Operator: Our next question comes from Alex Potter from Piper Sandler.
Alex Potter: So I had a question, regardless of how long it takes to ramp, I guess once we’re up and fully scaled in Malaysia, I know that there is some nuance here about what exactly “unit” is. But in the shareholder letter from today, you mentioned between 38 million and 75 million batteries per year in the aggregate coming out of Fab-2 in Malaysia. If you divide that by four, right, it’s between 9.5 million cells and almost 19 million cells per line. So this could be semantics. I know because are small cells, there are big cells, but to me, when I first saw those numbers, it seemed like an upward adjustment versus your expectations for per line output versus what you historically said. Is that correct or am I reading that incorrectly?
Raj Talluri: Ajay, I want to let you answer that.
Ajay Marathe: Yes. Again, good observation and good calculations, but let me just direct you towards, the small — the way we are designing our lines is the first line is more for universal line. Because we have so many engagements with multiple customers, first line will be able to do small and large, both, form factor. In other words, the corner cases are pretty wide in terms of what can be done on the first. So for that we give up a little bit of capacity on the first line. But second line onwards will be highly optimized towards narrower window of the dimensions and therefore will have a lot more capacity per line, which is why when Raj said, in the investor letter between 9.5 million to 19.5 million batteries per line. So you can — depending on again, the demand, and how we match the supply to the demand. That’s how you will get to the number of lines required for the volume that you just stated. That’s how I would look at it.
Alex Potter: Okay. That’s very helpful. And then maybe the follow up question to that, then if I wanted to take those unit numbers, and translate that into revenue capacity to the extent you’re comfortable talking about this, right, if I don’t know — I know that $5, I’ve always historically assume $5 for a wearable and maybe $10 for a cell phone size battery or something like that. Could you take those $5 to $10 unit ASPs and multiply it by the range of those unit numbers and get to something in the neighborhood of 375 million, 380 million of annual revenue capacity out of Fab02, is that in the ballpark?
Raj Talluri: Yes. That’s a good first order approximation. Again, it just depends on which ones we sell how much but that’s a good first order approximation.
Operator: Our next question comes from Gus Richard from Northland Capital Markets. Please go ahead.
Gus Richard: Yes. Thanks for taking my questions. What run rate do you have to hit in manufacturing before one of your customers commits to production?
Raj Talluri: I mean, it’s not that simple as run rate, that’s not the only factor that decides. I think the most important thing for our customers is that we be able to — let me remind a little bit. There’s a lot of customers today that are actually Ralph is sampling that are comfortable going into production with our small cells and big cells, and we’ll see revenue from them this year and next year. So in that sense, we already have customers who are comfortable going to production with what we’re producing. The key was to give them enough samples and show that we have enough backlog enough inventory that we can actually meet their demand as they start ramping the product. Now, it depends on the volume of the product, if the product goes in millions of units, we clearly don’t have the capacity this year.
But next year, we aim to be able to produce millions of units. So I think then customers are more comfortable. So large volume customers are more comfortable. So it really depends upon the run rate of a particular product, right? If the product run rate is in the millions, we need to have that capability. If it’s the 10s of 1000s, we are ready today. So that’s kind of like how I look at it. And the other variable is, we need to give them the battery in the right form factor and shape that they can test it in the product that they’re putting it in, to be able to say, okay, you know what, I think we should go with this. Right? Those are the two big variables.
Gus Richard: Okay, I got it. And then, on the first half, you can produce 30k batteries, if I can add two numbers together. And for the full year, you can do 180k batteries. It’s a pretty big jump in the second half. Could you just talk about what’s going to accelerate that volume just so, what needs to happen?
Raj Talluri: Yes. I’ll have Ajay comment on that. He lives it every day.
