Enovix Corporation (ENVX) Earnings Call Transcript & Summary

Thank you, everyone, for joining us. I'm Raj Talluri, President and CEO of Enovix. We are very excited today to hold our very first AMA, short for Ask Me Anything, live stream. As I mentioned when I joined the company, it's my goal to be transparent to all our stakeholders and take you along in the journey. And that's what today is about. Now before we get started, I do want to remind everyone that our live stream is being recorded, and the replay will be available on our YouTube page afterwards. Now in addition, given we're a public company and it's important to highlight that we may make forward-looking statements today that are subject to risks and uncertainties and reflect what we know as of today, this is May 6, 2024. Please, as always, read our risks and disclaimers in our SEC filings. Okay. So in terms of format, we've received about 100 questions in advance, and we are expecting easily as many in the comments during the call. Now we may not be able to get to all of them, I'll try to answer as many as I can. Now that having said, I have a moderator here with me, who will read the first question -- read all the questions that were presubmitted. I will answer them first. And then as we have time, I'll go into the questions and the comments. Now before we go to the moderator, I do want to address the news of some of the cuts that we've made that have been reported. Now consistent with our earnings call, we reduced our fixed -- we reduced our burn by $35 million or 1/3 of fixed costs. Now the cuts we announced today, a vast majority of them are actually hourly factory workers that have been working in Fremont, mainly making EX-1M cells so we could get our technology moving forward and sample early to customers. Now our factory in Malaysia, as I mentioned on the call, has come up really nicely. And I was there a couple of months ago. Super excited by that. And in 100 days, the team there was able to build a phenomenal factory. And our Agility Line machines, almost all of them are now there after being effectively being complete and the line is getting installed and as I said, it should be done soon, which means we can get samples from there. So that's the reason why we felt we did not have to have a high-cost manual manufacturing line here with lots of hourly workers working on making batteries. Now this expands our runway well into 2026 and gets us to profitability sooner. Okay. With that, let's kick off the first question. Moderator?

Thanks, Raj. So the first question is, one thing that wasn't discussed on the earnings call was military or EV. Has there been any progress on that front?

Yes. Great question. So on the military stuff, as I mentioned, we have this breakthrough technology, which makes our batteries extremely safe. And we've been working with the U.S. Army, where they would like to have these safe, high energy density batteries to power the vest that every soldier would wear and keep them safe and also going for a long time. We have shipped quite a few batteries to them, and that contract is going well, and we will continue to make more batteries as their protocol, as their testing continues, and we expect to send them some more later on. I also want to highlight that the business we acquired in Korea has a very strong, stable business of making batteries for the Korean military, and that's an opportunity for us to actually expand those batteries into other opportunities and other militaries. Now on EVs, we are very excited by this business. We didn't get to talk about in the earnings call. But back in February, we signed our first development agreement with a Tier 1 auto OEM. And since then, we made a lot of progress. And what's driving the interest here is twofold. One, the architecture we have has the ability to enable the battery to charge really fast and also make the heat dissipate really quickly. Now one of the issues in cars, as you know, is when you charge fast, the battery heats up. That limits how quickly they can be charged. And we find that our architecture has an order of magnitude better heat dissipation because of how we orient our electrodes. This enables fast charging and the overall health and stability of the battery. The second advantage we had is that our architecture, the way we make the batteries, does a really nice job of handling materials that have the property to swell when charged. Now many materials swell when they charge, particularly as you increase energy density like silicon. But our architecture is not -- is agnostic of which material you put in there. We're able to control the swelling of any material that swells because of this. And we made a lot of progress with this OEM. Things are going well, and we expect to get them some batteries by end of this year. And we're also working on other EV OEMs, also making good progress there. Okay.

Okay. Next question. Raj, we received many variations of this question: When can we expect to hear a customer announced?

