But, to get the high energy density, we absolutely feel we need the Enovix architecture to constrain the swelling of silicon.
Operator: Our next question comes from Ben Johnson of Piper Sandler.
Ben Johnson: I don’t have a question at this moment.
Operator: Our next question comes from Chris Souther of B. Riley.
Chris Souther: Hey, guys. Seems like we’re getting more confident on the economics where we’re learning about the manufacturing process and pricing strategy here. We’ve talked about customers potentially financing future lines. Does the less than one year payback change that approach, or it makes more sense for you to finance yourselves or, just make it more attractive to customers to potentially finance? Can you kind of walk through, how that decision making process is evolving here?
Farhan Ahmad: Yes. Look, that’s, definitely a big consideration on whether to take customer financing or not. We’ve also talked to Asian banks in terms of project financing options. So, I think if we have signed agreements with demand confirmed and economics, that are attractive, I don’t think it will be a very difficult choice for us to get, financing on a, for project financing. And so, whether we take customer financing or we go project financing will really depend on the economics. And, I think the important thing really is to understand fundamentally what’s driving the model, right? And when you look at it, we give really unmatched energy density. If you look at EX-2M, it’s far superior to anything that’s on the road map that’s out there from any of our competitors, and, customers see that.
And we already know what the pricing is, for sort of the high-end batteries. And, with that pricing and with some premium, which we think will be justified for our differentiated performance and given that we are only game in town, I think we can get to the financial performance that I described along assuming that all the cost reductions that Ajay is targeting, we are also able to execute on it. So I think, like it’s, we have all the pieces, to get to that model, and we just have to execute, towards getting that.
Operator: Our next question comes from Sean Milligan of Janney.
Sean Milligan: Hey, Raj. Thanks for taking my question. I hopped on a little late, so sorry if you already addressed this. But, I think on the last call, you talked about kind of a nine month to 12 month, qualification timeline for the smartphone customers. And, I saw in the press release, starting to deliver samples, the six of eight in 2Q. Just curious if you could comment on that nine months to 12 month qual time. And, is that from delivery of first sample, like final sample? Like, how do we think about that qualification time and sort of the, I guess, the iterations of samples that may go to them if that’s happening concurrently in that whole timeline or not.
Raj Talluri: Yes. I mean, look. We are able to deliver some samples, now from Fremont, and those, we will be sending them soon. As I said, we’re producing them. You saw on our Shareholder Letter some of the pictures of what EX-1M batteries. The customers will do some testing with them, so they’ll get a feel for what it does and so on. But, ultimately they want samples from our high-volume manufacturing I mean, from our Agility Line from Malaysia to really start the qual process. So, that we mentioned, is when we start shipping in 2Q, we produce the first one, send 3Q produce, the next one. So, you can think of nine months to 12 months from, this summer when we start shipping samples, right? That’s why I was saying later half of next year is when we expect to see those productions happen.
Now, will a few customers do them sooner? I hope so. But that’s not what my experience has been with batteries. It typically takes that time, because they’re very careful. Battery is something that people want to be, make sure it’s a 100% safe and so on. So, but that’s for the first launch. Like I mentioned, once we get there, it’s qualified by their technology teams. It’s qualified by their sourcing teams. And, we are in the system. The next products can come much faster. So, the first one is the one that takes nine months to 12 months.
Sean Milligan: Okay. So, would the idea be that, sorry, so just trying to understand like, with the smartphone customers, maybe like, with their main sales season, like would you hope that you would have volumes in commercial phones, like the second half of next year? Or is it more like the first half of ‘26 and you would be building inventory kind of the second half of next year to serve, that 2026 launch?
Raj Talluri: Our target is to have them in phones in second half of next year.
Sean Milligan: Okay.
Raj Talluri: That’s what we’re working towards, yes.
Operator: Our next question comes from Tim Moore of EF Hutton.
Tim Moore: Thanks. My first question is, now that you inked the development agreement with the top five volume smartphone OEM, I’m wondering if you maybe could share a little bit more color and detail on how you evaluate and what hurdles you might be applying for allocating future capacity to customers in 2026 and beyond. In other words, really how do you go about prioritizing your capacity that’s going to be coming on based on proposals that come across your desks from other customers?
Raj Talluri: I mean, this is early stages, right? I mean, I think, this is not, this happens all the time. So, it’ll really depend upon which phone models and which customers and how much we get prioritized and are we in multiple models at one customer or one model at each customer and so on. It really will depend upon how the rest of this year goes and how early part of next year goes. It’s a little too early to talk about prioritizing customers.
Tim Moore: Okay. That’s helpful. And, all my other strategic and operational questions were already addressed. I was just wondering just one financial question for the income statement for the rest of the year. How should we think about accelerated depreciation and R&D showing up in the next few quarters? Is that probably going to occur until you maybe lap the acquisition late October?
Farhan Ahmad: No. So, the accelerated depreciation, just as a reminder, was associated with the restructuring that we did in, Fremont where we announced that we are going to stop the manufacturing activities in Fremont, for the small, so and plans to move high-volume production to Malaysia. So at that time, we had really taken accelerated depreciation in Fremont. And so, we had said that it would be over a two quarter period, so Q4 and Q1. So, and we disclosed that in Q1 $18.5 million were included in the R&D expenses, and that will not repeat in the Q2. So, basically, you take, like your Q1 R&D run rate, subtract $18.5 million. That gives you a baseline. And from that level, that’s kind of where you should start. And we will, we should probably be around similar level and then decline. For operating expenses, we should decline after that, because of the further actions that we announced today. Does that answer your question?
Tim Moore: Great. That’s helpful. Yes. It does. I thought it would last two quarters, but I just want to double check and try to factor in the extra cost savings. So, that clarifies everything. Thank you. That’s it for my question.
Farhan Ahmad: Thank you.
Operator: There are no further questions at this time. With that, I’d like to turn it over to Dr. Raj Talluri for closing remarks.
Raj Talluri: Yes. Thank you, everyone, for your questions, and, thank you for tuning in. Before we wrap, I want to highlight that, we’ll have a livestream of Ask Me Anything on our YouTube channel on Monday, May 6. If your question didn’t get answered today, please feel free to submit your questions for next week, and we look forward to what should be a great dialogue. And, thank you once again.
