Enovix Corporation (ENVX) Earnings Call Transcript & Summary

Happy holidays. I'm George Gianarikas, one of Canaccord Genuity's sustainability analysts. And we're incredibly happy and grateful to have management of Enovix with us here today for an update webcast. From the company, we have Raj Talluri, CEO; and Rob Lahey, Corporate Development and Investor Relations. Gentlemen, thank you so much for coming for joining us.

Really my pleasure. Thank you, Josh.

So Raj, you're bumping up against your 3-year anniversary at Enovix. And so I'd like to ask you at a high level, what your learnings have been so far being part of this emerging battery vendor? And if there are things maybe you would have done differently from the beginning.

Yes. That's a great question, George. Actually, I can't believe it's been almost close to 3 years. Time really flew by doing this. I'm sorry, my glasses are getting fogged a little bit here. It's kind of hot in the area, and we're turning the heat around, which I am not...

God bless you. It's pretty cold here.

I'm not used to turning the heater on. But no, it's been great. I mean I think the company, I'd say we made a lot of progress in many, many different areas. I'd probably start with company was when I started to now. Maybe I'll talk about it in different segments. If I talk about it, for example, on the product side, I really felt for a company -- early-stage company like this manufacturing batteries, we really needed to go after battery markets that have the largest TAM and largest volume per unit so that we could make one battery and sell a lot of them in the same size because lithium-ion batteries have to be made in different shapes and sizes. And if you made a lot of them in different shapes and sizes, the ROI wouldn't be the same. So smartphones seemed like a great market to really go after, and I had long deep relationships with many smartphone vendors. So I was able to visit them and get some really good requirements from them. Well, it turned out that, that is the hardest battery to make because the requirements in smartphone are very, very difficult in the sense that you have to go to long cycle life, you have to work in extreme temperatures. You have to charge really, really quickly. You have to be leading edge in energy density and the model size changes every year. But I -- after a lot of reflection, I felt that's the target the company should focus on because if you're able to accomplish all of those, the rest of the battery market, whether it's AR/VR headsets or speakers or computers or any of the IoT devices is much easier because those were the toughest ones to crack. And -- so I had my team focus on that. But that's been a long journey, right? As many of our investors know, it took a lot longer than we expected to get there. And I was reflecting on why it took that long. I think there is a fundamental difference between batteries and chips. This is something I realized over 3 years of doing this is when all my background has been making chips. When you make chips, there's a whole ecosystem of people we rely on, right? What do I mean by that? There are simulation models for how a chip will behave before you ever tape out. You actually can't predict what the performance would be, clock speed, power consumption and so on. There is Cadence and Synopsys and all these vendors who make tools. There is applied materials, there is a LAN, all these people who make the machines. And it's an industry that's been there for a while. So you use the tools, use the simulation, you rely on ecosystem suppliers, you tape out the part comes out working and you're off to the races. And the qualification cycle is pretty straightforward at the customer. While batteries are extremely challenging because the ecosystem in battery hasn't evolved over that time. What I mean by that is there are no real good simulation models on how a battery electrochemistry would perform in the world until you make it and test it. You can have models that predict it, but it doesn't quite work like that because electrochemistry is very difficult to model at the molecular subatomic level. So main way people make progress in batteries is through what I call design of experiments. So they make various different experiments of different electrochemistry combinations, anodes, cathode electrolytes, run them, do statistical analysis and find the right one. That naturally enforces a time line that's much longer than chips. Secondly, we have to build our own machines. You cannot rely on people like Applied Materials and Lam and all that to build machines. You have to build your own machines. Thirdly, there are no software models. So we have to build models of how the battery would perform under pressure and temperature. So we have to build them. So all these areas we have to build. So we had to build the machines and the machines didn't exist, so we had to get someone to make the machines for us. We had to build the models. We built a team in India that builds the models. We have to discover the electrochemistry because 100% silicon anodes have never been put in the market before. So it's been a longer journey because of all those. Now the good news is when you get there, it's just hard for anyone else to copy that and do that, right? So the battery -- that's why there are not that many successful battery companies in the world. Our competition like ATL and LG and Samsung and a few are out there, but it's not like there are hundreds of chip companies, there are not hundreds of battery companies that make great batteries. So that has been a learning for me. And I think the good news is we've invested in all those areas. We've invested in machines now. We've invested in modeling capability. We've invested in electrochemistry, and we've made progress in all of those in the smartphone area. So that's one learning. The other one, I think, is we've made a lot of progress in expanding our footprint with the acquisition we made in Korea. We did it in 2 shots. First, we got some business from Routejade, then we bought the rest of the SolarEdge acquisition. That gave us a well-running battery factory. That's actually grown very nicely. We've invested a lot behind that. And it was fortuitous because mainly we were selling into Korean military at that time. But now a lot of other U.S. and other countries need those batteries, and we are seeing a lot of good growth for that. And the other thing that happened there was because the team in Fremont was working on 100% silicon anode. We were able to transfer some of the know-how how to work with silicon anodes, infuse that into our batteries in Korea. And now we make batteries that have graphite plus silicon blend, which actually increased our energy density, not 100% silicon because as I mentioned many times, you put more than 15%, 20%, it starts swelling. So but we did get the energy density gains as our competition got. And those batteries are extremely competitive now and we're getting a lot of demand for samples and orders from a lot of the defense contractors in U.S. and so on, and I expect that business to grow. So those 2 have been really good. Now we built a factory in Penang. And I mean, that has been quite an accomplishment in the last 3 years. We built it from grounds up. It is empty space when we started. I think the factory now has maybe 300, 400 people. We built all these machines in Korea and Japan and different parts of the world and moved them there. The factory is producing samples now. So I'd say that's been very good. We hired a lot of great talent into the company. I would say that we have people from ATL. We have people that joined recently from LG. We have people that joined from Qualcomm, from Micron. So very, very strong bench, very strong talent. The company has grown quite a bit, almost 600, 700 people now. We capitalize the company. We really have a strong balance sheet compared to before. I think we mentioned we have over $600 million in the bank now. So I'd say in the 3 years, we made a lot of progress on many fronts. And the India R&D center, I mean, phenomenal. I'm very happy with that. Nobody has started a battery R&D in India. We did in Hyderabad. I just got a note this morning that we are ISO 9000 qualified. We can make sample batteries there now, test electrochemistry. So if I look back at it, it's been a fantastic 3 years. Now you asked the other question, what I would have done differently. I think I underestimated how long it takes to get batteries to production, right? I mean I thought we'd be in high-volume production by now, and we are not. We are sampling. And I probably expect it to go to production much faster and much higher volume, much quicker. I think I've learned, right, through that, and the team has learned through that, that it takes longer time and it takes more effort. But the company is in a much better place. So -- and I'm confident that over time, we will deliver what our investors expect us to do. I don't know, maybe that's a reasonable summary and reflection on that.