Yes. So this is a really good question, and I know a lot of people ask me this question. But I want to give you some context. Right now, we are working with majority, if not all, of the smartphone OEMs. And that's been the focus of the company because I felt that's an area where our energy tends to increase, we're able to provide -- provides maximum benefit with AI applications that are coming on to the phone. And we got very good customer feedback on that. Now you got to remember, these customers already have existing suppliers that they're using. And we are a new company that's coming in with a new battery to them. They like what we provide. They want to work with them. But they can't really go out and tell everybody, "Hey, I'm using Enovix battery" way ahead of time because they got the existing supply base to work on to worry about. This is something -- and also, I mean this is such a differentiated battery that the OEMs like to keep it, the fact that they're working with us, a little bit more guarded. And I totally understand that. That having been said, my experience is that, typically, a couple of months before production is when the OEMs will allow us to mention their name, and I'm working on that. Meanwhile, we will continue to do announcement like we did before, which is we basically said we announced the fact that we worked with the OEM and we got the agreement reached and so on. We also did that with auto. We did that with the smartphones now. And as we continue to make progress, we will continue to do that. Now in auto, it's even trickier because some of these auto companies have got some other battery suppliers that be given the long lead time. They worked with them for a while now. So please be patient with us. A lot of good traction. I'm really excited by the work we are doing. Our architecture enables us to produce much better energy density and the customers are super excited by that. But the ability to announce the names will come as we get closer to production.

Okay. Next question. Raj, we have received a few variations of this question as well, which is that there are many smartphones in the market with fast charge, in some cases, up to 5C or 6C, with long cycle life. How will our batteries be competitive against those?

Yes. So really good question. I'll first want to talk a little bit about all the various careabouts our customers have when choosing a battery. One of the one is fast charge. How quickly can you charge, get to some amount of charge capacity on the phone, and move on. The C-rate, 5C, 6C, 4C, talks about how fast is the battery get to 50% charge, for example, or so on. Now in the battery, there are competing requirements, fast charge, energy density, cycle life, how long can it go, safety. These are all things that actually compete against each other a little bit. For example, you can make the battery go really fast in terms of charging, but you give up a lot of energy density because what happens is when you want to make the battery charge really fast, what you need to do is you need to thin the electrodes, for example, so that the lithium is able to quickly come out and go in into the cathodes and anodes. But when you thin them, the amount of energy density you get is lower because now you don't have as much active material there. So it's a trade-off between fast charge and cycle life and energy density and safety. So we spend a lot of time addressing all of them. And it's kind of like a spider-like diagram, if you will. And each OEM is a little bit different. In fact, some of the phones in the market now that do 5C, we actually got those phones and we did some analysis, the energy density has dropped off very low when you talk about that. And also, even when people say it's 5C, many cases, it charges really quickly. Like, for example, you had a 0 charge, 0%. It will go up to 20% really quickly, but then it slows down. And then to get to 100% charge, it may take longer. So every OEM has a slightly different view on how the batteries should charge fast. And our technology has the ability to adjust to all of those, and we're making the right trade-offs along with our customers on that.

Okay. Let's go to the next question. Raj, we received a number of questions about EX-2M and the road map, specifically what technical hurdles are there in increasing the energy density on EX-2M and what changes will you need to make to achieve those -- the increased density. There's a second part to this, too, and that is that what are your expectations for cycles and increased density for EX-3M and beyond? What is the maximum increase in energy density we could see from silicon batteries in the future?

Awesome. Good question, and thank you for that. So as a company, we are focused on getting higher and higher and more and more energy density into the batteries that we make. And the way we do that is by this unique architecture we have where we were able to harness the power of silicon to be able to hold a lot more lithium than graphite. But when you do that, as you know, the battery swells up, so we had to control the swelling. And we control the swelling by this unique mechanical architecture that we have, where we slice the anodes and cathodes into really thin strips and hold them together. So we've done that with EX-1M. On EX-2M, we have a lot of other things that we haven't fully optimized. For example, we can have much higher density of LCO cathode, for example, powder on top of the cathodes. We can increase that. And the other thing is we can decrease the amount of inactive material, such as separators and the constraints. There are new anodes that have come about since we have started that actually can hold a lot more lithium and go longer. There is ways to make the current collector thinner. So there's lots of other interesting things that we have in the works, our R&D labs, that we can do on top of what we're doing in EX-1M. That enables us to increase the energy density, but at the same time, keep the gains of fast charge of cycle life that we have achieved with EX-1M. So it's really, really exciting. And all of this is made possible because we are able to use silicon, 100% active silicon instead of graphite, which can hold much, much more lithium than graphite. With EX-3M, similar concepts. We will continue to optimize the amount of cathode. We will continue to find different silicon anode materials, and also the electrolyte. The electrolyte is actually one of the things that a lot of people don't quite talk about. It's a very interesting thing because the electrolyte has to behave one way when it's connected to the cathode, has to behave differently when it touches the anode. So we have a lot of different electrolyte formulations in the company that also help us kind of get both energy density and fast charge. So -- those are just some high-level things that I mentioned. I know we have a team in India now. The India team has come up nicely where we're doing a lot of R&D, where we're able to predict what kind of changes give us what kind of advantages in terms of new material, in terms of new electrolytes, in terms of new cathodes. We can quickly figure that out and then use it in our Fremont R&D to make cells and manufacture them very quickly in Malaysia.

