Enovix Corporation (ENVX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Enovix Corporation Second Quarter 2022 Earnings Conference Call. [Operator Instructions] And now I'd like to introduce your host for today's program, Charles Anderson, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you. Hello, everyone, and welcome to Enovix Corporation's Second Quarter 2022 Financial Results Conference Call. With us today are President, Chief Executive Officer and Co-Founder, Harrold Rust; and Chief Financial Officer, Steffen Pietzke. We will also be joined today by Chief Commercial Officer, Cam Dales; and Chief Technology Officer and Co-Founder, Ashok Lahiri, for the Q&A portion of our call. Harrold and Steffen will review the operating and financial highlights, and then we'll take questions. After the Q&A session, we'll conclude our call. Before we continue, let me kindly remind you that we released our second quarter 2022 shareholder letter after the market closed today. It's available on our website at ir.enovix.com. A replay of this conference call will be available later today on the Investor Relations page of our website. Please note that the shareholder letter, press release and this conference call, all contain forward-looking statements that 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, August 10, 2022, based on the 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 accounting principles. 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 website. I will now turn the call over to Harrold to begin. Harrold?

Thank you, Charlie. The second quarter was a great quarter for Enovix and a major milestone in our evolution as a company. I want to start today by going back to the beginning. When we started Enovix in 2007, we did so the belief that there must be a better way to make the modern battery, one that advanced architecture over materials. On paper, we felt we can improve energy density by as much as 100% and deliver the best product in an industry that would have enormous strategic importance. We knew we had the people that could pull it off from prior companies where the architecture of our product was our core competency. But we also knew it wouldn't be easy to change the fundamentals of how something had been made for over 50 years. In the spring of 2020, we started ordering the equipment for our first production line and get at the building at [ Finning ] to prepare for the production of our battery. A few months later, COVID brought the world to a stop. We could have used that as an excuse or failure. We didn't. We just figured out how to get the job done, knocking down one challenge at a time. Resilience is one of the core values of our people. In February 2021, when we announced plans to become a publicly traded company, we set an ambitious goal to bring up and qualify our first-of-a-kind battery production line in the U.S. at what we call Fab 1, and then to deliver our first commercial products and recognize product revenue in the second quarter of this year. Today, I'm pleased to report that we accomplished that goal and have since delivered batteries from Fab 1 from multiple customers and distributors. It turns out that we were right about batteries becoming strategically important. Industry leaders have taken note of Enovix moving into production with a revolutionary product and have become increasingly aggressive in moving forward. Specifically, in the second quarter, we completed tech qual with 3 mega cap technology companies, which we refer to as strategic accounts. Two of these are the same companies that told us we have the best advanced battery they have tested and the third told us their goal is to move our technology across their product portfolio quickly. And we all know that in this business, the best product win. On top of that, we completed the initial phases of our product development program in the second quarter with a fourth strategic account after shipping commercial sales from Fab 1 and recognized $5 million in revenue from this customer. Equally important strategically is the U.S. Army, who has a critical need for high energy batteries manufactured in the U.S. I'm proud to announce that we received a follow-on evaluation contract in the second quarter to build and test custom cells for wearable battery packs, U.S. Army soldiers carrying in field. This opportunity is very large. Our estimate is that the total U.S. wearable military battery market is approximately $350 million annually based on currently established military programs. We believe our battery can deliver considerable operational advantages for our soldiers, while at the same time providing resiliency of domestic require. While we continue to work on moving customers through our funnel towards orders, we are focused on improving the output of our factory to meet future demand. We made solid improvement in output and yield during the quarter, but we need to increase our manufacturing yield metrics. There is no easy path when bringing up a first-of-a-kind manufacturing line. It is a relentless effort of continuous improvement. I'm an operations person at heart. I have ramped multiple high-volume factories in my career, and I'm super confident we'll get the job done. We are prioritizing Fab 1 improvements in the third quarter. This includes taking the line down for portions of the quarter to improve individual process modules and install planned battery conveyor. Our goal is to do the needed work in Q3 to position us for the start of our production ramp to close the year. We're putting all this learning into our Gen 2 production line design. Major portions of Gen 2 are designed to be half the footprint of Gen 1 with increased outlook. We had hoped to have finished our Gen 2 ordering in Q2, but we extended the design activities to incorporate all the latest earnings from Fab 1 as well as our BrakeFlow technology. We now expect Gen 2 to be installed in Fab 2 in the second half of 2023. As previously discussed, we expect to have both a domestic and an Asian [ book fabrication ] in the next several years. I also want to reemphasize that we have multiple paths to grow the company, including capital-light options such as JV or licensing. This is the likely path for the electric vehicles market and it may also be a viable path to support the capacity requirements of our roster of strategic headcount. Now let me turn the call over to Steffen, who will discuss our financials. And after that, I'll make some closing remarks.

