Enovix Corporation (ENVX) Earnings Call Transcript & Summary

Okay. Great. Delighted to have the Enovix team with us, Raj Talluri to my left, President and CEO; Farhan Ahmad, Chief Financial Officer; and Charlie Anderson, Senior Vice President, IR and Corporate Strategy. Thanks, guys, for joining us. Appreciate it.

My pleasure. Thank you so much.

Yes. Now there's a lot going on. I want to give you some time at the top. But just for those that are not familiar with Enovix. Enovix has an advanced -- it's an advanced battery company using 100% active silicon anode technology, leveraging a proprietary approach to battery cell architecture. So it's architecture first borrowing from a lot of principles from the semiconductor industry, promising energy dense, fast charge batteries that are exceptionally safe. That's the other -- that's the important thing here. And the company does generate revenue today. They are generating revenue and they're delivering batteries to customers right now. So this is not your average battery start-up company. I'll leave it at that. So Raj, any key messages you want to impress.

No, absolutely, Adam. Thank you so much for having us. I've been at the company, this is my -- actually ninth month in September time flies.

I think you had a baby.

Super exciting technology. And for those of you who are not familiar with us, we make lithium-ion batteries, but we make them in a way that, as Adam said, extremely safe, but also very high energy density, and that is the key value proposition with all the different applications, smartphones, computers, IoTs everybody wants more energy density. And we have a unique architecture where instead of making the batteries as jelly rolls, we slice them into little laser pattern, little thin anodes and cathodes and we stack them together. So then we are able to put them together with a mechanical constraint. So the silicon doesn't swell. That's been one of the problems of using silicon instead of graphite batteries. It swells up and we're able to constrain it. And that gives us a huge energy density advantage and all our customers love it and super exciting to be here and answer more questions.

Raj, you come from a -- we published a note earlier this week. Was it Sunday afternoon, Daniella on supercomputing and Tesla's Neural Net training. And I have to give you some credit. I mean we had a conversation about Enovix, but we also got on the topic of Vision Pro and machine learning, and I'm bringing this up for your background here, but just some of the things you were saying we're very -- the moment I got the phone with you, I e-mailed our team and like, "Oh my goodness, this guy, Raj, let's take it differently. Like you have an unbelievable -- the level of experience around real hard tech, all right, [indiscernible] like hard tech and then and then manufacturing it and scaling it. You come from a decade-long AI, computer vision background at Micron, but also Texas Instruments and Qualcomm. And I just learned so much talking from you. So tell us like why -- how that moment again of 9 months ago or little or more 9 months ago, why go to battery start-up?

Right, right. Yes. I mean I think as Adam mentioned generously, I've spent a lot of time in the semiconductor industry. I did my PhD in AI and computer vision in those days when it was mostly computer vision, not so much AI. When trying to work at Texas Instruments for about 16 years, working on a lot of processors. Then about 10 years also at Qualcomm building the Qualcomm Processor then about 4, 5 years at Micron. In all of my career, what I found is that we were making these chips that are faster and faster and memories that were faster and faster and producing tremendous value to all the products went to from smartphones to cars and so on. But what I found towards the latter part of my career was we made this LPDDR5, which was tremendously powerful. But you found that most customers weren't using it at the full speed, and we made all these gigahertz processors at Qualcomm and people would not run them at full speed. They would actually -- when you put these processors and memories in a phone, they don't run them at full speed because if you do, the battery goes down fast, particularly, if you actually look at some of the newer products that are coming, like this one, is actually a great example.

The problem is getting worse at a faster rate...

Like, if you look at this thing, the display is so big. -- and it burns about a lot of battery. And also the applications like you talked about the -- most of us don't think about it. The camera is actually a huge AI application. It does auto exposure, autofocus, auto white balance, detect spaces and so on. So what I found as I visited customers was that the #1 problem now is the battery. So that's why I felt the problem to solve now is to build a better battery.

My interpretation of that again is a bottleneck at edge compute and as everyone is like trying to find the next AI at the edge, but it's highlighting that the batteries we're using are just wrong. There is wrong and probably the compute to or maybe how compute design, but that's not my area of expertise, either I mean that Vision Quest Pro, you were talking about -- sorry, the Vision Pro, excuse me I shouldn't say Quest, The Apple Gen 1, if you will, headset -- has this weird sack like a little wire sack [ dongling ] out of the thing. It's like -- you got to believe Steve Jobs will be like, what the hell is that? But that is almost a walking advertisement for what you do, and that's priced at thousands of dollars and has, what, 90 minutes life. So it's almost like this can't work like something has to change.

