Enovix Corporation (NASDAQ:ENVX) Q4 2023 Earnings Call Transcript

Enovix Corporation (NASDAQ:ENVX) Q4 2023 Earnings Call Transcript February 20, 2024

Enovix Corporation misses on earnings expectations. Reported EPS is $-0.28 EPS, expectations were $-0.26. 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 Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] 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 fourth quarter and full year 2023 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 fourth 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 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, February 20, 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 the non-GAAP financial measures in our shareholder letter, which is posted on the Investor Relations page of our website. I will now turn the call over to Raj to begin. Raj?

Raj Talluri: Thank you, Charlie, and thanks to everyone for joining us today. I’m going to kick off with a few high-level remarks, and then we’re actually going to show you some new video of our Fab-2, featuring Ajay. Ajay is actually now in Malaysia, and he is going to show you some update on manufacturing there. After that, Farhan will cover some financials and the outlook before closing, and then look forward to your questions. Okay. We had a strong finish to 2023. And now, we have laid the groundwork on how to scale up in 2024. First, we reported record revenue of $7.4 million in Q4, well above our expectations. Secondly, we are in the process of completing our factory acceptance testing, and a good amount of our Gen2 equipment is now in Fab-2 in Malaysia, ready to produce the first batteries in April.

It’s very exciting to see that progress. Third, we made significant progress with our customers, both in smartphones and in EVs. Last quarter, we hosted the executive management teams from two of the top smartphone OEMs from China at our Fremont headquarters and very good discussions on how to collaborate on making batteries for their phones. Additionally, we entered into a development agreement with a leading automaker to validate the advantages of the Enovix cell architecture for an EV battery. Now, this significantly increases the addressable market for Enovix technology, and we have a strong pipeline of additional opportunities in this space. And last, we have gained significant confidence in reaching the 1,000 cycles on a smartphone-class battery, and we look forward to sampling it next quarter.

As I look back at our accomplishments last year, which were substantial, we began the year as a new management team operating at an expensive, low-yielding California factory with a product portfolio that, frankly, was not very well aligned to the key large customers and the end markets that we wanted to go after. Now, in contrast to that, we exited this year with a manufacturing base in Malaysia, ready to produce industry-leading batteries, a seasoned team in Korea that has shipped batteries over 20 years that we acquired, and close alignment with our customers that led us to gain a really in-depth knowledge and detailed product specifications that is helping us build category-leading products targeted at the largest portion of the market, which is the smartphones.

Now, we are engaged effectively with the world’s largest smartphone OEMs at various levels. These companies are eager to harness our architecture to keep up with the demand for more and more power hungry applications by this AI megatrend. I’ll show some data and touch upon this in a minute. But first, let’s take a look at our goals. What we need to do this year is to position ourselves for the large inflection in revenue with smartphone launches is very simple. First, we need to demonstrate high- volume manufacturing on our Gen2 equipment in our Fab-2 in Malaysia. Now, I know seeing is believing. So we’re going to show you a video of the Fab-2, featuring Ajay, and that we just made in the last couple of days that speaks to our progress. And of course, Ajay will join us for Q&A from Malaysia.

I think it’s pretty early for him there, but he’s online there standing by. So, operator, go ahead and let’s roll the video. [Video Presentation] That was awesome. As you can see, our confidence is very high around Fab-2. And we accomplished a great deal in a very short amount of time, and I’m really proud of everything the team has done. In addition to proving out manufacturing, this year, we will need to deliver samples of batteries around — tailored to the smartphone specification for fast charge and very high cycle life. I’m happy to report that our global R&D teams have made significant progress in the recent months, and we’re looking forward to sending our first samples of what we call EX-1M for mobile next quarter. By the end of the year, we’ll have an enhanced version of this technology called EX-2M, which will also be ready to sample.

Now, these two will be truly revolutionary products, and they will be the first smartphone batteries in the world that we are aware of that will have 100% active silicon anode, while also delivering 1,000 full charge and discharge cycles, along with the ability to really fast charge and increased energy density over the batteries that are shipping in the market today. The need for high energy density is critically important to smartphone industry. It’s a huge $10 billion-plus addressable market. Now, to give you a greater appreciation for why these smartphones need a higher energy density battery, last quarter, we asked Tirias Research — it’s a team I’m familiar with from my days at Qualcomm — to analyze the impact of the looming AI applications on smartphones.

