Enovix Corp (ENVX) 2022 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Enovix Corporation Fourth Quarter 2022 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, Charles Anderson, Senior Vice President of Investor Relations. Please go ahead, sir.

Hello, everyone, and welcome to Novus Corporation's Fourth Quarter 2020 Financial Results Conference Call. With us today are President and Chief Executive Officer, Raj Talluri; and Chief Financial Officer, Steffen Pietzke. We will also be joined today by our Chief Operating Officer, Ajay Marathe, and our Chief Commercial Officer, Ralph Schmitt, for the Q&A portion of our call. Raj and Steffen will review the operating and financial highlights, and then we'll take 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 2022 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 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 and our filings with the Securities and Exchange Commission. All our statements are made as of today, February 22nd, 2023, 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 prepared -- are not prepared in accordance with Generally Accepted Accounting Principles. You can find the 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 will now turn the call over to Raj to begin. Raj?

Good afternoon. Thank you, Charlie, and thank you all for joining us today. I'm really pleased to report a very strong fourth quarter for Enovix Corporation. We accomplished a number of things in this quarter. We significantly improved our yield of the batteries that we are producing. We made record progress of our customers progressing through our funnel. We explained last time the way we work with our customers is to get them samples of our batteries, which then they test and then they put them in products that they're actually going to launch and move them along the productization cycle. And through that funnel, we have got a lot of new customers and a lot of progress that we've made to date, and we'll talk more about that.

And we -- just over $1 million in revenue ahead of the consensus for this quarter. Now we ended the year with over $322 million in cash. And more importantly, our Fab-1, which is our Fab-in Fremont, is working, and we are focused on rapidly increasing its output now. The trajectory I see for Enovix is incredibly promising in '23 and beyond.

Now before Steffen talks about financials, I wanted to spend a little bit of time talking to all of you about me and my background, why I joined Enovix and what are the near-term actions that I'm taking to position the company for success. For nearly 30 years, I've been fortunate to have worked and led teams in some of the best semiconductor companies in the world, Texas Instruments, Qualcomm, Micron, and I worked on products that actually revolutionized the mobile device experience. And these mobile devices are devices from -- consumer electronic devices like digital cameras, MP3 players, DVD players, smartphones, tablets and so on. The products I worked on included digital camera chipsets, MP3 player chipsets, the OMAP application processor, which is one of the very successful application processors in the industry at Texas Instruments, that actually transformed our phones from just calling devices to true multimedia devices.

And from thereon I joined Qualcomm, where I was fortunate to lead the team that did the Snapdragon application processor, which actually powers majority of the Android cellphones today, and it really ushered the era of the modern smartphone.

More recently, for about the last 5 years or so before I joined Enovix, I was at Micron, and I was leading the mobile division. It's a division that -- actually one of the larger divisions at Micron and $7 billion of revenue in 2022, with over $2 billion of operating profit for that fiscal year.

Now having been in all these different companies, I understand what it takes to launch products at scale, the launch products at mobile devices to launch them at very high volume. And it has given me a unique insight to both to the customers, the care-abouts of the customers, the care-abouts of end users when they use these products.

Now one important insight it gave me is actually the importance of the battery technology in portable devices. Now what became obvious to me, but may not be obvious to all the average person who actually buy these products, is that the performance of these products, whether you bought a digital camera or whether you bought a smartphone or a laptop, the performance is actually throttled because of the constraints of the battery. This is something that's not so obvious to everybody.

For example, if you take a smartphone and you run things like an Android bench and so on, you get great performance numbers. But when you get those performance numbers, the CPU, the GPU, the camera, the memory, they're all running full speed to give you that benchmark number. But when you actually use the phone, the processor and the memories are not running at that speed, because if they did, they would consume the battery really, really fast. So in other words, end users are not realizing the full potential of the devices that they bought because the battery is limiting the performance. So the #1 problem I believe to be solved now in the consumer electronic devices, is the portable battery.

Now when this opportunity arose for me to actually lead this team, I did a lot of due diligence in different battery companies out there that could actually help solve these problems, so the users can get great end products that they paid for, and I felt Enovix is perfectly positioned to solve this problem. And that is the reason I'm here.

Now I've been here for about a month. I have been unbelievably impressed by the company and the talent and the resources here. It's really groundbreaking technology. It's highly differentiated across many, many metrics in the battery. These are metrics like performance, energy density, capacity, thermal performance, longevity of the battery, how fast it charges, how safe is the battery.