I actually wanted to double-click on a couple of things that you mentioned that were sort of interesting. So you mentioned this testing process that's way different for batteries than it is to chips. I'm just curious, is AI helping at all with that in sort of accelerating that process?

Not as much. I think AI helps with prediction, but the problem -- so let me talk about battery testing. I think it's kind of important to maybe double-click on that because last earnings call, we talked about cycle life and some investors try to take some follow-on calls to explain what that is. So I think it's important to understand what happens to batteries when you put them in smartphones. When you put a battery in a smartphone, the first thing that happens is people use it all day, it discharges, they charge it in the night, use it all day, discharges. What you find during the day it doesn't discharge at the steady rate. What I mean by that? When you turn the phone on and let's say, you watch a YouTube video on the 5G modem, it discharges much faster because it's drawing more from the -- you play a high-performance game, it discharges much faster. If you're just doing e-mail, texting or some standby like right now sitting here, discharges much, much slower. And that rate of discharge is a number people use to call 0.7c, 0.2C, 0.1C, let's just say this is a number. 0.7C is the highest rate of discharge that people want in smartphones. Now when you -- when people talk about cycle life, they talk about charging a battery and discharging a battery, charging battery, discharging battery, x number of cycles. Now most of us charge our battery in the night and use the phone during the day, charge the phone in the night and -- I mean, use in the day. So typically, our rate of charge and rate of discharge in those cases is much slower. It's not all 0.7c all the time. Now the problem is if you give a battery to a newer customer and we say, "Hey, we want you to put our battery in your phone," they're going to try and first test how many cycles they are going to get. Well, if they want to test 2,000 cycles, like how it was going to get used, they're going to test it for 3 years because there's 1 cycle a day because charge and discharge. So you can't do that. They can't wait for 3 years. So what they do is they do an accelerated test. They charge really fast, discharge really fast to a certain protocol. And the protocol, I mean changing the voltage and current at which you charge the battery and predict what the phone would perform like in a real-world situation based on this accelerated testing. Now again, this is one more situations where I talk about unlike chips, there is no real model for that because batteries just because you test them this way, it doesn't mean they'll perform exactly the same way in the field. So they test to an extreme cases to make sure it will work. So even then what they do is they try to test that in like a few months and predict what that will look like for over 3 years. So when we made the first cells that I announced in the last earnings call that we and our customer, Honor, which I announced at the call, decided that we'll need to do another round of battery chemistry change to get another round of testing. It's because when they were doing this accelerated testing, they have found that the slope at which the capacity goes down -- okay, by the way, I should mention, when you do testing, all batteries, the capacity goes down over time. So it's not like the battery dies after 1,000 cycles. It doesn't have as much capacity as it did at starting. So what they're trying to measure is how much capacity is dropping after every cycle of testing. right? All of you might know, you get a phone, you charge it. It looks great 2, 3 years from now. It says it's fully charged, but it doesn't last the whole day. That's because the capacity actually is not what it was at the beginning. So they try to get the capacity to stay around 80% at least after going 1,000 cycles. So what happened in this particular testing situation was that we saw the slope and we felt it was not going to go and remain at where they wanted it to at the end of 1,000 cycles. As a new battery vendor, nobody wants to, and I don't want to be in production without 100% confidence. So how do you make it go longer in cycle life? You have to change the electrochemistry a little bit. So you basically have to change the anode composition, the cathode composition or the electrolyte composition a little bit. And we had multiple -- as I mentioned, in batteries, you do many, many, many design and experiments to see which one works. At that time, we had given the lead candidate to the OEM, and they started testing it. Now we had other backup candidates, which we're running. And so when that happened, we looked at some of our backup candidates and another one was performing better because it came later in time. And those are the ones that we said in the press release now that we send new cells now with that backup candidate, which we perform is performing much better than the previous one. Now since we had a joint development agreement with the customer, we were testing at the same time they are testing. Usually, we don't do that. Usually, we test everything, make sure everything is ready, then give it to them. But since the joint development agreement, they were open to us giving us early-stage samples, so they could help us in how they actually do the accelerated testing because we wouldn't know every customer does accelerated testing slightly differently. So that was the process through which we did that. And now we have shipped the second batch. And my team and I feel confident that this will work, and this actually will go all the way. But people ask me the question, what if it doesn't because we have not seen it fully yet. We have other backups now that we've also started where we see if this doesn't happen, this will happen, and those are running in the factory now. So it is an iterative process of nailing the electrochemistry to exactly get there. But we've made a lot of progress in many areas. So safety looks really good on that cell. They do some kind of safety test, and they told us our battery is very safe on those tests. Energy density is good, fast charge is good, storage and gassing is good. So we've solved a lot of problems. We're working on solving the cycle life one.