Okay. Let's go to the next question. Raj, we're going to pool a few questions together here about the composition of the battery. They are: one, for the constrained system, some keep stating it adds weight and size. I believe it is negligible. Can you clear up confusion there? And then I'll tack on the other part of this question is, similarly, someone asked, could you share battery weight efficiency and how it compares with existing smartphone batteries? And last, how many electrodes are stacked in a mobile phone cell? Is there a limit?

Yes. So all good questions. Firstly, the constrained system that we use to hold the battery, hold the electrodes, we use stainless steel. It's really, really thin, what we use. And stainless steel is a very strong material that can actually hold these electrodes very well. Because we slice the electrodes thin this way, they don't apply as much force on the sides if you actually just put the electrode stack like that and put a lot more force. But because we make them like this, a lot less. So actually what I want to do is I want to show you guys a cell. This is actually the battery. This is the EX-1M cell. You can see here, we took it out of the pouch so all you see is a cell. And you can see here the electrodes kind of stacked like this and the constraints and put on top of that and holds it like that. So now you can see when the silicon tries to grow, it applies the pressure upwards so we can hold it down and not this way. If you actually want to see the constraint, the constraint is actually this. You can see how thin it is. It's like paper-thin. This is just a stainless steel constraint. And it has these slats, which allow -- you to put the constraint on like that. You can see here, on top. So you can see, and there it is. And that's how thin it is. So it's really negligible in terms of the weight it adds. It's like paper-thin kind of thing you can see here, right? So that's really not been much of a concern. In some cases, when you have -- I don't know, maybe make it drone or something that's flying, maybe the weight maybe a little bit of maybe an issue. But in the customers we've talked to in smartphones and consumer electronics, this has not really been an issue at all. And in terms of stacking, the number of electrodes we stack depends really on the size of the battery, the bigger the battery, the more we stack and also it depends upon how much milliamperes we want. The more milliamperes we want, the more higher we stack and the wider we make it. So the constraint, the shape and the stack really depends upon what's the size -- what's the capacity of the battery, if you will. That's why when we make the electrodes thinner, you can stack more of them, but there comes the trade-off of how much energy can be in each electrode.

All right. Let's go to the next question. The next question is regarding the size of the smartphone OEM TAM opportunity. Is the $12 billion opportunity based on current prices OEMs pay for batteries? Or is the $12 billion opportunity based on the increased ASP Enovix expects to charge?

Yes. So the TAM of the battery is really a blend where we assume that the battery has a different price point based on which tier of the market. For example, this is something I saw in smartphones for a long time. The premium tier smartphone could pay like $60 to $70 for a processor, the entry tier could pay 10% to 15% or even lower for a processor. So the entire Bill of Materials varies based on -- which tier of the phone you are in, so does the battery. But the battery doesn't vary that much because you still need a sizable battery to run these things. So we use a blend. But I can tell you this much, though, clearly, the battery capacities are going up. I mean, today, we see now 5.5 hours, even 6 hours. It is just my prediction. Raj Talluri's prediction is that we're probably well on our way to a 7-ampere battery or even higher. Now why is that? That's because of the gen AI applications. I mean I showed some data where just ChatGPT burns more of the battery life than YouTube. And these are just coming. And I saw the same thing in my experience with smartphones, the memory kept moving up, the processor performance kept moving up. So as you get more and more of these applications demanding more and more battery life, the size of the battery goes up. I mean the capacity of the battery goes up. But as I mentioned, the size of the battery cannot go up because the phone size is kind of fixed, right? You can make much bigger phones. That's where we have an advantage because we can take a battery like this and put it in here, which is much smaller but still get to quite a bit of energy density. So because we are able to provide energy density in a smaller form factor, we can go to 6 amperes or 7 amperes, but still not make the form factor of the battery go up too much. And there is a lot of value to that, and that's where I believe that we can get a much higher ASP premium.