Now what I also found is the technology in this company that have been done by tremendous number of people working for over 16 years in this space, we have significant technology in our laboratory this year. That has a lot of headroom to even increase this performance metrics beyond, way beyond what we are actually now able to sample. So I see here the foundation for a high-growth, highly profitable business with differentiated products, that I can spend the next part of my career scaling to new heights.

Now as you get to know me better, you'll actually see that I always start with the customer first. When I talk about the customer I talk about the customers who buy our products and also our customers' customers who actually enjoy these products. And I think about the user experience, those customers are having with these products. And then I work backwards.

What does that mean? I try to imagine how is a wearable device used? How is the smartphone being used? What's limiting the performance of smartphone? What's limiting the performance of laptop? What's limiting car from charging to a full battery capacity very quickly? Then it gives me clarity on what products we should be working on for those things to happen. And then I work with my team to build the right products to send it to our customers, so the end users can benefit from all these technology innovations that we make.

Now we are undergoing a transformation at Enovix. We are an R&D-focused company so far. Tremendous amount of R&D has gone in over the past many years to actually make these fantastic batteries that we are sampling -- now we need to transform this company into a customer-focused organization that focuses on morphing and tailoring this great technology that we have into high-volume production very quickly and very profitably.

Now thankfully, that is not the hard part of the job. A lot of us that have joined Enovix here know how to ramp products quickly to scale. The core technology development is behind us, and we really owe the founders of Enovix who have actually worked tirelessly for a long time, a great debt of gratitude for getting us there.

Now I do recognize that high-volume production is an area that we have most to prove. We have not ramped as fast as much as we would have liked to by now. But my commitment, my personal commitment to investors is I will take you through the journey, and I'll be transparent about our progress on unit production important milestones, things like yields and also what we're doing to derisk our Gen2 line, which actually is going to produce high-volume batteries.

Scaling is hard. I've done this many times for my carrier over the last 30 years in large companies with very, very complex products. It won't be perfect. It won't be like exactly how we want it, but we know how to do it, and we'll be clear about where we are and how we are doing it and where we are going.

I can tell you this, what I see today is unbelievably promising. Our new Chief Operating Officer, Ajay Marathe, he's got 38 years in the industry from some of the top companies. And he was most recently the COO of Lumileds, where their team has pulled off a tremendous job to make a huge amount of improvements in production. And here, his team has already made solid progress just in the short time that he's been here, and we expect to make very strong gains quarter-on-quarter throughout this year.

Now it's clear to me that we know how to make batteries. I see the factories right here, I see the batteries coming off the line. We just need to do it faster. And with Gen2 line, we will make them faster and we will make them in high volume.

Now I want to close with a comment about funding and our capacity expansion. Now we've had like numerous conversations with our customers. The battery technology is so compelling. The energy density we are able to provide and the quality we be able to provide is so compelling, that we are now finding many of our customers and also strategics and the government entities where we're actually trying to -- that we are working with, to build our Gen2 line are interested in infusing capital into the company to help us build the capacity.

Now this is a common practice in the battery industry and given the advanced stage of our technology, a lot of our partners see this as a fairly low risk for them to help us scale. So we plan to explore all these options and find out the most advantageous one to our shareholders.

Now I want to turn the call over to Steffen, who will give you some feel on the guidance. And then we'll take any questions you have.

Thank you, Raj. Our financials are available in our shareholder letter, which includes like a GAAP to non-GAAP reconciliation. So I will focus my commentaries on some high-level guidance comments. For '23, we are going to guide units produced as opposed to revenue guidance. Our annual revenue are highly influenced by the timing of our episodic service revenue. And we don't believe that it's necessarily a strong read on a progress on a scale up. As an example, for Q1, we don't expect to recognize service revenue.

For '23 full year, we expect to produce 180,000 revenue quality units in Fab-1. And for Q1, we expect to produce 9,000 units. Our plan is to at least double that production each quarter sequentially for the full year.

For CapEx, for 2023, we expect to spend 120 and 3 components of CapEx are first Gen2 line facilitization for Fab-2 in Southeast Asia and we are going to bring in an Agility Line, which is an automated R&D line to Fremont. That line will help us faster qualifying customers and focus on custom cell development.

Additionally, for '23, we expect to spend $120 million of cash operationally. While we keep the operational spend OpEx flat, we will shift more cost into cost of revenue as we support the increased production volume in Fab-1. And in the later part of the year, we will staff Fab-2 in Asia.