So the issue, just to put it bluntly, is that the rate of degradation, the projected rate of battery degradation after 1,000 cycles was going to be greater than 20%, getting to below 80%.

Right. At a certain rate of charge, not all rates of charge. Some other rates of discharge, we're okay. Some rates of discharge, we're not okay. So it's kind of like one of those things where it has to be perfect, right?

And this is a problem that could get solved by marginal changes in the electrochemistry?

That's right. That's right. That's exactly right. And it takes -- the unfortunate part of it is when you give a human takes 4 months to test it to know if it works or not. And that's why we start a bunch of different recipes and see. So we try to get ahead of the problem a little bit. But ultimately, the customer has to test the one best one we gave and it takes 4 months for them to test. That's the problem with the batteries. That's why the lead time, that's why it's hard to predict the ramp life cycle.

I did want to focus on one thing you said in the beginning, which I thought was interesting, and it's a really good point that because it takes so much work to do what you've done already, it makes -- it creates a greater moat around your business over the long term, if you're successful, which we believe you will be. But does that mean that potentially the existing cell manufacturers, the ATLs, et cetera, can they somehow replicate what you've done? Or are the barriers also similar for them or somewhat similar for them to getting into what you've accomplished now and it's completely changing the manufacturing paradigm itself?

I mean I think somebody that is already in the battery space arguably could get there a little sooner than somebody who's not there at all because some aspects of the battery making are similar. But nobody has commercialized 100% active silicon anode battery in smartphones. So it's not been done. So what we're trying to do is something that's never been done. So what -- and why is that important to mention? It's important to mention because what I found is the electrolyte that you use for 100% silicon anode is so different that we talked to all the lead electrolyte vendors and asked them what kind of electrolyte should we use? And they don't know. Actually, they have never done it. So they tell us maybe this, maybe this, maybe that. And these are people that have been shipping electrolytes for how many ever years in millions and millions of batteries. So we basically had to invent an electrolyte that actually works well with 100% silicon-anode with an LCO cathode because in an MC cathode, less than 100% silicon anode, or a graphite anode is totally different. Because the electrolyte has to behave a certain way when it touches the cathode and a certain way when it touches the anode. And our cell is under pressure because we stack them and put them under case. So the temperature is different. So the electrolyte behaves completely differently. So that is something that we have to invent to actually do that. And it took us a long time and many, many different trials to find that. So it's not just a question of copying the manufacturing. It's a question of understanding the intricacies of the electrochemistry and the modeling of the electrochemistry and the modeling of the behavior to 100% silicon anodes, the active silicon anodes is a complex thing, and we spent a lot of time. I think TJ mentioned in one of the calls, we have like, I don't know, 70, 80 PhDs that have been working on this problem for a long time. So it's taken us a lot longer, and it is taking us a lot longer than I would have liked. But I do believe we are building a significant moat in the company. And when we get to full volume manufacturing of this product, it will be a sustainable advantage.

And the electrolyte, is that patent protected?

Yes, of course. Yes. Well, some of it is patent, some of it is trade secrets, right? We don't want to say everything that's out there. So -- and it keeps changing, by the way, because as we keep changing new cathode materials, new anode materials, we are continually tweaking electrolyte. Electrolyte can be used on a certain voltage of the cathode, last time is not the same as the next one, as same as the next one because anodes and cathodes are constantly evolving, too.

Got it. Maybe to focus on Honor for a second. You've already talked a lot about it. But -- and to the extent this relationship with this company is different than potential second, third, fourth relationship, how is it -- is the joint development agreement that you mentioned? And what makes this relationship sort of different than what will come over the next few years, hopefully, with others?

