Enovix Corporation (NASDAQ:ENVX) Q3 2024 Earnings Call Transcript

Enovix Corporation (NASDAQ:ENVX) Q3 2024 Earnings Call Transcript October 29, 2024

Enovix Corporation beats earnings expectations. Reported EPS is $-0.17, expectations were $-0.2.

Operator: Thank you for standing by, and welcome to the Enovix Corporation Third 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 would like to introduce your host for today’s program Robert Lahey, Head of Investor Relations. Please go ahead sir.

Robert Lahey: Thank you. Hello everyone, and welcome to Enovix Corporation’s Third 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 third quarter 2024 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 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 those 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 of our statements are made as of today October 29, 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 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 non-GAAP financial measures in our shareholder letter, which is posted on the Investor Relations page of our website. I’ll now turn the call over to Raj to begin. Raj?

Raj Talluri: Thank you, Rob and thank you all for joining us today. For our format today, I’ll start with a recap of our recent results, some of our recent milestones and before I turn it over to Farhan for the financials and the outlook. I’ll have a few closing comments and then we’ll take your questions. Now, we had a very productive second quarter. To recap our recent achievements, first, we delivered a Q3 revenue of $4.3 million above the midpoint of our forecast. We grew 13% sequentially and expect even further growth in the Q4. Second, we opened our Fab2 in Malaysia. This was a really huge deal for us, because numerous leading smartphone and IoT companies tour our facility, they’re impressed by the quality of our first production lines and now they are even more confident in our manufacturing capability.

Third, I’m pleased to announce that we executed a new agreement with a leading global smartphone OEM for the qualification of our battery cells and the late ’25 launch of one of their fund models and this would mark our first official entry into our smartphone market. Now ramping Fab2 on schedule and showing it to prospective customers was a very pivotal accomplishment for the company which until now only made batteries from here in R&D headquarters in California. It’s also a significant accomplishment that we shipped EX-1M samples from Fab2 just weeks after the grand opening consistent with our plan. Now the Agility line is fully operational and the initial yields and the agility line are comparable to the final levels we achieved with our first client in California and with improvements expected from there.

The high-volume line is also on track to complete site accepts and testing in 2024, which is consistent with our time line and start mass production for smartphones IoT customers in late ’25. Now we are thrilled to announce today that, we formalized a strategic partnership with a second leading smartphone OEM. Now this agreement outlines the key milestones that we are working together with them and upon meeting them, we are set to enter the smartphone market in ’25 with high-volume production. I’ve said many times before that our first commercial smartphone deal would be the hardest. We still have a lot of work to do in passing the customer qualification process and ramping high volume line, but we’re doing that together with our customer, and we expect with our first expected customer.

Now to further bolster our 2025 sales pipeline, we aligned on a production schedule with a leading IoT customer, which includes a mass production purchase order. This partnership as well as the progress we’re making on the EV space underscores our ability to diversify into high-value sectors beyond just smartphones. Now, I’m very pleased with our recent commercial success and believe the opening of Fab2 has been a very helpful contributor. We’re also getting benefit from the recent surge in AI-enabled smartphones, which is further validating our strategy and driving significant pull for our products and the transformatory leap in energy that we can provide. Now last quarter, I mentioned that, 4,000 milliamp hours to 5000 milliamp hours battery, smartphones in our pockets today could soon go to more than 6000 milliamp hours ports and beyond due to AI.

Here, we are just three months later I report to you that our customers are now asking us about 7000 milliamp hours for smartphone batteries. Now why is this important? This is important because the smartphone size has not increased. So the industry will need higher energy density batteries to fit this increased capacity in the same space which bodes very well for a company like Enovix which works on producing high energy density batteries. As I mentioned earlier we’ve already started shipping EX-1M. Now as the needs of our customers continue to increase we’re also launching EX-2M as fast as possible. As I mentioned before EX-2M will increase their energy density on top of EX-1M. The first sample shipments to select customers of EX-2M are scheduled in Q4 and these are key also to accelerating our time line to full-scale mass production in 2025 and beyond.

We also completed the product definition and the road map beyond EX-2M reaffirming our commitment to pushing the boundaries of innovation and delivering industry-leading solutions to our customers across a wide range of industries. With that, I’ll turn it over to Farhan for the financials.