All right. Let's go to the next question. It's a question about the risks you see. What is the risk that AI or tech advancement does not lead to a pressing need for a greater battery capacity? And what is the risk someone produces a better battery than us? Last, what is your overall perception of the risks the market tends to highlight and whether they are real or overblown?

Yes. On the risk of AI and tech advancement materializing, I'd say in my experience over the last 30 years, I've seen the opposite trend. I mean processor performance, processor demands in battery life, memory demands in battery life display demands in battery life, camera demands in battery life has only kept moving, growing more, not less. That is with just the existing applications we know. The new applications are just starting, I think they'll demand even more. If anything, I feel like we're probably undercalling amount of battery capacity that needed to run these. I don't know if you guys use AR/VR headsets, I used the Vision Pro over the weekend. I mean you watch one movie in 2 hours. The battery life is pretty much done. But the experience is phenomenal, from the eye tracking and so on. That's what it's going to happen to phones. I think you'll get better and better applications. You'll get hooked on to them, you'll want them, but the battery life is not going to keep up. And also, if you see the work that Qualcomms are making, NVIDIAs, Microns, they're not slowing down. They spent a lot of money and a lot of R&D in making better processors, better memories that only need more power. So I'm not too concerned about that. On the risk of someone making a new better battery. Look, I'm always paranoid. I come from semiconductor business, only the paranoid survive mindset. But I do feel like we have an inherent advantage that no one has really figured out how to use 100% silicon active anode and our architecture is the only one that I know of that actually does that. So we have built in a sustainable advantage. And I do believe that the materials will get better. Anodes will get better; cathodes will get better; our ability to understand the different interactions between cathodes and anodes and electrolytes will get better. But I believe that our architecture helps us take advantage of all of that and make even better battery. I mean I've only seen people use between, I'd say, 5% to 8%, something like that, of silicon in a battery before it just swells. So I feel like architecturally, we have advantage that I'm not too worried about that risk.

I think there's one other question on market highlights.

Yes. I mean I -- look, I think -- I feel like as a lot of people talk about, can we really make a battery, can we mass produce it? Can we do this sustainably? Yes. I mean there are risks that people talk about, but I'm pretty confident. I mean, for a long time, people said, "Hey, can these guys manufacture at scale? Will the yields be right?" And you look at our FAT results, and we are pretty happy with what we've done in about a year. So I think this is not -- the manufacturing of this battery, a lot of people think -- are not sure if we can, and they're skeptical. But I feel pretty good because I've seen the machines. I've seen what they can do. We have a fantastic team, and we are solving these problems one by one. I think that is something that we will talk about. Time will tell as we produce more batteries.

Okay. Let's see here. So we had a few questions about BrakeFlow. What is the plan for BrakeFlow with fast charge? To my understanding, the BrakeFlow solution is a set of resistors built into the busbar. Has this been solved for EX-2M, EX-3M?

Yes. So BrakeFlow, great piece of technology, which is basically a technology where this company invented. There it makes the battery a lot safer when there's like a short in the battery by providing an alternate current path through a series of resistors connected to the electrodes so that the current goes -- doesn't go all straight into where the short is. And it is a technology that we have put into the south. We're giving to the Army that they're qualifying now. They are very happy with the results. However, there is one limitation we need to solve and our teams are working on it. Because we add these resistors, the fast charge becomes a bit of a challenge because now you added more resistance in the path of the charging. But we have some other ideas. The R&D team has got some really clever ideas of how to solve both at the same time. We're calling it BrakeFlow 2.0, which will allow us to do both fast charge and also get that safety together. And as we get more about it, as we make more progress, I'll be happy to communicate on that.

All right. Next question. Can you share with us what you learned during the FAT process? Obviously, you needed to make some equipment adjustments. What did those entail? And would you anticipate any adjustments to the equipment for the line 2 based on what you've learned?

