Enovix Corporation (NASDAQ:ENVX) Q1 2024 Earnings Call Transcript

Enovix Corporation (NASDAQ:ENVX) Q1 2024 Earnings Call Transcript May 1, 2024

Enovix Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to the Enovix Corporation’s First Quarter 2024 Earnings Conference Call. Currently, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. As a reminder, today’s program will be recorded. And now, I’d like to introduce your host for today’s program, Charlie 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 2024 Financial Results Conference Call. With us today are President and Chief Executive Officer, Dr. Raj Talluri; Chief Financial Officer, Farhan Ahmad; and Chief Operating Officer, Ajay Marathe. Raj and Farhan will provide an overview, and then we’ll take your questions. After the Q&A session, we’ll conclude our call. Before we continue, let me kindly remind you that we released our first quarter 2024 Shareholder Letter after the market closed today. It’s available on our website at ir.enovix.com. A replay of this call will be available later today on the Investor Relations page of our website. Please note that the Shareholder Letter, press release, and this conference call all contain forward-looking statements that are subject to risks and uncertainties.

These forward-looking statements are based on current expectations and may differ materially from actual future events or results due to a variety of factors. For a 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, May 1, 2024, based on information currently available to us. We can give no assurance that these 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’ll 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, which is posted in the investor relations page of our website. I’ll now turn the call over to Raj to begin. Raj?

Raj Talluri: Thank you, Charlie. And, thank you to everyone joining us today. For our format today, I’m going to start with the recap of our recent results, how we are progressing against our strategy before I turn it over to Farhan, for the financials and the outlook. I’ll also have a few closing comments and then, we’ll take your questions. We’re off to a great start in 2024. To recap our recent achievements, first, we delivered Q1 revenue of $5.3 million which was above our forecast, due to strong performance, from the IoT category. And, thanks to the higher revenue and favorable product mix, we reported positive non-GAAP gross margins for the first time in the company’s history. Second, we completed the Factory Acceptance Testing of our Gen2 Agility Line, and the vast majority of the machines are already in Malaysia, and the SAT is well underway, which is the Site Acceptance Testing.

As a result, we’re on-track to produce our first battery samples of the EX-1M technology this quarter. Now, I’ll also note that the FAT for the high volume, the Gen2 Autoline is nearly complete. And, given that it’s based on the exact same process kernels as Agility Line, for the unique and challenging portions of our battery manufacturing process such as laser dicing and stacking, our yields are already at upwards of 95% in our Gen2 machines. Big picture, manufacturing is in a great place. We are confident we can scale the Gen2 process given the amount of rigor we put into getting these qualification steps right. Now, let’s talk about the customer progress. Let’s start with smartphones, the largest portion of the battery market in consumer electronics.

We are deeply engaged with market leaders, given the value they see in our architecture to enable silicon and increase the battery performance. As we talked about previously, our process has been to work with these OEMs to gather the specific requirements, for the smartphone market and then develop a product that’s tailored to the needs of this market. This is exactly what we’ve done with the EX-1M. And, I’m thrilled to update you that we have now begun producing samples of EX-1M in Fremont for initial testing, which you can see on the cover of our Shareholder Letter. It’s super exciting for us. Now the samples of EX-1M will go out shortly and the customers are really eager to kick-off the qualification products of these samples with their products in mind for 2025 launch.

What does this mean? And, where are we with these customers? Now, let’s take a quick look with this slide. Now, what I’m showing on this slide is basically the size of the smartphone business opportunity for us. The smartphone battery leadership opens a $12 billion opportunity for Enovix. If you look at the top bar on the slide, you can see all the OEMs that shipped around 1.2 billion smartphones, in 2023. The top eight of them represent a, $1 billion units, which is 80% of the volume. Now, of the $12 billion lithium-ion battery TAM in smartphones, $9.5 billion is among this top eight. Collectively, they produced 280 plus models of smartphones, which means an average smartphone unit volume of 3.5 million units per model. So, three or four models of this will take a full line of ours.

Now, six of the top eight of these OEMs are going to receive samples from EX-1M smartphone battery from us. So, that $7.5 billion of smartphone battery TAM is actually represented here. So, we’re in great shape as you can see with the market leaders, something that is a priority for me when I joined the company last year, to focus on the largest part of the battery market. Now, the customer interest, has extended to conversations with OEMs about formalizing our relationship with them as we started making progress over the course of the last year. Some have expressed desire to be the first to market with products in 2025 and beyond. To that end, I am really pleased today to announce our first development agreement with the top five smartphone OEM by volume.

