Enovix Corporation (NASDAQ:ENVX) Q1 2023 Earnings Call Transcript

Enovix Corporation (NASDAQ:ENVX) Q1 2023 Earnings Call Transcript April 26, 2023

Enovix Corporation beats earnings expectations. Reported EPS is $-0.2, expectations were $-0.21.

Operator: Thank you for standing by. And welcome to today’s program the Enovix Corporation First Quarter 2023 Earnings Call. After the presentation, there will be a Q&A session featuring Enovix management. With that, I’d like to turn it over to your host for today’s program, Charles Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Charles Anderson: Thank you. Hello, everyone and welcome to Enovix Corporation’s first quarter 2023 financial results conference call. With us today, are President and Chief Executive Officer, Dr. Raj Talluri, Chief Financial Officer, Steffen Pietzke, Chief Operating Officer, Ajay Marathe and Chief Commercial Officer, Ralph Schmitt. Raj will give an overview and then we will take your questions. After the Q&A session we’ll conclude the call. Before we continue, let me kindly remind you that we released our first quarter 2023 shareholder letter after the market closed today. It’s available on our website at ir.enovix.com. A replay of this video call will be available later today on the investor relations page of our website. Please note that the shareholder letter, press release and this call all contain forward-looking statements that are subject to risks and uncertainties.

These forward-looking statements are based on our current expectations and may differ materially from actual future events or results due to a variety of factors. For discussion of factors that could affect our future financial results and business, please refer to the disclosure in today’s shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, April 26, 2023 based on information currently available to us. We can give no assurance that the statements will prove to be correct, and we do not intend and undertake no duty to update these statements except as required by law. During this call, we will also discuss non-GAAP financial measures which are not prepared in accordance with Generally Accepted Accounting Principles.

You can find a reconciliation of the GAAP financial measures to the non-GAAP financial measures in our shareholder letter. I will now turn the call over to Raj to begin. Raj?

Raj Talluri: Thank you, Charlie, and thank you everyone for joining our call today. I’m delighted to communicate to you that at Enovix, we are executing really well. And it’s been a solid quarter. We did hit a lot of key milestones this quarter. Firstly, we produced 12,500 batteries in our Fab-1 here in Fremont. This is ahead of our forecast of 9000 batteries that we talked about last time. Now we also completed a rigorous design approval of our gen two auto line. And we did this ahead of schedule. We completed the purchase orders for both the high-volume gen two auto line, and also the agility line, which we will use for sampling our customers for qualifying their products. Now we also chose a site in Malaysia for our fab two.

And we did this also ahead of schedule. Now I’m super excited also to tell you that we hired a leadership team there and 25 engineers already and we see a path for non-dilutive financing of our first production line. Now I’ll expand on that in a moment, as we go through the presentation. Then after the quarter, we closed $172.5 million convertible debenture, which is intended to fund our Gen 2, 3 & 4 auto lines. We did at a very minimum dilution to our shareholders, super excited by that offering that we closed. Lastly, this quarter, we made a number of leadership additions very excited by some really strong people that joined our teams from our previous associations. And now I believe we are totally set up to scale. Now we are already seeing the impact of the people that we have hired with strong progress in all our R&D programs and also in the manufacturing that we are making.

Now format-wise, I really wanted to cover two topics today. And then, we’ll hop into Q&A and answer any questions you have. Firstly, in the last three months that I’ve been here, I received most number of questions about two things. And I’m going to get those. The first question was that I’ve received many times is, why do we believe that our Gen 2 line will be successful and we’ll be able to produce millions of batteries and do high volume manufacturing. Given that we had some early missteps of our Gen 1 production line. So I’m going to talk about that now. Now, I’ve been here a little over three months, and Ajay has been here about five. And I can tell you both Ajay and I have tremendous experience for many, many decades in semiconductor industry.

And drawing from that, we’ve come to the conclusion after looking at Enovix manufacturing process, that these can absolutely scale. And actually they have some inherent advantages even to making chips. And I’ll tell you why here in a few minutes. Now, in semiconductors, if you look at manufacturing chips, really there are two processes, there’s a front-end process and the backend process. The front-end process is where you make the wafer fabrication, which is a very complicated process where we use very expensive machines to make the wafers. Then there’s the backend process, which is basically assembly and test. Here, you take the dyes and cut into small pieces, the small dyes, and then you put them in a package. The front-end is in a deep sub-micron manufacturing, and the backend process is actually a lot more forgiving.

Here, the mechanical tolerances to which we have to do are actually in single digit microns. Now, if you apply that analogy of semiconductor manufacturing to how Enovix makes batteries, the front-end process of the semiconductor manufacturing is very similar to the materials that go into the battery, these are the anodes and the cathodes, and the electrolytes and so on. Now, we at Enovix, don’t manufacture those, we actually buy them from the best suppliers in the world, they come in big rolls of coated electrodes. What we do then is with laser pattern them, we stack them, apply mechanical constraint. And that is really similar to the backend process in semiconductors. Now there’s one big difference, the tolerances to which we have to make these batteries, the tolerances to which we have to design our machines and execute this manufacturing is in the 50 microns range.