Farhan Ahmad: Thanks, Raj. All the relevant financial information is in the quarterly report in the shareholder letter. So I’ll keep my comments short. For Q3, we delivered revenue of $4.3 million, which was above the midpoint of our guidance range. Non-GAAP EBITDA came in at a loss of $21.6 million above our guidance of a range of loss of $23 million to $29 million. And non-GAAP EPS came in at a loss of $0.17 and at the high end of our guidance range of loss of $0.17 to $0.23. We ended the quarter with roughly $200 million of cash and equivalents. And we had CapEx of about $19 million and $31 million of cash used in operations during the third quarter. Our balance sheet is strong and gives us runway well into 2026. Now, turning to the guidance. For the fourth quarter of 2024, we expect revenue in the range of $8 million to $10 million and adjusted EBITDA loss of $19 million to $25 million and non-GAAP EPS loss of $0.17 to $0.23. Now, I’ll turn back to Raj to close.

Raj Talluri: Yeah. Thank you, Farhan. As you can see, we made substantial progress in the third quarter by opening our Fab2, securing our most meaningful customer commitment to date and the next major milestone this quarter on our journey to scale will be completing the site acception testing of our high-volume line, and shipping the first samples of EX-2M to our customers. With that, we can go into questions. Operator?

Q&A Session

Operator: We will now begin the Q&A session. Please note that this call is being recorded. Before we go live to questions we are going to read the two most highly voted questions submitted by shareholders ahead of this call during the call registration. The first question is what yields are we currently seeing on the Agility line? And when can we expect an update on HVM line yields?

Raj Talluri: Yeah. Ajay, do you want to take that?

Ajay Marathe: Yeah. Sure. So as we communicated with you all the Agility Land completed the SAT during the quarter last quarter. And we brought up the agility line on the EX-1M technology node at yields a little bit higher than where we left off here closer to 80%. And the HVM line, which has identical kernels to the agility line is in SAT mode right now in Fab2 and there’s no reason to expect anything lower than what the Agility Line was able to do. So, we feel pretty good about the yields, how they’re ramping.

Raj Talluri: Yes. Thank you, Ajay.

Operator: The second question is, Understand Enovix proprietary process is patent protected where applicable, but how long of a first-mover advantage does Enovix have before you see competition, begin utilizing silicon and batteries on a larger scale once Enovix and customers prove the technology works and there is a demand market. And as your arrangement with Group 14 technologies afford Enovix exclusivity in the markets, where you utilize their SCC55 material.

Raj Talluri: Yes. Thank you for that question. Yes, as you alluded to, we have a patent protected process, with significant amount of patents and more importantly significant amount of trade secrets and industry know-how, in not only how to manufacture higher entry density batteries, but also the machines that actually we use to manufacture the batteries. As you — as I have mentioned before, we first designed the machines and the design — the machines then make the battery. So, our intellectual property is in both areas. Our unique architecture of manufacturing the batteries, allows us to use 100% active silicon. We are the first ones to use 100% active silicon batteries in this consumer market, and we’re really excited by that accomplishment that the team has made.

The competition that we have seen has been mostly people who use 5%, 10% in the best case of SIC or SIO, some pharma silicon material doped on top of graphite. If you use any more than that, what we have seen is the battery continues to swell up and the swelling cannot be controlled by traditional manufacturing process. We have a unique advantage there and that is why we feel strongly, that we have this unique value proposition. As far as our agreement on — with Group14, we — we’re working with Group14 they provide great anode material. We also work with other suppliers of anode material, that use silicon and some form of carbon. So we have multiple suppliers that we use, based on the market, best of the end products and based on the requirements of the battery.

So, thank you.

Operator: We will now go to the queue [Operator Instructions] Our first question comes from Ananda Barua with Loop Capital Markets. Please umnmute your line and ask your question.

Q – Ananda Barua: Yes. Hi, guys. Thanks a lot. Congrats on the new announcement. Thanks for taking the question. Yes, two, if I could. I guess I’ll just start with the — is really a clarification around the announcements Raj. So is the announced volume customer for December quarter 2025, is that the new customer? Is that the new relationship? Or is that the prior relationship?

Raj Talluri: Yes. This is a new customer that we announced today. There is a commitment on the agreement that we made that, once the batteries as — that we jointly agreed to, that once the past the qualification commitment to launch in next year. The other customers we work with, are also well along the way, and we hope to get more as the year goes by just proving that the value of our technology is there for multiple customers in the smartphone market.

