Enovix Corporation (ENVX) Earnings Call Transcript & Summary

Good morning. My name is Bill Peterson, U.S. Clean Tech analyst, and we're really pleased to have Farhan Ahmad here from Enovix. And he's going to give us a little intro to the company. He's been with the company, how long now?

About 8 months.

8 months. I've been covering the stock for around 2 years. It's a really interesting play in advanced batteries, and we're looking forward to discussion. Farhan, thanks for supporting the conference. I'll let you do some intro comments. I'll take some questions after that. And then if anyone has any questions in the audience, we'll do that as well. Just make sure you use the microphone. And over to you.

Thanks, Bill. Thanks for having us at this conference. And thank you, everyone, for coming up so early for our presentation. So I'll start with some forward-looking statements. On the call today, we will be making some forward-looking statements. These statements carry risks and uncertainties with them and for a full disclosure of risk factors associated with these statements that we make today. Please refer to our Form 10-K that's available on our website and on SEC website. So I'll start with a brief introduction about who we are. And Enovix is a disruptive battery company. We were founded in Silicon Valley about 17 years ago. The -- what makes us unique is that we have a very unique architecture that allows us to use 100% active silicon. That -- and we are the only battery company today that can use 100% active silicon. Now this is extremely important because compared to graphite anode, silicon anode uses much less space, so about 60% less space. And that basically allows us to increase the energy density in the battery. So we can get the highest energy density batteries available in the market today. And we can get about 20% to 30% energy density improvement from what's out there in the market. And now in terms of the battery architecture, we have a unique architecture. The -- what we have done is we have used a lot of mechanical engineering. We have architected battery-rich stacks, anodes and cathodes in a stock and basically puts pressures on them. And we have a constrained system designed to keep the battery in pressure. And this not only is the battery architecture unique and there's a lot of IP and patents associated with it that the company has. But also the manufacturing process itself is very unique, and we have custom tools that we have designed that allow us to manufacture these batteries in high volume. The battery architecture, in addition to giving the highest energy density in the market today with our silicon anode -- 100% active silicon anode, it also has some other unique properties which allow for faster heat dissipation. And these thermal properties make the battery architecture, very appealing to EV makers. And the energy density part of it, that being the highest energy density battery, that's really very attractive to the consumer electronic market. Now the company is in the journey of scaling the technology. So I'll cover basically 3 aspects when I think about the company there. Basically, there are 3 vectors. The company is making strong progress on. There's technology. There is manufacturing and their customers. So I'll start first with the technology. So the first product that the company -- the first generation of products that the company developed is called EX1, it is a very differentiated technology with the highest energy density available in the market today. It is -- it has been embraced by Army for putting the batteries in the West that the soldiers have because of the safety features associated with the battery and the high energy density that comes with it. So -- and this generation of product, which was very exciting for the market. When our CEO, Raj, he came into the company, he's looked at the product. The technology was amazing. But the product management function did not exist. So he brought that function and Raj is somebody who's been a veteran in the smartphone industry. He has been very well known. I've worked with him personally at Micron, and he's pretty much a legend in the smartphone area. The guy basically developed smartphone, Snapdragon processor and prior to that, the Texas Instruments, OMAP processor, which really enable the smartphones. And then at Micron, he led the mobile business, which was an $8 billion business. So here's a really good understanding of product management and also has very strong relationships. And he saw that the greatest need for the energy density was in the mobile phone market. And so as soon as he got there, he engaged with customers, we started working on a -- on tweaking the product to make sure that it is really perfected for the smartphone market. And internally, as soon as we got there, we started a program on EX1M that basically was targeted towards smartphones and getting to the performance specifications of the smartphone market. So basically taking the EX1, tweaking it for the smartphone market. And that technology node, we're working hand-in-hand from day 1 with the customers. Customers love the technology, and where several OEMs are engaged. But as you know, in this space, what we can say and cannot say is often determined by NDAs and things like that. So we can name some of them. We have named a few of them in the past. We have named a few prominent Chinese OEMs. And -- but we are engaged with many more apart from that. And -- so the EX1M, we're targeting to ship the samples in second quarter of this year. And that should have about 18% higher like the EX -- that should have like about, call it, like close to 18% higher energy density. And then the next-generation EX2M should be like about 30% higher energy density. So those products, we are targeting -- the EX2M is targeted towards the end of the year, the technology, we should be starting to ship but EX1M, we should be shipping in 2Q of this year. And the progress on both of them is good, and we are basically focused on making sure that we can deliver these samples to customers. Now switching to manufacturing. We are also made good progress on the manufacturing front. The first generation of factory -- our Gen1 factory, we put in Fremont, that allowed us to make sure that we demonstrate to customers that the technology is manufacturable and learn. And then we are now in the process of ramping our second generation fab which can produce millions of batteries. So our second generation line is targeted to produce 9 million to 10 million batteries in a year, and that really is high-volume production line. Each line can produce about 9 to 10. So once we demonstrate that, there would be more confidence that the customers will have to adopt in the battery in their products. So we are in the process right now of scaling this technology -- of ramping this in manufacturing and are on track to begin to ship sample -- or to begin producing the samples for the batteries with -- in Malaysia on our Gen2 line in 2Q. And I will talk a little bit about the FAT and SAT. So the Factory Acceptance Tests, we are going through that process. Most of the tools have completed that, and we have a detailed update that Ajay in his podcast earlier this -- like last month he provided an update and that I would encourage you to listen to and we will continue to provide updates on the website. Raj was in Malaysia last week. He was very excited by the progress in Malaysia. Really, the site is coming along really fast. A lot of tools are moving in. The clean room is in great shape. The team is top notch. So really, he was very excited by the visit. It's really a momentous task when you talk about all these custom tools that are shipping on site, and we are bringing them fast. It's a fairly complicated task, but the team is really focused on making sure that we can get it ready so that we can produce samples for customers in 2Q. And then switching lastly to the customers, the customers, we have a very strong engagement, like I said, all major -- I shouldn't say all, but pretty much who's who of the consumer electronics space, the customers we are engaged with. And we have very good engagement, working really hand in hand on the EX1M, and there's a very strong interest on the technology. The customers feel that their traditional batteries are kind of running out of improvements. And there are -- they can't get much improvement. You look at the batteries in recent years, there's 2% to 3% improvement in energy density. They really are pressed for a need for higher energy density because applications like AI are going to demand a lot more energy. And there isn't like a lot of space in the phone. So for that reason, there is a lot of interest from customers. And with AI, actually, there is even more interest. Raj was at MWC 2 weeks ago, met pretty much with all leading OEMs in smartphones. And his basic feedback was that the AI interest is higher than before and customer interest in our battery solutions is very high. And we have talked about 2 ways -- 2 OEMs visiting our company in fourth quarter of last year with like at a CEO level and the entire battery divisions coming with them talking about the technology, the evaluating our manufacturing. And there is a lot of excitement around Malaysia and customers, and they want to visit the site when it's ready to make sure that they get comfortable with the manufacturability of the process in high volume. And so that's -- it remains a very important milestone for the company. And the target for the company remains that with customers, we are engaged in different markets. On IoT, we will be having second half of this year revenue, smartphone revenues dumping in '25 and then the PCs in '26. And before I end, I just want to cover the EVs opportunities. So while like, I would say, a 90% plus of our R&D focus remains on really working on the consumer electronics space. We also have unique architectural advantages in the EV market. So because we vertically start the electrodes, as I mentioned before, there is thermal properties that are attractive. And if you fast charge on our design batteries, the simulation shows that it will be basically very limited temperature variability across the battery, like something like 10x less variability. So our battery, the temperature profile may be 3 degrees centigrade temperature increase on fast charge, whereas in one of the -- in some of the traditional batteries, there might be a 75-degree variation or 50-degree centigrade variation across the battery, which can be very harmful for the cycle life of the battery. So with our architecture, customers can go to a really fast charge. We have demonstrated on small cells, about 5 minutes -- close to 5 minutes, 0% to 80% charging which can be a game changer in the EV market. So the OEMs are very interested. We are being very selective in who we are engaging with because of limited resources. And we have really picked -- we are picking like couple of the customers that are most interested and have the potential to become large. So we announced on our last earnings call that we have an agreement with one of them. And we will be basically working with them closely to deliver them samples this year that will show the viability of our product and then hopefully, we can translate that to a bigger engagement from next year. And we also may pick another supplier sometime -- another customer sometime later this year. So the EV opportunity is also very exciting just because the unique architecture that we have. So I'll stop there and maybe we can jump into your questions.

