Enovix Corporation (ENVX) Earnings Call Transcript & Summary

Good afternoon and thanks for attending the 7th Annual Energy, Power & Renewables Conference. My name is Bill Peterson. I cover transportation and fuel transformation here at the firm. Really pleased to have Harrold Rust, CEO of Enovix, here with us. He's going to start off with a brief presentation and then we'll move to Q&A, and certainly happy to have questions from the audience. So with that, thanks for joining our conference.

Thank you. All right. So let's get the boring stuff out of the way first. We may make some forward-looking statements that obviously contain risks and uncertainties. So please make sure to check out all our risk factors contained in our on our IR site and our SEC filings. All right. So who is Enovix? Enovix is a company that you may not have heard of. We've actually been around for about 15 years. We are an architecture company that has developed a new lithium-ion battery architecture that provides a step change in energy density, and we'll talk about how we do that. Specifically, we make silicon work. The batteries we make have 100% active silicon anode that differentiates us from many companies in the field that are trying to make silicon work. We are a manufacturing company. We have built an entire manufacturing line in California. We started shipping our first commercial products this past week. And we intend to target at start the consumer electronic markets, but then eventually take our technology into the EV space, and we'll talk about that. The architecture has advantages not only in energy density but also in safety and charge rate, which we think are also very compelling. So let's look briefly at the history of energy density in batteries. This red curve is the curve of what the industry has done in the last 30 or so years, and what you find that energy density in batteries has been pretty anemic. It grows about 4.2% a year. The blue line represents our products. Our first product is roughly 5 years ahead of where the industry will be, and we have successive generation of products after to increase that lead up to 9 years. And in a world where that red line moves very little, if you can jump off that line, it's not difficult to get customers interested in what you're doing. Here's some examples of products that are just on the market today where we've looked at those batteries, we've evaluated what our batteries would be in them. And what you can see is that depending on the product, you can be 24% better to as much as 133% better. So that's that much more energy in the same form factor you have, and that's pretty compelling. That enables products, that enables new features, it enables longer run times, all of which are very desirable in the consumer space. And depending on the product, that energy densities can be leveraged in different ways. We just started shipping recently. That said, we have a $1.5 billion revenue funnel. These are customers that we've been working with, in many cases over a number of years, that have tested our batteries and are in active discussions about taking product. The bottom part of our funnel are customers that have completed that evaluation work, and we've started design work on a specific product for them. And -- or they funded a custom design or is qualifying a standard design that we make today. We make some standard batteries today that we offer. So how do we do that? If you look on the bottom right of your screen, you'll see some micrographs. These are cross-sections of batteries. The bottom one is a conventional battery. It's called the jelly roll. Most batteries are made that way today. It's a wound-up structure of an anode and a cathode and some other materials. Our battery is the battery above that. It is a stacked battery rather than a wound battery. Among other things, it's a much more efficient use of the space. But more importantly, it makes it possible to move through a silicon anode. And if you see on the bar chart on the left, the industry, in general, tries to make small amounts of silicon and with graphite, whereas we use 100% active silicon in our battery. The reason that's important is that silicon can store over twice the lithium of graphite. And so in a battery if you can make a silicon anode work, in principle, it can be half as thick to accomplish the same job. This is what our battery looks like. It is a stacked battery with electrodes which are about 3 millimeters tall. They're stacked in a horizontal plane, and then there's a constraint system that we put on top and the bottom of the battery, which is stainless steel. That stainless steel is critical to solve one of silicon's big problems, which is an expansion problem. In a traditional battery, the expansion of a cell creates forces which are almost impractical or are impractical to try to manage. In our battery and the way it's organized, that expansion force operates not on the top of the battery but on the side of the battery. And that constraint system, with an engineered cell, actually keeps that battery from expanding and allows us to use the 100% silicon. So energy density is obviously a prime attribute. People care about that across all markets. Also, cycle life and calendar life are very important, and we have very excellent data on both of those. In many spaces, fast charge, this is a [ big care about ], and we've demonstrated some pretty exceptional results on fast-charging that the architecture also enables. And then lastly, you guys all know about safety issues on batteries in the past. This is kind of a constant issue in batteries. The architecture actually enables some very unique ways to improve safety, and we think some of those are gamechangers, which, in some ways, might be as significant as any of the advantages listed above. So what are we doing? We are -- we've launched our first factory called Fab-1. It's commercialized and shipping products now. Those first products are in the wearable space: smartwatches, fitness trackers, those kinds of things. We are going to quickly move into some larger cells over the next year that service things like smartphones, laptops, mobile communication devices. Our plan is to build out a couple factories. The first one we call Fab-2. This is additional capacity on top of Fab-1 and then a Fab-3. The reason for 2 factories is to have factories located close to our customers. One of those will be in Asia, one of those will be in the U.S., to service the demand in those countries. As you guys know, there's a significant amount of interest in establishing a domestic supply chain of batteries. We have many customers that also would desire that, even in the consumer electronics space. Ultimately, the technology can make it into EVs. It scales quite well, and we've done a bunch of initial testing, much of which you can find on our website. We believe getting it at the market will be primarily a licensing opportunity for us, and we don't intend to build Gigafactories building car batteries, but we intend to equip others with the ability to do that and then profit from those relationships. Here's our location. We're in Fremont. For those of you know where the Tesla factory is, we're across the freeway. There's a couple of pictures of what our manufacturing line looks like. It's fully automated. You essentially load incoming raw materials into one end, and you put the boxes in the UPS truck at the back end. So it's something you can put anywhere, which is very advantageous. The equipment is quite custom for many parts, but in other parts, it's actually quite standard. The pieces unique to our stacking process are very custom to us, and there's a lot of IP built around that. And then, as I mentioned earlier, we shipped our first batteries this week, and this is someone I know that did that. But it is -- we've got a 300-person company of people that were kind of behind that. And that one event kind of is a big milestone, and it's been a 14-year journey to develop a technology, build a manufacturing line, have customers willing to pay you for it and then build a profitable business. So with that, I'll end, and then I'll take questions.