Now, the results of the study are actually staggering. I want to show this to you in a slide here. What you see here is on the left side, the global GenAI output forecast of the amount of video and image frames in billions. You can see in ’23, 15 billion; 24, 59 billion; to 28, we expect it to be a staggering 2,500 billion of frames generated. And these are going to be on mostly battery-operated devices, on phones, PCs, laptops and so on. And what you see in the middle is actually very interesting data. What we did here is actually profile how much battery consumption in terms of how much capacity is used per hour in milliamp hours for different applications. On the left side, you see non-AI-based conventional applications. On the right side, you see the AI-based applications, so things like 4K video.

When you go to 8K video, a lot of upsampling is done using AI applications. Things like YouTube that you’re all familiar with on the left side, but on the right side, things like ChatGPT or Llama 2 chatbots. It’s staggering that ChatGPT actually consumes more battery than running YouTube on your phone. It’s pretty amazing. And this is just the beginning. And this is very important because this is what we are hearing from all our customers that they just need a much higher energy density battery. In fact, I just saw a couple of new phones launched by some of our — the Chinese OEMs. And actually, the flyers for the phone is actually all about the AI applications that run. You can also see something similar for Samsung Galaxy advertisements. So the trends are clear.

With our product roadmap and our customer relations, we are well positioned to enable the smartphone industry to really usher a new era of mobile computing. In addition to that, we are now thrilled to have our first deal done in EVs. And with that, I’m going to turn over to Farhan, who will provide a recap of our financials and then the outlook. Farhan?

Farhan Ahmad: Thanks, Raj. So all the relevant financials are in our quarterly reports, I won’t go into the details, but I’ll just do a quick recap of the results and the outlook. For Q4, we delivered revenue of $7.4 million, well ahead of our expectation. We ended the quarter with about $307 million of cash and equivalents. Q4 CapEx was about $29 million. About $27 million was used in operation, and about $10 million of cash was used in acquisition of Routejade, net of the cash that we acquired as part of Routejade. As a reminder, we are accelerating the depreciation of Fab-1 equipment post our decision to stop manufacturing in Fab-1, as we decided to convert it for product development purposes. Our Q4 results included $18.5 million of accelerated depreciation.

$6.2 million of this was in COGS. $12.2 million of this was in R&D. And $0.1 million was in SG&A. In Q1, we expect a similar amount of accelerated depreciation, but most of it will be in R&D expenses. Now, turning to our guidance, for the first quarter of ’24, we are expecting revenue in the range of $3.5 million to $4.5 million. Now, there is some impact, a meaningful impact to our Q1 guidance because of the war in Middle East, which is causing a longer time for the ships to go from Korea to Europe. We expect for Q1 an adjusted EBITDA loss of $24 million to $31 million and expect non-GAAP EPS between $0.29 loss and $0.35 loss. I would like to note that our non-GAAP EPS loss does include the impact of the accelerated depreciation that I talked, which is about $0.10.

And with that, I’ll now turn to Raj.

Raj Talluri: Okay. Thank you, Farhan. In closing, I’m super excited by all the work we’ve done in ’23, and we set the framework for our business to scale in the years forward. And we have significant proof points to deliver in ’24. And I’m super excited by — as you can tell, by all the stuff we have going on in our manufacturing fabs and executing to these key milestones. So with that, I’ll open up for questions.

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Q&A Session

Operator: We will now begin the Q&A session. Please note that this call is being recorded. Before we go to live 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, will management address the current and future status of government contracts for batteries? Is there still a near-term 8-digit revenue opportunity? Or has management totally abandoned this?