Ajay Marathe: Absolutely. Again, very good question. And, yes, as you saw in the Q1 we did 12,500, we’re saying we’ll do 18,000 in Q2, the quarter we are in already. And the ramp is pretty steep. The ramp is driven mostly in the confidence that we are going to get to that ramp is doing a couple of things, right? One is the yields. And while we don’t talk in detail about our yields which nobody really announces their yields. All I can say is we are making significant improvements in yields throughout the year. And it is the proof points are sort of behind us. So that gives us confidence about the second half. That’s one. Second is uptime, and mean time between failures of the equipment, right? So essentially, is the equipment getting a little bit more predictable.
And though both those things we are making good, solid progress day after day after day, which is what is giving us. So between now and end of the year. We feel very, very strong that our assumptions are actually fairly accurate. And we are going to do the 180,000.
Operator: Our next question comes from George Gianarikas from Canaccord.
George Gianarikas: Hey, everyone. Thanks for taking my question. I’d like to ask about the slides that TJ presented in January that talked about they had red, yellow and green and in terms of just the issues that were needed to be fixed going from Gen-1 to Gen-2, some of those included like I see a red line here for insert, slot fill. And I’m curious if there’s any update on any progress that you’ve made in turning those reds, to yellows and those yellows to greens? Thank you.
Raj Talluri: Yes. I mean, I’ll give you a high-level color. We made significant progress on those. And in fact, I was looking back at that presentation the other day when someone asked me a question. And we’re actually on track to almost everything that was said there. And that’s the reason why we were able to get the approval to make the purchase order for the Gen-2 equipment, because we made solid progress in each of those. And so I think, clearly, the team has worked really hard, I mean, Ajay with all his experience, and the team he has brought in, we’re able to solve most of those issues. So we feel pretty confident about that. Ajay, anything else you want to add?
Ajay Marathe: Yes. Just very quickly, the way we kind of test that, are we making progress? Are we solving real root causes of what was stopping us from feeling a whole lot more confident? What we’re doing is, we’re building proofs of concept, right? We introduced that last time, in the January third meeting, called a POC, there are several POCs, in upwards of three dozen POCs, which were in motion, all the way from January, literally January 4, until yesterday, I can give you the update. Most all those POCs are doing extremely well showing us that whatever we are assumed to confirm the UPH that we’re expecting, are all being met. So that’s how we progress. It’s a pretty rigorous way of approving the next step and the next step, et cetera, in that approval cycle, as Raj mentioned. So we’re feeling pretty good after the POCs.
George Gianarikas: Thank you. And then, just next question is on the — I noticed that you have these two silos that you have in your revenue funnel, and one of them is engaged opportunities. That was slightly down sequentially. Is that because engaged opportunities moved into active designs? Is that the right way to think about it?
Raj Talluri: Yes. Ralph, you want to take that? That’s kind of my understanding but Ralph can cover.
Ralph Schmitt: Thanks for the question. And that’s the simplest way to think about it is that we’re trying to progress these customers into more active and real design wins. And then, that was moving faster than getting new customers into the front-end of that funnel, the engaged part. Really, exactly what you want to happen in order for us to get them to a revenue state.
Operator: Our next question comes from Ananda Baruah from Loop Capital Markets.
Ananda Baruah: Yes. Just a couple if I could, I guess the first is on sort of processing and getting, Gen-2 mobility lines stood up, will you be giving us any updates on equipment delivery, and any updates, kind of through the year on the way to getting them through, you want to be around particular metrics or anything of that nature? And then, I have a quick follow up? Thanks.
Raj Talluri: Yes. We will continue to give you updates in these meetings, as we move forward in the different stages and where that is. I think the next big milestone for us is the factory acceptance test, which will come up like in August, I believe. And then after that, we’ll have site acceptance when it actually be delivered to our site. So we’ll give you updates on both those milestones. But so far, we are very pleased with the progress. And our teams are visiting, our suppliers come here, Ajay, and I see this all the time. And even yesterday, I saw a video of one of our Gen-2 machines, the newest one working, it’s pretty exciting to see the progress being made by the team.