Well, when you start in one of these businesses with a new product in a new market, I mean, a new product for us, the market exists, a new market for us. What I found through my time, 30 years that I've been doing products is important to have what I call a teacher customer. So what does that mean? That means you need to have a customer that is invested in making your technology to production because they see the value. And they want to invest engineering resources. They want to work closely with you weekly, day in and day out, not kind of go up all and panic when things go wrong, but give us feedback and say, okay, this happened, change this, change that. And it's kind of a -- because they're all trying to figure this out on how this works. They're testing how it works in the phone or the different conditions. Like, for example, almost many phones have what is called telemetry, which means they communicate back how the phone is performing. So they have a lot of information on how it performs in the field and how the battery is getting discharged. Based on that, they tell us, hey, when you put your battery in our phone, here is how the users might end up using it, which we would never know as a battery maker. So that kind of input from them was very important. So we picked one lead customer to do the joint development agreement because we don't have infinite resources. We're trying to build this product. So it's been a long journey, and the engineers and the leadership at Honor has been very supportive. We have weekly calls with their engineers, our engineers, and we made a lot of progress. And even though our first effort that we gave them the most recent effort didn't pass all the cycle life, they were okay to, as mentioned their name saying we're working with them because they believe in our technology, and they continue to work with us. Now one thing I'll say is that the rest of the market has very similar requirements because they're all in the same market competing with each other. They all use Qualcomm processor or MediaTek processor, they use Micron memories or Samsung memories, they use displays and cameras from same kind of vendors. So if we can help meet the requirements of one teacher customer, well, the rest of them, I truly believe, are much simpler. And this is the same strategy that many people who provide chips into phones use. And the same thing I did when I was at Micron or Qualcomm, pick one customer, get it to production, understand everything is needed, then quickly ramp into the other one. So there will be differences, how their fast charge is a little bit different and the battery size is a little bit different. But majority of the heavy lifting would have been done by working with one lead customer. That's why it's so important, I've always mentioned getting one out is very important.

Given the joint development that you're doing with Honor, are there any restrictions on what you can sell to other customers? Is there anything that they own in terms of the process or the electrochemistry?

Yes, I can't comment too much on the agreement, but I can tell you this, we -- they want us to be successful and ship to a lot of people. Otherwise, we won't get scale, right? So in their interest that we need to make sure that we are able to scale, right? Every customer agreement is a little bit different.

Okay. And just as a reminder, and Rob, please keep me honest, you're expecting an order at some point in the first half of the year, first quarter, when can we sort of expect a conclusion to this process?

Well, I mean, we gave them the new cells. So they're testing them. And as I said, it takes 4 months to test. So this is during the holidays we gave them. So depending upon how things go, I'd say April, May -- sorry, March, April is when the testing should be complete. And if they feel everything passes, things are really good. We expect them to give us an order to be -- in some phones. If we need to tweak some more, we need to tweak some more, but I hope we don't have to.

Okay.

And hopefully, knocking on wood, scale production at some point in '26, second half.

That's right. And I mean the thing I got to mention is that a lot of times, people ask, how much are you going to ship in '26? What's your volume ramp? I think to me, it's more important to meet the requirements and get into production with the customer. I think that's the most important thing. And how much we ship will really depend upon, one, of course, timing. The second one is -- and I mentioned this many times before, a new customer -- a new supplier like us, customers will typically put us in a model, test is out in the market, see how it is, get to the next model, get the next model. This is what happened in many times in my career. So the important thing is to get the first customer qualified and launch in a model, then be ready as it ramps into the years that we have the right capacity. So the first one is the most important, and they will always start small.

Just to maybe focus a little bit more on smartphones. You mentioned you have another lead potential customer as well, # 2. I'm assuming this is one of the big smartphone OEMs, a large one. What's -- any update on the incremental progress you've made with that potential customer?

Yes, very similar, we've given them cells. They've given us feedback. And again, we are waiting to give them these cells where we fix the cycle. We mentioned it to them that, hey, we're going to give you new ones and the cycle life fix. The first ones we did, don't have all the cycle life and they're okay with it. And we told them we'll come a little bit behind because I actually do want to give them things that we feel are really good with the first customer, right? So we will get them these cells, too. We did get -- we are working on getting requirements for the cell size because their cell size is a little different from the other one. So our factories have to adapt to that. So we're now in the middle of that discussion and exactly what cell size should we make for the second one, what cell size for the first one. So that conversation is going. But things are progressing. Again, it will all depend upon how the testing and qualification of these first cells goes, these new cells we're shipping go.

And in terms of your relationships and testing with broader smartphone OEMs, I remember -- this is last year, you made -- you signed an MOU with a company called Elentec, which based on our work, they're a pack manufacturer for companies like Samsung. Is it fair to say that many of the other large OEMs and maybe the non-Chinese, maybe some Koreans, you're also working with in terms of establishing relationships and potentially after this testing is done, shipping your cells to other OEMs.