Exactly. That's the main problem to solve. And in particular, I feel like the areas where there is displays and areas where there is a lot of compute, are the areas where they need most battery. And actually, this is something that I -- after joining this company, we've had this tremendous funnel of lots of different opportunities that we were sampling our batteries to -- but now we are kind of evolving to picking the few, that actually really need a high-density battery like smartphones, like computers.

So I'm going to throw something out there, and you tell me where I'm wrong or adjusted. You're focused on the consumer electronics market now. It's a market that's moving really fast. It's a market where the properties of the batteries that you're developing are a bit more pronounced as we've just discussed. And you can generate revenue right now and get the iteration really fast. And you're even doing now work with the Department of Defense, which is fantastic on a lot of levels and shows that what you're doing is real. And then moving that to like car batteries man, that's a big gap, okay? This is mine area something where you can disagree, maybe by the time if there is a real sizable commercial opportunity for you in automobiles or EV tolls or whatever, are you really making these things at this point? Or did you use the hard problem of the CE market to iterate and then develop and then eventually you go to a licensing model or search another alternative for your -- for BrakeFlow and the other architectures that you have?

Yes. We are not manufacturing batteries for auto now. We're really focused on consumer electronics where the margins are actually really good. much better than the auto because the energy density, we can actually margin at much higher because we are solving a battery as a percentage of the end product is much lesser in this consumer. So a much more attractive market. But we found that our technology has great applicability in auto not just for energy density, but because it can dissipate the heat really, really fast compared to other architectures just based on our mechanical structure, and that allows automakers to charge really fast. The actual commercialization of how that we will bring our technology to market will probably be more like the layer where we license and work with OEMs. And we are working with a couple of them, but still early stages. Right now, we are focused on building our factory for the consumer side.

On the manufacturing front, walk us through your contract manufacturing strategy with YBS of Malaysia. What's the plan for Fab-1 between now and then Fab-2 starting next year? And how is your current generation production equipment progressing?

Yes, absolutely. So we are actually very happy with the way we have managed to improve the production capability at our current Fab. In fact, we had a target that we'd like to get to about 60% yields in our current Fab, and we've already achieved that ahead of the year. And also we produced enough small batteries that we feel comfortable that we understand exactly what went wrong with the factory. I mean when we first started, we had like very, very low single-digit yields. Our energy now is on really focusing on making bigger batteries, not -- because our current factory only make small batteries. So our energy now is to make bigger batteries into these markets where the AI application and the displays are prominent. And that's going to be done in Malaysia. And that factory is coming along very nicely. We put out a podcast, I think, earlier this week to see where that is. We expect to produce big batteries from that by April next year and go slowly go through and we expect to be in smartphones in '25 early.

Okay. Farhan, if you don't mind. You've been at the company, again, how long?

Two months.

Two months. So tell me what are your priorities in terms of allowing Raj to be a mad scientist and actually bring the stuff and execute, which he's known for and keeping the ship together and from a capital allocation and running the business in the least dilutive way possible.

Yes. So you said it, right? Like the main priority is for us to scale this business in the least dilutive way possible. I'm coming from the same school of thought that Raj and Ajay are, which is the semiconductor industry. Enovix, if you look at the history of the company, there's a lot of great technology development, but I think in the last phase of the company, there was not as much focus on products and manufacturing. So the focus for, I think, Raj, Ajay and me is basically to scale the company and to make it focus more on the product and operations and grow the business in a least dilutive way. We will look for financing all forms of financing, right? We think there are 3 forms of financing that we can use, they are capital markets, of course, that we can use, there are customers that will be also were willing to finance the Fabs. Obviously, nothing is free. It will be a decision based on what is the cost of capital that we can get to our customers versus what we can do ourselves. And then as we grow the business, I do expect that there will be governments, which will be interested in moving the supply chain to their countries as well, and we will use that as an incentives -- as a way of raising capital as well. Now the key of lowering the cost of capital and to access all of these 3 avenues, it comes down to derisking our technology, growing our manufacturing footprint and getting qualified at customers. So that's where the focus is. And we will look at things that can help us reduce our cost to manufacture organic and inorganic both ways to have to lower our cost as well by doing supply chain work. So all of those are priorities.

Raj, anything you want to add to that, and, do you want to address the shelf registration?

