Enovix Corporation (ENVX) Earnings Call Transcript & Summary

Good afternoon. My name is Bill Peterson, U.S. clean tech analyst, and really pleased to have the team here from Enovix. We have Raj Talluri and Farhan Ahmad here with us today. Thanks for supporting our tech conference.

First, starting out, maybe as part of the introductory question, maybe start off with where do you see the most demand for better batteries today? And how are recent discussions around AI, for example, shaping your view of the battery funnel? And you can, of course, introduce the company along with that.

Yes. Thank you, Bill. Thank you all for joining. Really my pleasure to be here. And before I get started, let me just say that we'll be making some forward-looking statements today. For risks associated with that, please look at our formal filings with 10-K and Q and so on. Okay. So where do I see the -- first, let me say a little bit about Enovix. Enovix is a company where we are basically reengineering and reimagining the lithium-ion battery. We have a very unique technology where we are able to replace the graphite in the battery with 100% active silicon. That gives us much higher energy density, while keeping other requirements like fast charge and cycle life and so on. And it's been a company that's been there for about 16 years and went public like a few years ago. And I've been the CEO since, I guess, it's like 1.5 years or so now. Okay. As far as demand, where we are seeing, it's really amazing to see how much all the portable devices need better and better battery. Just to give you a feel for -- anecdotally, I was just in a meeting with an investor just a little while ago, and he came in with this nice, fancy laptop, and he said, he just got this laptop and he was super excited by it and all the apps can run on it. And as soon as he came to the room, he was looking for where to charge it. He said it lasted 45 minutes before it ran out. So I think what has been happening is the applications that we are running now have gotten more and more demanding in terms of everything that they do. Even regular applications like Zoom, for example, when they first came, we used it, but now, a simple thing like removing the background and putting a blur uses so much of AI to do that, that all these applications have not suddenly been a lot more demanding. And maybe you guys saw the announcements from Microsoft this morning and all the Copilot+ and AI PCs; tremendous amount of demand. Smartphones, actually, now, when I see smartphone announcements -- I was at Mobile World Congress. Most of the smartphone companies had announcement that talk about AI at the edge. And again, this is not like some fancy use cases. This is just like running your ChatGPT on the phone, or just running video editing or gaming and so on. So those are -- we are seeing a lot of demand in -- for our batteries in applications where there is a display, where there's heavy amount of compute, and when there is things like gaming and AI-based applications running. That's where we're seeing a lot of demand.

Yes. So, I guess, maybe talking about the competitive landscape and more about your approach, you're taking an architectural approach, materials-agnostic. You can use new materials that can offer some really nice energy density advantages. But I already got a couple of questions here also coming, too. How does your approach vary or differ from those who may use like a silicon carbide or a carbon-silicon approach that claim to be just plug and play. How do -- just compare and contrast your competitive moats, if you will.

Yes, absolutely. So when I say we are material-agnostic, what that basically means is that in our architecture of how we make the batteries, where we dice the anodes and the cathodes into really thin strips and stack them and then put a constraint around them to stop the silicon from swelling, we can replace the anode by some of -- today, we use 1 form of silicon anode. It's 100% active silicon, but it's a silicon oxide of some kind. We've also used other forms of silicon like compounds of silicon, silicon-carbon compounds, for example. There's many different suppliers that are coming to us with different forms of silicon anodes, if you will, and also different cathodes. We -- our intellectual property is in taking those kind of cathodes and anodes, finding the right electrolyte that matches with both of them, and putting them inside our unique architecture, so it stops it from swelling, and we get the energy density increase and the advantage. What I've seen in the market is people have kind of taken traditional graphite batteries like graphite anode and sprinkled 5%, 8% kind of some form of silicon-carbon material. And you put any more than that, the battery starts swelling. In fact, we, last year, acquired a graphite battery company because they had this coating capacity that we needed to make our batteries. And we actually took some of these silicon-carbon-based powders and we put them in the graphite battery ourselves to see how much we can put in. We find that after 8% -- after 5%, it started swelling. At 10%, it's just not even usable. So all these new materials we are finding, they improve, but very small percentage. And I -- as far as I know, the only architecture that allows 100% active silicon is the architecture we have.