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As I mentioned, in backend semiconductors, typically these in the five microns range. So that’s kind of a long way of saying it’s an order of magnitude simpler problem in mechanical tolerancing. This is why Ajay and I believe is absolutely, we’ll be able to do this, and we’ll be able to manufacture at scale. Now, the proof of that is what you’re seeing in the operational improvements that you’re seeing from us. You can see how we’re executing on Fab-1 and continue to produce 1000s of batteries. And we’re also hitting all the key milestones on getting the Gen 2 up and running. Now Gen 2 compared to Gen 1 is really all about adding speed, adding speed and automation and parallelism, so that we can handle more tasks at once. To give you all a feel for what Gen 2 looks like compared to Gen 1, we made a short video where Ajay describes how this works.

And there’s a link to the video in the shareholder letter that you received. And it shows you Ajay presenting side-by-side how these work of Gen 1 and Gen 2 machines. I encourage all of you to please click on that and take a look at that. It’s a short video, but it does really illustrate the point that I’m trying to make here. Now, what is this advantage that Enovix batteries have compared to semiconductors. One of the aha moments for me in the last quarter since I’ve been here at Enovix is realizing that we can produce higher density and much better capacity batteries with the longer cycle life without having to change our manufacturing process. This is actually very important to understand. Now in my experience in semiconductors, let’s say you wanted to make a higher performance processor or a high-density memory, you pretty much most of the time have to buy brand new machines and go from one process not to the other.

And again, these are deep sub-micron lithography machines that cost hundreds of millions of dollars. And sometimes the fab has to be kind of upgraded and rebuilt to really house these machines. What we find at Enovix is that the manufacturing lines we are building since they’re akin to the backend manufacturer, as we make advances in getting better electrodes, better cathodes, better silicon-based anodes, better electrolytes, which we have, our electro chemists are working on sourcing them and making experiments with them. We can use the exact same machines that we are building to make those batteries. In other words, as we make advances in electrochemistry, and we make advances in higher energy density, our manufacturing footprint totally scales.

It’s not like we have to build completely new batteries in new manufacturing facilities every time you want to improve energy density. This is a fundamentally a huge advantage for the way we manufacture batteries. So that is what I believe will make this business ultimately very profitable in the long run. Now, the second major topic I wanted to talk to you about is capacity built out. Now that we’ve gotten a lot of questions on this as I talk to investors over the last quarter. I mentioned last time that we will have multiple options to raise money or build, get the financing we need to build our capacity. Now we are now executing towards that. This quarter we got a non-binding LOI or a letter of intent from our manufacturing partner YBS International in Malaysia.

This LOI has YBS working on giving us an existing building space in Penang Science Park to house our high-volume manufacturing lines up to four lines with dedicated personnel to staff that line. This is very similar to how we would use a semiconductor backend assembly subcontractor. Now, YBS, in addition to this, is working with a syndicate of local banks to make a significant investment in our Gen 2 auto line. This is subject to some purchase commitment from Enovix. Now, while we are negotiating all the details, what I can share with you is that we are seeking at least 70 plus million dollars of non-dilutive financing to fund the first line. Now, as I said earlier, this funding is not secured yet. But we are very encouraged by all the discussions we have to date with them.

Securing this funding, now would elevate us from spending the $120 million full year CapEx forecast I gave you last time. Now we’ll provide an update for you on this in the next quarterly call. Now beyond that funding, we recently closed the private offering of the $172.5 million convertible senior notes. That gives us the CapEx, the capital we need to make the Gen 2 auto lines 2, 3 & 4. So in other words, we are now set up to be able to build four auto lines in Malaysia in terms of CapEx that we need. Now, let me close with our outlook, with a few remarks here. For the full year of 2023, we continue to expect to produce the 180,000 cells that I mentioned last time, including 18,000 cells in second quarter. Now once again, we’re not forecasting any service revenue at this point, because this tends to be episodic and based on milestones.

Now, I want to reiterate our full cash guidance of $240 million of spend half from CapEx and half from operationally running the company. We do plan to revise this guidance in the next quarterly call as we get more visibility on the YBS transaction, in addition to our own efforts to internally operate a lot more efficiently. In closing, we’re off to a fast start. We’re making substantial improvements in Fab-1, we’re hitting all the milestones we set for ourselves and that I communicated last time to you, our journey to scale in Fab-2 in Malaysia. We are working to fund our capacity build outs while protecting our cash and limiting our dilution. Now I really want to thank all the Enovix employees for their hard work this quarter, along with the investors who actually are supporting us in our efforts.

