really fast. So if you think about a smartphone, when you have a smartphone, what a lot of customers do is, particularly with these AI applications, a whole day battery life is getting harder and harder. So when the battery life goes down, people like to be able to charge and get to 15%, 20%, 30% charge so they can go through the rest of the day. So that is a very important care about. To do that safely and to do that in a way that it doesn't hurt the battery longer term is a very key care about.

Speaker 3

And that's one thing that we feel good about now. And the third one is increasing energy density. So we have now looked at all the different phones out shipping in the market. And we believe that we can provide an advantage compared to that while keeping fast charge, while keeping increasing the cycle life and also different temperatures. I mean, that's the other thing you need to worry about in these markets is that what temperature you operate the battery at, what top of the cycle charge it looks like and so on.

Speaker 3

So those are all the things that EX 1M addresses. And again, these are slightly different based on each customer. Some customers want more cycle life and maybe a little less CD. Some customers want more ED and a little less cycle life. So we are now in the middle of basically a target specification, which we have finalized now on EX1M.

Speaker 3

And those are the batteries that we expect to sample from our Malaysia factory in April. What EX2M does on top of that is actually continue to increase energy density. And you've seen us put out a slide before on where we expect to get there with that, while keeping the increases in cycle life, while keeping the increase in fast charge, while keeping all the safety parameters. Now to be able to accomplish that, we have finalized a set of materials for EX1M, cathodes, anodes, electrolytes, separators and so on. We have shortlisted what they will be for EX2M and in short order we'll decide which ones.

Speaker 3

Some very promising results, so we're pretty optimistic of being able to get there.

Speaker 7

Thanks, Raj.

Operator

Our next question comes from George Giannakoulis with Canaccord. Please unmute your audio and ask your question.

Speaker 8

Hey, everyone. Thanks so much for taking my question. I'd like to ask about your material supply chain. Earlier in the quarter, you announced an agreement with Group 14. And I'm curious, first of all, how diversified your silicon supply chain is?

Speaker 8

And how extensive are the choices by handset vendors or device vendors into making that decision? Or is that purely a decision that Innovix will make in terms of which silicon they put you put into your batteries? Thank you.

Speaker 3

Yes. So if you look at producing a battery that increases energy density, but also meets all these other requirements, and I can't emphasize enough of that, because ultimately a battery has to meet the requirements that are required by the end product, which our customers make cycle life, fast charge, swelling at the end of life and so on. It's a function of not just the anode, but it's a function of the silicon anode, a function of the cathode, and more importantly, the electrolyte. Because in a battery, the electrolyte, when it interfaces the cathode, has a certain properties, a certain way it needs to behave. When it is phase of the anode, the other side, it has to behave a certain way, all at the same time being able to pass lithium ions.

Speaker 3

And the separators make big role as to how thick is the separator and how do they handle the stack pressure and so on. So the recipe of choosing the right cathodes, right anodes, right separators and putting them together is really the intellectual property that we have at Innovatex and experience we have here. So we like I said, there's multiple choices on anodes, multiple choices in cathodes, multiple choices in electrolytes. And that is the intellectual property that we have. We are constantly looking for new materials.

Speaker 3

We were very excited by the results we got from the Group 14 material, and that team has been super supportive. We are also talking to other people. Supply diversity is also important. And ultimately, what we're going to do is to find the right recipe for the right end applications based on the customer feedback. So that's kind of the best way to answer that question.

Speaker 7

Thank you. And just as

Speaker 8

a follow-up, I'd like to ask about your timelines here on the FAT and SAT testing. Your confidence level in terms of getting out samples for the agility line in the second quarter, I know that on a recent podcast you discussed a little bit of a push out in some of the time lines there. Can you just kind of reiterate that and give us confidence that you can get those samples out in the Q2? Thank you.

Speaker 3

Yes, I'll answer a little bit at high level and Ajay, feel free to add. I know he's in Malaysia. I'm not sure how good the line is. But basically, we feel very confident that we're going to get samples out in April timeframe to our customers. And we did announce some delays on FET of 1 of the zones.