Okay. So you guys have made a lot of progress with the Malaysia site. Can you share the latest progress on site acceptance testing for each of the remaining zones at the Fab-2 facility since your call earlier in the month?

Yes. So I'm really excited by the progress we've made in Malaysia. We've got a lot of help from the Government of Malaysia and the whole infrastructure there. It's been just a fantastic experience for us. When we went to Malaysia last year, in about 100 days, the team there was able to take a site that's like just big shed and turn it into this beautiful factory, where all our machines are already there. We hired close to 100 people, and it's clean room, dry rooms. It's just come up so quickly. I mean, amazed by the infrastructure that country has provided for building nice, world-class manufacturing. And everybody who has gone there has been super excited. One of our investors went there recently and came back with glowing reviews. And we're actually going to have an opening, a grand opening, like in August time frame with a lot of our investors and some customers visiting that. Where the factory is now? We've built these machines that actually make the battery in Asia, in different countries, actually. And there's 2 kinds we've built. One is the machines that what we call make up the Agility Line, which is a line that runs like 100 UPH but produces different size batteries so that our customers can evaluate and test them. Then there's a high-volume line, which actually produces -- can produce up to 1,350 UPH, which is a really fast one, that comes right after. We decided to prioritize the Agility Line first because giving samples to the customers is the #1 thing because it takes them some time to qualify these. All the machines that are needed for the Agility Line, we've done the factory acceptance testing, which means all the yields are where we need to be, throughput is where it needs to be, and we've shipped them. They're all in our factory in Malaysia now. And we're putting them all together, and we expect to produce batteries in 2Q, test them, get them to the right level of quality and give it to customers in 3Q. The high-volume line is right behind that. And the important point I want to make is, the machines that are in the Agility Line, they're basically the exact same machines that will be in the high-volume line. They just -- more of them and run faster. So getting the factory acceptance and site acceptance of Agility Line pretty much guarantees that we can do the same thing with high-volume line. And the high-volume line is right behind the Agility Line. So I'm very comfortable with the manufacturing. This is something that a lot of times people have said, hey, Raj, can you guys make these machines? Fremont didn't work like how we thought. Today, I feel like we totally understand the manufacturing and it's in a good place.

So, to be clear, you still remain on track to sample out of the Agility Line by -- within this quarter, and then, you say, soon after, I guess, within a few months, for the high-volume line. Is that the right way to think about it?

Yes. The high-volume line samples will be based on what the customer dimensions is. What happens is, when we give samples from the Agility Line, they will give us different shape of the battery they actually want, and whatever the lead time that is to make that and which customer comes first, and that's what that is. But that will be sometime this year, too.

Yes. A question comes in online here. So just -- maybe just to be clear, what is your core IP? Do you have -- what kind of patent protection do you have? And is there concerns that your technology could be basically stolen, for lack of a better word?

Yes. We get this question a lot. The core IP consists of, I would say, 2 broad things, and we have a lot of patents. The company has been working on this technology for 16 years. We have over 400 patents in the various stages of some -- many granted, some being in application stage and so on. And we continue to keep filing patents to build a strong intellectual property presence. The core IP is in, one, how we actually manufacture the batteries. That is one aspect of it, which is our method of taking batteries and completely different from how people do it. The way people did batteries is to actually make them to jelly rolls or stack big sheets. We cut them into really fine thin strips and stack them together and then put the mechanical constraint on it. And there's some stuff like prelithiation and formation and so on that are also very specific to what we do. So manufacturing of this kind of special battery is or core IP. And the IP not only translates to manufacturing of the battery but designing the machines that actually manufacture the battery, which is actually the very important part. We build -- we have our suppliers build the machines that then build the battery. So we also own all the intellectual property of the machine itself, right? So I think that is the main one. And there's a lot of trade secrets here. We've been doing this for a while. So there's a lot of little nuances how to do it to get the yields up, to get the quality up, so that I think we feel pretty good about it. The other very important aspect of it is the -- no one has actually put 100% active silicon anode in a battery. So when you do that, how the cathode and the electrolyte and anode, how to balance the entire cell, what kind of electrochemistry goes in there? We have many, many PhDs in electrochemistry in our company that perfect that recipe, and that's other area we have a lot of IP in.