Q – Ananda Barua: I got it. I got it. That’s very helpful. And EX-2M, can you remind us, which batteries you’ll be going to market with next year, at volume EX-1M, EX-2M if it goes, if everything goes well once you start getting samples out.

Raj Talluri: Yes. As I mentioned, EX 1M is a battery that we sample to our customers, and people like the performance of the product. People like what they’re seeing. They’re giving us some feedback on things to tweak and update to better fit, those particular smartphone models, and we are continuing to work with the customers on that. EX-2M is our next technology, which we will be sampling this year and we expect that to go to production in 2026 and we are working hard to get that accelerated also.

Q – Ananda Barua: Got it. That’s helpful. Thanks so much. Appreciate it.

Operator: Our next question comes from Colin Rusch with Oppenheimer. Please unmute your line and ask your question.

Colin Rusch: Thanks so much guys. As you look at initial yields as well as the evolvement specs from your customers and what’s happening with pricing on batteries, can you talk a little bit about how those pricing dynamics are trending and how that rolls through into your target gross margins that you’ve previously communicated?

Raj Talluri: Yes. We’ve started the pricing discussions now with our customers of these products that we’re expecting to launch next year. We’ve also closed pricing with some of the other customers in the IoT space. We are continuing to be able to command a premium for our batteries because we provide much higher energy density and that’s very valuable in premium tier smartphones, which is where we are focused on where the value will provide translates into value for the end customers, so, our customers are able to give us that price premium because they’re able to take advantage of the higher battery density. So, we feel pretty good about it. As for the gross margins, we’ve mentioned in the last quarter our long-term gross margin profile that we expect to get to as we get to these premium tier smartphones in the 50% range. And at scale, we still expect to get to that.

Colin Rusch: Okay. Fantastic. And then–

Raj Talluri: Colin, I think, Farhan wants to add.

Farhan Ahmad: Yes, I just wanted to make sure that you got that its cash gross margin of 50% plus not just gross margin. And we — I mean like Rob said, we expect that like we can get there. And already in the market what you see very clearly is that the batteries which are higher-energy density get a premium. And so we expect to get a premium as well. This market is sensitive to energy density. And for us to achieve our long-term target, we have to get the XTM types energy density and beyond and get to scale like we said and we expect that we can get those margins once it’s scale.

Colin Rusch: Fantastic, appreciate the clarification. And then in the guidance for fourth quarter and revenue in the $8 million to $10 million, can you just break out what’s coming from Rugged and how much is coming off the Agility line and driving that revenue?

Farhan Ahmad: Yes, it’s mostly coming from Rugged. There’s a small amount that is coming from the Agility line. But at this time, we have mainly sampling and so the revenue contribution is mostly coming from Rugged.

Colin Rusch: Appreciate it.

Operator: Our next question comes from Bill Peterson with JPMorgan. Please unmute your line and ask your question.

Bill Peterson: Yes, hi. Good afternoon and thanks for taking the questions. Nice to see the additional announcements. I wanted to ask about sampling, so I guess, how many of the top eight smartphone OEMs have received the DX1 samples thus far? What’s the initial feedback then? I think you’re looking to sample six out of the top eight. Have you sample the large Korean or the large U.S. player? Are these pretty much all in China? And I guess are there other form factors or device types that you also sample in the quarter with similar technology.

Raj Talluri: Yes, the Agility line as I mentioned, we just guided up and we have sampled some customers and we’ll continue to sample more and more. There’s interest from many, many different people and it’s just that we are trying to make them as quickly as I can. I can really give you all the details of who are we sample to, it wouldn’t be fair to say that. But I can assure you there’s a lot of demand and we’re trying to make them as quickly as we can. And maybe Farhan wants to add.

Farhan Ahmad: No, I just want to say that we have sample like we said, the two customers that we have disclosed are top five OEMs in smartphones. So, they are not like some tiny company. They are companies that are very prominent in the premier tier smartphones in China and so that’s something that we can tell you.

Raj Talluri: Yes, that’s what we’re prioritizing first because that’s where we see our highest demand.

Bill Peterson: Okay. I guess on the commercial side given your expectations with the new smartphone OEM announcement plus I guess some early IoT production schedules. Can you give a sense of what kind of volumes you’re expecting broadly in 2025? I mean are these — can these be in the millions I guess in the smartphone side or how should we think about volumes?