Thank you, Harrold. Our detailed financials can be found in our shareholder letter. I will spend my time covering a few high-level topics. We recognized $5.1 million of total revenue in the second quarter with one customer accounting for $5 million of service revenue as a result of us completing the initial phases of a product development program. Our adjusted EBITDA loss in the second quarter was $18 million compared to an adjusted EBITDA loss of $19.4 million in the first quarter of 2022. Excluding stock-based comp, our non-GAAP operating expenses in the quarter were $19.5 million, up from non-GAAP operating expenses of $19.4 million in the first quarter of 2022, which also excludes stock-based comp. We closed the second quarter of 2022 with net cash of $385 million, down from $408 million in the first quarter of 2022 due to $20.6 million of cash used operationally and $4 million of cash used on capital expenditure due to the timing of capital equipment purchases. We expect higher capital spending the rest of the year as we make initial payments for our Gen 2 production line and continue to outfit Fab 1 for higher output. Now let's discuss our guidance. For full year 2022, we now expect to use between $160 million, and $180 million of cash, of which we expect roughly half will be CapEx. As Harrold mentioned, we have extended our time line to complete the design of our Gen 2 line, which impacts the timing of our cash use. For revenue, we now expect to recognize between $6 million, and $8 million for full year 2022. We have lowered the top end of the range given we are prioritizing improvements in Fab 1 over shipments in the third quarter. We are also incorporating our latest view on the cadence of service revenue. To summarize, we achieved our target of recognizing product revenue in the second quarter. We are being thoughtful about spending and continue to possess a very strong balance sheet. I'll now turn it back to Harrold for closing remarks. Harrold?

Thanks, Steffen. What excites me about our future is not just the massive growth opportunity that lays ahead of us with our breakthrough energy density. Equally exciting to me are other attributes and features we can deliver that we didn't really fully realize when we started Enovix. As we changed the battery architecture so radically, problems that are difficult for others are not for us. Having a 100% active silicon anode with its cycle life is an example of this. But there are other advantages that could be equally, if not more valuable. We announced several of these over the past quarter. Our architecture by its design delivers exceptional rate and thermal performance, important in portable electronics and critical and EV applications where fast charging is a major care about. It also enables compelling safety advancements, the first of which we announced earlier this year called BrakeFlow. Today, we announced that our BrakeFlow cells pass the Nail Penetration Test at Inventus Power, our partner on the U.S. Army program. Safety is critical for our soldiers who typically carry 15 to 20 pounds of batteries into the field. The Inventus CTO stated that "Enovix batteries are the only next-gen high-energy density cells to pass our Nail Penetration Test." These are just the start of what we can do with our architecture. Stay tuned to see what else we can do. As a final note, as many of you are aware, our Chairman, T.J. Rodgers, is legendary in Silicon Valley for his love of technology and explaining in layman's terms. If you really want to understand why BrakeFlow is so important, we invite you to check out a video we posted today on our website, featuring T.J.'s explanation of BrakeFlow. Check out the fireworks at enovix.com/fromthelab. With that, I'd like to turn it back over to the operator for your questions. Operator?

[Operator Instructions] And our first question will come from Gabe Daoud of Cowen.

It's Gabe Daoud, here. Thanks for all the prepared remarks, guys. Just -- I know maybe what you do in revenue next year isn't really all that important in the grand scheme of things. But could you maybe just talk a little bit about the Gen 2 equipment and just kind of elongating that design process and I guess, expecting that equipment to arrive now in the second half of next year. So when should we expect that line to be, I guess, generating some revenue? Is it really like the first half of '24. Just trying to think through the timing there.