And again, a reminder, if there's any questions from the audience, certainly happy to take them. Thanks for the overview. I think there's probably a lot of investors that follow the broader battery space. There's a lot of newer companies, and there's a lot of discussions on the next-generation types of batteries, battery technology. We hear about silicon anodes, hear about lithium metal, solid state. Can you speak to some of the differences and how Enovix is positioned?

Yes. I mean we're obviously fans of silicon. There's other people that are playing in that space, many looking at kind of engineered material solutions to kind of work within the existing battery supply chain. And then there's some more out-there things around things like solid state, lithium metal batteries. And I think it's a big market. Even the consumer electronics space is a $13 billion market. The EV space is obviously going to be much bigger than that. And I think there's places for a lot of companies to win. We really like our position. We -- many of these companies are in technology development still. They've got to finish off and solve some hard problems. We spent the last 15 years doing that. And then when you get done with that, you got to figure how to actually make something, which is also not trivial, and in our case, probably take us 3 or 4 years to do. And so our view is that some of these new technologies certainly will make it, but they've got a ways to go. And we think ultimately, our approach gives us the highest energy density and gives us an advantage long term both in energy density, but we think also in cost. And we're ready now. I mean we're a commercial company now that will be growing this year and expanding rapidly over the years to come.

I guess to maybe tie in. So you're focused on consumer electronics. What is the competitive dynamics in there? And why focus on consumer electronics compared to, I mean, ultimately maybe a larger market in EVs or stationary or whatever the case might be?

Yes. I mean, somewhat surprisingly people think the mobile electronic market is kind of small. It's actually not. It's $13 billion. And it has some attractive dynamics for it being a place to start. One is, obviously, I don't have to build a Gigafactory on day 1 to service that market. And if you look at batteries and the devices we all carry around, the batteries tend to be in the $5 to $10 range in your thousand-dollar phone. And if you can really deliver a battery that's 50% better, they can afford to pay you a premium for that, whereas that's much more difficult than something like an EV where the battery is a big portion of the price of the car. And that's what we've seen with the customers we're talking with. We have a premium pricing model that the customers are not blinking at. And the other dynamic about the market is that to qualify to be in a consumer electronic is not a multiyear effort. To be in a car, you're talking 4, 5, maybe longer, years. We decided we'd like to become a battery manufacturer now, make money, become profitable. And we give up nothing in terms of going after the larger EV markets. The technology is completely applicable to that place. But we just think that's a really tough place to cut your teeth to start. And so from the beginning, we said, let's go after a market that we can be in quickly, that really cares about energy density deeply and is willing to pay for it.