What this agreement reflects is a progression of our technology relationship with this company and a mutual plan from both the company and us to bring out our technology into user’s hands, very exciting development that has happened in the last quarter. And, we see similar interest in collaboration from other customers who are also sampling to, who we are going to sample with our EX-1M technology in the coming months. Our goal is very straightforward. We begin with a handful of SKUs from this group of customers, ramp EX-1M to production in ‘25, then further differentiate with our EX-2M, a battery that samples later this year for product launches in ‘26. As I have highlighted in the past, there is secular demand for increased battery capacity with every smartphone generation, and Enovix may be the only company that can help these leading companies, leading smartphone OEMs keep up with the demand for the higher and higher energy density needs of the batteries because of all the AI applications that are coming into smartphone, particularly for all the on-device AI applications.

So, let’s recap what products we plan to bring to the market on the next slide. We’ve shown this slide to you before, EX1 is our current technology that we were sampling last year. EX-1M is a new technology that we will be sampling the second quarter this year. And, this technology is comparable on energy density to EX-1M, which is quite a bit differentiated from all the cells shipping out there in the market. But, we’ve made a few important advancements to this battery. We’ve increased our cycle life, increased our capability to charge fast, both of which are very important in cell phone market. Now, we plan to sample EX-2M, which is the generation after this, where we continue to make improvements on energy density and cycle life and fast charge capability.

Our R&D teams have already started working on EX-3M, where we will further make improvements over EX-2M in all of these three factors, energy density, faster charge and so on. And, our plan is to sample them in 2025. Once we bring a leading smartphone battery to market, our view is that this gives us the entitlement to win in other large parts of the battery market, namely the IoT and computing. There is another $12 billion of TAM in those two markets. The reason for this is a smartphone battery has the highest bar of all consumer batteries. The demands of on-device AI are very high, so it needs higher energy density, higher cycle life, people like to keep the smartphone for a while, fast charge rate, they like to charge it quickly and move on, highest levels of safety, it’s a device you carry with you all the time.

So, when we produce a battery that meets these requirements, all the other markets are entitlements for us. This is actually something, same thing I saw at Qualcomm. When I was at Qualcomm, we built a significant mobile phone business, but very quickly we were able to sell the Snapdragon into IoT businesses after that. Now, it should also be not lost to anyone. The logos you saw in the previous slide of the smartphone OEMs are the same logos of some of these customers who are actually leading in some of the IoT markets like wearables and tablets and computers. So, proof positive for strategy is once we qualify with a smartphone customer, takes our EX-1M sample, they’re not only qualifying us for smartphones, but also for smart watches and so on.

To this point, we are continuing to make inroads into multiple other IoT customers. We are applying our vertical markets philosophy, where we selectively engage with a few high-volume opportunities with leading OEMs that are products that take advantage of the higher energy density and higher better battery performance of EX-1M and EX-2M. Presently, our commercial team is focused on select IoT design opportunities for both 1M and 2M with product launches targeted in ‘25 and ‘26 for high energy density batteries. So, some really meaningful progress here. Now, as we look forward, we’re approaching some key milestones this quarter. As production begins in Fab2 and we get samples of our EX-1M going out to the customers. Now, let’s take a look at our scale up strategy.

We’ve shown this slide before. Q2 ‘24 is when we are going to be sampling our first EX-1M batteries from our Agility Line to some of the smartphone customers and also some IoT customers. Second half of ‘24 is when our Fab2 will get ready for production. And, Q4 of ‘24, we expect to sample the EX-2M, the next generation of the battery. Now, that takes more and people take some more time to qualify that and we expect that to launch to production in ‘26. In 2025, our goal is to launch multiple smartphones and also IoT customers with our EX-1M battery. Now, what does scale look like when we get to launching multiple products with multiple customers in the coming years? This is a slide that we haven’t shown before. Our R&D, this is a slide about the smartphone production line unit economics.

