Enovix Corporation (ENVX) Earnings Call Transcript & Summary

I guess the other thing that I would add to that discussion is the fact that what we seem to have lost in the translation is the fact that we currently have product we're shipping out of a process at a reasonable volume levels. And those products are the products customers are qualifying today, and we expect that to continue. So that line will continue to produce output. We also discussed our second line, where it goes. That's been an ongoing discussion amongst all our investors. And I just want -- I want to make sure it's clear. I mean, there is a discussion that we've now shifted to a belief that we should have that line in Southeast Asia. And that's really driven by the market demand where it is more so than cost. I think it got kind of misunderstood that, yes, cost will be better there. But we'll have built product in kind of the Asian territory where almost all of our customers are building today, just the transportation cost of materials coming into the factory and then back out of the factory are pretty dramatic. So it's a big cost reduction just from that perspective. And then our lines because they're somewhat automated take a fairly low headcount as well. So you can do that in any kind of part of the world. And we've always said, okay, we need a North American prices, we need Asian prices as well. It also should give you the confidence that we think Gen2 is -- will be very solid and come up quickly because we're taking it and putting it in a part of the world where we don't have the expertise that we had for line 1 that brought up as well. So there's a number of factors there that I think play into that decision. And frankly, it's taken us long, and we've had a couple of different changes in mentality on how to do that effectively. But are now confident that we can get it done. And one of the big reasons for that is bringing Ajay in as our COO, he, myself, others in the company have built factories in those parts of the world. we already have an established base of people and places where we can do that effectively.

Great. There's no questions. Let's move on to the demand and really your side of the fence here. I think 1 of the things that was kind of lost in the presentation was a rather significant uptick in active designs and design wins from the third quarter to fourth quarter, $423 million to $669 million, more than 50% increase quarter-on-quarter. I guess, how are you able to ship just a large amount of that funnel into the active design and design win.

Yes. So thank you very much for that question. I was hoping I was going to get that the other day because that is, by far, the biggest shift we've ever seen period, the end. I mean, not even close. I mean, we did that kind of shift over a year previous day. And one of the main drivers. and frankly, as you can tell just by -- hopefully by the way T.J. presented is, we're pretty in on how we run through this. This isn't like, okay, this guy looks like it's may be a design win or not. Now there real milestones and real things we have to get through. And to grow that much in 1 quarter, it's just a testament to actually getting production products. So he had shown some of the milestones, which, again, I could describe further, but there's a milestone called QS 100, and that essentially means, okay, you're shipping a production product to a customer. And they are qualifying it as a quality product. It's a quality sample is what QS stands for. And that shifts these customers, okay, now I have the confidence that you guys can build, you're building off that line, let's qualify them forward and that's essentially a simple version of that. And we did a lot of that in that quarter. I don't expect to see that kind of an increase every quarter moving forward. But you'll see a continued pretty good flow in that. And that's a really good indicator in where we are.

I presume a lot of these are in the wearable camp. But how should we think about the progression from wearables to larger format devices and sort of a focus point, sort of this year and as we progress over the next few years from a device point of view?

I'm glad you asked because that got asked as well and maybe not answered as well as I would have liked to. But we've been focused on wearables because clearly, that's the first cell that we put into production. And that drives then clearly the customers that we can progress through that funnel faster. We have a secondary cell, which is a larger cell, which is a mobile platform, which is behind that essentially. And so we're working through that. One of the things that may have been missed is there is a commitment from Ajay and his team to produce a number of thousands of those units in this year to again see that market and move it forward. What I'll also state is there's less customers in that space, right? You're going to have 6 to 8 customers that really matter, and we're engaged with all of them at this point. And most of the guys, and this was what was asked in the call, do you shift from, let's say, a wearable cell because the risk is lower to a larger cell into the mobile platforms because there's a lot more benefit as our batteries get bigger from a standpoint of energy density and capacity. And so we do have -- so yes, you can think about it as we're probably more mature in the customer engagement on the wearable side. And some of that is also medical and industrial type of applications followed by mobile and then the laptop is sort of behind that because there's also some more stringent requirements when you go into the laptop market that we need to address as well.