Maybe -- and I'll tell you the question I'm getting here online, but what does a better battery mean? Is it a smaller battery that has the same energy or, let's say, lifetime as a existing product? Or is it the same battery size that gives you longer lasting? What does a better battery mean in the consumer space?

Yes. I mean there's no -- I don't think there's a single answer there. But sadly, I think in most cases, what's going to happen with the better battery is not that your phone is going to last 2 days because none of the phone companies really care about that. What they care about is having you make it through the day and then giving you a bunch of other features or selling you a more expensive phone or whatever, right? And so I would think about how the devices could change with better energy. I mean things like 5G, which -- I actually personally have never seen the 5G speed. It's a huge power hog. And I think actually having a better battery might actually make that a true reality, things like more processing on the phone and less reliance on the cloud for privacy reasons. And I would say there's even products that today can't exist without a better battery. I mean you think about something like augmented reality. There's been a few goes at that that haven't really panned out. But some of the largest technology companies, many in California, are spending billions of dollars on that market because they view that as the next great computing platform, and it is massively battery challenged among other things. And we've got some relationships in that space. The customers there have told us that our battery is the battery that can make that work. And so in that case, that energy density just enables a whole new product category, which doesn't exist today. So we think that's pretty powerful.

Maybe sticking on that theme. I mean would you say that, like your type of battery required to kind of even maybe potentially start off that or -- I'm just trying to think about the...

Yes. So for the several companies we've been dealing with, what they've told us is that they need our battery to make that product work.

Okay.

I mean -- and it's so battery challenged that -- they have other challenges as well, but it's really critical to their success in that category.

So you discussed the $1.5 billion revenue funnel, nearly $400 million of which in active designs or design wins that have already been captured. What type of products account for the bulk of the revenue funnel today?

I think it's actually pretty broad across the market segments. I mean you think about consumer electronics, on the small end, you've got wearable devices, smartwatches. You've got the AR thing we talked about. You've got mobile communications, things like policemen, fireman radios. You've got smartphones. You've got laptops, tablets. We have broad wins across that space. Those products have come out at different times. It just so happens that things like wearables are quicker to qualify than something like a laptop. But in general, we have aspects of that whole market across the bottom part of our funnel.

Okay. Maybe just taking a step further. Where do you see the biggest opportunities to expand your funnel? The PC market, for example, is a really stable market, but is PC, smartwatches, is AR...

Yes. I think we've got representation to grab that whole market. I would say if you think about our company a couple years from now, well, this year, wearables is a significant amount of what we're doing. I think over the next several years, you'll see a bigger portion of our business be around things like smartphones and laptops. Those batteries -- those markets are bigger, obviously, and the cells themselves are larger, so they just can generate some more revenue. So I think -- and I think a lot of the customers we deal with, they have got products across all those segments. So we see a dynamic where early penetration in some of the wearable categories, but then that success extends into other parts -- other market segments that are in their product families.

Okay. All right. Let's move on. You mentioned the safety aspects, which is important for battery designs. You introduced the proprietary BrakeFlow technology, I believe, in March. And this improves the tolerance against thermal runaway without compromising energy density. Can you expand more on that? What's the roadmap for integration of the technology?

Yes. So batteries store a lot of energy, obviously. That's what we count on. But storing energy also entails risks because in a normal battery or any battery, if you have an internal short between the layers and that battery tries to discharge all this energy through that short, at some temperature that battery will catch fire and that's a bad thing, obviously. And part of the problem, with normal batteries, you have a single anode and a single cathode. So you've got a lot of energy in 2 sheets trying to get to each other. And our battery is very different. And effectively the way we stack this battery is we put many, many sub-batteries within the battery and that allows us to take safety inside the cell. And so we're able to do in our battery in the case of a short is limit how much current comes out of all the adjacent electrodes into that short and that allows us to reduce the temperature you get that might cause a fire. We think it's a gamechanger. We are in the process that we've already shown that in technology development we're in the process of working on samples to customers for that and our belief is that this will be in our product lines towards the end of next year.