Raj Talluri: Yes, it’s very difficult to know exactly that. I think we will get more clarity as we move along. So, as I mentioned last time, I think it’s important to understand the process of how smartphone penetration happens, right? So we give them samples. They’re going to test them then we’re going to get from them the specification of the exact battery size that they would like to use in the phone that’s going to launch in late 2025, and that will usually come beginning of 2025, that’s when they finalize what the model would be, what the size would be then we make that sell in our high-volume manufacturing line. And they’ll go through another set of series of tests within the phone model itself. And based on the performance and based on which model they are targeting and the volumes will vary based on which regions the launch and so on, at least initial ones.

And then through 2026, you’ll see them build up and go into more and more models. That’s typically how the smartphone ramp works. They start small but they keep going up.

Farhan Ahmad: Yes. And the other thing I would just add like Raj mentioned it earlier, the — we have always felt that the hardest part of the ramp is getting the first customer. Once you have the first customer, you can — your value proposition to customer changes. Before that the risk for customers is, hey, this is a battery that nobody else is using. And I — if I use it and something goes wrong then there’s a lot to lose. If on the other hand, the best battery goes in a smartphone and it launches and it’s proven then the equation changes then if you don’t use it then you’re rest falling behind. So that’s how we have approached, and it’s very encouraging to see at least one customer like has gotten over that hump and said that a, we build the batteries in their form factor and if they meet the performance that is in line with the expectation. And based on the initial samples, they feel good about engaging with us with the intention of launching a phone in 2025.

Bill Peterson: Perfect.

Farhan Ahmad: Thank you.

Operator: Our next question comes from George Gianarikas with Canaccord. Please unmute your line and ask your question.

George Gianarikas: Hi, everyone. Thank you for taking my questions. Just to maybe tack on to that the previous question to the extent you wanted to fill your revenue pipeline additionally for next year given how late we are in 2024, how long it takes to qualify and get designed in, is there still potential if customers come to you that are testing your samples to fill the 2025 revenue pipeline between now and the end of the year or wherever that deadline kind of meets? Thank you.

Raj Talluri: Yes. It’s all going to be based on how quickly the batteries that qualified in the customers’ products, right? That’s the most important thing people need to realize about this market. Batteries people take very seriously when they put it in a device. And the qualification process is very strict and takes a certain amount of time, a lot more stringent than semiconductors for example because of safety and so on. But I do believe that we do a lot of the testing in-house to make sure that what we’re giving is what people really want and are safe. So if things go well, it could be much faster. But we are planning that will be late next year. But I will tell you one thing. First ones are the hardest with any customer, because once you’re supplier that is better in their system and they’ve launched some batteries with us, the following models come much faster and much quicker. So I think that’s the most important thing.

George Gianarikas: Maybe as a follow-up to that does the same logic applied to additional IoT customers, who could fill the revenue pipeline for next year? Thank you.

Raj Talluri: In some IoT markets the testing could be a little lesser — less stringent, because for example, in smartphones customers want 800 to 1,000 cycles. So to test 800 to 1,000 cycles takes months, because you can charge and discharge and touch and dispatch 800,000 times. Some IoT markets people only want 500 cycles, because maybe the product doesn’t last that long. I’m not charged every day. There could be lessers. So, in that one example where you could launch the product sooner, because the testing cycle could be shorter. I’ll give you another example. Like in a portable device like a smartphone, people do a lot of safety test like a drop test, like thermal abuse test and so on. If it’s a larger portable electronics device, maybe that’s not as important.

So again, it all comes down to the nature of the device, the how many cycles it has to go through, how much testing the customers want to do and how the device is used. And that is what gets how quickly a product can go to production after we give them samples that qualify.

Operator: Our next question comes from Gus Richard with Northland. Please unmute your line and ask your question.

Gus Richard: Yes. Thanks for taking the question. Now that you’re getting visibility into 2025 given the mix you’re expecting, what do you think the revenue potential for that line would be given the mix you’re looking into both IoT and mobile?

Raj Talluri: I think we mentioned before, our line is capable of running at 1350 UPH and that is for large sized batteries. We mentioned roughly like nine million units at $10 is what we can get the line up to. But again I think, the gearing thing is not so much the line but the gating thing to how much revenue is the customer qualification time lines. And we take that very seriously and we spend a lot of time on making sure the batteries are safe and the customers to go through all their tests for the first time around when we are the new supplier. But once we get there, I think the revenue will be much, much quicker.