I wanted to move into the technology and maybe some of the other applications. But again, I want to see if anyone in the audience has any questions before moving on. Okay. So one thing announced last year was BrakeFlow, really exciting technology. I guess one of the things about it though is I think coming out of the presentation, it's maybe less clear on how to think about the timing of the qualification, timing of commercialization. And maybe prior to that, if you can remind us just how this really helps augment your competitive positioning? So how does it fit in with the Gen2 auto line? When could it be qualified? And how should we think about a commercial production time line?

Okay. Yes. So BrakeFlow again is something we developed that we think is incredibly important. Safety is one of the biggest concerns we get from customers. There's obviously been examples of problems that people have had in variety from wearable platforms to mobile, which is one of the ones you hear the most about. And in a way ours works is the simple version is if you get an internal short of some sort, we have a way to restrict the flow of the energy. And then the battery itself will never catch fire or explode. And that is -- that's a pretty massive thing when you have a pretty big cell somewhere between 12-watt hours and 20-watt hours in some of these bigger applications, It can be pretty spectacular. T.J. did a great video. I'd also loves to tinker with the technology itself, so he feels he's really connected to it and shows kind of the effects of that. Customers cannot wait for it. I mean I'm just getting hammered left and right by them wanting to get this product. And we're just at the sampling phases today of getting that into it. It will be put on our Gen2 line. I think T.J. pointed this out as well is there's 1 process step that's slightly different than we do it today. That's not necessarily how we'll bring up the Gen2 line in the -- initially, but we'll have that tool set in place pretty quickly, after we bring that line up. So our belief is we'll start ramping with our standard process technology, and then BrakeFlow will be as quickly as possible right after that.

Okay. This is our CES sort of tech and auto forum. So maybe just some comments on EV. There was less so in the presentation, but we also attended the Advanced Auto Battery Conference in San Diego back in December. And from our point, it seemed like there's a lot of interest in Enovix' technology for automotive. And one of the key areas was around fast charging, which maybe wasn't one of your initial thoughts for a use case. Can you remind us again what your strategy is? What Enovix strategy to address the EV market? How should we think about potential partnerships, time lines? What are you looking to achieve this year and maybe more importantly, over the next few years?

Yes. And so you're right. I mean, part of the presentation that T.J. just gave was really more of a tactical execution of what we need to get done today. So EV, in his mind, is still something we're really in early phases on. What we did do over this past year is we put forth dedicated team to go after that. And we're adding to that team. It's -- I'll tell you, it's a very -- there's a lot of very talented individuals that have done a lot of work in the EV space. Now we've put together, and they've gone out and they've met with a significant number of the OEMs and others in that sort of supply chain part of the market and have determined that there are some other things that are more important to that customer base. And so you mentioned fast charging. So we did some experiment work and have shown data in conferences in which we can charge the battery much quicker in a kind of 5-minute horizon getting more than 80% capacity. And that's huge and that's what they're looking for, obviously, a customer -- better customer experience. Secondarily is our battery is built in such a way that you get excellent heat dissipation out of it, much more dispersed, easily done. And that is a massive problem for a lot of the automakers today. They spend more money on actual cooling and the infrastructure for the batteries and sometimes the batteries themselves. So we found ways to actually simplify that, bring a lot more cost out of the equation with our technology the way it's built. And you can kind of look at it, just if you're familiar with it, there's a constraint system around stacked electrodes and it's very tightly packed and that constrained system almost looks like a heat sink. So it just kind of really dissipates the heat well. Those kind of 2 aspects, I'll say, and there's more, but those 2 aspects have got any attention on quite a number of people. So we're diligently working on the appropriate size battery, et cetera, to sort of use as a mechanism to show that marketplace, what we can do with that technology. In this year, in '23, what the focus is to engage a partner or multiple partners to take that on. From a business model perspective, it's still early days. But clearly, we understand the amount of capital you would need to scale this up as much larger than where we are today. So most likely, it'll be some sort of JV or licensing that we would go off and do in that market space.