Speaker 3

And again, you got to remember, these are very, very complicated things we are doing. These are tens of machines all working in tandem together. One thing, both Ajay and myself and the leadership team we've done is we're not going to cut corners, right? We're not going to cut corners in the requirements of FAT, in the requirements of SAT, how much material we need to run, what yield they need to come up with before we take acceptance of any of these machines for our customers from our suppliers. So that has caused some amount of back and forth with our suppliers.

Speaker 3

But we feel good now that it's within reach and we feel good about the machines we've received. We do expect all of them to work together and some of them have been shipped. They're in Malaysia, some are in the way of shipping. But we're holding the date for getting the samples to customers, although some of the zones have pushed a little bit.

Speaker 9

Just to add to that, yes, feeling fairly confident. I don't know if you guys can hear me okay or not, but I'm here calling in from Lab 2. Feeling pretty confident about how the machines are behaving. And I think we shared some of the data as well, early data on F80 during the in the podcast. So, yeah, feeling confident that Q2 will definitely get samples out from the Agility line here in Malaysia.

Operator

Our next question comes from Jed Dorsheimer with William Blair. Please unmute your audio and ask your question.

Speaker 10

Hi. Thanks for taking my question here, guys. Raj, you've talked about some of the performance trade offs between EX1, EX1M and EX2. I was wondering how should we think about the value creation in terms of some of those trade offs? And what I'm really trying to get to is ASP differences between the different products.

Speaker 10

And then I have a follow-up.

Speaker 3

Yes. I mean, Jed, it's really based on the end markets. I think our view is that when you go into things like smartphones, where they're going to laptops, you've got to get to 800,000 cycles in that range. You think about it, if you have a phone, you're going to charge it every day. So you're looking at 350 charges discharge cycle, say, a year.

Speaker 3

Let's say you keep this one for 2.5 to 3 years, you're quickly at the 1,000 range, right? So you pretty much have to be able to do that. If you look at a a wearable or maybe some of the IoT devices, you might keep it for less number of years. Maybe you don't charge it every day. So you can go get away with less number of cycles, right?

Speaker 3

When we decided to go after smartphones as a big market and then laptops, 1,000 cycles, 800 to 1000 cycles became a must and we aimed at 1,000 as a target. If some customers want to take 800 cycle device, that's good. We can do that, but we set the goal aggressively. Now the ASP is going to depend upon what the value most, right? I mean, ultimately, there is must meet requirements, which is fast charge, which is cycle live, which is not swell at high temperatures when you store the battery, safety and so on.

Speaker 3

Once you meet those, the amount of EDU we provide on top of that is what's going to change the ASP premium that we command. In some other markets, maybe cycle life is not that important. We can index more on ED, and then we can get a premium for that. So it really depends on the end market. Some are must have requirements and some are requirements that once you do them, you can get more premium for high ED.

Speaker 10

As a follow-up, I know on wearables, we've talked about Apple Watch in terms of value or the value of the additional battery life is not as great as that of a phone. But I'm curious, when we look at Apple Vision or when we look at something that only has 2 hours of battery life and is certainly gating the adoption of that product. How do you think about the value in terms of the and therefore the gating function of the battery to kind of help those markets open up to larger volumes? Thanks.

Speaker 3

Yes, absolutely. I mean, that is there are more and more applications like that coming out that absolutely need much higher energy density. And I am one of those proud owners of Apple Vision Pro. I love the device and I hate the 2 hour battery life. It's the single biggest problem with the device is the battery life.

Speaker 3

So but it's a phenomenal device. And I mean, I think the reason the device is so great is because of the performance that's in there, you know, with the memories and the process and the displays. And I mean, there's an IMAX app I tried on it and it just feels like you're in a movie, you know, in IMAX theater, but the battery goes down pretty fast. So I think the ASP premium is there in those markets because that's, I think, all told $4,000 product. And I mean, people will be willing to, I mean, what if you could double that battery life?

Speaker 3

That'd be awesome. So I think a lot, I mean, I actually think that is just the first of the many products that are coming. And this is what I mentioned when I first came to this job is that the performance and the end user experience that great processors, great memory devices, great displays, great cameras can deliver is huge. We haven't seen how good that can be. And now we are seeing with the early products coming out, there'll be a lot more like that, that will come out.

Speaker 3

And you'll see that to deliver the experience that these advances in chips and cameras and memories as really delivered, you can't really realize them until you have a better battery. And that's why I think that once we produce this battery, there'll be a lot of opportunity for a differentiated ASP.