Gus Richard: Okay, got it. And then just thinking about the second line, I think you had talked about that starting production maybe at the end of next year. And I was wondering if those plans are still on track?

Raj Talluri: Yeah. The way we think about second line is this. Again as we get more and more visibility through 2025 as the customer qualifications are going for example if you’re getting into a very high-volume phone, we’ll know that. And when we know that we’ll need to quickly start investing on the second line to build that up. And if it’s a lower volume and then the next model is higher, we probably have a little bit more time. So the whole — and also we want to make sure that the second line is a much lower cost than the first line. Ajay and his team have some great ideas on how to not only cost reduce the line, but make it faster, as all those things were taken into account. And we’ll give you more color through 2025 how we are building those lines in 2026 and 2027. Anything else you want to add Ajay?

Ajay Marathe: Yeah. Just to add to what Raj just said, we are working learning from the line number one, the high-volume line where can we cost reduce this line significantly. And we already said that that was the plan and we are executing to that plan now to substantially reduce the line number two. So we don’t want to rush into ordering line two, which is exactly replicate of line one because then that would not be right. We need to cost reduce it and we have a lot of good ideas, which are actually in the works right now before we order the second line. Yeah. And many of those concepts, which will be in the line two, which cost reduces the line have been tested through proofs of concepts, the POCs that we typically build. And we’re finishing that up before we are ready to order the line two.

Operator: Our next question comes from Gabe Daoud with Cohen. You please unmute your line and ask your question.

Gabe Daoud: Hey everyone. Thanks for the time. Maybe just going back to the order, guys could you maybe talk a little bit about what exactly has to happen from here into 4Q 2025? Obviously they’re going through prolification process, but maybe some of the milestones that need to be achieved whether it’s specific targets on energy density or cycle life or cash charge capability. I know it may differ depending on specific model but curious if there’s any brackets you could put around that?

Farhan Ahmad: Yes. So the important milestones from now in the first quarter, we will get the dimensions from the customer. And based on those dimensions, we will make the samples. 2Q we will ship to them. And 3Q, we expect to get the final order. Raj is that right? So those are the milestones there for you.

Raj Talluri: Yeah, we do have clear targets on energy density and fast charge and cycle. So we do have those targets from them and we are working with them to deliver those to them.

Gabe Daoud: Okay. And then just a quick follow-up to that. So you expect to get the order in 2Q. And any kind of range on the specific models, what they do in terms of shipments a year just to try to get a sense of what the actual size of the order could look like?

Raj Talluri: Yes. I think, I answered that question. It’s hard to tell that now. We’ll know more about it. I can tell you it’s in the premium tier. That’s where we provide most value. And we’ll give you more color as we get closer.

Gabe Daoud: Okay. Thanks, guys. And then just a quick follow-up. Any comments on capital needs and maybe options to bring in additional capital in the door if you think you need it.? Thanks, guys.

Farhan Ahmad: Yes. Thanks, Gabe. So you look like we have runway until 2026 and we will continue to evaluate more capital if we need it like as I’ve mentioned in the past we may need more capital to get to profitability. And so at some point we have to raise capital. There are three avenues open for the company; the capital markets, the governments and the customers. And we are pursuing all of them to see what makes the best sense for the company and provides the most efficient path with at least a lot of possible dilution, while managing the risk for the business. So we will continue to evaluate that. And one big thing that we are very particular about is delivering on the milestones before we go and raise capital. So that’s something that is also important to the company.

Gabe Daoud: Thanks, Farhan. Thanks, guys.

Operator: Our next question comes from Derek Soderberg with Cantor. Please unmute your line and ask your question.

Derek Soderberg: Yes. Hey, guys. Thanks for taking the questions. Just regarding the Smart Glass opportunity for you guys. I’m curious how investors should think about the addressable market there maybe relative to smartphones. I don’t know if you could talk about that — the size of that market today versus what maybe you guys expect over the next 10 years or so. And then from a content standpoint Raj it sounded like these smartphone customers want a pretty sizable battery cell. But for the smart glass devices what, sort of, capacities are those devices targeting?

Raj Talluri: Yes. Great question. So first I wanted to kind of maybe add a little bit color to the requirements of the smart glass market versus the smartphone market. When you look at this AR or VR, XR as some people call it or mixed reality headsets. The requirements on the draw on the battery is actually much, much higher than smartphones at any given point of time. And the reason for that is they don’t have like standby mode like my phone is right now. These things are when they’re on they’re on fully on. And the processor is on the memory is on the display is on and your — to get that real experience the GPU is running full speed so the power draw on the battery is very high and the batteries last very short period of time.