So I guess, seems like it's slightly different manufacturing process. Is there any significant cost associated with the technology, or maybe conversely, what are people willing to pay for it?

Yes, so I think, if you think about the [ engine ] manufacturing process, pieces of it are very common. The majority is actually the same. Battery manufacturing is a bunch of gigantic coding machines which are the same whether, you're us or somebody else, and then the back end where you package the battery and you test it is the same. The difference is really our stacking process. We replaced a winding process with a stacking process, so that's unique to us. That drives some capital to do that, but you're replacing some capital as well. So I think it gives you an opportunity also to think about, as you grow the company, working with existing players, which are really good at battery manufacturing and retrofitting existing factories or as new factories come up, you license our technology in some markets to enable them and then have that be a growth engine for the company. Ultimately in terms of product cost, we think at scale, our products will be very cost competitive with others. One of the advantages you obviously have is that if you're making a battery, as an example, which is 50% higher energy, people think about battery costs and dollars per watthour. And so if your battery has 50% more watthours, you're dividing by a bigger number to start, which gives you an advantage on the cost side.

Moving on to EVs, you mentioned it takes -- qualification time is longer. But I guess how does Enovix plan enter the market and I guess to address the market opportunity and what should investors look for in order to track your progress?

Yes. So that's a great question. We are -- the technology really plays, we think, quite well in EV space. We've tactically decided not to start there, but we do have a bunch of efforts going on there. We have a group we formed within the company called the Enovix Mobility where we brought in some top talent from the EV battery space that's helping us in that area. We're halfway through a 3-year grant with the Department of Energy where we are building and testing cells with some of the EV material sets that you find. Typically EV batteries have different cathodes than consumer electronic batteries. And thus far the results on that are super-exciting, both in terms of cycling and calendar performance, but also in terms of rate performance. We've got some super-impressive data where we've been charging some cells to 80% -- from zero to 80% in 5 minutes which is pretty impressive. And the battery inherently has got just some structural advantages around heat dissipation that help allow that. We are actively talking with OEMs and partners in that space now, and with the business group, Enovix Mobility, pushing those discussions and basically trying to get in some development agreements over the next year. Ultimately, as I said earlier, we think this is a great licensing opportunity. And our goal is to work these relationships and do some down-selections and have something going on the licensing front mid-decade.

Yes. And I think this is -- these are like cell level tests. So what would be next steps? Like larger cells and...

Yes. So obviously, we're not -- today we're not making EV-size cells. The lines we've designed can make a variety of sizes but not quite to the EV size. We're putting in place some new development capacity, and we'll be working over the next year or 2 to have the ability to prototype some of these larger cells. It turns out that our testing to date shows that even as we scale cells now, the technology works and the performance doesn't drop off as you go between bigger cells and smaller cells. Yes.

I guess, just...

Wait, do you have a microphone? I'll repeat it.

Just talking about the manufacturing of the battery cell, and you kind of mentioned what a difference [indiscernible] battery. The commodity in metal usage in battery, does it [indiscernible] relative to those traditional batteries.

Can you repeat the question?

Yes. So if you think about the battery, the energy of the battery is 100% related to how much cathode material you put in. So if our battery's got 50% more energy, it's going to have 50% more cathode. The beauty is that we can put that 50% more cathode in because we don't have as big an anode. So in general, I'd say it follows traditional cell in terms of those equations. The one advantage we have is that we're on a path to get to pretty cheap forms of silicon. Silicon is the second most abundant element on the planet, and if we execute on our plans, we think we can get to a cost of silicon that is actually quite a bit cheaper than the graphite you use in batteries today.

Let's stick with manufacturing. Early this week you announced you're now shipping products for revenues. So I guess can you update us on the current capacity and your manufacturing progress? Specifically, how are yields trending and what are the opportunities for improvements?