Operator

Our next question comes from Derek Soderbergh with Cantor. Please unmute your audio and ask your question.

Speaker 7

Yeah. Hey, everyone. Thanks for taking the questions. I wanted to start with, on the slide deck, it looks like you guys have the goal of multiple smartphone launches in 2025. I'm wondering what you're going to need from a production capacity standpoint to achieve this.

Speaker 7

Can you do that with a single line? Do you need 2 lines? Any detail on that would be great. Thanks.

Speaker 3

Yes. So I think it's important for me to like explain how the process works. I know I get asked this question a lot. So if you think about where we are in our journey, we now have a recipe with the X1M that we feel pretty good about that actually meets the requirements of the market. We are factory coming up now and we feel pretty good that we'll be able to get some samples in April from that.

Speaker 3

And so what happens next, right? We're going to give this to our customers. They're going to test them and they're going to give us some feedback and they're going to give us feedback on maybe some optimization on dimensions of how big the battery should be and so on. We're going to make those changes because we have an agility line that can actually do different size batteries. We're going to give those back to them and they're going to test them again.

Speaker 3

And like I said, we are sampling multiple cell phone customers. And when you do that, typically it's 9 to 12 months, as I mentioned, on how long it takes them to qualify the battery. Because you remember, we're talking about a 1,000 cycle battery, which means they got to charge discharge for 1,000 cycles to make sure it's okay. That'll take some that'll take the 9 to 12 months. And then we get designed into if things go really well, maybe multiple models, they'll start with 1 model.

Speaker 3

If things go really well, maybe we'll have multiple OEMs. So the amount of volume that we need is going to depend upon how these qualification cycles go. And that's going to get how much capacity we need to build. We do have one line now that can produce, as I mentioned, around 9,000,000 batteries or so a year. And we're going to be watching those customer qualifications closely and making decisions on how to make sure we have enough capacity based on how the design wins are going.

Speaker 3

And that's something that as this year go through, we'll continue to update you on that.

Speaker 7

Got it. And as my follow-up, Ajay, you spoke a bit about yield on the last podcast, and you mentioned a bit about throughput just now on the video. From your perspective, how is the equipment as a whole? I know you guys did a bunch of proof of concept tests. And, just curious your thoughts and confidence level around, everything together hitting sort of that 13.50 UPH metric, and share any incremental details on how throughput is tracking as well?

Speaker 7

Thanks.

Speaker 9

Sure. Yes, good question. The yields, I mean, as a part of the SAT, as Raj mentioned, we are doing some rigorous, Just take one example, laser, for example, is about 25, 26 critical to quality parameters that we track. They're doing that in SAT, making sure the CP and the CPKs of that is at good more than 1.0 CPK levels. We'll further fine tune that to 1.33.

Speaker 9

But yes, fairly looking fairly good that we are when we clear the FAT that the yield on certain critical processes throughout the line from our learnings in Fab 1 we'll not only hold, but we'll start at the right time at the right place. So you're kind of looking more and more confidence we are gaining actually as we finish the FAD. The POCs helped us design the equipment right. Now the FADs are helping us ensuring that the yields are going to hold. And then the SAT, which is going to happen here, some of it has already started.

Speaker 9

In fact, the machine behind me are going through SAT right now, are going to assure that the fine tuning will help us get the yield even at a better place, right? So that's yield. UPH wise, zone 23 is really the battery line, which runs at or which will run at 13.50 UPN. Load 14, we are tuning it to as a farm and we'll do the 13.50, but we can keep on adding to that to make sure it is debottleneck. So 14 are farmed.

Speaker 9

They will be adjusted to 13.50. 23 are the ones which are kind of locked in. We are feeling good about both these things.

Operator

Our next question comes from Anthony Stoss with Craig Hallum. Please unmute your audio and ask your question.

Speaker 11

Hey, Raj. A lot of my questions were asked, but maybe now that you've had Rauj Jade under your belt for a while, can you update us what you've learned from Rauj Jade? And then also just to get Farhan in the action here, just your view on OpEx for March and where OpEx trends through the rest of the year?