Now for everyone that runs financial models, I would like to give a couple of pointers for the models. One is we are anticipating here to increase cash and noncash expenses that we recognized in cost of goods sold versus operating expenses, primarily as we shift the resources from R&D into manufacturing. The shift in higher cost of revenue will take shape in Q1, and you can see here and expect around $4 million of sequential increase in cost of revenue, whereas only a $2 million decrease in operating expenses, both on a non-GAAP basis.

Closing out, we have made really good progress on the manufacturing side. We have a strong balance sheet and our experienced team is really committed to build shareholder value.

With that, operator, we can start the Q&A session.

(Operator Instructions) Our first question comes from Ananda Baruah.

Raj, good to hear from you and thanks for the remarks. Yes, I guess quick 2 if I could, just piggybacking off of your Gen2 remarks. Can you remind us when we can first expect Gen2 revenue -- Gen2 volume and what we might expect, at least the first couple of few quarters of that ramp to look like? And then I have a quick follow-up. Appreciate it.

Yes, absolutely. The question is about Gen2. Thank you for the question. We are now in the process of completing the design of the Gen2 and as TJ mentioned last time, and as you've seen in our shareholder letter, mid-March is when we will approve the design at the Board meeting and we'll start placing the POs and pieces of equipment will start coming in and we expect the build out to start happening by early next year. So in the mid next year is probably when we will start seeing revenue from some parts of Gen2.

Got it, got it. And then, didn't hear EV mention yet. Can you just give us the thought process on what some of the milestones are for EV for this year, and where some of your EV investment might be pointed to? Appreciate it.

Yes, thank you for the question, the question about EV. Yes, EV is, as many of you know, a very exciting market for our technology. A few things about Enovix battery technology, particularly for the EV market, in addition to the energy density, which we have, it's much better than our competition, much higher than our competition. We also have some other advantages such as how fast it charges and also the amount of heat, the battery actually dissipates.

If you guys have Teslas or a car like that, when you start charging them, you will see that the batteries get hot in this environments. Our battery, because of the way it's constructed mechanically, has the ability to dissipate that heat much faster than our competition. And we are also kind of material agnostic in that technology, and EV will use slightly different materials. So what we -- we have been talking to different companies in the automotive space. There's a lot of interest for our technology in that space and we're now figuring out the right strategy to partner, to have a joint development agreement with multiple partners. And as we meet those milestones, we will absolutely communicate to you. But we have given them some of our consumer batteries and actually all the EV companies look -- all the automotive companies love what we can show.

Our next question is from Bill Peterson.

Thanks for the overview. Maybe just, I'm not sure this one is for Raj, but I wanted to talk about how you're going to be progressing to, I guess 180,000 units? I think in the special presentation you talked about trying or hoping to achieve around 60% yields. I guess in the early part of this year, how are those progressing, and is that still the right way to think about yields as we, I guess, exit Q4 of 2023?

Yes, absolutely. I'll take a shot at the question and if -- Ajay, if you feel like there's something else you want to add on top of it, please jump in. As we mentioned, our yields are progressing nicely, steadily improving from where we presented last time, and we are on track to where we expect to be by end of the year. We are quite pleased with that.

We are, as we said, more than doubling the number of batteries that come out every quarter. Again, lot of these batteries -- so we feel very confident we're going to hit this 180,000 number. No issues there. In fact, we produce more than that sometimes because, we have to give batteries for qualification to our customers and so on. These are revenue producing batteries that we're talking about. But yes, things look good there.

Okay. I guess the second question I have is, it was sort of -- I guess sort of briefly mentioned by TJ In the last call, you didn't speak to it here, but he alluded to, I guess one potential return due to slowing. I wanted to clarify, is that truly an issue? Is it only 1 product that was returned or if not, or maybe it was something else entirely? Just trying to get a feel for, if that's something we should be on the lookout for?

Yes, there is only one -- Ajay, go ahead. Yes.

Yes.. I can handle that question. Yes, there was one particular cell which came back from a customer. In fact, we saw the pictures of it and concluded that the result was due to the -- the swelling was due to the mechanical damage to the cell, which we're trying to understand where it could have happened post shipments from Enovix. So, yes, but that's the only cell that we have seen so far, which is out there in the field, which has been reported with the swelling.

We're doing a lot of [R&D] work, reliability testing ourselves and trying to find different causes of what could be problems. We haven't seen the -- architecture is very robust. So we haven't seen anything like that.

Our next question is from Gabriel Daoud.