Yes. No, look, you covered a lot of things that I'd like to dive a little bit deeper in. So let's first talk about factory and site acceptance testing. And yes, these webcasts or blogs you do have been really kind of important to follow the milestones. So I guess, when do you expect to complete, I guess, have 100% completion of the site acceptance in Malaysia. And then how does that inform your confidence level in terms of sampling off the agility line in April? Some of the timing was, some things were pulled in, something were shipped it up, but how does that -- how has your confidence to ship from the agility line, I guess, April?

Yes. So look, the main focus for the company is to get samples produced in Malaysia in hands of our customers. Because for customers, it is very important that part of the qualification that they get samples from the same site that is eventually going to be producing. So the team remains on track to produce samples in Malaysia, in Turkey. And that's what everyone is focused on. It is a very hard task. And that's why like we do provide detail breakdown of things from time to time, and I let Ajay manage that narrative. And -- but just for the benefit of everyone, I'll go over what FAT, SAT is, and how we get from here to producing samples for everyone. So on FAT, it is really to make sure that the tools that are designed to manufacture the batteries, they are working exactly to specification. And we have very tight specifications. And one of the things that we learned from Gen1 is that you really don't want to relax any of the specifications. And you want to make sure that the battery -- the equipment that is making the battery is perfect and doing everything that you wanted to do. There are milestones associated as soon as you complete FAT, you have to pay a certain amount of money to the supplier. So their incentive to get that milestone -- meet that milestone is pretty high. And so the team is really focused on ensuring that the FAT process is done perfectly. And we are very much engaged on that, and Ajay has been providing updates on it, and we will continue to provide update. The Malaysia Fab is filling up fast. If you go there, like I said, Raj was there. Most of the tools are there. The team is ramping them. Once all the tools are there on site, we have a plan to quickly start producing batteries, and we expect that because we spend the time in FAT that the [ ramping to ] SAT should be relatively quick, and we can start producing batteries after that.

Okay. I want to talk about qualification, and we can talk later about manufacturing ramp. But how should we think about product qualifications for your smartphone makers as well as maybe your wearable makers. So for example, you have EX1, EX1M, then you're going to have EX2, EX2M. How should we think about the qualification times for the initial product like EX1? And then maybe a year from now or whenever you have EX2 ready, how should we think about the qualification time line of the second-generation products?

So typically, we expect once we have samples coming out of Malaysia, given the background of work that we have done with customers, we expect about 9 to 12 months qualification times with the OEMs that are fastest in qualification in the smartphone space. So some of the Chinese OEMs, they have really accelerated the time lines for qualification. And we expect that we can -- with the work that we have done with them already, we can get the qualification done in about 9 to 12 months. Now one important thing to note is that they need samples from the site that will be used for producing the final product for the -- for starting some of the things in qualification. So from -- once we start making the samples in Malaysia and ship them to customers after testing, from that time on, it is a 9- to 12-month process. And so we expect that in the EX1M, we should have qualification with customers sometime in the first half to middle of next year. And then the -- that should allow the customers to ramp EX1 in some of their products, right? Like -- but that really people want to walk before they run, right? Like one of the things that I would think is that they are not going to put all their phones all at once in the beginning. It will be like limited amount of SKUs, 1 or 2 that a customer will pick that they will put us in, validate that, hey, you are basically taking the sample that the phones are working, everything is good. They demonstrated in field, the performance is good. And that's an important data point for them. And then they can -- on the EX2, they can really have a much broader proliferation of the product. So EX1M is very important because it's a validation platform that allows them to ramp some products. And the key thing that I would say here is that when -- what we hear from our customers is the design that we have is really unique, and that's why they're so interested in working with us. And they want a platform that not only can give them energy density improvement today. But that can deliver faster energy improvement and get to higher improvement over time, right? Like so in a year, they are getting 2%, 3% energy improvement. They switch to our platform. It's like 10 years of improvement. And when you think about like the iPhone this last year, in its review, the Wall Street Journal was like, hey, the phone, there's not much change the battery life sucks, and that was basically their heading after review. So it's something that affects replacement times for phones, your innovation in the phone can speed up a lot if you can get a better battery. So really, that's a need from customers. So now switching to IoT market. We will -- we expect to have revenue in the back half of this year. And like I said, in the PCs, the qualification times are longer. And so that will take until 2026 to get qualification and ramp.