Speaker 3

Yes, Raujed, I visited the factory, I think a few months ago. We are super thrilled by the acquisition. It's really phenomenal. I mean, this company has been making production batteries shipping for over 20 years. And it's an expertise that really complements what we have in the company.

Speaker 3

They understand battery manufacturing. They understand safety. They understand different end markets. And more importantly, their coating expertise is phenomenal. So the thing I want to mention is that when you coat a roll properly to the right specifications, it makes it much easier to cut it on the laser and to stack it.

Speaker 3

So it's very important you own the incoming material quality and specification, and which is one of the problems we had when we were running in Gen 1 that we were relying on 3rd party toll quarters who weren't that motivated to really to quote it like how we wanted it. Because you got to remember, we don't just take rolls and make them jelly rolls like other people that they used to supply to. We cut them with lasers, so they're very different and we stack them. So it's a a, I realized when I came in last year that it was a key piece of the manufacturing process we absolutely needed. And now we are using that capacity to even for Ajay to do his FET and SAT and so on.

Speaker 3

So when the material comes out, we're able to quickly go back and forth between making sure its coating is right and the laser cutting is right and so on. So it's like an end to end optimization. The second thing we found is that the team at Rao JET has 2 things that they do really well in addition to the things I mentioned. They know how to make high current batteries. So these are batteries that can actually propel things like run electric motors, run drones, run military applications.

Speaker 3

That's a very unique value proposition that actually we are able to now looking at how to extend the customer breadth there. And the second one is they can make odd shaped batteries. They can make donut batteries. They can make different shaped batteries because of their ability to the way they laminate and the way they stack batteries. So we have some customer base that actually overlaps, that we're able to now go in and also present some of the silicon anode based batteries.

Speaker 3

But some customer base where we're able to sell ROUT JED mid graphite batteries. And so we will continue to spend more time and grow the revenue of that company that we acquired. I mean, it's one team now. So super exciting and it's very fortunate to us that we were able to get the acquisition done quickly.

Speaker 5

So, yes, touching on the OpEx side, from Q4 to Q1, it should be similar level. From Q1 to Q2, there should be a decline because of the $18,500,000 of the depreciation that we talked about. And also because of the actions that we have taken in Fremont, some of those benefits will come through. So you should get additional low single digit kind of a benefit like that should also decline. And then for the year after that, we should be holding it steady, maybe go up slightly towards the end of the year.

Speaker 5

For the full year, like if you look at the EBITDA of the company, you should kind of think of it for the full year very similar to what we had in 2023 and fairly steady through the year as well.

Operator

Our next question comes from Gabe Daoud with Cowen. Please unmute your audio and ask your question.

Speaker 12

Thank you. Thanks everyone for all the prepared remarks and Ajay for the great video. Raj, I was hoping we can maybe just go back to EX1M and EX2M. There's already been a lot of discussion around it. But just curious if you could maybe quantify what the energy density targets are for each and just how that compares to leading edge mobile phones in the market today?

Speaker 3

Yes. We haven't put out exactly a precise target, mainly because we are making the right, I would say, trade off between energy density, cycle life, fast charge, safety, and then also the fast charge. And that's very important. It will definitely be higher than what is in the market today. I think we put in our investor deck what we expect to get to on EX2M.

Speaker 3

Where exactly EX1M will land is a decision we're going to make together with our customers. As I mentioned, it's not just a one parameter that drives doesn't drive design wins. It's a sum total of all those 5 parameters that we need to be thinking about. And that's where we are focused on. It will definitely improve the over what's in the market for sure.

Speaker 3

We just want to make sure that we did it right with our customers because they also are involved now in the trade off that they actually want to make to get the right battery in time.

Speaker 12

Yep. Okay. Okay, got it. That makes sense. Certainly a lot of parameters you need to solve for depending on the customer.

Speaker 12

Okay. Then just as a follow-up, very clear on when EX1M and EX2M are expected to be shipped for customers to sample. But when will the cells actually be coming off the high volume manufacturing line? I guess I'd imagine that some customers would want to see cells off of that line as part of the qualification process too. Is that within the 9 to 12 month window that you talked about?

Speaker 3

The short answer is yes. The good news is our Agility line and the high volume manufacturing line use the exact same modules. So in that sense, it's and also from the same place, they're both in Malaysia in the same factory that you see where Ajay is right now. So in that sense, there is a lot of similarities. So our expectation is that once they get samples from 1, moving to the other one should be a short cycle time call, because they're really the same machines.