And they’re also smaller because you got to put them inside the glasses. So it’s a market that’s very ideally suited for our kind of batteries which deliver high energy density even in small form factor. So that’s a market where we’re excited by. I’ve seen some industry reports these will be multiple tens of millions in the next few years like 20 million — 30 million units is what I saw in out years. I think this market is still being built out. I’ve seen demonstrations of the products we announced a customer, I think last quarter or the quarter before I forget that was interested in our product and then they are making custom sells for them. They look amazing. I think there’s a lot of progress has been made in waveguide optics. So the experience you get is really, really good.

And I expect a lot more customers to start making those products, particularly with Gen AI you can use speech to navigate now and that’s looking really, really good. And that also demands a lot of battle life. So in that sense I think there’ll be smaller batteries when they look like glasses there could be bigger batteries when they look like AR/VR headset. If there are form factors where the batteries on the side and you plug it in like a Vision Pro those could be bigger batteries if the batteries inside the head they may be slightly different batteries. So I expect there to be multiple form factors of batteries in those kind of devices. But all of them have this need for high energy density in a small form factor so something that suits well for us.

So it’s a market I’m quite possibly quite excited by. It may take a little bit longer to become a really large market but I think it’s a good market for us. And the ASP is a market where we can get a very nice ESP premium. And I think we are seeing that in our first batteries that we got it.

Derek Soderberg: Got it. And then as my follow-up just regarding the announcement around the IoT customer. Some of the wording that’s been used is mass production. I’m curious if you can sort of quantify what that means by mass production? Is it sort of one million battery units annually something like that? Is there maybe something we should go off of? And then also I’m curious if you can speak to which kind of device that IoT device is? Thanks.

Raj Talluri : Yes. Unfortunately, we are not at liberty to speak wise. I know this is a question I get often, which device, which customer. And I promise you, I’ll work hard on trying to get names from the customers, so if we can mention them. Like you got to understand, when you’re an early-stage company and when you get customer samples into these products, the customers are a little hesitant about really letting us speak to them, speak exactly what they are. But I would say that, we are excited that it is something that will be in the market that you should be able to buy some of that. I know everyone is looking forward to that. But that’s probably all we can say at this point in terms of who the customer is and how big it is.

Operator: Our next question comes from Sean Milligan with Janney. Please unmute your line and ask your question.

Sean Milligan : Hey, thanks for taking the question guys. Have been from another call, so sorry if you already answered this. But can you kind of go over the remaining CapEx to deliver the first auto line? And kind of maybe how that splits up into in terms of like what’s the fourth quarter and what’s the first half next year?

Farhan Ahmad : Yes. So, most of the CapEx will be in this year. So, we are funding for the line ourselves, and we expect that the CapEx will be somewhere about $80 million to $90 million this year. And then for next year we are expecting — we are not expecting a lot for this line. It should mostly be done this year maybe $5 million or so might carry on to next year. And then next year the CapEx should be fairly small until we get to the Gen 2 line. And when we are ready to order that then we may have an uptick. But overall….

Sean Milligan : But that is most of that…

Farhan Ahmad : Yes. Sorry, go ahead.

Sean Milligan : How much of that is left to be spent of the $80 million to $90 million?

Farhan Ahmad : No, that’s like next year is only like about $5 million. So you can look at the CapEx for this year and we are expecting like about $80 million to $90 million for the year.

Sean Milligan : Okay. And then as you start to order additional lines, how should we think about like the payment splits. How much is on order. How should we think about that cadence?

Ajay Marathe : No. The next line is not on order. Again, like I said, we have been doing proofs of concepts of how to do this second line a lot more economical, and that’s the only thing that we have spent on is POC is actually proof of concepts. And the way to think about Line 2 is the target we are expecting where Line 2 high-volume line 2 will fall is roughly 60% of the Line 1 roughly.

Raj Talluri : Some in the beginning probably earlier on that.

Ajay Marathe : Yes. So what we do is actually we’ll manage the cash flow in such a way that the long lead time items, we will order probably earlier on in the year 2025. And so the proof of concepts will pan out through the year. And as we get closer to the end of the year call it Q3, we would place orders for the remaining parts of the line. That’s how typically — and again, this is all going to be driven by how the demand shapes up and the profile of the demand.