All right. Thanks for that. So in terms of manufacturing, you guys have spoken a little bit on your yield sort of ramp. How long should we think about, I guess, achieving sort of high yields into the 90s? And I guess maybe equally important, I think there's a lot of questions on how fast you can add new lines, lines 2 through 4. How many lines -- the questions we get is how many lines could Enovix have next year in '25 and then in '26 and '27?

Sure. So in terms of their yield ramp, we expect to start the yield at higher level than in what we achieved in Fremont. So what Ajay has said that we expect to start at 60% plus in Malaysia from the get-go. And then by end of the year to get north of 90% and through the year, improved the yields there. And now in terms of the ramp-up lines, we are working closely with customers. And as we have the qualifications and based on the timing of the qualifications, we will order more lines. And so really looking for a very steep ramp to -- in revenues in '26 and '25. So the lines will -- we will bring up the lines depending on the pace of the customer qualifications and how many phones we get designed in and things like that and the demand for those phones.

And how fast from the time you order to...

Yes. So that's a good question. So it's typically like 6 to 9 months and the way the ordering of the line works is that you will order the longer lead time parts first. And so for example, you're making a laser tool and you were like, hey, it takes the longest you will order the lasers first and everything else later. And you would put something like 10% as a down payment. So it takes about 6 to 9 months. And basically, it's not an uncommon practice in industry that the long lead time items you will keep it ordered so that you can turn around in 6 months. So we will target something like 6 months cycle time for or lead time from the decision to actually having the tools.

Maybe speaking about the competitive landscape. I mean you have EX1, EX2, you have a road map. But I mean, everybody knows you're going to need better batteries. So one could presume it's going to be competitive. What -- how do you see the competitive landscape today? And how do you see that evolving over the next few years?

That's a good question. So one of the things that is unique to us is that we are a battery agnostic company with a unique architecture.

Material-agnostic.

Sorry, material-agnostic company with a unique architecture. So we take advantages of the material innovation. So the traditional battery industry, the way they have been improving the energy density is there is innovation in material, you put the more advanced materials and you get higher energy density. And we can benefit from that. And we can take the cathodes that are more advanced. Right now, the cathodes that we have taken on our EX1, they are about 4 years old, right. Like so we are missing on 4 years of improvement. So that's where EX2 can come in and really give us a boost in energy density. Architecturally, there's nothing that we have seen, which gets you anywhere close, nothing which has got 100% silicon -- active silicon that we have seen in the consumer electronics market. The most we have seen is some people have started to use like 5% to 10% of silicon material in there -- active silicon material in there in the graphite batteries, but that has very limited advantages. You don't get like the full benefit of what is possible with our silicon using that approach.

And I guess you talked earlier about broad customer interest from names that everybody would recognize based on how you're feeling about the manufacturing ramp cost structure and pricing. Are they supportive of sort of the long-term target sort of 50% or approaching 50% gross margins that you've spoken about in the past?

Yes. Look, I think like we will be able to get good gross margins, 40%, 50%. We have brought up that hey, these batteries will require premium pricing. And I mean one of the things that you should think about is that compared to the EV batteries, the smartphone batteries are really 4x per kilowatt hour, right? And that's because of the energy density, there's about a 30% higher energy density that you get from the materials that are used in EVs to the materials that are used in smartphones. So the customers in the smartphones for the performance attributes that are needed in the phone are willing to pay a premium. And we are not asking for a 4x higher price. We will need a premium, but we will give like a 30% boost to energy density. And with that, we think we can get to good margins. There is no other game in town. We are the only game in town for giving this level of energy density. So we think we can get to good gross margins, once it scale, we obviously have to ramp manufacturing. One of the things that is important is that like because we have a lot of unique materials in our battery. Scale is important because manufacturing things like constraints that requires to get to volume. So sometime in the 2026 time frame, we should be at scale. And we did need about 4 lines to be ramped to be at scale. And that should -- at that time, I think we can get to very good gross margins.