Our manufacturing R&D team has been very busy at work to reduce the cost of our lines. Now, we are targeting the CapEx per line to be in the $60 million range in the out years. And, we’ve also targeting now with the experiments we’ve done to be able to get the throughput to be 1,650 units per hour. What that does is, each line has a capability of producing a revenue of $150 million. What we’re finding is that as we produce higher and higher energy density batteries with better performance, there is the opportunity to increase the ASP because the customers want a higher energy density battery because that will help them differentiate the products much better. At that point, we expect our cash gross margin to be in the 50% plus and we estimate the payback of each of these lines to be one year.

So, very exciting future here as we get into scale of manufacturing. As you can see, we’re making tremendous progress and we have very clear path and very attractive long term financials as we scale this business. Now, none of this would be possible without the collective success of our global teams. From the operations’ team in Malaysia readying our Fab2, to the team in India reducing our R&D cycle times, to the team in Korea improving our coating capability. Based on this progress and taking advantage of our global footprint, we are now accelerating our plans to identify additional efficiencies as we scale to take advantage of this global footprint of our engineering teams and manufacturing teams. Our plan is now reduce our fixed cost by more than a third or by more than $35 million annualized by this year-end.

This significantly reduces our capital needs and accelerates our path to profitability. With that, I’m going to turn it over to, Farhan.

Farhan Ahmad: Thanks, Raj. All the relevant financials are in the quarterly report in the Shareholder Letter, so I’ll kind of keep my comments at a high-level and then provide the outlook. For Q1, we delivered revenue of $5.3 million which was ahead of our expectations. And, we also had a first, positive non-GAAP gross margin, as Raj mentioned. The non-GAAP EBITDA came in at a loss of $26.3 million, better than the midpoint of our guidance. And, non-GAAP EPS came in at $0.31 loss, a penny better than the midpoint of our guidance. We ended the quarter with, $262 million of cash and, equivalents, for Q1 the CapEx was $15 million and, we used about $35 million in operation. Our balance sheet remains strong. And, with the reductions that Raj mentioned, it provides us a strong liquidity into 2026.

As a reminder, we accelerated the depreciation of Fab1 equipment, as we converted it to for usage for our product development. So in Q1, you see that the R&D expenses had about $18.5 million of accelerated depreciation. This won’t occur in Q2, and we expect to return to a normalized level of depreciation expense and operating expenses in Q2. And then, we should see reduction, in back half of the year and into 2025 as we reduce our spending in high cost geographies as, Raj had mentioned. And, now for our guidance, for the second quarter of 2024, we forecast revenue between $3 million to $4 million, and adjusted EBITDA loss of $26 million to $32 million and a non-GAAP EPS loss of $0.22 to $0.28. As we have highlighted on the last call, Q2 tends to be the seasonally low quarter, for the battery business that we acquired last year, and we expect strong revenue growth, from Q2 level in the back half of the year.

With that, I’ll now turn to Raj.

Raj Talluri: Yes. Thank you, Farhan. As you can see, we have a very, very busy quarter ahead of us as we begin production in Malaysia and begin getting our EX-1M samples out of the door to their customers. Customer enthusiasm is very high, and our relationships continue to grow stronger. On that note, we have a number of customers. We’re in the middle of scheduling visits to our Fab2 in Malaysia over the summer, and we are planning to have a grand opening of our factory with all the key constitutions, customers, investors in about August timeframe. We’ll plan to share more details later on. It should be a very exciting event. We are very excited to showcase this facility, and I was there in Malaysia recently, and it’s really phenomenal what the team there has done. And, it’ll be awesome to showcase it to our customers and investors. With that, we can go to questions now. Operator?

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Q&A Session

Operator: We will now begin our Q&A session. Please note this call is being recorded. [Operator Instructions] Our first question will come from Mark Shooter of William Blair.

Mark Shooter: Hey, team. This is Mark on for Jed Dorsheimer. Congrats on the JDA. That’s great news. A nice surprise for us. Speaking of them, and I know that the target is for a 2025 launch. But does that give you any indication on when you’ll need to see a PO to achieve that timeline?

Raj Talluri: Yes. The question is on, PO for, for the launch in 2025. In consumer electronics, typically, the POs, I’ve been in this business for a long time. Typically, the POs are placed a couple of months before production. And, so from now, we’re going to give them samples. They’re going to qualify these samples and then give us some feedback. And then we’re going to get from them the exact battery size that they actually need to go into a phone. Once they decide the phone model, then we need to give them samples in that exact size, then they go through some more rounds of qualification within that phone. And then, when the phone passes all the EVT, PVT, all the tests and it gets close to production, that’s when we actually get the PO. So, I’d say it really depends upon the couple of months before launch time. So, I’d say second half of next year. Early to I mean, like, summer to second half probably.