So just kind of some perspective, right? I mean we're very focused on improvements around Fab 1 this year. That line will be the workhorse of our output next year. We have made sure we put all of the learning from Fab 1 and our Gen 1 lines into Gen 2. I mean the way we think about Gen 2, it's really the innovation of kind of profitability and growth for this company. And we got to make sure we get that exactly right. We've actually been working on those tools pretty deep and design for over 6 months. So they progressed a long ways, but we want to make sure we capture kind of that last learning on Fab 1. So you're right. I mean, our current outlook is that those tools will land in the second half. There's a chance those could come into production at the end of the year, but I think the safer assumption is they start producing revenue in the first half of '24. That's kind of our current view. Obviously, we'll be working as much as we can and try to pull that in. But I'd think about next year as really being more of a Fab 1 event from a revenue standpoint.

Got it. That's helpful. And then maybe just shifting gears a bit. Obviously, it looks like there's a lot of demand for -- value is obviously a great thing. And you mentioned you completed the tech qual with those 3 strategics. So could you maybe just give us a little bit of a color or visibility into, I guess, what happens next with those 3 strategics, when can we maybe see that kind of move into the active design or design win bucket?

Yes, sure. I'll talk a little bit and then maybe have Cam come in. I mean, one of the things that's maybe been a bit startling to us is kind of Fab 1 has come up is how strongly these large strategic companies have been running to push the ball forward. So we've been really filled with that progress and engagement at the highest levels with some of these companies. And during the quarter, we actually ship cells from Fab 1 to 2 of those large strategics, which we think is a great element. And each one of these in principle, could generate enough demand to kind of fill us up for a number of years. So it's a tremendous opportunity. It's great to see them really pulling and then also in their mind, kind of getting through the tech qual part and then realizing we got a functioning factory. It really puts us in a whole new conversation with them. And I'll let Cam talk a little bit about kind of how he thinks those kind of relationships move forward.

Yes, sure. Thanks, Harrold. Yes. So Gabe, if you recall, last quarter, we announced a pretty important announcement with one of these strategic accounts. I think the story with the other 3 is similar. I mean these companies are, I'd say, very sophisticated about how they evaluate technologies, the hurdles they set up to then move forward into product and then ultimately into production. And so we view these tech quals as being essentially the major technology validation point for these companies. And what that means is that they've been testing ourselves, some of them for years, actually. And we've reached a point where we meet the requirements and essentially their requirements and their business process to move forward into kind of product development. So yes, as you follow those in the progress of those accounts forward, we expect those to move into the active design, design win categories over time. And then ultimately, if we're successful there into production. And just kind of a note on the overall environment, I mean, Harrold alluded to this in his comments, but there's definitely been a real acceleration in the urgency of these potential customers and how they're behaving with respect to the programs we're working with them on. We think that's probably triggered by the commercial milestones that we've met because to reach that stage, you have to really go through essentially all the different pieces of your business, the technology has to work. The product has to work. It has to be reliable. You have to meet certifications, you have to meet quality. You have to be able to manufacture it. And so as they see that happening here, it makes them move with increased urgency towards capturing the value that a battery like this can produce. And we're definitely seeing a mentality shift where these large companies are thinking about battery as being a strategic lever in their businesses. It can affect essentially everything that their products ultimately do in terms of performance, in terms of form factor, et cetera. And for the longest time, there hasn't really been a way to compete on battery. And we think it's an exciting time for us because this is really, to our knowledge, kind of the first real breakthrough battery to make it to market, and it's being recognized as such by these companies.

And our next question will come from Bill Peterson of JPMorgan.

If I could first start off with the throughput and yield improvements that you have going on. I guess, can you shed some more light on what's going on? Is it, for example, cell-to-cell repeatability, reliability or meeting, I guess, consistently metrics such as energy density or cycle life? Just trying to get a feel for what's needed to be improving. I guess maybe most importantly is, do you know what the issues are, so that -- so we have a good line of sight that maybe just here in the next quarter or so, you can get past though the issues.