Yes. So this line shipped its first qualification samples earlier in the year, and we just shipped our first revenue stuff just recently this week. We're working on similar deliveries with other customers as well. We're going to be working -- while we've seen great improvement on yields and throughput this year, that's actually going to be a task that we are working on all of this year and to some part of next year. And we see a clear path to where we want to get to, to get to the long-term models. It's just the basic task of bringing up a manufacturing line, particularly one which is a first of a kind. But we see a good path to get to where we want to be, which is very comparable with any battery manufacturing line in terms of yields.

A good segue. So Fab-2, can you provide an update on that? Have you ordered the equipment? And maybe following on the last question, what are your key learnings from Fab-1 that you can apply for the second fab?

Yes. That's a great question. Do prior to this first factory we were essentially building batteries by hand, pretty manual. And so this first automated line was a pretty significant leap in technology for us and capability. And we learned an awful lot in the process of bringing up that first line. And over the last 6 months we've been working on designs for a second line, which is significantly better than the first line. Not that the first line is not great. We're very proud of it. But we were able to design a second line which is significantly smaller in footprint and more efficient and higher throughput. We started ordering equipment for that recently, and over the next several weeks we expect to be moving on with the majority of the equipment for that. That line shows up in the first half of next year and then starts going to add revenue in the second half of next year, and we're pretty excited. That line which we'll put into a new location will be really the blueprint for how we scale the business and grow our output over the next several years.

Got a question from the webcast that says, the Enovix battery makes it possible to run smartwatches and local neural networks. What are the positive implications of this?

Of neural networks?

Yes.

I'm probably not the expert to answer that question. But I would say that so much processing on these devices now takes place up in the cloud, and there's a big desire to pull some of that stuff down, privacy reasons, speed, those things. But if you spin up your processor to full speed all the time, it's really going to kill these devices. So I think having a better battery will actually allow for a lot of things to happen, which quite honestly today there's just not enough horsepower to do it at the device level.

Okay. Another question, it sort of ties into earlier one. It says can you discuss the battery wars in wireless devices and where Enovix sits in that battle. Maybe just remind us of the key value proposition within CE.

Yes. I think in general across consumer electronics, they're dying for energy density because they see so little improvement year over year. And if you can actually provide a step change, you unlock the closet of ideas that have been held back because there just haven't been the energy density to do it. And we think that's a super-exciting opportunity to really change things. And, quite honestly, and we know some of this but a lot we don't. There are devices that are going to be out that you don't even know you need yet, but you're going to decide you just have to have this thing once it comes out. That's the power of the energy density of the battery.

In terms of the use of cash, over $400 million on the balance sheet at the end of the last quarter, how does Enovix intend to deploy capital for the rest of the year? And I guess are there any opportunities to accelerate your programs? Yes. So you're right, we ended the first quarter with $408 million in cash so we have a really strong cash position. We are investing this year in our second factory. So significant part of our spending this year goes towards that. But I think we still leave the year in quite a healthy position. So the cash we have allows us to get Fab-2 started, allows us to add some additional capacity, and puts us in a great position to build the business. I do believe strongly that as our product gets out on the market, we're going to get increasing pressure from customers to add capacity quickly. So one of the things I think we'll seriously look at as customers is a mechanism to do that. In the consumer electronic space, it's quite common for some of these larger customers to help fund capacity to grow quicker. And the other thing I would probably mention, I did earlier, is that there is a big push in the U.S. to develop a domestic supply chain of batteries. And there's capital there that can be tapped that we're also looking at. Any last questions? What would you say -- you've had a lot of discussions with investors today and in recent weeks. What are the things that are like most misunderstood, things that people may not miss about the investment thesis?

Well, people always think that simply better energy density makes your device last longer. I think I told you that's not going to happen unfortunately, but it'll unlock a lot of key things. I think the other things that people need to understand is that it really is one thing to develop a technology. It's really a completely different thing to figure how to make it and have customers pay you for that thing. That is a whole other set of challenges you have to go through. And I think until you get through both of those things, you really don't have anything. And we've had a lot of blood, sweat, and tears to get to this point, but we're super proud of what we've accomplished, and we're excited to get our product out in the market.

Well, with that, we're out of time, and thanks a lot for the update and look forward to following the progress. Thank you.

Thank you.