Mark Shooter: Got it. Thanks for the color. And, for the follow-up, I’ll ask another one here is, so that it seems as though you’re using a land and expand model with these customers, right? Do they all have many different tiers of performance? Do you think that the customer is looking to get you into is a trial in the top-tier form, or is there do you think you can be in multiple models by the end of 2026 with this customer?

Raj Talluri: Yes. Again, I like I said, I think we are we are sampling multiple customers. We’ve just closed the JDA with one of you know, what I announced here is JDA with one of them. The development agreement is one of them. But there, we’re working with multiple ones. Typically, my experience in what happens in smartphones, from what I’ve done with other companies is that they put you in a model. They see how that is. And, before they put you in the model, there is a battery evaluation team that, make sure that they’re comfortable with the battery and where it goes, become one of the chosen battery vendors for a platform. So, it starts with one model, but once you’re qualified by the customer, you make a model, that quickly my experience is moves into multiple models across different tiers.

And, again, people typically optimize the battery for energy density, for fast charge, for cycle life based on the geography in which they’re launching a model and the shape and size of the model. So, my expectation is that once we get in, the next model should come much, much faster and much shorter, qualification cycle.

Mark Shooter: Great. Thanks, Raj.

Operator: Our next question will be from Colin Rusch of Oppenheimer.

Colin Rusch: Thanks so much, guys. As you’ve gone through the equipment testing, and gotten everything installed and you’ve talked about, kind of starting out at roughly a 65% yield sort of ratio. Can you talk about any surprises or positive incremental movement, as you’ve gotten through the exception steps and gotten everything installed?

Raj Talluri: I’ll let Ajay handle that when he’s here.

Ajay Marathe: Sure, Colin. Good question. No. The FAT, as you have been saying, is pretty rigorous process, right? We go through several different, not just critical to quality parameters, but also the marathon runs, the UPH uptimes and yield, of course, right? So, no surprises. We are expecting high yields and that’s what we are getting at FAT. There’ll be more fine tuning that we will continue to do through SAT, Site Acceptance Test. But, generally speaking, I’m particularly quite excited about how the equipment has performed in the FAT cycles that we have run and pretty much, most all the FAT for agility is done, and the yields are exactly where we expected and then some. So, no surprises, only on the positive side.

Colin Rusch: Excellent. And then with the customer engagement, obviously, you guys are getting deeper and more intimate with these customers. And the performance specs, I’m sure, on these phones are changing very quickly. Raj, can you talk a little bit about the cadence of that performance and what they’re demanding of the phones, and how quickly that’s changing as we start to see generative AI become a much bigger part of some of the future growth for the phone functionality.

Raj Talluri: Yes. What we’re noticing is that, customers want higher and higher energy density for, one. And secondly, they’re asking for batteries with more higher and higher capacity, in terms of 6,000 milliamp hours and higher. I think the reason for that is simply that, the Gen AI is just the battery consumption is like crazy. And, when they start using these apps I think, last time I showed some data, on YouTube versus ChatGPT versus now DALL-E and so on. Clear indication from all our customers that they want more energy density, larger batteries, and an ability to charge it quickly and different shapes. But, the unfortunate reality is the battery industry hasn’t kept up for many, many years. And, that’s why when we come and offer a higher energy density battery, the timing is really good because now is when they actually really need it and this is the time that, we are showing up with a great battery.

Colin Rusch: Okay. Thanks, guys.

Operator: Our next question will be from Bill Peterson of JPMorgan.

Bill Peterson: Yes. Hi. Good afternoon. Thanks for taking the questions. In the technology and product section of the Shareholder Letter, you mentioned you’re working with two leading smartphone OEMs on launch for next year. Is one of these actually in this development agreement, or is that a separate thing? That’s the first part of the question. But the really, the crux of the question is, what’s the extent of the relation with the second question? And then you mentioned you have four others to receive samples presumably this year or next year. Is there potential upside to the two smartphone customer launches, in terms of revenue generation in 2025 or really the rest of the customers you’re sampling are more like ‘26?