Sure. Thanks, Bill. Yes, let me talk about that. So some of you may or may not know, I'm kind of a manufacturing guy at my core. It's kind of what I've done my whole life. So kind of because of that, I've got pretty high expectations for what I think manufacturing where it needs to be. And albeit frank, we're not to those expectations yet. That said, I'm encouraged at our trajectory. We've been making good progress. If you think about our line -- first of all, I want to start off by saying we don't have reliability problems with our devices. We have in-line deals issues that we're working on, right? And these end up being primarily things where you're working on tweaking equipment throughout the line to make the product run better and to reduce fallout throughout the line. But the stuff that we get out is 100% meets customer specs. So let me maybe give a little bit of color just as an example on that. There's a point in a process where we apply what we call our constraint on ourselves. That's a critical thing that makes the silicon work and that's a welded part of our device. We – I'd say, when we started up that equipment last year, that equipment was running somewhere below 80% in terms of yield. So 20% of the parts at that step didn't make it through because we have a very high threshold for all those well looking good. And over the last several quarters, we successively have driven that up to 90%, 95% and then the current quarter is at 98%, right? So -- and in some ways maybe I'd love to tell you just one thing. In the end of the day, it was ending up probably being 20 small incremental things we had to do to make that process better, none of which were magic, none of which were science. It's just a bunch of at the end of the day kind of tweaking. And that's really what yield improvement in manufacturing is like. I mean my experience in manufacturing before through several companies that were very high volume is that it's kind of endless -- not endless, but long game of just fixing one thing after another. And I'm seeing we're making those improvements. It's just going to take several quarters time to get that stuff done. So I'm super optimistic. I don't see anything out there. I'd say as a showstopper. We just have to keep our heads down and make those improvements. It's something that I pay a lot of personal attention to because it's just kind of in my DNA. And I think we've got exactly the right people here that are going to get that pulled off. So I'm super bullish on that path forward. And I think we'll see quarter-over-quarter improvement in those things as we move forward.

Yes. That's helpful color. It sounds more, I don't know, blocking and tackling versus discovery or development. So that's encouraging. I guess the second part is, if we look at the next sort of, call it 1.5 years, we'll be relying on Fab 1 to support the strategic customers, of which obviously, it sounds like there's strong demand. I guess, how do you balance that demand across these customers with clearly limited supply here the next, like I said, maybe a year plus. And then how should we think about the potential, I don't know if it's unit opportunity or [ swat ] hours over revenue, but trying to understand what you could supply in this interim phase before the next 2 fabs?

Yes. I mean you're right. I mean we're very focused on Fab 1 and improving its output as we get into next year. That's one of the reasons we're super focused on now when it's early days. I think you had a couple of questions in there. In terms of kind of balancing customers, these are kind of early days, so we're actually -- we're trying to engage with customers, the customers we want to grow with, right? And there's always some balancing in there. And we kind of constantly look at that on a day-to-day basis. I think at this point, we're able to make those engagements we want to. There may be some point in the future, we have to do some down selection, but I don't think we're there yet. Your second question is kind of what does that output look like. I think our -- we'll give some kind of official guidance as we get into our Q4 call about next year. But our current thinking is Fab 1 on its own between the couple of lines we have here is producing something in the single million digit units this next year. And depending on the product that is there's a range of revenues that could be. And so we'll give some more clarity on that in the future, but we're going to maximize Fab 1, get that learning into Gen 2 and get that Gen 2 line up as soon as we can.

And our next question will be coming from Colin Rusch of Oppenheimer.

Can you talk a little bit about the impact of the BrakeFlow technology on pack cost, volume, weight and safety and especially what that means for your entrance into the EV market?

Yes, sure. Maybe I'll start on that and then hand it over to Ashok for some comments. We're super pumped about this BrakeFlow thing. I think the industry is starting to catch on as well as investors. One of the big highlights this last quarter is we set cells with BrakeFlow to our partner for the U.S. Army program. And you can imagine they're experts at abusing cells, right? And they subjected our cells to Nail Penetration Test, which is a proxy for other types of entailments I'd say. And I don't remember the exact quote, but the basic quote from them was this is the only high energy density cell they've ever tested that pass this test, which is a pretty compelling statement. Obviously, in that field where people are getting shot at features like that are super important. But I think also if you think about even consumer space and some of the history there, BrakeFlow is also super valuable. And I think our customers are very excited about that. Certainly, the military is. And we posted this video on the website so that people can get a little sense of how that works, that T.J. kind of narrated for us. I encourage people to look at that. But I'll let Ashok talk a little bit about kind of the technology piece of that a bit more because it's one of these features of our battery that we can uniquely do, which I think is very exciting to us and it's really a function of our different architecture. So Ashok, why don't you add some color to that?