Speaker 3

It's just the scale is different, which is actually a very key part of our strategy to reduce that cycle time. But ultimately, look, we'll get them the samples, but the exact qualification time, like I said, is going to depend upon phone level of qualification. And when I talk to my customers, they basically tell me, look, Raj, depending upon how good your first samples are and where we put it, anywhere between 9 12, and that's kind of what we are looking working towards.

Speaker 12

Okay, okay. Got it. Got it. Great. Thanks Raj.

Speaker 2

Absolutely.

Operator

Our next question comes from Ananda Baru with Loop Capital Markets. Please unmute your audio and ask your question.

Speaker 2

Yes. Good afternoon, guys. Thanks for taking the questions. Really appreciate it. I guess the first one maybe is for Ajay, if you're still online, Ajay.

Speaker 2

Just to the earlier question about yields, is there a useful way to think about where you guys think yields in FAD2 will be in April, May when you start putting out legitimate samples? And then are there yield targets through the year as well? And I guess I have a quick follow-up, but like what's the value of the yield targets that you guys have as well? And I have a quick follow-up after that. Thanks.

Speaker 9

Good question, Ananda. So all the learnings and all the root cause analysis that we have done on the Gen 1 yield that for the last full year that we have been sort of ramping up ramping it up slowly. Where we ended in Gen 1, that's where we will begin in Gen 2. All the learnings have been played in into the Gen 2 equipment and the design. And what Gen 1 could not provide, we have make sure the design accommodated that here in Gen 2.

Speaker 9

So we will start there. Pretty decent yield, mostly all CPK windows or the process driven, more than 1.1, 1.2 CPK kind of thing for every process step. There are several yield points during the line. So you can multiply those and you get a pretty decent yield. But then immediately after that, all the fine tuning and within the 3 quarters, we are going to deliver upwards of 90% plus yield in the Gentoo line.

Speaker 9

That's how we are thinking and that's how we are planning actually and the FAD entities are supporting that.

Speaker 2

So that's super helpful. Thanks. Yes, super helpful. And I guess the follow-up is maybe this is for Raj and Farhan as well. Like what in terms of your margin model, right?

Speaker 2

So let's say you hit the 90% plus yield targets that Ajay just spoke to. What is that at scale margins, is that in the margin model? I guess, where are you in the margin model when you start shipping kind of volumes of those kinds of deals into initial customers production?

Speaker 3

Yes, that's the right number. That's the right number to think about. I mean, look, this is consumer products, right? I mean, we've all done this with the process of memories and Ajay and I have done it for I don't know how many decades, but you got to get to 90 plus percent yields. I mean, high 90s is where we really need to get to.

Speaker 3

But we have premiums that we believe we can command because of what we're able to provide and that will help us for a while. But ultimately, we got to get to those numbers. And I think we factored that in into how the FAT is done and SIT is done. And that's kind of the important part here is that the acceptance criteria for the machines is to be running at that level of CPKs, so that when we get them and string them all together, it shouldn't take hopefully it shouldn't take a lot of optimization to get to target yields. So that's kind of what we are planning.

Speaker 2

Okay, awesome. Thanks a lot. Appreciate it.

Operator

Our next question comes from Chris Sullar with B. Riley. Please unmute your audio and ask your question.

Speaker 13

Hey, guys. Thanks for taking my question. I just wanted to follow-up on you talked about a 9 to 12 month to qualify for some of these wins. Is that after EX1M is already in customers' hands? Or are we already in that like 9 to 12 months with some of the samples of prior sales you've supplied to some of these customers?

Speaker 13

And then then should we think about is there kind of a lead time out between design in and kind of a launch that's a good kind of rough timeframe we should expect? I just wanted to kind of get a little bit more on the cadence there.

Speaker 3

Yes, that is what after we delivered the samples from in April from our factory, right? I mean, what we have done previously has really helped them understand our technology and how it works and so on. But the product that's actually targeted to go into the cell phone is a 1,000 cycles fast charging product, which is one we want to sample in April. And that's when you can think of the clock starting. Now typically, my experience in these kind of things is that we will get to a model that we're going to be in.