Yes, absolutely. We have interest from all the top OEMs for cells, and we will be shipping to all the ones you mentioned, right? We have interest from all of them. Look, I mean, when we -- everyone in the cell phone market knows that ultimately, the battery is the bottleneck. And it's the #1 reason people actually change their phones, battery then camera, right? So -- and with AI use cases, the battery demand is only going higher and higher. And the interest for our cells is in all of them, and we've got every one of them asking for samples, and we are shipping them as and when we can make them. But again, I'm -- the concept of having a teacher customer is you work with them and get it all ready. So the next ones who get will have a much better experience in the sense that much swifter experience because the first one, we are working -- it's kind of like you have 2 cooks in the kitchen. But next time, you bring the dish out, right? So that's kind of what's gating the rest of them. But we will -- now that we have these new cells, we will get them out. But we are able -- but one thing I'll tell you, this thing I mentioned about going after smartphones being the toughest market. And sometimes people ask me, Raj, why would you go after the toughest market, I mean, as a small company. But I'll tell you why it's paying off because in the AR/VR market, in some of the industrial handheld markets, other markets, the requirements are not nearly as high. And so we are able to now ship these other cells that I talked of that these cells that we said we're working on a cycle life improvement to that market already because the cycle life and the rate of discharge is not nearly as high what they need there. And we hope to see some products next year with these cells in those spaces while the cell phone qualifications continue to go. So I think the strategy seems to have -- is working. It's just been harder to really go out. It's like trying to run the marathon and then, okay, maybe I can run a 10-K. So...

That's a great segue into my next question, which is CES, which is in a few weeks. You've talked about maybe making some announcements there, some exciting stuff in smart glasses. Any preview you can give us as to what's on deck for that show?

Well, I mean, what we found is that the smart glass market is one of those markets where the ecosystem has developed quite a bit in the sense that Qualcomm processors, there's another company called BES, they have processors and NXP and a lot of people are starting to make processors. And a lot of people have made these kind of AI use cases with microphones and cameras. And that whole camera and microphone ecosystem has been really developed quite a bit because of smartphones. And if you look at smartphones, we worked hard on making these cameras accessible to everyone, and we worked hard to make on this, microphones access to everyone, the speakers accessible to everyone. Everyone in the sense every OEM that wants to make a consumer electronic device. It's kind of amazing, actually. The camera and the smartphone is so small, but now you can take it and put it in your glass. So I mean, there's a lot of technology that has been made popular by smartphones that now is quickly moving into the other markets. You would never had that if you had to take a big digital camera lens and put it in the eyeglasses, it never worked. So similar to that, going -- us making a battery for the smartphones is helping us put that battery in eyeglass. There will be a lot of customers, I feel. The winners and losers in this space is not like defined because emerging market. And our goal is to be able to make our battery accessible to many people that can quickly make demonstrations of that. In this market, you need to make demonstrations with OEMs, demonstrations with ODMs because ODMs are people who make the product that the OEMs will brand. When you think of ODMs, you think of people like, I don't know, Foxconn or something like that, right? So we want to work with ODMs. We want to work with OEMs, and we wanted to show some demonstrations of the technology. Ultimately, we want to make this accessible so that quickly it can go into products once it is all put together properly, right? Not take as long as it takes on smartphones. So that's our goal. And I'm hoping that -- I've seen a few early prototypes of what the glasses look like with our cell, and they're very exciting. And I've seen the performance metrics of what our cell can do, and they're really good. So I'm hoping to see some of those -- a lot of engineers working through holidays, let me put it that way to make sure that we have some demos at CES.

Cool. So some interesting -- and we should expect products in the wild next year with your cells in them...

That is my hope that these demonstrations we show will actually go to full volume production. Now again, how big is the volume? We don't know, but it's important to get them out there so people can actually see them, right?

Yes. And I would expect that these are brands that we all know. I mean, I'll just say what we've written, we've written that we think that Meta and Snap are customers. You don't have to comment, but those are 2 very large companies who are very much interested in this space. But that's an expectation of yours that these are big...

I mean we're sampling it to everyone. And again, which customer launches when it's hard to tell, but we are sampling it to many customers and some show publicly, some privately, but we're hoping to get there, yes.

Maybe to focus on defense a little bit. It's something we've talked about, something we've written about. We've -- speaking of brand names, we've written also that we think that you may be working with Anduril, which is a very exciting emerging defense company. Can you just talk about a little bit what you're working on there? And you have this Korea facility that you bought, really great acquisition in terms of price capabilities. Is it just the Korean non-silicon cell that you're selling? Or you're actually interested in other chemistries as well, the silicon chemistries?