Yes, absolutely. I think when Farhan came on board, the first thing is very pragmatic finance guy from Micron. He's like as a public company, we need to have a shelf and so that we have it out there and it's a tool in the toolbox and really the shelf registration. And being a early-stage company that just went public in '21, we had to put a number on how much the shelf number was. And we put a large enough number that people wouldn't think much about like $1 billion. And I got a lot of feedback that, oh, my god, these guys are going to go out and raise $1 billion of capital that's clean up...

I mean if you...

But the other thing was we had an ATM there also, and we haven't exercised it. We haven't used it, and we don't plan to use it in the near term. So I think it's important for all the other investors to know that we're just being pragmatic and running the company as a good housekeeping good public company.

I mean, again, you're doing the Fab in Malaysia. But is there any consideration of the loan program office or some of the incentives provided by the U.S. taxpayer to maybe do something else at some scale in North America? Or is that not a focus right now?

Well, I mean, actually, what's interesting, Adam is, we've got people asking for us to put factories in different parts.

I'm not asking you to.

Understand. But the U.S., I think the part of our manufacturing is actually quite a bit people intensive because it's more akin to back-end semiconductor manufacturing, not the front end. The front end is like making wafers. Back end is like packaging and testing and so on. Very few companies almost none I know of, have back-end manufacturing in the U.S. because still people incentive and the cost is pretty high.

Yes, that was smart. We were talking about that because it's all like, oh, it's got to be in the states. It's got in states and you're like, why do you go to Malaysia, you're like, they know how to do this stuff. And you had architected this from your previous slides. Questions for Raj, Farhan, Charlie, just from the audience? I'll just queue you now if you have any. I'll come back to you. Tells again, like the importance of being architecture first in material agnostic. If you could elaborate?

Yes. That's actually a very, very interesting and a key part of our value proposition. Is it what I'm finding now in the last many months, is there are quite a few companies coming up with better material, better silicon anodes, better cathodes, better electrodes, particularly because of this push towards EV and ESS and we are now finding that we can use quite a few of them in our architecture. So the more people make better quality materials, the more we are able to use them and get higher and higher energy density. Like for example, our next-generation technology which is where we changed the anode, and the cathode, and the electrode has double-digit increase in energy density from the previous one. And the one after that will be 1 more of those. So that's actually one of the key things because our mechanical -- our architecture first constraints silicon from swelling. And in fact, in time, if people start using lithium in batteries, we can put lithium instead of not having any electrode in our battery to, particularly, for example, maybe EV kind of thing. So being architecture first allows us to take advantage of all the material innovation happening in the industry and parley that into energy density advantage or into cycle life advantage or into fast charge advantage and provide the value for the end customer. So it's a very exciting time.

Is Enovix's technology at odds with solid-state projects? Or can it kind of help enable it and address some of these expansion issues. So I didn't know if you also wanted to share your views on solid-state development through your knowledge categorically?

No, absolutely, it coexists. I mean, in fact, we are talking to some people who are making solid state electrolytes to see how we can put that together in our constraint. Because, ultimately, we are truly material agnostic. I think we saw the problem that when you put more lithium, the anode swells because as lithium combines the anodes whether -- what kind of electrolyte we use, what kind of cathodes we use -- it's just a question of how do we solve that problem. But more importantly, what we are now learning is we are understanding how these batteries actually work in end products. Like, for example, when you put a battery in a phone, the way it's charged, the way it's discharge, what temperature it works at, what temperature it discharges, how would it is destroyed, how quickly it charges, what voltage is the apps for us that delivers. Those are key things that we understand much better now. And that's different in phones versus different and laptops versus different in EVs. So as a battery manufacturer, we're able to bring that know-how to take the material manufacturers into that space, so we can actually tailor the right materials of the right product.

You mentioned you're kind of ahead of plan in terms of yield on the plan for this year. I don't know if you want to add any other -- make any other comment about how you -- how things are tracking for the remainder of 2023 and what key milestones should investors be focused on for '24?

Yes. The key thing I want to add is for '23, the demand we are seeing now is really a lot stronger and much stronger on bigger devices. So we really have to get our factory to produce larger batteries, like the opportunity we have from the army is for a big battery. The opportunity we're now having in smartphones is in a bigger battery. So we're now trying to figure out how to manage our 3-month operation to produce more bigger batteries and smaller batteries, particularly now that we understand how to make a smaller battery and yields are where we want, and we're making a number of units we need to satisfy our customers. For '24, it's going well. I think the factory is going well. We expect to produce big batteries from our Malaysia factory in April and get into our customers and be in high-volume production from that factory towards the later part of '24 and early '25.