Great. I want to talk about the competitive landscape and maybe more in the conventional space for now. But when you consider your funnel and design wins, are these gets primarily conventional lithium-ion batteries? Are you seeing more competition from higher energy density maybe silicon anode? And how do you see the competitive landscape evolving?

Well, this is the question I laugh about because people are so worried about all the different new technologies that are coming at us. That isn't at all who we convenience. It is absolutely the incumbent graphite gas. I mean they're at scale, they're at cost, their products work, et cetera. If I come -- if we, as an organization come in to an account after some other advanced battery company has come in, we always get the comments like, "Oh my God, your stuff actually works, right? You're actually delivering something that meets the specs that you put out there. And it's actually hurt us to have others fail like other silicon anode type in front of us because we then have a bigger hurdle because the customer already hits is a non-believer I'll call it, right? So we've been hurt by that. We actually hope to see some others. The market is what large enough by far, to have more -- more than 1 solution. And so that's important to us because there needs to be existence proof out there that this technology can be used in those types of products.

I want to see again, just check and see if there's any questions, please? If you step with the microphone, the microphone, please? Yes, it's webcast. If you can talk to the microphone, please.

Yes, thanks for the presentation. My [indiscernible] is automotive. So on the form factors, prismatic, pouch, cylindrical, large format, 2170, 4680. Relative to your product offering for automotive adoption. You said it's a fast charging, it's important to everybody. Do you have a preference? Or does your product work better with different form factors or chemistries because LFP versus NCA? And then just if you can kind of flesh that out, it would be helpful.

Yes. I mean we're pretty agnostic in general to kind of generalize what you just said to different materials and as well as different form factors. Probably the strongest thing based on just the geometries of it has to be some sort of 90-degree angle. So cylindrical cells are not necessarily what we would find ourselves in. But what I will say is we do have some people inside that believe they could put it into a cylindrical cell. Not saying we're doing that today. So the form factor itself is to be determined. That's part of this process with a possible partner because there are multiple options to go to, for us. So that -- I don't want to speculate too much, but you can imagine it wouldn't be significantly different than what we're doing today. We have shown kind of 3 generations of products and actually the packaging does change over that period of time because we can actually use what's now the internal core of the battery as a package itself instead of throwing a pouch around the outside of it, if you're familiar with the technology. So like I said, there are some factors there, and it really depends on the engagement with the customers.

Great. One of the things that came out of the presentation, I think maybe it was just misunderstood, but basically the balance sheet, use of cash, cash burn, timing of maybe potential capital raise. I mean how should we think about the use of cash over the next few years? When will Enovix need additional capital? And what avenues for Enovix to raise capital or maybe potentially leverage partnerships or other arrangements?

Yes. So maybe true, I mean, I don't quite know how it was taken on the commentary about capital. But one of the things I will say, just from history, and I've worked with T.J. for over 20 years is he is incredibly capital efficient. That is like a #1 thing for him. And so one of the -- I thought the message that should came across was, hey, we're going to be really efficient with the money that we have, we are going to make sure we use it effectively. And we still have quite a bit to be able to scale out Gen1 and the Gen2 lines, et cetera. And that we didn't talk about other sources of capital. So I can tell you, we've had numerous conversations with key customers that are very interested in infusing some capital into either building out lines, building out capacity, that sort of thing. And that's not unusual sort of in the battery space anyway. So that is clearly an opportunity for us. Are we there yet? No. We still have ways to go on that. So to be determined, as '23 progresses on at tail end of '23, I think some of that will become probably clear, but it's clearly not looking to have any kind of dilutive event in the near future. And anything that if we ever do go out to raise more capital, we'll be with a clear positive impact to allow us to scale even larger or faster.

Well, Ralph, Charlie, thanks for joining us. This is really insightful. Unfortunately, we're out of time, but best of wishes for 2023, and we look forward to following the progress.

Thank you very much.