Hey. Afternoon, everybody. I was hoping to maybe just go back to the tech side, you mentioned the 1,000 watt-hour per liter battery scale through a mobile phone and laptop size, kind of optimizing for cycle life. Could you just remind us maybe where you are today on that tech roadmap and where do you have to get to?

Yes, that's actually a good question. As I came here in the last month or so, what I have kind of realized is that, we are clearly making -- we are where we thought we would be in terms of our cycle and we have lot of innovations along the way on materials, on the way we develop the technology to continue to increase that and get ahead of -- and the energy density, continue to get ahead of the competition and also improve our cycle life.

The main important thing here is that, both in energy density and cycles, somehow I feel like people are characterizing batteries by just simple one number and we are -- as we get into more advanced stages where we actually have our batteries at our customers and I talked to many of these customers. What I find is that, how the battery is used in the device and the used cases that the battery goes through is actually just as important.

For example, when you talk about a cycle, people talk about charging all the way to the peak and bringing it down. But nobody actually does that. I mean, if you have a mobile phone, you will probably start charging it before ever goes to fully zero and also, if you think about energy density, when it's fully charged, it's one thing, but the used cases of how a watch is used, versus a phone is used, versus a laptop is used, has a lot of bearing.

So we have kind of evolved a little bit more in how we actually measure the value of the battery to our customers, to more than just those 2 numbers. That's not to say we're not making progress on those. We're absolutely on track on that. But what you will find from us moving forward, is actually talk more and more about the customer experience of using the battery than just 1 or 2 numbers, because I don't think those numbers fully capture all the aspects of the differentiation that's built into our technology.

That's super helpful. And then maybe as a follow-up, we will pivot back to EVs. I guess, could you may be shed a little color around how those conversations are progressing, whether with cell manufacturers or just traditional auto OEMs? Like, is there any concern I guess with performance maybe not scaling to an EV size capacity battery? And then also form factor. What are the thoughts or latest thoughts around form factor, just given some of the headlines around potential OEMs or OEMs potentially going towards cylindrical?

Yes, I mean -- so, first I want to make one general comment about form factor, not just specific to EVs. It's something that I think it's not clear to everyone here. What I've learned at our time here, is that the form factor of the battery is different in watches versus digital cameras, versus other IoT devices, versus smartphones, versus laptops, because they're kind of -- everyone needs a battery to be of a certain shape to fit in the cavity that's allocated to it after all the electronics and the displays have taken their space, similarly in EV. It's a different form factor.

Our technology, now we are building manufacturing lines, that actually have the ability, what we call, Agility Lines, to customize the battery to different form factors very quickly. And our Gen2 line will have the ability to do that and produce at different form factors. So that's something I just wanted to put it out there. It's a core technology and core competency we are building and we will need to build to be successful, and our architecture is very amenable to that.

Now in terms of EVs, the conversations are going really well. The consumer batteries that we've given them to test, they really like it. It's too early to tell how exactly the business model would be, in terms of -- be a manufacturer or they manufacture it, we do a joint development, we license the technology, quite a few of those options are open and they are at kind of early stage of development and I'll continue to comment on that as the year goes by.

Our next question comes from Colin Rusch.

Sorry about that, you guys. I think I'm good. Wanted to just get a little bit more color in terms of the design activity and the design wins in terms of the target customer, the process and how that's cycling and how quickly you are moving through those cycle times, with the design-ins, because that may be very-very crucial for some of our estimates as we get into late '24 and '25?

Yes, absolutely. I'll say a little bit as a general level and I'll ask Ralph who actually deals with this every day to comment a little bit more on that. Our design-in activity has been tremendously -- has been so much better than what it was before. The last quarter was actually fantastic. What we're finding is that, as we are able to produce more cells in our Fab-1, we are able to give more samples to customers and that is helping them test our battery versus their current batteries that they're using, and is really giving them the confidence that what we're talking about is real and they're able to do it, test it in their own way. And of course we understand how they test and we put those tests back into our testing. So the next time when we get the battery, it already meets their requirements.

So in terms of samples we have given out, in terms of customer pipeline, I think there is some data in the shareholder letter that actually shows the progress. But super pleased with the progress so far and many of them have actually progressed from initial testing, where they have samples and said, yes, this looks good to actually putting it in their own form factor, and then testing and saying, it is much better. So now at this point, we actually know what products we will go into.

But Ralph, do you want to add more color to that?