Is it as simple as just making the battery bigger? Or does the size also introduce technological challenges that need to be tested. And I didn't know like bigger bat it could be simple or it could be like no, actually, it's kind of something that needs to be completely tested and validated, it's more complex than it sounds.

That's a good question. Our architecture scales from small battery to big battery. So we make it the same way. We cut them into a laser pattern on them to stack them and pack them and put the thing. What we are also changing is actually the anode, the cathodes and the electrodes. Because now in the bigger battery, we are able to put more advanced anodes, more advanced cathodes. So it produces much higher energy density than our current smaller batteries. That is one advantage. The second 1 is BrakeFlow, which is our patented technology of how to make batteries safe. Our bigger battery has to be really safe because now you're packing so much energy density. So all our big batteries will come with BrakeFlow. So those are some of the advantages.

And Farhan, just remind folks that may not be as familiar, refresh us on your financial position right now, your pace of cash burn kind of thoughts on minimum cash levels. I didn't -- in terms of just what you have in the tank and then how fast you're consuming think about that over to understand.

So as of last quarter, we had about $409 million in the bank. This year, we have said that we will burn about $120 million operationally and $70 million CapEx on top, so $190 million. Next year, we are probably going to do lower than that in terms of we lower the cash burn. And so that gives you some idea. So we do have runway. I am fairly conservative, so I like to see a strong balance sheet, and I'm glad that we have a strong balance sheet. And it will be my goal to make sure that we always have a strong balance sheet.

Question. We feel -- don't mind waiting for the mic. Thank you.

That's a very helpful presentation. Can you talk a little bit about what's going on in the customer side? I know you -- there are these large customers you were tracking having discussions. Where is that going? And when do you -- because I think that's kind of be helpful in terms of converting you have these plans coming up? Are you selling that? Is that there? Or is it a build it that will come where I know you had some LOIs, I think it was Samsung or something like that. I can't remember, but where are things in that whole process?

Yes, actually a very, very good question. And particularly now that I've spent 9 months in the role, I have a good comprehension of where our customer base is. What the company has done over time is to really sample these batteries to a broad base of customers. So like a 100 customers for examples, batteries. So there's interest from all of them. Some, of course, go through don't fall apart some stay, but what we used to call funnel is actually a huge amount of revenue potential we had there. But as I spend more time in this space, maybe a little bit of diversion. But I look at businesses as having either horizontal businesses and vertical businesses. Our horizontal business is like a TI DSP where we make a DSP and hundreds and thousands of customers take it. A vertical business is like a Qualcomm business. We have half a dozen cell phone customers that drive a lot of volume. I feel like for Enovix as a manufacturing company, it needs to migrate more towards a vertical business, which means a few years from now, we'll probably have 10 customers that drive 80% of the revenue and 20% will drive the rest of the revenue. And the reason for that is when you make a factory, when you make a custom size battery, you want one battery to run a large number of volumes in one product, like a phone like this ships 2 million units. And a phone like this ships much more. So you kind of have to -- and if you take a computer, for example, there's half a dozen people who make computers. Each computer takes 4 batteries. So you design in 2 or 3 of them, you can run your factory on that. So the -- where we are right now is we've picked from this funnel of customers we've had the most valuable opportunities in terms of highest volume. We're sampling to them and they're in various stages of qualification. But the challenge with them is they're not going to launch until we have millions of units of capacity, right? I mean because while each phone launches at least 2, 3 million units. But they see that we are building a factory. They're doing the qualification. They're giving us the feedback. We are testing with them. So I expect that we will give the bigger batteries to the customers through '24, and those will ramp into production in '25. Meanwhile, the smaller batteries we've made in Fremont, we will continue to sell those, but the real volume opportunity for the company is going to be selling big batteries into places that have a display where this kind of, as I alluded in the beginning, the AI and machine learning has put so much demand and the displays are putting so much demand, that's the direction that the company will be going.

Anything else? Yes [indiscernible]. Then just for a second while you get the mic. That again, the overlap between compute and energy efficiency. It's kind of -- it's a serious freaking problem -- like it's not just Bitcoin this is something...

And the margins are right because when you actually provide value, the customers are happy to give us margins and prices for solving their problem.

So yes, that makes a lot of sense the way you outlined it there. But when the -- so you have to wait until the next Fab in Malaysia is kind of coming up and you'll have enough product there. But will people sign up for that product before because they'll have some time -- and where will they put it into? Because I'm not sure what the capacity that will be will be for some like niche product from some big cell phone player, but it's hard to take was coming out of one Fab and put it on like the new iPhone coming out be -- approving like a time for it could really get...