Yes. And I would also add that in addition to the patents and IP, there is a tremendous amount of know-how in everything that Raj described. When you have a manufacturing process with 40 steps, all of which custom, and you have invented things to do a certain way to manufacture the battery, then there is a lot of knowledge that goes into integrating the whole thing together. And because everything is custom, not much can easily leak out as well.

Okay. I guess, moving to product qualifications, so assuming you're going to sample here later this quarter and then from the high-volume line soon after that, can you, I guess, speak to the different stages that occur between customer interest, followed by sampling, and then ultimately, when a customer launches their product? And maybe delineate between smartphone, wearables or what other products you may be sampling.

Yes, absolutely. I've spent, I guess, over 20 years building processors and memories for smartphones and wearables and IoT devices. Pretty much all those businesses, I'm intimately familiar with the qualification cycles and how to interact with customers and how that works. So I can give you a little bit more insight into how that typically works. Typically, what happens -- let's talk about smartphones. In smartphones, there are technology teams at our customer side, and these are technology teams that could be battery technologists, camera technologists, processor technologists, memory technologists, and these companies have formed large tech teams. So the first thing that typically happens when we get a new battery into one of these markets is the customer first looks at what it takes to -- the battery guys first look at it and say, okay, let us take your battery and test it. And here are the series of tests we would do. What tests do they need to be -- like how fast do they need to cycle, how fast do they need to charge, what the different temperature performance is, and so on. And one -- and we get all that from the customers, and we've got all those test cases. And once we get those test cases, we validate that in our own factory, and we give it to them. When it passes the qualification stage of this technology kind of teams at the customer side, then typically, we get involved with the people who actually make the decisions, well, which smartphone it goes into. These are the business unit people that actually have the decisions on it. And then, you get the feedback on exact size of the battery and what shape it should be and where it should fit, which model is it going to go into, which region will it go into, and so on. And then, we have to optimize for that. So, as I said, we expect to get batteries out of our Agility Line in second quarter. We'll do some of these testing that our customers are going to do. And then, we give those tested batteries in third quarter. And on the same time, we will be getting from them what is the size of the battery that they want and which model of the phone it would be. Then we need to make the battery to those specifications. And then, they will test them in their phones and then they go to manufacturing into high-volume production. So, that whole time takes between 9 and 12 months, as I've said before. So we are expecting to get to production in second half of next year, but a lot of work between now and then. But once we are in those phones, once the product has passed the gates of these technology platforms and it's in the market, the next models take much shorter because now you're an approved vendor. You've got the battery working. So we can then go much quickly from there. And in IoT and compute, compute takes even longer, actually. Typically, it takes maybe more like 2 to 3 years. Some of the IoT markets can go much faster because we may not have to completely reengineer the shape of the battery. The batteries we have can fit as it is. But one thing I'll say is that if you look at the IoT market, if you look at the compute market, if you look at the smartphone market, some of the top makers like Oppo and Vivo and Xiaomi and Huawei and Lenovo and Honor, Samsung, Apple, they all also make IoT devices and compute devices. So getting qualified for the phone is a huge thing because that is actually the toughest bar. And when you get a battery that qualifies that, the rest of the markets can also be addressed by the same technology.

I guess, speaking of your road map, you've talked about EX-1M kind of more on the current time frame, followed by EX-2M with better energy density, other improvements. First of all, what are the key technical differences? What are you doing internally to optimize the product? What do you have beyond that? But given that some of the advantages that EX-2M may have, do you see any people pushing out to just wait on that type of product?