Speaker 3

There will be technology evaluation where they're just evaluating the battery in isolation in terms of the tests and so on. Then they'll actually pass that, then they'll actually put it in an actual phone model, and that'll go on for some time. And then the precise phone it will go into is the one that happens next. So that's the total period of 9 to 12 months. The actual design win of what model we are on will come just few months before high volume.

Speaker 3

Typically, it doesn't they don't decide way ahead. But the good news is once you pass the technology qualification, once you are vendor list, subsequent models can come much faster because you're now inside, right? And that's what my experience has been previously with memories and process. The first one takes a little longer. Once we get in, follow on models can come faster.

Speaker 13

Understood. And then maybe just on the RouteShade contribution in the Q4. Can you update us on what the run rate is for that legacy business? It seemed a little bit stronger than I had been expecting at least.

Speaker 5

Yes. No, I can talk about that. So in the Q4, RouteJade business tends to be stronger. There's normally a seasonality associated with it. So for the year, the seasonality is that the second quarter is kind of the low point, the Q4 is the strong point, generally speaking.

Speaker 5

This year in 'twenty three, what we saw was that there was a bunch of business that was at the end of the year and beginning of 'twenty four percent of 'twenty three, beginning of 'twenty four, and a lot of that got shipped in 'twenty three. So that was a factor why the revenue came in stronger. And also like quarter on quarter decline also it contributed to it. So generally speaking, for the 1st three quarters, you should think of it as about $18,000,000 annualized run rate and then Q4 stronger. And with like the Q4 of 'twenty three being somewhat exceptionally stronger.

Operator

Our next question comes from Tim Moore with EF Hutton. Please unmute your audio and ask your question.

Speaker 14

Thanks. And most of my questions were already answered. But regarding you mentioned the 90% yield gold commentary 2 questions ago. Can you maybe give us a rough better sense, we won't hold you to it, of the timing roadmap maybe for potential revenues run rate when you look out to maybe the December quarter or the March quarter next year from the Fab 2 sample production, if that goes pretty well? Any rough thoughts on maybe what the revenue tied to that could be a year from now quarterly?

Speaker 9

Yes. As Raju go ahead, sorry.

Speaker 5

No, I was just saying that we are guiding 1 quarter at a time. And so we'll get to it when we get to it. But we kind of talked about the timing of the production ramp and we talked about, we gave you some good color on that. And we have given like, you know, 25 that we will be in smartphones and so you will have a revenue ramp associated with that. I don't know, Rajiv?

Speaker 3

Yes, I mean, absolutely. I mean, look, we're going to sample products from our Fab 2 in April. And we hopefully, there'll be some IoT type customers that can go to production earlier in 'twenty four, but the smartphone ones will really be in 'twenty five. So, yeah, I think that's just the way you guys should be thinking about this. And again, super excited by the technology and the acceptance of the customer base.

Speaker 3

Once we qualify, it's just going to be a lot more fun.

Speaker 14

That's good. Yes, I think you were pretty clear on the 2025 timing for the smartphone, but the IoT, it could be pretty promising maybe towards the end of the year. The other question I had is on smartphones. I mean, I mentioned it was a sum total of parameters and there's trade offs. If you get asked during qualifications and maybe pilots, do you think you could get asked to do an exclusive contract for major OEM customer?

Speaker 14

I think you do the unique specification exclusively for them or is that something you want to consider?

Speaker 3

Yes. I mean, look, it's just a business case, right? I mean, so if there's guaranteed volumes and good ASP, we're totally open to it. But by the way the nature of this business is that what I expect to happen is that we'll probably sign some joint development agreement or something like that, and then they'll talk about what size battery they want, what size battery we make, what time is the yield, and that's how these things go typically from my experience. But in some way, it will become a little bit exclusive because of the shape of the battery, not the technology

Speaker 2

itself, right?

Speaker 14

Okay. That makes sense. Well, thanks and good luck with the April sampling and that's it for my question.

Speaker 3

Thank

Operator

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

Speaker 3

Yes. Thank you all. It's been a really great year in 2023 recap. Super excited by where we are in 24. So look forward to talking to you guys next quarter.

Speaker 3

Thank you for all your interest.

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Earnings Conference Call
Enovix Q4 2023
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