Thanks, Raj. Yes. Everything Raj said is exactly on point. As we showed you last time in TJ's presentation in January, we're now tracking these to cell milestones. And those cell milestones are showing that we increased sort of our active designs and design wins by about $200 million in this last quarter, which is by far the biggest jump and really shows that these customers are now fully engaged, because they've taken essentially the batteries off of our production line and have done their own full qualification. This is their tests in their products. So that's a very important milestone for us, and just shows kind of the progression we're making.

Now I'll state cautiously as I don't expect to see a $200 million improvement every quarter. It was because we've now shipped enough units, thousands of units to these customers to be able to make those progressions in the funnel. But we're right on track and you'll see the '24 revenue will grow fairly substantially, based off of these early qualifications from our customers on these existing cells out of Fab-1.

And as a follow-up, I want to hear a little bit more about the toolset that you guys are looking at for the Gen2 line. Obviously you're coming close to being finalized on that design. But curious about how many vendors you're able to go to, in terms of having backup vendors on some of these things, and your ability to access the -- what you need in terms of all the different pieces of equipment in a timely way, given the relatively (inaudible) timeline, you guys are looking at for this ramp on the next factory?

Yes, great question. The question is about Gen2 line. I'll make a quick high-level comment and I'll let Ajay talk to you about -- Ajay is actually in Asia right now as we speak, talking to all the vendors there. So that's why he is not here in person, but he can give you a live update on where is. I think he has met just some vendors yesterday too.

It's going actually very well. The designs look very good. We've done a lot of proof-of-concept experiments to make sure that whatever issues we saw on Gen1 are actually resolved in Gen2. So we know what we're going to get, is going to be at the high throughput.

And Ajay, you want to comment on vendors and specifics more -- more specifics as you...

Sure, absolutely. Thanks Raj. Good question. Yes, we have several suppliers in the whole supply chain of these Gen2, right? Now what we have learned through the -- through this last Gen1 experience and since then, designing specific tools, which addressed real problems that Gen1 showed us in the early days is that, there is battery companies and then there is semiconductor companies. Semiconductor companies -- our architecture with mechanical tolerancing and placement tolerancing, et cetera, is lot more lending itself, going to semiconductor suppliers out there, who are very, very familiar with plus or minus 5 microns, 10 micron placements, imagine the (inaudible) to raise of -- thousands of balls in a PGA or array package and doing something like that.

We actually engaged with those guys very early on about 9, 10 months ago and now we are seeing these proofs of concepts which are coming through. But then we also need to complement that battery experience as well, right, because there's very peculiar stuff which is going on. So they -- the semiconductor vendors have been working with battery counterparts which we brought together.

So this is a big ecosystem and yes, we want to make it hard so that doesn't get replicated by just about everybody else. But at the same time you have a good design. I saw very encouraging results actually. I was in Korea a couple of days, and then I'm here and in other parts of Southeast Asia going through that. In some cases we've tripled row certain areas, which were higher risk but we are coming down to now working with one set of suppliers, who have given us tremendous confidence in the Gen2, both the schedule and the cost. So looking...

And our next question comes from Alex Potter.

Perfect. That's actually a really good segue into what I wanted to ask. So you mentioned the cost, I know that Gen2, some of the numbers that I was -- that I seem to recall was something in the neighborhood of $70 million of CapEx per line and you were looking to put 4 lines or so in the first fab there in Southeast Asia, right. I guess the second fab. Are those numbers all still ballpark in the neighborhood or have your conversations led you to believe that those numbers should be revised anyway?

Yes. Good question.

No, I should -- yes, go ahead, go ahead, Raj...

Just, give me a second. maybe I'll make a comment and then you can add on top of that. So basically, the way this is working out is, Ajay and team are looking at making sure that we have enough space, so we can put 4 lines or even more as needed and so we're going to make sure that we have enough capacity. And what we're going to do is, we're going to start first with an ability to quickly make a custom cell, using the pieces of the line that we're going to use in Gen-2, right. So this won't have full automation, but all the same machines that will be in the Gen-2 will come here and that'll come earlier, what we call the agility line. That will give us lot of confidence that we can make different custom-sized cells.

Then we will scale up the line and, yes, I mean -- we still believe that with the demand and the customer pipeline that we have, we will need to get to at least 4 lines and maybe more in time, but we're going to do it in a staged manner. We're going to do in a staged manner because as Ralph mentioned, different customers are at different stages of qualification. As those products get qualified, we want to be able to scale quickly, but also in sync with the customer demand. Because what's going to happen is -- for example, a customer needs a smaller cell may qualify faster than a customer who needs a big cell or maybe a customer needs a big cell in a smartphone qualify sooner. So we need to make sure that the equipment we are building is tightly in sync with that. So we're kind of evolving to that stage of capacity planning, which is matching the actual customer demand with actual supply, and we are on track to do that.