No, it's a great question. So I think phone market is 1 of those markets. I've lived there for a long time, almost 20-some years. People -- maybe just a little bit, there are 1,200 million phones made a year, Apple and Samsung, if you remove them in the big phones that we're familiar with, another, I would say, 700 million phones between Xiaomi, Oppo, Vivo all these customers. They make a lot of models. Some models only ship 2 million units. And they may launch a model into India. They may model into Europe. So those are the kind of products where for a company that doesn't have a lot of volume, we can start for us. As we build our factories to be bigger and we have millions of units, then, of course, we can aim to go into something like an iPhone or a Samsung Galaxy. But there's a lot of opportunities for a few million units per model phone in Android that we can build our factories on.

Any more questions from the audience? Yes, go for it. If you don't mind just sorry. Thank you for your patience.

For context, when you think about the energy density of your architecture using a pure silicon anode or more traditional cathode. How do we think about density in terms of watt hours per liter or watt hours per kilogram versus existing like 2170s or system or [indiscernible] guys that are claiming 850, all these type of things watts per liter.

Yes. I mean, look, in the applications we are going into, like in the cell phones that we're going into, we get the feedback from the customers that we are providing 30% more energy density than what they're using, right. Well, the difference is this, people only quote one number like energy density, they don't quote cycle life. They don't quote fast charging. So this is actually very important because what I've learned over the last 9 months is energy density, fast charging, cycle life, all together is what a battery needs to do. So I've seen some of our competition produce much higher energy density, but they go 200 cycles. But if you think about cycle life, it's actually kind of -- sometimes it's obvious, like we charge our phone every day. So that's 365 days. If you keep your phone for like 2 years, minimum 600. So unless you get -- and our battery, we produce minimum 500 cycles now. And I haven't seen cycle life numbers from all these other people who talk about their batteries. They talk about watt hours. And I found that it's very, very difficult to get the cycle life and fast charge, along with energy density. And that's where we excel is we provide a product that solves an end product need, not just one number.

Any other questions from the audience? We got some people's attention here. I want to give you just a chance to make any closing remarks or touch on any topic that you wanted to -- that we didn't hit on that you want to emphasize.

Anything else guys...

I think we covered everything that we have.

No. I mean I just super excited by the technology and let's continue our conversations in AI.

You know what I do want to ask you one more question. Give me some advice. What would you do if you were writing research about the future of transportation and the interplay between energy storage and AI at the edge, what would you what kind of things would you do or bring attention to or where you think there might be an analytical dislocation that could help investors make better decisions?

I asked -- sorry for...

We didn't script I need help.

Great question. So I asked my team the other day to run -- you mentioned mad scientist, crazy geek. But I'm 1 of those. No. I mean I asked my team to they run stable diffusion, which is an AI application that generates images like Dali and all these things have it. I asked them say, basically, you type in a few keywords and say create an image. You create an image of a hummingbird in the backyard. So there you go. So they did it. And then I asked them, "Okay, why don't you tell me how much battery life it takes if you run it on the cloud, what is you run it on the computer? So they ran both. It took 58x more battery to run it in the laptop versus the cloud. 58 times and then I ask them, okay, why don't we do this. Adobe produced a great noise filter called Denoise in Lightroom. Just cleans up the noise -- and I'm a photographer I take a lot of pictures. And then they had an ice filter before and they had this AI noise filter. And I asked my team, why don't you run the same number of images run the AI noise filter, and the regular noise filter. It took like orders of magnitude more compute and the battery just went down like no time. So I actually think people haven't really quantified the impact of AI moving to the edge and how much more energy that's needed and I think it's a great research and now we're trying to figure out what is it due to phones, for example, if you run chatGPT on your phone, what does it do versus the cloud, right? And people like it on the cloud, but cloud is expensive. You already paid a lot of money for your computer.

And we're really seeing a new technology revolution. I mean electric vehicles were like that was the horseless carriage business like in 1905, I think Thomas Edison was working on electric vehicles with Henry Ford. Henry Ford's wife like preferred the electric car is noisy disgusting in terms -- but the storage wasn't there. There wasn't enough, I Iearnt some stuff.

Yes.

Raj, Farhan, and Charlie, thank you so much for your time. Really appreciate it.

Thank you.

Thank you, my pleasure.