Raj Talluri: Yes. So, very good question. As we did last quarter, we continued to deliver batteries to the Army contract that we have, which — these are BrakeFlow-enabled safe batteries that the Army will use in vests and so on. And we expect to continue to do that through this year. As we do that, these batteries are put into different kind of tests by the Army and a lot of qualification process and so on. Once that’s done, we do expect that they will end up in higher volume production, and we will have a good business opportunity there. Also, with the acquisition of this company, Routejade, they have very good batteries that are actually being sold to the Korean military, and we see opportunities to actually market those batteries to the U.S. Army also. So, yes, we do expect to continue to do that.

Operator: The second question is, what is happening with the former production space in Fab-1 now that the Gen1 line has been shut down?

Raj Talluri: Yes. Thank you for that question. So Fab-1, so we are not doing high- volume manufacturing Fab-1, but we are using it right now to make samples to give — like EX-1M and EX-2M and so on, to give it to our smartphone customers to sample — to validate the technology before our Fab-2 is ready. As I mentioned, we expect to produce cells from Fab-2 in Malaysia in April time frame. So we are actually using the current fab in Fremont for that. Also with this new EV opportunity, we have — which we expected that we will need a clean room and a dry room and a facility to make those cells here, which we’re going to do here in Fremont. So it continues to be a good R&D facility for us.

Operator: [Operator Instructions] Our next question comes from Colin Rusch with Oppenheimer. Please unmute your audio and ask your question

Colin Rusch: Thanks so much, guys. As you’ve gotten deeper into the customer conversations and testing on the smartphone side, can you talk about the number of SKUs you’re expecting to have to make in the next 18 months to 24 months to serve those customers?

Raj Talluri: Yes. Thank you for that question, Colin. So what’s happening right now, I’ll give you a little bit of color, taking that opportunity of that question. So what’s happening right now is that we’ve got very detailed specifications from multiple customers. These are 20, 30 page documents on how the battery is tested, different temperatures, different size requirements, fast charge requirements, safety requirements and so on, from multiple smartphone OEMs. So we are now building samples and sampling — and we will be sampling them soon to these customers with the requirements that they’ve given. And what we do is, we test the batteries to those requirements so that when we give them the cells, we are pretty confident that they will pass.

It’s something that I’ve always done in my past is to make sure we understand the customers’ testing requirements, test them and then give it to them. And then, what we expect to happen is, after they pass the technology qualification, we expect to get different dimensions and capacities, so 5,000 amperes or 6,000 amperes, based on what smartphone it’s going into. And each customer is a slightly different size. Like if it’s going to flip phone, it’s one size. If it’s going to candy bar phone, it’s going to be slightly different size. And then, we will make those particular form factor batteries from our Malaysia fab, get them those samples, they go through the rest of the qualification, and then you get to high-volume production next year. It’s hard to tell exactly how many different shapes we’ll need to do because we are sampling to multiple customers.

And based on how quickly those evaluations on their side go, it’ll drive that. I’d say probably in the single digits is what I think. It shouldn’t be too many because I do think that a lot of customers will try to use a similar kind of cell because the phone form factor is kind of very similar between customers.

Colin Rusch: That’s super helpful. And then, given the opportunity in mobility, there’s certainly a lot going on in terms of vehicle design, pack design, and given the safety profile that you guys have and the potential for fast drive, can you talk a little bit about your expected pack size and how that might look for some of these vehicles as they look to optimize both space and the energy density in the vehicles? Are we talking about 60 kilowatt hours per vehicle? Or are we talking something more like 80 kilowatt hours or 90 kilowatt hours?

Raj Talluri: Yes. Good question, Colin. So what — just to be clear, what we are doing now is working with — what we talked about is one OEM that’s interested and there’s others we are talking to on proving out the value proposition, right, proving out that we can control swelling, proving out that we can charge fast. Exactly what kind of cells they would be, how many they would be, what kind of EVs they would be? It’s too early to tell. We will continue to update you on milestones as we get there. At this point, we’re just proving out the technology.

Farhan Ahmad: Yes. The only thing I would add is that they will have our architecture, our unique architecture. What’s common is that all of these cells that we are working with automakers are with our unique architecture and will have fast charge as the unique differentiator.

Colin Rusch: Thanks so much, guys.