Sean Milligan : Okay. That’s helpful. Thank you.

Operator: Our last question comes from Mark Shooter with William Blair. Please unmute your line and ask your question.

Mark Shooter : Hi. Thanks team. Congrats again on the second customer. We got more details in that engagement. So should we read this as more concrete? Or is this customer more eager than the other? Is there an opportunity here to try to pick these two against each other in a race for qualification?

Raj Talluri : I mean, every customer is a little bit different Mark. And I think as you know I have relationships with all of them. Every estimate is a little bit different, every customer is in a little bit different stage. I think that’s the way you should read it. Our goal of course is to be a sizable player in the smartphone market. So it’s just a question of who does first versus next. So that’s probably the best way to describe it.

Farhan Ahmad : Yes. And I would just add to it. Like earlier also Raj mentioned and I mentioned that. The first one is hardest and the equation changes. Once you get one, it goes from push to pull. The first one is like you have to convince them and you have to cross all the hurdles. But once you get past that, from the next ones, it becomes a lot easier.

Raj Talluri: Yes. And my experience, both at Micron, PI and Qualcomm is we launched the first one, then pretty much most of the market tends to use the technology once it’s differentiated and they see the value. So that’s just the way the smartphone market works.

Mark Shooter: Got it. Thank you both. Silicon has a slightly lower reduction potential and so a lower voltage profile. And I know smartphones are a high-power device with high voltage. I’m wondering if customers have brought this up? Is there any pushback in terms of the voltage profile? Or are they open to modifying the power management and the electronics? And any conversation like that with your customers?

Raj Talluri: Yeah. Yeah. We’ve had a lot of conversations with them, and it’s an area where we work very closely with the other components in the ecosystem. For example, Qualcomm makes processors and PMICs, and we work with the customer and Qualcomm. So I think people have realized now that silicon is going to be in the smartphone market. So the PMICs have already made the adjustments to actually be able to get that last bit of energy from silicon, so which is what we’ve been doing through last year, and we are pretty happy that, that should not be a problem anymore.

Mark Shooter: Got it. Thanks for the color.

Operator: We have one final question from Tony Stoss with Craig-Hallum. Please unmute your line and ask your question.

Tony Stoss: Thanks, Raj. I wanted to follow up on your comment about the 7,000 milli amp batteries. I’m curious kind of when you think you could be producing something to that density? And also, what would the ASP be like on that? Are we kind of stuck in that $10 per battery ASP? Or would the higher densities markedly move up from that $10 number?

Raj Talluri: Yeah. I’ll take the comment on when, and I’ll let Farhan talk about the ASPs. He’s pretty passionate about that. But yeah, this is for launching next year. We are actually talking about the next year 7,000 milliamp batteries. And I actually think it’s going to keep going up if we can produce higher and higher energy, higher capacity batteries in the same footprint, I think there is still a lot more demand for energy capacity in the smartphones because the applications we see now are just drawing more and more power from the battery.

Farhan Ahmad: Yeah. So I would say that if you look at 5 milliamp to 5.5 milliamp cell, those batteries like is what we said like when we said that 11.5 million units and $150 million revenue, so about $13 in ASP would get you to our target revenue. And if you look not our silicon batteries, but what’s in the graphite silicon space, those batteries are in the $10 to $12 kind of a range, the higher performing tiers based on the market analysis. And so getting like a little bit of a premium to that is what we are expecting. And so — and by the way, the commodity batteries are like 7, 8 kind of range. So already higher energy density batteries getting a premium is already validated and we — because we will have a significant energy density advantage.

So what we were basing is not that trough. Now switching to 7,000, it’s a higher energy density and higher amount of material goes in. So it’s fair to think that pricing should be higher. Exactly how much remains to be seen. It’s probably too early to say because at that point, to the best of my knowledge, there’s nobody else who’s providing those batteries. So once we get there, we may have more ability to price and get a better price, but it will definitely be higher than the — what we are charging for 5 to 5.5 amp cells today.

Tony Stoss: Great. Thanks, Farhan.

Operator: There are no further questions at this time. With that I’d like to turn the call over to Dr. Raj Talluri for closing remarks.

Raj Talluri: Yeah. Great quarter, and thank you all for patiently listening to us. And we’ll talk to you next quarter. Thank you.