Raj Talluri: Yes. I mean, so I’ll speak to it from my experience and how these things typically work. Typically, in smartphones, we mentioned one of the top OEMs that we’re working with, then we’re sampling another one and another one. So we will sample, like six of the top eight so far, that we have planned. And again, these conversations are going, so people keep asking us for more and more as we get these samples out. And, what happens then is, it’s, some customers may decide may, their qualification may go faster, because they may decide to put us in a particular phone. They can qualify faster. Some customers may be a little bit later. So, it’s hard to tell, exactly how many will be in production next year, but you also got to realize we have limited capacity, so we have to modulate that a little bit, with how many we can sell to. And, so I think it’s possible it could be more than two. It just depends on how the qualifications go.

Bill Peterson: Yes. And, my follow-up is actually kind of related to that. So, I guess for this year, we should assume you’re going to have your high volume line. Is that line still more in the 1350 UPH, I think 9 million unit support, or can this existing line already do up to 1650, which I guess would infer more like 11 million units? Just I’m trying to understand that, that’s just what we should assume for your volumes for the foreseeable future. And then, kind of related, I mean, when at this point do you think that we should consider, putting more lines into the system at this sort of 60 million per clip is I presumably ‘25 timeframe, or how to think about the CapEx cadence for this year and next year?

Raj Talluri: So I’ll let, Ajay, handle the first part, and I’ll talk about the second part about the next second line.

Ajay Marathe: Sure. The first line is, just as a reminder is, as we said, it is a universal line which can be adapted very quickly, to the smaller cell size to the larger cell size. So, we have been talking about that. So, you can expect 1350 UPH, we have clocked it with marathon runs on this line at 1350 at FAT, which is what, the HVM FAT is also underway as you know. So 1350, 9.5 million roughly batteries a year for the first line is how we should model it. From second line onwards, it’s both things are happening. We are speeding up the line. We are removing some of the bottlenecks. We are looking at exactly how the machine is behaving in terms of what can be condensed, what can be combined and that type of thing. And, that’s where we are getting 1350 to go up to 1650. And, also cost reduce the line as Raj talked about earlier in his presentation.

Raj Talluri: Yes. So, to add a little bit color to the second line and so on, I think the first thing I want to mention is that as we have gotten deeper and deeper into building these lines and manufacturing, a line’s not really a monolithic thing, right? So there’s, the first part of the line where we do dicing is the Zone 1 with the lasers. Then there’s a stacking, and then there is actually the putting into the pouch and so on. Then there’s a formation at the back-end. Each of these parts has a different lead time and a different amount of capacity that we need to put in. So, what we are looking at right now is, what really exciting piece of work, which is which I have a lot of experience coming from place like Micron, is to figure out what is the customer qualification?

How is that going? What’s the demand? How is that shaping? Which models are we getting into? How many customers are coming in? And, then figure out which parts of the line have to be ordered earlier, which can be ordered later to make sure that we balance the lead time of the procurement. But at the same time, we do it in such a way that the capacity ramps in sync with the customer qualifications. So, stay tuned for that as we work through it this year.

Bill Peterson: Can Farhan speak to how to think about CapEx for this year and maybe high level thoughts into next year?

Farhan Ahmad: So, yes, like look, for this year, no change, from what we have said before, just CapEx for this first line. And then into next year, we will, as it’ll be tied together with how the demand shapes up, and, the just related to how, the, qualifications go. And based on that, we will order the lines. It’s probably too early. We don’t guide, CapEx because, it’s flexible. We want to be flexible and maintain the flexibility.

Raj Talluri: Yes. The other thing is as I mentioned, I think, Ajay and his team have come with the way to cost reduce the line. So, we need to make sure we order the right things in the right way. And because the first one is a universal line, so we knew what we wanted to do there. We have the flexibility. But, in the second line on, as it is smartphones we are going after, we can narrow that window down, of the shapes that need to change. That gives us higher throughput. That gives us lower cost and so on.

Farhan Ahmad: Yes. And, I’ll just add one thing, Bill, to your question. In terms of thinking about the cost of the line, in the 2026 timeframe, you should think of that as 60 million. And this year, obviously, first line was a lot more expensive than that. The 2025, if we order, it’ll be closer to 60, but it won’t quite be there because not all the, cost reductions would be, projects will be completed by then.

Bill Peterson: Okay. Thanks. That’s clear. Thank you.

Operator: Our next question comes from Derek Soderberg of Cantor.