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

Bill Peterson: Yes, thanks for taking the question. Maybe just to piggyback off that last question, it sounds like you said the key focus area will be fast charging. But can you just shed some light on some of the key milestones and timelines for this? What are the contribution and commitments from Enovix in terms of sampling testing? I guess, is there further appetite for Enovix, as well as resources as well to actually ink any additional agreements? Or should we just think of this single agreement for now?

Raj Talluri: Yes. We hope to get samples out this year. That’s our goal. We are working with other OEMs, too. But I can’t really comment much further than that. It’s kind of early stage, and we’ll keep you updated as we make progress.

Bill Peterson: Okay. Second question. So when we think about EX-1, EX-1M and EX-2, I guess, what are the key changes you’re making on the material side? Are the formulations and process — manufacturing process fixed for EX-1M and EX-2? And I guess, if not, I guess, the formulations for EX-2, if they haven’t been fixed, what are the issues or performance gaps you’re looking to address before locking in the materials choices and process? Just trying to get a sense for how mature these are at this stage.

Raj Talluri: Yes. Good question. So basically, if I look at EX-1M, it’s built on top of what we have done in EX-1, which is adapt that technology to meet the requirements of the smartphone market. And when I say the requirements for smartphone market, there is a few key requirements. One is clearly safety. People really, really care about safety in phones. As you know, we have spent a lot of time on that, and that’s one area we address. The second area is cycle life. Our previous EX-1 batteries ran up to 500 cycles. Our target in EX-1M is 1,000 cycles, which is basically doubling that. And that’s a significant increase. And the third one is the ability to charge really, really fast. So if you think about a smartphone, when you have a smartphone, what a lot of customers do is, particularly with these AI applications, a whole day battery life is getting harder and harder.

So when the battery life goes down, people like to be able to charge and get to 15%, 20%, 30% charge so they can go through the rest of the day. So that is a very important care-about. To do that safely and to do that in a way that it doesn’t hurt the battery longer term is a very key care-about, and that’s one thing that we feel good about now. And the third one is increasing energy density. So we have now looked at all the different phones out shipping in the market, and we believe that we can provide an advantage compared to that, while keeping fast charge, while keeping — increasing the cycle life and also different temperatures. That’s the other thing you need to worry about in these markets is that what temperature you operate the battery at, what top of the cycle charge looks like and so on.

So those are all the things that EX-1M addresses. And again, these are slightly different based on each customer. Some customers want more cycle life and maybe a little less ED. Some customers want more ED and little less cycle life. So we are now in the middle of basically a target specification, which we have finalized now on EX-1M. And those are the batteries that we expect to sample from our Malaysia factory in April. What EX-2M does on top of that is actually continue to increase energy density. And you’ve seen us put out a slide before on where we expect to get there with that, while keeping the increases in cycle life, while keeping the increase in fast charge, while keeping all the safety parameters. Now, to be able to accomplish that, we have finalized a set of materials for EX-1M, cathodes, anodes, electrolytes, separators and so on.

We have shortlisted what they will be for EX-2M. And in short order, we’ll decide which ones. Some very promising results. So we’re pretty optimistic of being able to get there.

Bill Peterson: Thanks Raj.

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

George Gianarikas: Hi, everyone. Thanks so much for taking my question. I’d like to ask about your material supply chain. Earlier in the quarter, you announced an agreement with Group14. And I’m curious, first of all, how diversified your silicon supply chain is, and how extensive are the choices by handset vendors or device vendors into making that decision. Or is that purely a decision that Enovix will make in terms of which silicon they put — you put into your batteries? Thank you.

Raj Talluri: Yes. So if you look at producing a battery that increases energy density but also meets all these other requirements, and I can’t emphasize enough of that because ultimately, a battery has to meet the requirements that are required by the end product, which our customers make, cycle life, fast charge, swelling at the end of life and so on. It’s a function of not just the anode, but it’s a function of the silicon anode, a function of the cathode, and more importantly, the electrolyte because in a battery, the electrolyte, when it interfaces the cathode, has certain properties, a certain way, it needs to behave. When it interfaces the anode, the other side, it has to behave in a certain way, all at the same time being able to pass lithium ions.