Clear focused on consumer electronics, but you did announce the auto arrangement, maybe there's some more on the comm. Can you just -- maybe just at a high level, how do you think about auto? What are the key milestones we should look for? How could this evolve over the coming years?

Yes, sure. So the auto -- let me just take a step back and talk about the auto strategy relative to smartphones. So the company is focused on getting to profitability sooner. One of -- like the company's largest shareholder is our Chairman. T.J. Rodgers, who has been a veteran done many -- brought many companies to market and really a legend in the bay area. And he's -- like one of his philosophies that you want to minimize the cash burn that you have before you become profitable. And on EVs because of the scale needed, it's a very long journey, right? Like it's not something where things can become profitable. So we were like very clear that we want to go and focus on the smartphone market and the consumer electronic market more broadly because that was the fastest path to get to profitability. So we have been focused on that area, but we -- as I mentioned, there is interest in EV. So on the EV side, our strategy is to use the architecture that we have and bring it to market, but do it in a fashion where we don't have to put a lot of capital to work. So we are looking for close customer collaboration for customers to fund the R&D largely and minimize our R&D contribution and show that -- like demonstrate to them that, hey, our architecture is great for you. And we will put a little bit of R&D dollars to demonstrate that, but then we will get the R&D dollars and then probably license it to them, like Raj has said, like it makes sense and that way, we can minimize our investments there, but still bring the benefits of this technology to the market. And so on that front, like we are working with 2 sort of leading OEMs. One of them we announced as a customer that we have signed an agreement with. And we have -- this year, we will show the viability of the product, the next couple of years depending on the viability, we will do prototyping closely but like with the -- working with the customers, R&D dollars largely coming from customer. And then after that scaling in manufacturing.

Okay. I want to stop and see if there's any questions in the audience. If there is, we got a microphone over here. Anyone?

Just a couple of questions -- just around costs, perhaps just interested in what the sort of cost is compared to traditional battery in manufacturing? If you've got an estimate of that? And also where you -- in terms of sourcing raw materials, if you've got arrangements for that or where the inputs would come from.

Yes. So the materials are -- that we are using, like we said, are commodity materials, largely like the electrode. cathodes, electrolyte, they are not like something that is unique to us. And those are available across suppliers. We have commitments for what we need for next 1 year, 2 year kind of framework. But -- and we will continue to get those arrangement like for what makes sense. And -- but we don't think it's a big challenge for us. Now in terms of the cost structure, we think that once it's scale, we can get to a cost structure where -- and I'll separate, the EV side from the consumer electronics side because the battery is very different, and I'll talk about that. On the consumer electronics side, we think we will have about 20%. We are targeting about 20% incremental cost per capacity. And that's what the team is driving to. We are not there yet. We will -- in order for us to get there, we need high volumes, and we need to bring down the cost of manufacturing the line itself, the capital cost for the line itself. And those projects are going on, but there is a line of sight for that. And with that, like we think we can have a good business. Now on the EV side, it's a little different because EV side, we don't need to have silicon material. It's mostly the stacking of the architecture. So once you do that, you don't have the process complexity of prelithiation, you also don't have the need for a constraint that puts pressure on the battery in some cases, depending on the materials that you use. And so in that case, the cost delta would be much lower. It's maybe like 5% or something close to that. But then with that, the EV customers are very price sensitive because it's a big portion of the BOM cost unlike smartphones. In a smartphone, you have a battery, which is $5 to $10 -- like $10 call it, and the BOM cost of a phone on a high end is like $500, $700. So it's a very tiny piece of the cost, but it matters a lot to what the battery performance is. So they are less sensitive. But in the EV, they are very sensitive. But in addition to the battery, they have to spend thousands of dollars on integrating the battery in the car and a lot of it is cooling systems. So if you use our battery, you can simplify the cooling system. And if you can fast charge, you don't need as big a battery. So the value proposition is there. And it's very clear. And the cost delta in EVs is probably not going to be as much.

Well, Farhan. Unfortunately, we're out of time, a lot more questions we could get to. But thanks a lot for your time this morning, and we'll look keenly on how the company is executing here in 2024. Good luck.

Thank you.