Enovix Corporation (ENVX) Earnings Call Transcript & Summary

Good morning, and welcome to the second day of the 51st Annual TMC Conference. My name is Bill Peterson. I'm the clean tech analyst here at the firm. Really pleased to have Enovix and Raj Talluri, the CEO, is here to join the fireside chat. We have a lot of prepared questions, but certainly willing to take the questions from the audience as well. This is being webcast, so please wait for the microphone. Raj, thanks for joining. And maybe perhaps you can just provide a brief introduction of yourself as well as the company, and we'll move on to the fireside.

Yes, absolutely. Thank you, Bill. Good morning. Really a great pleasure to be here in Boston. A quick introduction to me. I spent most of my career in semiconductors in -- I spent 16 years at Texas Instruments, about 9 years or so at Qualcomm, and then I was there for about 5 years at Micron. My last job at Micron, I was running the mobile division, about a $7 billion division in 2022. Super exciting, we're making DRAM and NAND devices for mobile phones. So being in mobile and consumer electronics for a long time, really, really exciting space. And I've been at Enovix for about 4 months now, a little over 4 months, love the job, it's been a very exciting piece of technology, solves a much-needed problem to be solved in consumer electronics, which is providing higher energy density batteries that really enable all the customers to take more advantage of the processors and the memories and cameras and displays that they already bought because battery has been throttling the performance of many of those things. Great team, a lot of strong value for the customers. And super excited to be here and take any questions.

Great. You kind of alluded to it, but you've worked in mobile and a couple of different parts of your career. I guess trying to get a feel for how after spending some time now at Enovix, presumably with a lot of the same customers. What has been the feedback along your view of the opportunity and I guess, comparing and contrasting this opportunity with other products that you've been supporting.

Yes. Thank you for the question, Bill. I think 1 of the key things I find about this space and this company and this technology is the products that are actually getting used in the exact same market spaces that I've been selling to for the last many years. IoT, which is a division that I started at Qualcomm and I was there got to be a really nice business on mobile phones and laptops and so on, 1 of the key advantages of Enovix is that the product is actually truly differentiated in the sense that we are making batteries that are targeted to replace some of the existing battery technology that our customers are using. These are graphite cells. The battery we have depending upon the application and whether it's a watch or a smartphone or a laptop, over 2x the energy density in the exact same configuration, which is really phenomenal. It doesn't happen often in our industry to get that much of a step increase. Batteries traditionally have -- the lithium-ion batteries have grown like 4%, 5% a year over the last many -- maybe a couple of decades. Great to see that kind of innovation. And I talked to many of my customers, they're all interested in this technology because it helps them take advantage of it and provide better user experience. So that part has been very nice to see.

Great. obviously, before your time, the Enovix team talked about the addressable market. It was kind of bucketed across different sectors. But I guess how do you view the addressable market as you see it today? And how are you staging each of these market opportunities?

Yes. So I mean, for most of us, like who use portable electronics in our day-to-day life, I mean, if you just take an inventory of all the products around your house, you'll find tens and dozens of products that use lithium-ion batteries. So the addressable market is something that everyone can easily relate to. We -- given that the market is so big, I think $23 billion TAM is something that we looked at last time just in consumer electronics. We had to make sure that we staged it in a way that it is suited to our technology and one that we can ramp to production fast and get good gross margin and revenue. So we kind of segmented the market, I would say, into probably 3 broad categories. I would say the first 1 is what we call Internet of Things or the IoT devices. And these are things like smartwatches, headsets, charging cases for headsets. You can think of medical devices, AR/VR glasses, and many other products like that, that you can quickly relate to. And then the other 2 markets are mobile phones, again, 1,200 million mobile phones sold a year, and laptops and tablets 200 million to 300 million a year. The reason we chose the IoT devices as the first point of entry for our technology is because as a manufacturing company as we build scale in manufacturing these are markets that we can start off with tens of thousands and hundreds of thousands of units per customer because they are broad markets, many customers, each product may not sell very high volume like millions, but we do have manufacturing capability to support them. And the other one is the qualification time lines in these markets is shorter than qualification time lines for example, in laptops and mobile phones, so we can get to revenue faster. And the third reason is in very high-volume batteries like in consumer, like smartwatches, like phones, the battery has to be a certain precise form factor, to fit in the cavity that it's allocated to. That means the battery -- as a battery manufacturer, we have to have the capability to make cells of varying -- slightly varying dimensions for the customer needs. In the IoT space, in some of the markets, we can be -- the customers can be a little bit more forgiving on taking the sizes we have and just the form factor to make them fit. So we make a large battery, that big and a small battery today, and we are launching them into the IoT spaces. But now we are building machines that have the ability to customize the batteries to the right form factor, then we will get into the very high-volume manufacturer of things like laptops and tablets and smartphones.