Yes. So firstly, this -- we haven't talked enough about our Korean factory. It's a really, really fantastic facility, and we were lucky that when SolarEdge was trying to exit that, I was able to purchase the rest of it. So we have over 300 square feet factory there, and we will continue to invest in that, and we'll continue to grow that footprint. We've had some very good success with the Korean military itself. And one of the areas is actually drones. We have a very good drone battery that now in some products that companies -- that our Korean factory is sampling too and will be in production next year. We have got a lot of interest for that battery in many other customers now in the U.S. And we are increasing the energy density of that by adding more silicon to it, so it gets to the next level. There, the trick is gravimetric energy density, not volumetric in the sense that how much energy does it have per kilogram. We have some very good technology here. That team has been doing it for a long time. We haven't really talked enough about it, but you'll see a lot of cells come from that. We've got multiple orders for samples from U.S. defense companies, as you mentioned. We've given some samples, and now we're getting repeat orders for that. We expect that business to grow steadily this year, this coming year and the year after, and we'll be adding more CapEx to that facility, hopefully, in '26. That's what I'm planning to grow that. I think that will be -- and again, because we understand how to work with 100% silicon, we were able to use that know-how and my R&D team was able to help the Korea R&D team to boost up the energy density of that, which translated into a much higher rate of discharge because they were making cells that actually -- I mean, we're talking about 0.7c. We're talking about multiple orders of magnitude discharge when these things go into like underwater vehicles and drones and so on because there, you are spinning motors, right, and driving things. So the discharge rate is much higher than running a 5G modem. But we have that capability in that company. We have the capability how to run high rate cells, which we are shipping in high volume into these defense markets. But now we're able to add our silicon know-how on top of that to actually get them to market. So very exciting stuff. We are hoping we'll see that in '26, '27 and beyond. Again, the qualification takes some time to get to full volume production, just like any other market. But there's a lot of pull from some of this defense customer to accelerate qualification because main competition there is Chinese batteries or people who have factories in China that are doing contract manufacturing, which the defense doesn't really want. So that's helping us quite a bit.

So it's not the 100% silicon yet. It's more what you're doing is you're doping some of it with like 5%, 6%, 7%, 8% silicon, taking your learnings from working with 100% silicon and sort of enhancing the energy density and getting into drones, subsea vehicles, you mentioned handhelds.

That's right. Well, I mean the thing you got to remember is that you can probably dope even more than a small percentage because what happens if you dope more it swells more. But if you're putting in a drone, there's enough space that people actually put some pressure to hold the cell. If it swells 5%, 10%, it's not the end of the world there. But in a phone, you swell 5%, blows the back off. So which is the important thing you got to remember. I mean, it blows in the sense it pushes out, doesn't blow up. But that's why it's important that in those markets, some swelling is okay, so you can afford to add more silicon there. That's an important distinction.

And so we'll see, to your point, a steady growth in that in '26, '27 and beyond.

Yes.

And I'm curious, are you -- you've mentioned interest on behalf of the U.S. government, but you also getting interest from allied countries, Europe and the rest of the world.

Yes. Yes, we are. Yes.

Maybe to focus on other emerging categories, something we've written about over the last few years is electric vehicles, laptops, et cetera. How should we think about those other markets emerging over time?

The laptops are actually very similar to smartphones in the sense that if you really think about it, once you make a smartphone battery, it's multiple ones of those inside a laptop. That's one way to think about it. And I think traditionally, it hasn't really grown a lot. The laptop market is in the $200 million, $250 million, $300 million range. But the whole AI laptop is becoming a big thing now. And I think there, people are actually really interested in that growth now. So I think once we get a smartphone qualification, we will go into that. We do get interest from some of the laptop customers for samples and so on. We are working with them. But again, my goal is not to go after many markets at once, but actually qualify one. And then we have the technology, so which is kind of what we did. We did one, we got the cell phone stuff in a reasonable shape. We went after AR market. And then once we make the cell phone cell work, then we'll go into the laptop market. But we are talking to the customers, and we're understanding the requirements. We're understanding what it takes. On EVs, we've always mentioned we are not making cells for the EV market because that needs a huge gigafactory. There, it's more of a licensing play. We are -- there's a couple of advantage our battery brings, which is the ability to charge fast and not get too hot. And people feel there's a good need for that. And we are continuing to figure out how to get that to a stage where we can license that technology to somebody. But that's -- it moves slowly. That market takes a long time. But there are other markets, like I said, like other IoT markets that are actually reasonably big that people want these cells. So we are looking at those markets as we get the cell phone stuff qualified. Again, right now, the focus is on AR/VR, cell phones, drones and defense, right? That's the 3 markets we're really focused on.

Right. Drones and defense in Korea?

In Korea factory, right.

Excuse me. And then 100% silicon in Malaysia?

That's right. But I did mention in the call last time that we are now working on seeing if we can build a small R&D line in Korea to actually build 100% silicon batteries also because I want to get 2 factories know that know-how so that we have it in both the places. So we'll continue to work on that next year.

Interesting. Can we focus on operations for a minute? So it was a journey. I remember it, you called it the journey to scale getting the agility line up with the high-volume manufacturing line up. So how should we think about progress on yields and how you feel about the operations in Malaysia right now?