Now we have a busy year in front of us. But I’m even more confident today than I was when I joined that we have the right product and the right team to achieve our goals and enhance the shareholder value. With that, I will turn it to Q&A.

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Q&A Session

Operator: We will now begin the Q&A session. Please note that this call is being recorded. . Our first question comes from Bill Peterson from JPMorgan.

Bill Peterson: Yes. Hi, thanks for taking my question. I noticed you said you sample to 106 customers. I don’t recall what the number was in the fourth quarter or even if you stated it, but I look back and it was like 25 in the third quarter of last year. So I guess based on that, how many of your customers you have qualified? How many of you expect to be qualified later this year? And I guess how many of you waiting for post, I guess line two ready before the qualification will be finished?

Raj Talluri: Yes, absolutely. The question is about customers and customers sampling and qualification. I think Ralph is on the call and he’s closest to this. So Ralph if you want to take that.

Ralph Schmitt: Thank you for the question. So yes, we’ve seen even a bigger acceleration of the number of customers looking at our product and evaluating the technology. We haven’t laid out the exact numbers as you asked for them, Bill. But as you saw in the release both the active and the design category that we have in our funnel has increased to about $718 million. All the cells we’ve been shipping over the last few quarters are now in qualification and take numerous quarters till those qualifications are done. But we’re still on schedule exactly how we thought that in the back half of this year we’ll start seeing customers put products into the market with our batteries in them.

Bill Peterson: Okay, thanks for that. My follow up question is related to new product development, and somewhat related to prior questions, when do products such as EX 1 to 1.5, EX-2. When do those intercepts? And I guess can move to Fab-2? And I don’t think you mentioned great flow, but similar type of questions when did these get qualified and Fab two? And then send the customers through their qualification? Or I guess, ultimately, most importantly, for high volume production and revenue?

Raj Talluri: Yes, sure. I can talk about that. As I mentioned, in my opening remarks, it’s really exciting, our manufacturing strategy that we can continue to improve our process technology and continue to improve the energy density with, as some of you may or may not know, EX-1, EX-1.5, EX-2 are our various recipes or process technologies that actually improve energy density and cycle life and so on. We’re on target on all of those EX-1.5. We expect to sample towards the end of the year, and we expect to run all those in our factories in Malaysia. Malaysia factory, as I mentioned, will produce samples like in April, next year, and get into high volume manufacture towards the end of the year. We will continue to run as we make progress in our process technology; we will run them through, our Malaysia factory.

And as for brake flow, I’m very excited by brake flow. It’s a phenomenal piece of technology where, as you put more and more energy density into batteries, safety is just paramount importance. And brake flow is a technology that Enovix has, that really provides great safety by not allowing the battery to go into thermal runaway, and outlined in Malaysia will help brake flow integrated when we make these batteries. And in fact, we are sampling batteries with brake flow now.

Operator: Our next question comes from Colin Rusch from Oppenheimer. Please go ahead.

Colin Rusch: Thanks so much, guys. You are separate from the engagement and design activity? Can you speak to the incremental specificity that you’re being able to gain on customer needs and adequacy of the current product roadmap to meet those needs as you’ve gone through the last four months or so?

Raj Talluri: Yes. I will make a few comments. And again, I will ask Ralph to comment on this because he is just a lot closer to it. One thing I found as I visited a lot of customers, as I’ve been spending more and more time here, and as you guys know, the customers we’re now talking to, are the same customers that I’ve shipped for many, many years when I was at TI and Qualcomm and micron and so on. I’ve got solid feedback from many of them, that the battery technology that we have is superior and it produces higher energy density than anything they have today. Now the requirements we are getting are actually a lot more specific. I did mention that we hired more people, hired Samira, who’s actually used to work at Qualcomm before, who is the Head of Products, reporting to me.

Now she’s able to, along with Ralph and his team, meet the customers and get more precise requirements on how is the battery charged, for example, what voltage it is charged at? What are the different waveforms that are used to charging? Cycle life versus energy density trade off, getting more specific on the shape and size of the batteries that fit in wearables versus computers versus phones. So we are getting a lot more detailed, specific requirements that is really helping us drive a much stronger product roadmap. Ralph, do you want to add more to it, please do?

Ralph Schmitt: Yes. I think you covered it well, but what I’ll say is our expectation has been that the current technology that we have in the line that we’re running is really meant to be targeted towards the IoT space and the wearable products. And so we’re very, very well aligned with that, because we’re way down the path. The other markets that Raj mentioned, both mobile and laptop, we’ve been engaged for multiple, almost years at this point with those customers and have their needs as well in their requirements. And we continue to add or slightly change things as we move forward to better address those market requirements. But it’s still the same strategy and we’re very well aligned with the market needs in each of those kind of in different stages. Wearables were frankly close to the production stage, mobile and laptops are just after that.