Enovix Corporation (ENVX) Earnings Call Transcript & Summary

This podcast may 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 business, please refer to our filings with the Securities and Exchange Commission. All of our statements are made as of today based on information currently available to us. We can give no assurance 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. Welcome to our Journey to Scale Podcast for Thursday, February 8, 2024. In this episode, we bring back Enovix's Chief Operating Officer, Ajay Marathe, for an update on the company's Fab-2 progress. Welcome, Ajay.

Thank you, Christian. I appreciate the opportunity to talk to you again.

To recap, when we last spoke on December 6, we covered why you chose Malaysia for the location of Fab-2, the meetings you had with the Prime Minister of Malaysia and other government officials. And then we got into the weeds with an update on the company's manufacturing milestones. And our listeners want to know where we are today. So I'm going to kick it over to you, and you can tell us what does Fab-2 in Penang look like today?

That too is currently the most exciting place actually in the company, which, again, it's a hidden gem right now because we haven't really unveiled it to a lot of people. A lot has happened in Fab-2, all the facilitization work has finished. Roughly 220,000 square feet of clean room area has been facilitized, all the rooms for different zones are ready, all the air handling systems, Plus 10,000, air showers, changing room, downing rooms, everything is all set up and equipment has started rolling in. So a lot of exciting stuff happening in Fab-2.

For the clean room environment, has that been certified?

Yes. We have got all -- so what we have done there is the production area as we have mentioned to you, 4 zones. The first 3 zones are in a clean room environment, which is controlled in HEPA filter cleaned to the Class 10,000 ad so the airflow, which is basically recirculated through the rooms maintains a particle count, which is certified by a third party to what is called a Class 10,000 status, and we've got external parties actually certifying the cleanliness of those rooms. That's Zone 1 through 3, which are in the clean room and Zone 4, which is more of a test and sort and final OQC and ship is in what is called the Class 100,000 area, which is typical of semiconductor assembly and test type of environment, whereas the Zone 1, 2, 3 are in a clean room environment where more compensatory airflow comes in and purified it through the HEPA filters and comes into the production floor.

So let's get into the details since I think everyone is anxiously awaiting to hear about factory acceptance testing. And I believe you've started site acceptance testing on some of the zones. So let's start with Zone 1. Can you tell us where we are?

Yes. So the Zone 1, again, to just completely describe what Zone 1 is? Zone 1 is our laser patterning and dicing equipment. As we have mentioned to you, consists of all 3 layers inside the battery [indiscernible] and laser cutting and the tools for one set were already installed in December per plan. The balance of the 5 tools. So 4 tools already installed, balance of the 5 tools are also getting now shipped and installed. So Zone 1 is getting near completion of installation. So all FAT is done and installation near-complete. It should complete here imminently.

And then after installation, you start site acceptance testing, is that okay?

Right. So after installing the equipment basically gets powered up, dry cycled and SAT on the first 4 tools has already begun. We are well into it. The first 3 machines have completed to the order of 85% requirements of the SAT checklist, which is pretty rigorous. Now just to remind everyone, FAT, which is a factory acceptance test is externally rigorous process by means of which we qualify the tool at the site of the supplier. That's FAT, right? And we don't allow the tools to ship or go to the next phase, which is packing and creating and shipping from its respective places where the machine is being built all the way to Malaysia, that we don't allow until the FAT completion is done. So a lot happens during that FAT process, a lot of qualifications in case there is a problem found where the machine gets kicked back into engineering hands to go improve. All that stuff happens during FAT because what we need the discipline we follow basically is do not allow anything that is not fully accepted at the factory level to get out of the factory. And we have been following that very, very rigorously like religion. And then the installation happens, dry cycling happens and SAT, which is site acceptance test also equally rigorous, in fact, even more so, even the presence of the supplier engineers showing up at the site plus our own engineers who are already there and eagerly waiting for this equipment to show up, jointly started working on SAT, we are well on a way for Zone 1 SAT to be completed. Currently, we are expecting SAT to be finished sometime over the next 4 weeks on Zone 1.

That is excellent progress. Let's shift to Zone 2, and if you could describe what Zone 2 is and then tell us the details?

Right. Zone 2 begins where the laser dicing is finished, and the electrodes are in the form of distal electrode on rolls, which are fed to the stacking machine and then all the way to the end of Zone 2, which is basically the [indiscernible] constraint attach and that type of thing. So that's all Zone 2, right? So there are 2-time lines we are tracking on that one, which is one for HVM, which is the big 1350 UPH line and another one is the agility line, which is also equally important. Zone 1, again, was a farm, which is common to both clients. Zone 2 is where the differentiation happens between the agility and HVM lines, right? So both are tracking, FAT on HVM line is completing by the end of February, which is this month, and it will ship right after that, whereas the agility line is slightly ahead of that as we had planned. Agility line, we wanted to make sure that, that gets into Penang the soonest, so that we can start preparing samples for customer shipments given to them in the form of engineering samples of that line to the specs of the customer. And that one is completing imminently, even before for like -- 1.5 weeks before the HVM line and will be in the Fab-2 by middle of March.