Yes. Thanks, Harrold. So Harrold talked about the impact on the consumer, the army, of course, safety is primary consideration into other markets. And I think your question was specifically about EV cells and yes, this technology is really interesting to EV customers also because as everybody knows, I mean, that is a primary factor in consideration on how these customers look or how these OEMs look at safety. So they are, I think, equally interested in this technology. And really, it is something that is uniquely enabled by our technology, by our architecture. And to answer another part of your question, it has really a negligible impact on the cost and the productivity of the line, there is some minor modifications that have to be made.

Okay. My question was really wondering about cost reduction at the pack level, but we can take that off-line. I'm assuming that you're going to be able to save your customers on costs at the pack level. So that's helpful. Just in terms of the things that you guys are balancing and the time frames around this. So if I understand right, it sounds like you're working through some engineering -- reengineering on the line. You're also talking to a number of customers and looking at how you serve the relatively large volume of demand and thinking about what those contract terms are. I guess if you look at identifying the final locations for the capacity expansion and work through timing on some of those engineering plans as well as some of those contractual elements, which may include some prepayments, how should we think about getting that information? Is that something that you'll make an announcement on? Is that something you just give updates on around the quarterly call? And kind of when can we expect things to get a little bit clearer here? Is that have a 3Q event? Or is that more by the end of the year?

Colin, this is Steffen. Thanks for the question. You need to think about it on the product revenue side. These are early days, and we are living with PO arrangements, which we really like because obviously, that gives us a lot of flexibility. From the service revenue perspective, these are complex development programs, which we typically don't disclose terms. And as we progress through our strategic accounts, we will update you as we go along through those terms when we get to more substantive contract arrangements there outside of like a PO-based arrangement.

And the time frame for finishing engineering for the following plants, is that something that you guys feel like you're closing in on the -- ramping that up or is that going to be more closer to the end of the year?

No, I think -- Colin, this is Harrold. We've been kind of in detailed design mode on some of the Fab 2 equipment probably for at least a quarter. So they're pretty follow along. I mean maybe they were kind of polishing the apple. But we want to get some of these last improvements in from Fab 1 into that. So I mean, I would view that we're going to move forward with Gen 2 in the next several weeks. It's not that far off. And that would allow us to land that equipment in the second half of next year. So it's pretty mature already, but we want to make sure this is perfect, right? It's really our engine of growth going forward.

And our next question will come from Gus Richard of Northland Capital Markets.

Yes. And congratulations on the tremendous progress you made in the quarter. My first question is on the revenue split in the quarter, was that $5 million milestone payment from your first strategic customer that's -- was that $5 million milestone payment from your first strategic customer that's using your battery in the watch and how many other customers made up the other $100,000 of revenue?

Steffen, why don't you take that?

Thanks for the question, Richard. From a product revenue perspective, that amount is immaterial, pretty small. We ship to a couple of customers. The majority is service revenue. And from a design perspective, we finished design. We delivered production units and that closed out that large development program for that one strategic customer.

Sure, I can jump in a little bit -- so total, we shipped to 10 different customers and 4 distributors, Gus, sorry. And among those, 2 of those were 2 strategic accounts. One of those strategic accounts was the one that was closing out the $5 million, if that answers your question directly.

Got it. And is the $5 million from the watch company?

No. So we announced last quarter a strategic right that you're pointing out that their first product with us will be a smartwatch. The $5 million is a separate company, a separate project, and we're actually not at liberty to really talk about what the application is there. But based on the kind of how we define a strategic -- each of these companies has multiple applications that could put our battery into.

Got it. I understand that. And then, Harrold, as you think about getting the single million units exiting 2023 run rate, how do you think about that ramp? Is it going to be a linear ramp? Is it going to be exponential? Is it going to be a little start stop? How do you think about ramping up the volume and sort of what that looks like as you progress?