Ananda Baruah: Awesome, Raj. Thanks. That’s helpful. Yes, we look forward to that. And then, I guess the follow up question is, what like, how would you like us to think about incremental capacity? I know you just got Malaysia, okay, like in place. And you’re just starting to get to sort of get the purchase orders in waiting for the equipment. But I’m sure we’ll start all getting asked as we move forward about incremental capacity plans, and at some point, incremental funding plans like that. So anything you can help us out with context wise around that, will be grateful. Thanks.
Raj Talluri: Yes. I mean, as I mentioned, I have a lot of experience in high volume manufacturing businesses. So, the most important thing is to make sure your supply and demand are tied out, and you don’t have too much supply or too little supply and line the demand, which takes a lot of planning, by the way, it takes a lot of planning in the demand side with the customers, a lot of planning and when we order the equipment, what are the long lead times once and facilitation. So it’s a complex problem, both Ajay and I have a lot of experience running this. So the way we’re going to do this is, first, we secured the funds to make sure that we have the capability to buy them as we need them. Second thing and we now we secured the site, and in the middle of getting the facilitation done with our partner.
And then, we give heads up to our suppliers and when they need to come. And then we start sampling our customers. And like I said, we are set up for the first four lines now. And as we get to that stage, we will see the progress in the next couple of years, both on the customer side and both our machines are running. And we will continue to optimize the machines. And we’ll continue to look to how to expand beyond those four as the demand shows up.
Operator: . Our next question will come from Marc Cohodes from Alder Lane. Marc, your line is open. Feel free to unmute.
Marc Cohodes: So Raj, you’ve been there for three months, and Ajay a little more than five months. What gives you guys the incremental confidence that you can actually manufacture these batteries at speed? Because everyone constantly hears it’s hard to do, it’s impossible, fly in the sky. But you guys are sounding more and more confident. So what has exactly happened that gives you that confidence? That’s question one. And question two is, when are you guys going to start building batteries for inventory to actually ship commercially for these new products? Thank you.
Raj Talluri: Yes. Thank you for that question, Marc. Firstly, I think as I mentioned, the reason that we are increasingly getting more and more confident, the more time we spend here is really because of the couple of things I mentioned in the call. The way Enovix manufactures batteries, is really like the backend semiconductor manufacturing. It is a backend assembly test kind of technology that we have to master and do. And that technology is there. And many people have done it. And even then, the tolerances to which we need to make is an order of magnitude less stringent than what’s done in chips. And you can see the progress we’re making in the number of batteries we’re producing over the last few quarters. I mean, we went from almost nothing to 4000, something to 9000 to now 12,500.
And we are committing to 18,000 next quarter. So progress we are making in producing batteries as we learn that. Our understanding of the actual mechanisms and the machines that produce this and the tolerances to which they need to do. I think those are two things that really give us a lot of confidence. And thirdly, all these proof-of-concept experiments that we’ve been running, where targeted at what went wrong with the Fab-1, when we did it, where did we lose yield? Where did we lose the throughput? Where did we lose machine up times? And we created a target experiments to make sure that those don’t happen in Gen-2 and those experiments proved out and we are confident now. We picked a new set of suppliers who are actually very capable of producing machines like this.
And we are not paying them all the money upfront. So there’s a lot of skin in the game on their side, because we only paid 10% on the first approval, and then incrementally we pay the money as the yields come up and as the machine throughput comes up. And there’s different milestones that we use to check that. And we followed this well-known process, the EPR process that actually helped us make sure that we’re ordering the right machines. So all those things give us a lot of confidence and we feel fairly strongly that we can get this done. And as for your second question inventory, we are now building, as you know in this kind of consumer electronics markets, when you start giving units to customers, they want to make sure that if their product is successful, we have the supply to be able to support them.
And that’s kind of what we’re doing through the year. We are of course sampling a lot of customers with the batteries we make. But we’re also building a reasonable healthy level of inventory. If the products that our customer wants suddenly start selling really well. We don’t want to be in the middle, or we want not be the bottleneck to not be able to supply them with batteries. So it’s a responsibility we take seriously and we’re handling that. Ajay anything else you want to comment on the machines.