Yes. just tying the technology, obviously at a tech conference. When you think about your customer interactions, what kind of technology you're trying to enable? What are you trying to enable for your customers? And I think in the past, you guys have talked about trying to have like semiconductor like margins in a space that really hasn't seen that. I mean what gives you confidence that these customers are going to be wanting to pay for that?

Yes. So if you first think about the technology that we are delivering and the value of the technology to our customer, let's spend a few minutes on that one. My experience having launched and working with customers and many, many consumer electronic devices, smartphones, notebooks and so on, one thing I found is that as we made advances in processor technology in memories and in displays and in cameras and so on, there's a lot of high-performance computing and storage in all these devices like phones and so on. But that technology, our customers are not really able to take full advantage of that, because if you actually run the smartphone processors to its full capability, I mean, they're like 8 cores at 4 cores at 2 gigahertz plus, if you run them at full speed, the battery is going to go down reality, really fast. If you run the GPUs or the camera engines at spell speed, the battery goes down. If you have the display at full brightness, the battery goes down really fast. So what has happened in the industry is our customers have paid for these expensive processors and memories and cameras and displays, but they're not able to fully take advantage of what they have paid for and deliver that user experience to the end user who ultimately really wants to have that great experience. Case in point is we all have smartwatches, but most of the time in watch the screen is off and only comes up and you actually want to look at time. Otherwise, just a little black screen you put on your wrist, which for people who spend a lot of money and nice clothes, you kind of wear this watch that's black all the time. And many times, people like to use the watch to measure their sleep patterns and this great technology in those watches to measure sleep, but you have to charge your watch in the night. So really, it's a kind of well-kept secret that you have all these products that don't deliver the value that they're supposed to deliver. So when we're able to deliver a better battery that's almost 2x better than existing batteries, suddenly, our customers are like, now we can take advantage of everything else we have paid for and also differentiate our product in the marketplace. And that -- there's a lot of value to that, and we are able to kind of translate that value into higher selling price for our product. So we actually are able to in some cases, get almost 2x the selling price per watt hour in our battery compared to an existing battery because the value we deliver is something our customers can monetize and create value for themselves. And that is something that's really compelling, and a great advantage to our customers and to us.

Okay. We'll get to the technology, I guess, the cost side later on, but we have a question here. I guess the ultimate is kind of related to competition, but it basically says, what optionality do you have, your customers, you may have to wait for 1 or 2 years to get your batteries. Why would a customer wait 1 or 2 years for a next-gen device and would a JV with maybe 1 of these big consumer electronics companies make for a quicker installation?