Yes. So FAT, the Factory Acceptance Test, from a manufacturing perspective, you really have to take this super seriously, which means you need to have a whole list of checks you need to do in terms of yields, in terms of performance, in terms of accuracy, in terms of Cpk, which is related to how the machine works in terms of the distribution of the output that comes out, in terms of the throughput, in terms of reparability and so on. We put a very, very rigorous FAT plan in place when Ajay came over, and I came over, and we have stuck to our guns that only when all those checks are done will we accept the machine from the vendor. It's a very, very, I should say, tough, rigorous, high standards that we set up because we need to manufacture them in the millions. Honestly, that has caused a little bit of delay, but not a lot. And I -- Ajay and I felt that was okay because we did not want to accept machines that are not perfectly passing our FAT. It took a little longer in Zone 3. This is where we basically put the constraint and then we put the pouch and then we prelithiate, and so on. What are vendors or the people who make the machines did wasn't quite up to our spec. I mean it worked, but we really -- didn't meet the yield and the throughput and stuff that we wanted. So we said, hey, you guys need to come back with a spec that meets it, and it took a little more time. But we held our lines and now it's done. Now it's done and it's done right. And I believe in doing it once and doing it right and not repeatedly messing with it. So now it's good. Now what are the next steps? The next steps for us is to reduce the cost. Our cost of manufacturing, the first battery line that we made, like $100 million is what we said. Again, I think since -- what we learned along the process of making these machines and our FAT process is that their idea to cost-reduce is even more. We don't have to do it the way we did it in the first line. So that's why I feel like the next lines we order will be much lower cost than this. And once we execute it, and as I mentioned in the earnings call, our line economics look great when we execute them. And this is very compelling and with almost a 1-year payback on these machines. So we learned a lot during the FAT process. Again, like I said, we learned how to do it right the first time, set the bar high. But at the same time, as we watch that being done, we saw, you know what, we could cost-reduce this part, we could cost-reduce this part, we could make this part more efficient. So those are things that we learned as we are building this, and you'll see us roll those in into our next lines.

Okay. I'll see here the next question. Raj, we had a number of questions about the quantity of samples going out and whether we will charge for those samples. Can you address that?

Yes, absolutely. I mean, so right now, as I mentioned, we are making just a few hundreds of samples from Fremont line. And with what we announced today, that will quickly come down in the next couple of months. But at the same time, our Agility Line will be up in Malaysia. So we'll have an ability to make 100 UPH line, whereas we are making barely, I don't know, 100 cells a day here. So it's like a huge 24x faster in Malaysia. So it really speeds up our R&D because they run experiments a lot more, speeds of our ability to give samples to the customers. Typically, whether we charge customers for samples or not depends on 2 things. One depends on how many samples and also depends upon how strategic the customer is. I've seen it done both ways. But when people go from hundreds of thousands to 10,000, 20,000 kind of samples, we absolutely charge for that. So I think that will be to the latter part of this year.

All right. This is a series of questions. Raj, do you want to take them one at a time? Or...

Okay. Sure.

Yes. All right. So the first one is, the European Union will require all phones, handheld consoles and similar devices to have user replaceable batteries by 2027. How will this affect Enovix' strategy, where cell users will want to replace their batteries without upgrading their phones?

I think if that happens, that's a great tailwind for Enovix because right now, the issue is the qualification times of getting a battery designed in and ramped into a phone takes a long time because you have to decide then the shape of the battery, how the battery fits. And for each one, it's a little different, and we can qualified along with everything else in the phone and get it all working and it takes some time. But if the batteries are replaceable, the beauty of it is we can make a higher energy density. For example, let's say, we have a battery like this, which is EX-1M battery, and it goes into a phone. Now we can replace the material inside that, which means anodes or cathodes, the electrolytes, produce much higher energy density in the exact same footprint. So now customers will have an option of buying a phone and later on buying another battery, which fits in the exact same slot, but has much higher battery life, much higher energy density, much higher fast-charge capability and so on. So it's a really good thing when that happens. I mean clearly, I think there's things to be worked out about is it waterproof and all that kind of stuff. But I think it's a good thing.

That's great. So next question is, if customers are sampling off the Agility Line, is there any further testing that has to be done with the batteries produced from the high-volume line once it's up and running?

Yes. really good question. The kernels of the machines, like, for example, the laser, the one that's taxed, the one that puts the constraint on, they're all common between the Agility Line and the high volume line. The difference really is that the high volume line runs much faster, and it has conveyances. That means you can go from the stacker, from the one that cuts the, sorry, the dicing to the stacker just automatically, it just moves. In the Agility Line, we don't have all those conveyances built in, so it's a little cheaper machine. And it also has just different sizes. So from a customer perspective, it shouldn't be that much different. I mean my experience is that any time you move a line or change the machines, customers would like to test a little bit more. But my expectation is that will be much lesser.

So another submitted question -- comment and question says we can't expect a major EV OEM to allow them to be named for many reasons. But can't we come out and say top 5 car OEM in North America?