Ajay, anything else you want to add on that?

Yes, just very quickly, actually no change, no revisions to the original numbers. The cost per line question that you asked is roughly in line with what we're seeing now. As we do replicate second, third, fourth line, et cetera, those costs will obviously go down the economies of scale, and our ability to negotiate better with various supply chain members. So yes, not much change from the numbers we gave you.

Okay. That's perfect. And then maybe one more financial oriented question, referencing the flat -- generally flat OpEx guide for 2023. I hear you on shifting some of the R&D costs and the cost of revenue, as you move more toward production, but was also somewhat surprised, presumably, you're going to need to be staffing up in Asia, and a lot of that would hit OpEx in the G&A line. So maybe, none of that hits in 2023, but at some point, there would presumably be an upward inflection in that line unless -- correct me if I'm wrong?

Yes. So I'll take a shot at it and we'll see if Steffen maybe can add a little bit more color. What I found when I came here is that, we are actually fairly well staffed on OpEx and the company was at sub-scale on manufacturing, in terms of output. So that's one of the reasons why I feel like I can hold OpEx flat from last year to this year.

There was a lot of expenses also with, coming from SPAC into the company and so on, which was really onetime last year. And moving forward, the mix of investments is changing from my perspective. I think we are investing a little bit more, bringing in a lot of good talent, actually in the electrochemistry side and the manufacturing discipline, the mechanical engineering and so on. But some of the other operating expenses that we had last year were really some kind of onetime. So we were able to reduce that.

Moving forward, I feel, you know, we will add more in Malaysia. But at the same time, we have a lot of costs in Fremont, which will actually slowly come down also because of our current manufacturing. So in that sense it might actually balance out. And our any other -- for example, it could be any other Asian country that we look at, costs are actually much lower that we have seen.

So our goal is to actually manage the transition, so the OpEx actually doesn't become too high.

Excellent. Let me add Alex, a couple like numbers, one for '23 and one for the outer years. In '23, I mentioned, we spent $120 million planned for cash on operational side. That's around $20 million of depreciation and amortization, non-cash. So keeping OpEx flat is around $80 million OpEx for 2023 and then on our cost of goods sold side, it's around $60 million; $40 million cash and $20 million is noncash.

And then in outer years, as Raj alluded to, right, the business model hasn't changed. We still expect to have around 20% on operating expenses run rate beyond like '24 or '25.

Our next question comes from Gus Richard.

Just, you brought off -- took an impairment charge for a piece of equipment, and I'm just wondering what was the rationale and how is that related to the ultimate output of Line-1?

Yes, maybe, Steffen can take that.

Thanks, Gus. Yes. So that $4.8 million charge that we took is for a piece of the equipment that we ceased to develop. It has a high UPH than the balance line, as the line runs here in Fremont that's 100 UPH in that equipment versus 600 UPH. So we don't develop that small portion. We don't expect anything to reoccur.

Got it. And then, Raj, you mentioned in your prepared remarks, you had a number of customers that we're interested in either doing JVs or building the factory together or what have you. I was just wondering, as you evaluate those opportunities, what are your criteria, you know, that who you get fit with, is it just purely economics, your percentage of output? How are you thinking about those opportunities?

Yes. So that's a very good question. Actually it's the strategic decision for the company that my team and I are focused a lot on. There is customers. There is different governments in Asia that we are actually -- as we start thinking about putting lines there, that are interested in supporting us, that whole and that's the model that they are quite familiar with out there. So we are evaluating multiple countries and multiple customers.

Ultimately we have to make the decision of the partners, based on what is in line with the strategic direction of the company, and the strategic direction of the company is -- for me, the way we think about it is, we have now two standard sized cells, which are small cell and a big cell, that are going really into Internet of Things market, and I think that is something that you'll hear us talk more and more. Because there -- in those markets, it's not as critical that we are the optimal in size and shape and all that.

Our next target is -- within that, wearables is a big part of that market, health monitoring and so on. Then there is smartphones, then there is laptops, then there is EV and that's the direction and order in which we feel our technology will scale. So when we pick our partners, we want to pick them in that particular -- in line with their strategy and not deviate from that, that will take us away from what's core to us. So that's kind of how we are looking at it. And I think it's more about making sure our technology is a good fit, based on where our current technology is, and it's a good fit for the markets where we're going into.