Well, I mean, right now, all the focus has been making samples for different markets, not so much on getting yields in high-volume production, right? Because ultimately, a lot of the cells we make are all going to R&D to get these spins done to actually make the right cells. And as I mentioned, we made 2 AR/VR cell -- glasses cells. We made a couple of different sizes of smartphone cells. We made another IoT cell. We finished our defense contract that we had. So the factory has been spread pretty thin on making 5 different sizes. So we have -- and they all are in different sampling stages now. So next year is the year, we'll need to focus more on getting -- just 1 or 2 products where the highest volume is to the right levels. So this year, the factory has been running more in the customer engineering sample mode. And this is not the time to really focus so much on yields and units and so on because you're changing the factory all the time to make a new cell. So once we stabilize that, we'll focus on that.

Is it -- should we still think about a line -- a capacity per line about the 9.5 million for cell phone batteries and then double that for the smart glass cells?

Yes, that's the nameplate capacity. That's how fast the machine can run. Now we're not running it that fast, clearly because we don't need the volume, and we are still working on sampling. We're changing it all the time. But when we get to full volume, that's where we'll be.

Okay. Maybe to focus a little bit on materials. We've asked about this. We kind of touched on it with electrolyte, but there are several vendors who are trying to develop the silicon to provide to companies like yours and others who are doping it. How should we think about any supply constraints for silicon across the world? Are there any?

Well, we're not buying a lot of volume, right? I mean right now, right now, there's not that much of a concern right now. We have the supply we need. And like I said, there's multiple vendors that provide that. And it's -- all of them want to work with us because we use 100% of it. So that's the other interesting thing. We don't buy a small percentage to dope it. We buy 100% of it. So -- and also, they kind of believe that the future will be for people who can make this work. So they work with us quite a bit. And we also give them feedback on when you use this much, when you quote it on this and when you press it like this, this is what happens, here's what you should change. So it's a good collaborative process with the vendors. And there are 2 or 3 different silicon anode vendors. There's multiple cathode vendors. So we don't have any supply constraints right now, but we do try to be multisource so that when there is a crunch, hopefully, we'll have enough suppliers.

That was a nice way of me asking because there are a couple of companies who are American that say they have figured out to make really good silicon, but is there any differentiation between what you're seeing here or coming from other countries from private companies there?

I mean they're all different. They're all different in what they do, right? They're all different in cycle life versus performance under pressure versus how easy it is to quote them, to cut them, how expensive they are. They're all a little bit different and what electrolyte we use with them. So we have to modify things a little bit to make it work with them, and they all have their advantages and disadvantages. So some are more suited for some applications, some are more suited to other applications because, for example, rate of discharge, rate of charge is a big factor. So you kind of have to optimize that. Again, we don't just put the silicon powder as is. We mix it with some other things that are proprietary to us to make sure those can actually work. So they're all a little bit different.

Are there any material constraints you're seeing because of just the state of the world, U.S.-China relations, et cetera?

Right now, no, thankfully.

And you mentioned that you've patented some trade secrets on your electrolyte solution. Are you developing that internally? Or do you use some sort of contract manufacturing scheme to make the electrolyte?

No. We create the recipe that we want, then we ask with an electrolyte vendor to make it to us. So again, this came from our India team, by the way. This is another advantage of having this phenomenal R&D center in India. They came up with electrolyte that actually works with 100% silicon anode now. We have some very strong people there, and they can do pouch cells and they came up with this. So we have R&D there. We have R&D in Korea. We have R&D in Penang, and we have R&D in Fremont. So it's a joint R&D effort. Yes, we come up with it and we tell the mixture and other -- I mean we can make in small batches. We can buy all the chemicals and make them. But ultimately, the higher volume, we need to have a supplier and make them.

A couple of months ago, you raised money and told us that you're thinking about making an acquisition, clearly haven't made it yet. So any update there? And how should we think about how you're thinking about what you need to see from any acquisition target?

Yes. So that work is ongoing. We are looking at some potential acquisitions as you put it. My view on that is in smartphones, people have a lot of battery know-how. So we can sell them a cell and they can go to production. In other markets, the battery know-how is not so much there. So you really have to provide more of a solution. For example, you have to put the BMS on top of that. You have to put a package on top of that. You have to put some circuits around that. You have to have supply chain distributors around that. You have to have support systems and engineers and so on. So to move -- to grow the business, one of the areas that you need to have is this ability to go to market in different markets quickly with the technology we have. And that's an area that potentially could be of interest to us to accelerate the growth. Now there is other interesting technologies that may make our manufacturing go faster. There could be technologies that could have chemistries that are better, improve our chemistry on top of that. But I'm looking more for companies -- we are looking more for companies that have a good revenue growth and also good EBITDA to get the financials lead better rather than just more R&D. We have enough R&D right now unless we find something really compelling. That's probably one way to think about it.

So when you announced this, it sounded like there was something that was sort of kind of imminent. Is that -- was that the wrong way to interpret the news? Or should we expect something in the first half?

No, we were working with multiple ones, and we're still working -- I mean these things take time. You got to do the due diligence, you got to get to that. So we are still continuing to evaluate the process on multiple ones at the same time. And again, it will be thoughtful. It will be something that moves the company forward, and we'll be, as Ryan likes to say, careful stewards of the capital. I like the expression he uses, responsible stewards of the capital, but it's nice to be able to have the company capitalized so we can actually look for these opportunities.