Yes. So firstly, we had a technology called EX-1, which our teams developed here in Fremont, which went up to 500 cycles, and it had energy density performance increase over existing batteries. But what I found out when I came as the CEO of this company was that, that was -- in addition to energy density, there are other parameters that are very important in launching into smartphones or IoT devices or compute. And 2 of them were how many cycles can it go? So charge, discharge, charge, discharge, and you have to get that much higher than 500 because particularly nowadays, with all the AI coming in, people are having to charge the phone multiple times sometimes. So we had to improve our cycle life, and we improved that now. And we also had to have the ability to charge really fast. So when I say charge really fast, I mean a lot of the phones, you plug them in and in like 15, 20 minutes, or like 5, 10 minutes, they go up to like enough charge that you can go through the rest of the day. So we had to build that capability. So the EX-1M builds on those 2 capabilities on top of having the energy density increase. So that's why customers are so excited because the product we had before had the energy density but didn't hit these other parameters. So now that we got those, the people are excited about using those products. What EX-2M does is continue to advance on all those vectors, so make the fast charge even faster, quick -- get there faster and make the cycle like go even more, but more importantly, increase the energy density even higher. Now, I get asked the question, how do you get that? So most of it is based upon our ability to now harness newer cathodes, newer anodes, newer electrolytes, thinner separators. So we haven't pushed on all of those in our EX-1M because we first wanted to get it out with the ED increase we already had. Now, we're going to catch up and push the envelope and get to the cutting edge on anodes and cathodes and electrolytes. That's how we believe the EX-2M will give us that 30% energy density increase over what's commercially available in the broad base of the graphite batteries. Super excited by that. And then, of course, then we have EX-3M coming in right after that, where we can do even more advances on that. Typically, our view is that we probably will make a node change, if you think of these as nodes like in semiconductor, maybe once a year. But what we find with our customers is that they launch new products every year, so they want to take the best technology we have, launch it in '25. When 2M comes, they'll launch it in '26. When 3M m comes, I expect them to launch it in '27, and so on. So it's not a case of waiting for the next best one because there's always going to be a better one a year after.

I'm going to pause and see if there's any questions from the audience before we get plenty online as well. All right, maybe I'll tie one online with another one. So you've kind of pivoted -- well, the company was talking about IoT before smartphones, and then you came on and maybe more focused on smartphones versus IoT, but you just described how smartphones can drive IoT. But I guess, what drove that decision originally? And -- but then, now, with IoT sort of coming back in the fold, are you still on track? I think you've talked about potential revenue within this year. c

Yes. So think about it this way. What I found out when I came here is that lithium-ion batteries are very different from, let's say, AA batteries. There is no standard form factor to which you can make a battery. A pouch cell in every single electronic in a consumer device is custom-made to a particular shape. A battery that goes into watch is different in shape and size from a battery that goes into a phone, battery that goes into a laptop, battery goes into an AR-VR headset, battery that goes into an industrial device versus the battery that goes into a medical device, for example. We had customers in all these aspects that had tested our batteries. But what I felt was to make a custom-size battery, custom-shape battery, first for some of these IoT devices, would take us a lot longer to get to volume because each battery, each of those customer units only ships a few hundred thousand units, doesn't ship in the millions. Whereas in the cell phones, each cell phone model ships minimum 1 million to 2 million, 3 million units. Some ship tens of millions. So in terms of return on investment, when you make a custom-shape battery, going after units that make lot of -- take a lot of volume on one particular shape is financially the right thing for the company. Plus, what I also found is the requirements and performance in terms of energy density, in terms of cycle life, in terms of fast charge, the bar is really set by the cellphone battery. And when you can hit that, the other ones are much easier, and you can take them along the way because the same customers actually make those too. So that is 2 reasons. And the third one is I have great relationships with all the key people at cellphone spaces. I've been shipping for 20 years. When I was able to visit them, they were able to give me precisely exactly what kind of testing we need to do, what the requirements of the battery are so that we were able to then use that to really tailor our technology. The company had great technology, really make it a lot more customer-focused and really a lot more targeted. And I was able to get the R&D to really focus on that. So now, not only we have a great technology, it's actually solving the precise customer problem. I think that was the third case. And the fourth one was, I always thought the place where we can get highest premium for our battery is places where higher energy density is most needed. And I felt products with bigger display, product with higher processing, product with more memory are the areas where AI is going to happen most fastest, and that's where most energy density is required because AI is consuming so much of it. I felt that's where we'll get the highest premium, and that's kind of what we are feeling validated by now.

Yes. So last quarter, you announced a development agreement with a top 5 smartphone OEM, as well as the intent to sample to basically the majority of the smartphone OEMs at this point. I guess, can you share what differentiates the development agreement from the other customer engagements? Have any resources been committed as a result yet? And I guess, tying into a question online, has this agreement led to a decrease in time to production? And I guess, finally, when do you expect to announce more, if at all?