Our next question is from George Gianarikas.

Hi, good afternoon. Raj, I'd like to just ask you like you've been now at the firm for a month or so, and curious as to, if you could share any detail on the things that you've seen that you can improve upon or any processes, any methodologies that weren't implemented in the past that you are bringing fresh eyes to -- through your experience?

Yes, absolutely. I think the number -- firstly, I'm actually unbelievably impressed with the technology and how differentiated the technology is. It's not often you find a technology where you are that much better than the competition in terms of performance numbers and that much unique in architecture that is hard to replicate, and it took us a long time to get here, almost 16 years. And then it's taken -- it took us a lot of effort to actually get this mechanical constraints done. So we have sustainable differentiation, I feel, and there's a lot of stuff in the pipeline that will make the technology even better in terms of -- we talked about energy density. We talked about cycles and so on. So that part has been very pleasantly surprising.

The parts that I bring is really the external, and the customer focus; because my whole career has been working with customers who make varying kinds of products, cameras, MP3 players, DVD players, smartphones, wearables, IoT devices, laptops, cars. So I bring that customer first mindset. And what I find is that, when you're able to understand what the customer is trying to do with this technology, it gives you a view of what exactly our products should look like to fit in that product, right. We're not making AA batteries, right that's not what we're making. So we're not going to -- so this business is not about making one size fits all batteries.

But then we really have to have the structures and processes in place, when there is so much interest from different customers, which ones do we pick, which markets do we go after first, which ones do we go after next, how do we scale up, how do we build manufacturing capability, which is tightly matched to the supply and the demand we are getting. That's the areas that I'm really focused on and that's where I feel the company really needs more strategic direction. Particularly when the demand is so secular for batteries, it's important -- just as important what we don't do first as what we do first.

And as a follow-up. Speaking of those customers, as you engage with them further, as you had conversations I'm sure with them before you got to Enovix, what are the competitive products, if any, that you're bumping up against? I mean, is there anyone out there that offers anything close to what you do -- performance characteristics and potential brand?

Yes, I mean, what I've learned is, pretty much we're competing with traditional battery technologies that exist today, standard lithium-ion batteries. There is no one that I've bumped into -- that our customers have talked about, that would use something like a silicon anode for example that we're doing or the energy density that we're providing. So it's very, very unique in its capability. So most of the places, we are actually trying to replace an incumbent, that's standard lithium-ion battery that exist today which was invented sometime back. So it's truly revolutionary in that sense. But we have to adapt our technology to that particular customer form factor to get it to production.

Our next question comes from Tony Stoss.

We will move on to Derek Soderberg.

Yes, hey guys. Raj, I wanted to touch on yields. I think that number exiting the year was 42.9%. Can you give us a yield number today? And on the January presentation, you talked about yield sort of following the S curve. And just looking at the yield today, is it still on that curve, is it tracking better or worse? Any detail on how yield is tracking since January, that would be helpful?

Yes. So, as we mentioned, the yields are tracking down the S Curve. Absolutely they are in line with where we expected it to be, and we are steadily making progress in that front. So, I'm pretty confident that the rate at which we're making progress, we will get to our 180,000 batteries number.

Clearly again, I'm not going to break down yields at this factory, this month and so on, because of a lot of factors involved in that. But really what I'm super excited by is, we will be able to hit the number of cells we want. And the learning from that will actually make sure that the Gen2 we build, will be at much, much higher yield right off the bat, which is really the number that matters because that's where we're really going to ramp majority of our production. But so far I'm pretty happy with what I see, Ajay and his team have done a very nice job.

Got it. And then as my follow-up, in the shareholder letter, there was some commentary around enhancing cycle life. I think you guys are at 500 cycles for the consumer applications batteries. You talked about working with new electrolytes and things like that. I'm wondering how we should interpret that commentary? Is this something that your customers are asking for? How should we think about that?

Yes, I think, different products need different cycle lives. Like for example, battery -- wearable needs certain cycle life. Batteries in phones need a different cycle life and batteries in laptops, different cycle life. But I also think that -- so we have to continue to improve that and we are working on improving that. We have lot of ideas, lot of techniques, lot of experiments going on to do that. But I do also want to say, the important thing is, as I come into this business -- to me cycle life -- and also like energy density, is kind of like asking what is the clock speed of your Snapdragon processor. It's just 1 number, that doesn't really translate to how good is your camera, for example.