This is not the last call, but 2 calls ago, I remember specifically that your -- the discussion around average selling prices was much more positive than I remember in the past. And so did we interpret your tone the right way? And what are you seeing and hearing from companies that are interested in your cells like in terms of a price range for both smartphones and for smart glasses, AR/VR?

Yes, clearly, I think people are now realizing that in some of the markets, the battery is the bottleneck and the battery is still a small percentage of the BOM. And if the battery can improve the performance of the product tremendously, they don't mind paying more. I mean, like I said, the #1 reason many studies show that people change their phone is because of the battery. So if you could improve that $600 bill of material in a phone, the battery is typically between $10 and $15. So it's still a pretty small percentage. So for the #1 reason to change your phone. So I think there is still a lot of room there. And I think the trick is to provide higher energy density that truly differentiates the product. When you do that, I think the ASPs will continue to be there. And the other thing I mentioned last couple of calls ago is the size of the battery is increasing in phones. When the size of the -- capacity of the battery is going -- it's gone from 5,000 to 8,000. And I mean now customers are talking about 9,000, 10,000 in time milliamp-hours. So typically, the battery prices go by dollars per milliamp-hour. So let's just say, round numbers, $2 per milliamp-hour. Now you're looking at a $20 battery at 10,000 milliamp-hours and so on. So that's kind of where I was coming from was the ASPs are proportional to the capacity of the battery and the differentiation you provide because of the higher energy density or capacity in the same volume.

And I forgot to ask this question earlier, so I'll ask it's a good segue into next one. How are you seeing your battery -- I know there are multiple metrics, particularly in smartphones where you have to measure performance. How -- if your cell is successful, right, you finally get that order and you start shipping, how will that compare to what is out there right now in the marketplace in terms of performance across the board?

I mean the main one will be the ability to provide higher energy density, higher capacity in the same volume and also charge really fast, right? That's really the metrics. Of course, with while meeting cycle, while meeting swelling, while meeting performance. And our batteries end-of-life will and should sell -- should swell a lot less because of the constraints we put in and should be much safer. That's -- those are probably the safety, slow swelling end-of-cycle life, higher energy density is how we typically qualify our batteries as -- differentiate our batteries.

Maybe last one here, Raj. What do you think investors are maybe misunderstanding about the company? I mean you mentioned yourself it's taking maybe a little bit longer than you were expecting, which is typical, I think, for start-ups, which is kind of essentially what you are. But what do you think investors are missing? If you had to boil down to 1 or 2 or 3 bullet points?

I mean I think the main thing is investors are missing -- well not missing is what I would say. They're rightfully expecting us to be in production by now because I've been here 3 years, and the company promised much more before I came. And it's been a long journey. I mean it's been a long journey, and I really appreciate their patience. But as I mentioned in this call, why it is so hard and why it is so hard and why when we do finally get there, it is going to be a differentiated business. So patience. But it's tough and I can understand a lot of people have put their money in and they would like to see the growth in the stock price, and I understand that. I think probably -- investors are probably -- this is not like -- I guess one investor I was talking to after I explained the situation said, aha, so this is not like a biotech pharmaceutical company in the sense that, okay, you got the drug, now it's done. You fail 1,000 cycles. Now your FDA approval is done. It's kind of not like that. It's an iterative process and a joint collaboration with a customer that takes time to build. And once you get there, you now made the first step and then more and more and more, it kind of goes like that. So I think it's -- that's the part that probably some investors are maybe missing. And the second one is people who lived in smartphones understand what it takes to bring new technology into smartphones. I've lived 30 years of it. I remember the first time we put a camera in a smartphone. I remember the first time we put Bluetooth in a smartphone and a GPS in a smartphone and fingerprint sensor a smartphone, Wi-Fi in a smartphone. And they all were huge lifts to put any new technology. And I still remember the first camera was terrible, and now we don't even think about it. And I mean, we put Netflix playing in a smartphone, and we put people using biometric sensors and using credit cards. So differentiated technology has come into smartphones over the last 20 years, and I've been there. And silicon batteries is one more of them. But it takes time. It takes time. And once it's there, you kind of take it for granted and you go about and ask for more. But I think that's probably the one part investors are missing. And the other one, I think, is there also -- I think we will do a better job of showing how much excitement there is on our defense cells from the Korea factory and how much more we can grow that. That's a nice market that we actually are at the tip of, particularly with the factory that we own. And unlike a lot of other competitions, we own our own factories, so which is a huge advantage, and we don't make them in China. So I think some people haven't quite seen that aspect of that. I think those are probably the 2 big ones. And there's -- I think -- I don't know, if we can go on and on, but those are probably the 2 big ones I'd say.

Got it. Well, Raj and Rob, happy holidays. Good luck at CES, and we think it's going to be an amazing 2026 for Enovix. So we look forward to it. And we'll talk to you soon. Thanks so much for your time.

Thank you, Josh. Appreciate it. My pleasure.