So anything else you want to tell us about Zone 2 in terms of timing?

No, I can share with you some exciting stuff, which is happening in Zone 2. Now in Gen1, Line 1, which is where in Fremont here, we have -- even though we have done a lot of work on yield and progressed well, which I've shared in my previous blogs with everyone. We have done kind of learnings and root cause corrective action or failure analysis on where are we losing yield in the Gen1 and Zone 2. Zone 2 is a very critical zone, Zone 1 and Zone 2 are kind of attached together. The quality of laser ablation and cutting gets judged by how well we can stack in the stacker and that's why Zone 2 becomes like a report card for Zone 1 as well, right? It's important, are we able to stack these electrodes when we cut them in the way of pairs in the right format. And that's what is called yield of the Zone 2. Now exciting stuff during the FAT work in Zone 2, we have in here in Gen1 Line 1, we have never experienced the kind of yields that we are now showing in the FAT. The yields are where we want it to be. I can't really share with everyone all the yield numbers but it's line needs high, it's where the line needs to be. It's in the high 90s closer to that 3-digit number, if I can say it that way a little bit longer. Then we are in that position for Zone 2. Again, this is pre-FAT and FAT work. The same test will be done when the machines are in Fab, which is the SAT work, which we are eagerly waiting for when that will begin and then I can report out next time what the yields look like in Zone 2 but good early indicator of yields in FAT, exactly what FAT is supposed to do.

Great. So let's talk about Zone 3, the longest line. Let's give us a little color around where we are with Zone 3?

Zone 3 is actually divided up into 2 parts we have shared with you, Zone 3A and 3B. The 3B, which is the degassing line, is complete. That was completed end of the year per plan, and the machines are on the boat sailing towards Fab-2. So that's good. Now Zone 3A, in the month of March and basically still in Q1, we will finish the FAT work.

And then Zone 4, that one is way ahead of schedule, right?

Zone 4 is ahead of the schedule. We said the cabinets were installed. The loader, unloader, the conveyance system for Zone 4 is installed. So Zone 4 is pretty much ready. It's way inside the SAT timeline now. Engineers are over there buying out the equipment in the form of site acceptance test in Zone 4, not an issue with Zone 4 at all.

So just to recap, Zone 1, FAT is complete, SAT is in process. Zone 2 will be done this month. Zone 3A by into Q1, 3B is complete, and SAT is in process and Zone 4 SAT is in process, is that right?

That's accurate. Yes.

And then I think what everybody was waiting to hear is you already mentioned it but I'll just reiterate that first samples are still on track to be produced off the agility line in Penang in April.

Yes, that is correct.

That's great. [ 70 ] tools, and all of this learning, FAT and SAT, you weren't able to do. I mean, it was before your time on Gen1.

Actually, it started before my time but it got accelerated after -- when I got on board here in November of 2022. And since then, we made a lot of progress understanding of all the yield. And we have been continuously feeding that learning in the form of very properly documented root cause analysis for the yield issues. And like I said, now that work is paying off because in FAT, now we're seeing the indicators already that what we thought would be fixed in Gen2 in high-volume production is actually the case. And we are getting that evidence now rolling in from the FAT work.

Well, so how are you feeling now that we're inching towards April?

Confident, also of the dates. And like I said, eagerly waiting for all machines to show up so that we can begin this work starting to produce batteries as a finished product and putting them in the hands of the customer. Nothing -- no more satisfaction for an operations guy than having samples in hand, which you can confirmly give to the customer and say, "Please test these and give us your feedback." And that's the feeling we have, actually all of us.

That's great. Well, your expertise surely shines through as you talk through all of these processes. And then additionally, Enovix recently announced that the next earnings call will be on February 20. So assume we'll be hearing more updates from you then.

Yes. So, the plan again is for me to be actually conducting the live streaming from our Fab-2 location showing some of the equipment, which is already going through SAT running behind me at the time, and that will make it real. I'll also have some footage of Fab-2, which we can load in the videos, which we can share. That building is our pride and it is coming out quite nicely. Actually, you'll see it in the videos, we will share with everyone.

And the team right now in Penang, you've got about how many people?

About 85 people of different disciplines, product engineering, process engineering, some support people as well. And it has grown. Completely excited, more than half of the team, actually, 60%, 70% of the team was at the supplier side or still is, in some cases, buying off the equipment tools so they hit the ground running when the equipment shows up in Fab-2. So yes, very exciting for that team as well.

Exciting times. And I'm sure we'll be giving more updates as we get closer to the April date. Is there anything else that you want listeners to know?

No, just feel the excitement that I have going through me, and I hope I can -- I have transmitted that enough but if not, see you on the 20th.

That concludes this episode of our Journey to Scale Podcast. Thank you all for tuning in. Be sure to subscribe for alerts. We'll be releasing new episodes as we reach new milestones and scale up to high-volume manufacturing. Until then, thank you, and have a great day.