Yes. It's a great question. I think ultimately, the -- whether it's a JV or not, the batteries have to be manufactured. Our batteries are manufactured in a certain way. We take advantage of the higher energy density silicon provides by able to hold more lithium, but we stop it from swelling by making these mechanical constraints that hold it. And we are building factories as quickly as we can, and we will get to ramp as fast as we can. So I'm not quite sure if a JV will actually accelerate the time to market in terms of getting the batteries to production. So I think we will get it there as quickly as we can. And your question on margins and comparison to semiconductors, there's a couple of comments I want to make to contrast this business with the chip business that I've been in for a long time. Firstly, the question gets asked, how complex is the manufacturing of batteries compared to manufacturing of chips. The unique architecture that we have in the way we manufacture batteries at Enovix, it's really an architecture where we mechanically constrained the silicon anode and the cathode and the separator material that we cut it to thin strips from swelling by putting mechanical constraint around it. And there's a lot of other IP in that process and other things we do to make it possible. The machines that build this in the back end, we have to build these machines to roughly 50-micron tolerances, that's kind of the mechanical tolerancing at which these machines may be built. And in semiconductors in the back-end test they're in the range of 5 microns. So it's an order of magnitude, simpler problem in the mechanic and tolerancing. And throughout my career, I worked on many, many complex semiconductor manufacturing products. So this is a much simpler problem. So that's 1 reason we feel pretty confident we can do it. And the other question you asked me is about gross margins and how does this compare to the chip business. There's a couple of inherent advantages to this business. First one, as I mentioned, is the ASP premium we can command because of the differentiation of the product and the value it unlocks for our customers. Second one is, I mean semiconductor manufacturer, when you go from one process node to another process node, you do a die shrink. When you do a die shrink, it did involve deep submicron lithography so you have to buy very, very expensive machines, hundreds of millions of dollars like if you go from 1 process node to the other. And now there's things like UV, which are even more expensive. So every time we go 1 generation to the other, you spend a lot of money. In this particular case, because we are a material agnostic battery company, and what I mean by that is we work with our supply chain to come up with better anodes, better cathodes, better electrolytes, better separators, that give us much higher energy density from generation to generation. But the exact same factories we built can take advantage of that because the factories we built are actually cutting the anodes and the cathodes into thin strips, and stacking them together. And if there are higher energy density and better quality anodes and cathodes, we still use the same machines, which means that we can amortize our machine costs over a longer period of time. And once we build the factories, we can continue to produce better and better energy density. And when you produce better energy density, we're able to margin up and get a higher ASPs. So in that sense, it's actually a very scalable business in terms of revenue generation and margin generation without adding a lot of incremental cost in manufacturing. That's why I feel confident that this is a business that will be a higher gross margin business, generating a lot of profit in time, as we get to producing millions of batteries and as we get to producing better and better energy densities through material innovation.

Great. And somewhat related to the prior question about manufacturing is going to be maybe a few years before you're reaching high volume. How do you view the competitive landscape today and maybe how that evolves over the next few years, given that really your revenue wrap doesn't really occur in a big way, maybe in a year, 1.5 years, 2 years. What do you see in the rise is coming from the different, whether it be solid state or silicon anode or graphite or whatever the case might be, there's still competition. So how do you view that thing?

Yes, absolutely. A couple of things. I think one of the -- right now, when we visit customers, pretty much almost all the time, our competition is the existing graphite suppliers. There's not any real volume or even reasonable number of samples, silicon anode batteries in the consumer electronics space that we are in. So -- but what is happening in the graphite space is, as I said, traditionally, they haven't really improved a lot in time. We are now seeing a few batteries makers add a little bit of silicon into the graphite like some kind of a powder and so on to improve the energy density. But it's more in the range of 5% to 8% silicon, we are 100% active silicon area. We don't have any graphite in our battery at all. So that gives us quite a bit of advantage. And again, it is our first generation now. And like I said, we have other better materials coming in that will make it even higher. We do -- that's probably the main competition right now. So we have to stay ahead on our material innovation, but we do have the advantage of being quite a bit ahead from other silicon anode competitors. And also, we are at a stage where to launch batteries and consumer electronics, you have to work very closely with the customers because the way a battery is charged and discharged and used in a smartphone versus a laptop, versus a wearable device versus the camera is very different. And because we are now able to sample high volume, high -- number of units to our customers, we are able to learn exactly how the battery is used in these different applications. Sometimes cycle life is more important. Sometimes energy density is more important. Sometimes the voltage at which you charge and discharge is more important, sometimes how long they store it is more important. So we're able to make those different trade-offs to better suit our battery for each of these applications. And that's an advantage we have over other silicon anode companies because we're a little bit further ahead in our journey.