And the separators play a big role as to how thick is a separator and how do they handle the stack pressure and so on. So the recipe of choosing the right cathodes, right anodes, right separators, and putting them together is really the intellectual property that we have at Enovix and experience we have here. So we — like I said, there’s multiple choices on anodes, multiple choices on cathodes, multiple choices on electrolytes, and that is the intellectual property that we have. We are constantly looking for new materials. We were very excited by the results we got from the Group14 material, and that team has been super supportive. We’re also talking to other people. Supply diversity is also important. And ultimately, what we’re going to do is to find the right recipe for the right end applications based on the customer feedback.

So that’s kind of the best way to answer that question.

George Gianarikas: Thank you. And just as a follow-up, I’d like to ask about your timelines here on the FAT and SAT testing. Your confidence level in terms of getting out samples for the Agility Line in the second quarter — I know that on a recent podcast, you discussed you saw a little bit of a push-out in some of the timelines here. Can you just kind of reiterate the — and give us confidence that you can get those samples out in the second quarter? Thank you.

Raj Talluri: Yes. I’ll answer a little bit at high level, and Ajay, feel free to add. I know he’s in Malaysia. I’m not sure how good the line is. But basically, we feel very confident that we’re going to get samples out in April time frame to our customers. And we did announce some delays on FAT of one of the zones. And again, you got to remember, these are very, very complicated things we are doing. These are tens of machines, all working in tandem together. One thing both Ajay and myself and the leadership team we’ve done is we’re not going to cut corners, right? We’re not going to cut corners in the requirements of FAT, in the requirements of SST, how much material we need to run, what yield they need to come up with before we take acceptance of any of these machines for our customers from our suppliers.

So, that has caused some amount of back and forth with our suppliers, but we feel good now that it’s within reach, and we feel good about the machines we have received. We do expect all of them to work together. And some of them have been shipped. They’re in Malaysia. Some are in the way of shipping, but we’re holding the date for getting the samples to customers, although some of the zones have pushed a little bit.

Ajay Marathe: Yes. Just to add to that, yes, feeling fairly — I don’t know if you guys can hear me okay or not, but I’m here calling in from Fab-2. Feeling pretty confident about how the machines are behaving. And I think we shared some of the data as well, early data on FAT during — in the podcast. So yes, feeling confident that Q2, we’ll definitely get samples out from the Agility Line here in Malaysia.

Operator: Our next question comes from Jed Dorsheimer with William Blair. Please unmute your audio and ask your question.

Jed Dorsheimer: Hi. Thanks for taking my question here, guys. Raj, you’ve talked about some of the performance trade-offs between EX-1, EX-1M and EX-2. I was wondering, how should we think about the value creation in terms of some of those trade-offs. And what I’m really trying to get to is ASP differences between the different products. And then I have a follow-up.

Raj Talluri: Yes. Jed, it’s really based on the end markets. I think our view is that when you go into things like smartphones, whether you’re going to laptops, you’ve got to get to 800 cycles, 1,000 cycles, in that range. You think about it, if you have a phone, you’re going to charge it every day, so you’re looking at 350 charges, discharge cycles a year. Let’s say, you keep the phone for 2.5 to three years, you’re quickly at the 1,000 range, right? So you pretty much have to be able to do that. If you look at a wearable or maybe some of the IoT devices, you might keep it for lesser number of years. Maybe you don’t charge it every day. So you can go get away with less number of cycles, right? When we decided to go after smartphones as a big market and then laptops, 1,000 cycles — 800 cycles to 1,000 cycles became a must, and we aimed at 1,000 as a target.

If some customers want to take 800-cycle device, that’s good. We can do that, but we set the goal aggressively. Now, the ASP is going to depend upon what they value most, right? Ultimately, there is must-meet requirements, which is fast charge, which is cycle life, which is not swell at high temperatures when you store the battery, safety and so on. Once you meet those, the amount of ED we provide on top of that is what’s going to change the ASP premium that we command. In some other markets, maybe cycle life is not that important. We can index more on ED, and then we can get a premium for that. So it really depends on the end market. Some are must-have requirements, and some are requirements that once you do them, you can get more premium for higher ED.