Great, want to move on to sort of the manufacturing, first starting Fab-1, which is you're sampling out of the site. So you talked about 180,000 units, where could this be like why not, could it be higher, I guess? What are you assuming for the manufacturing strategy of that site? And I'll just ask a second follow-on. The importance of the Agility line, how should we think about that in terms of its importance and also how that relates to Fab-2.

Yes, absolutely. So our current fab in Fremont, we produced like 4,400 batteries in the fourth quarter last year. And we guided that in first quarter, we'll make 9,000, and we did mention that we want to be able to more than double every quarter. We made 12,500 batteries in the second quarter, and we guided to 18,000 in third quarter, and I feel we're on track towards that. And we also guided to 180,000 batteries for the end of the year. We absolutely have the ability to make those. We could even make more if you wanted. But one thing is that the batteries we make in Fremont are very expensive. We have machinery that was not operating at full speed, and it's very expensive to manufacture batteries in California. But as our Gen2 Line in Malaysia comes up, we have the opportunity to -- and I would like to move as quickly as possible to that line because I think the cost of battery will be much better there. You asked about the Agility Line. So the Agility Line is a line that has the capability to produce batteries at different sizes. And that's actually very important in this market because if you think about it, the batteries that go into smartwatches are a different size than the batteries that go into phones, different sizes of the batteries that go into laptops. And even in phones and smartwatches, different customers use slightly different shapes and slightly different dimensions. So for us, it's very important that we are able to make batteries of the right dimension to qualify our customers. So that's the Agility Line that we're building in Fremont this year. That will have the capability to produce different shape and size batteries. And when we do that, we can qualify our customers quickly. And when our factory in Malaysia comes up to production in April next year, I believe, we'll be able to then ramp the customers to production from there.

Yes. Just clarifying. So 18,000, that's second quarter, right?

Yes, second quarter, sorry second quarter. I miss spoke.

We're targeting 180,000 units for the year. Let's move on to Fab-2. You announced Malaysia. I think coming on the last call, I think you were commenting about trying to match supply and demand. What is -- I guess, what is your philosophy on capacity planning, when can we see additional lines? How should we think about the rollout of these lines? And I suppose it probably depends on the applications you're working on as well. So yes, telling the capacity versus demand side, please?

Yes, absolutely. I think the key is we are investing on the first line now, and that will start in April next year and start producing. Last time, I mentioned about manufacturing supply and -- matching supply and demand, there are some questions about, hey, how is your demand? The demand is really, really strong, and there's not a comment about demand at all, because as I mentioned, there's 100 customers that we sampled our batteries to and the markets we're going after are huge. Look at IoTs and smartphones and laptops. So the demand is very strong, and we have a lot of opportunity to sell, but I think it's important in these markets to actually produce the right shape and right-sized battery to meet the right application because the gross margin that you make in different markets is different, smaller-sized batteries in wearables, there's a higher gross margin because it's very difficult to pack that much energy into a small cell and so on. So what we would like to do after the last fund raise, we now have the capability to build up to 4 lines. But we want to build them in a way that it's correctly matched to where we want to sell in the demand. So we want to optimize it to the places where we get best gross margin. So for example, the first line we're building is a universal line that can produce batteries that are very small to batteries are that big and anything in between. But when we make the subsequent lines, we want to make them in a way that may be less flexibility, so they may only go from a battery that goes to a smartwatch, but you still have enough flexibility around it, but not all the way to battery that go in the smartphone, are we want to make a battery that goes into smartphone, but enough flexibility to go into multiple models of smartphones. When we reduce the flexibility, but still keep the flexibility per segment, that line is more optimized for that end market, which means that line will cost us less that line will produce much higher throughput. And hence, the cost for battery will be lesser. So that is kind of the equation that we need to correctly manage in terms of when we bring on the right lines to maximize the revenue and the gross margin for the company. The good news is we have capitalized the company and we are able to fund those lines, but we want to make sure we do them in the right sequence to make the most business sense.