So because nobody -- the way we measure cycle life is to charge it fully to the top and take it all the way down and fully to the top, and nobody actually does that. So if you actually only charge it halfway, because most of us, when use a phone or watch or whatever, and when you see it running low out of charge, you start charging it, and sometimes you may not charge it all the way.

So we do have to continue to improve the cycle lives and we are. But more importantly, to me the exciting part is, as we work with the customers, they are actually telling us how they use the battery and the tests they're performing to make sure the battery fits their application and we are customizing to meet that requirement. I think that is kind of the key.

We will now come back to Tony Stoss.

Sorry, all my questions have been answered.

We will then move on to [Marc Cohodes].

If he doesn't have any questions. I guess I'll add a few. First of all, Raj, congratulations. You're going to become a very, very, very wealthy man over the next decade. But my real question since it was such a big issue on TJ's call about having to raise money, can you elaborate on interest from your partners in helping you build facilities and governments? I assume, Ajay is over in Asia, speaking with governments, as well as customers in building the facility. Can you get into a little more detail, Raj, about the interest of helping you fund this?

Yes. Thank you for your question and thank you for your comments. It's a little early to precisely comment on that, because we are in the middle of these negotiations in multiple ones and I really don't want to get in the middle of the negotiation that Ajay is doing. But I'll give you a couple of comments on how these things usually work, with my past experience in building these kind of factories in Asia and so on.

Many governments actually like to help companies build out manufacturing facilities there, either by helping with facilitization or paying for a line or two, because it provides employment and they also get a great return on their investment later on. So there is multiple opportunities for that. And for the customer side, typically what customers want is, they like our technology and they feel it's very exciting. But they worry whether there'll be enough volume for production when they go to high volume, because some of these are high volume lines, and they'd like to reserve some capacity, for example. And that's where they'd like to help us build, but they want some reserve capacity.

So those are the kind of the variables that we're looking at. And that's why it's very important that we make [decision] carefully because there's a lot of interest in the technology and we want to pick the right partner. So hopefully, I'll be able to comment on that more in time.

What do you think is behind the dynamic of your design wins and your backlog going up? With production being below where initially it was stated? It seems like people are more excited than less excited, even as these pushouts have occurred. Can you square that a little bit on what you see?

Absolutely. It's actually very simple. We've had -- this company has had great technology and a few batteries that we were able to give, and what everybody saw was super exciting and we gave like couple of cells here, half a dozen cells to somebody and they are all super happy. But for them to really consider a design in, they needed hundreds and thousands of cells, which we've never been able to do. As Ajay and his team, and as all our investments in Fab-1 are starting to materialize, we are able to produce thousands of batteries.

So now as we produce thousands of batteries, the customers are able to put them in their products and test them and that is increasing their design-ins. And so it's really a question of just satisfying that early sample requirement, that's helping us.

And you're able to satisfy everyone now?

Well, I wouldn't say everyone but as many -- Ralph wouldn't be too happy if I said everyone. But there's still a lot of demand, but definitely much better than we were able to -- Ralph has done more happy customers, than he has done in a long time.

Next up we have a question from Chris Souther.

Hi, guys. I'm just curious with 180,000 batteries for revenue this year, can you give a split between they're going into kind of end products versus testing with different customers? Just want to get a sense of what the full year demand is for the testing, if you have any sense of that?

Yes, I mean, we're not really breaking them exactly that way, because all of them -- I can say this much, all of them are actually products that customers are paying for. Sometimes they'll be in high volume production, sometime maybe in the early stage of production, pre-production lines and so on, but those are basically products themselves. Ralph, you want to comment on that?

Yes, I think that's fairly accurate. We've got some products we believe we will launch this year and they're fairly lower volumes in the grand scheme of things. But we've worked closely with customers to try to, say prime the pumps effectively, so that we go into '24 and start really ramping into much higher volumes.

If I were to put a slag on it, is probably about half the cells are going to at least going to be in some sort of product that you're hopefully going to be able to get in the market. Of course, that's always reliant on when a customer can actually release those products.

Understood. That's helpful. And then maybe just last one. In the letter, you talked about proof-of-concept demonstrations. Can you talk through confidence of the 13 head changes you highlighted on the January call? I'm just curious if there are any changes since that call to those different pieces that seemed to be the higher risk areas? What if anything, do we really need to do, to validate the plans between now and mid-March?

Yes. Absolutely. Maybe Ajay, you should take this one. You are living and breathing this every day.

Yes, absolutely. Good question, again. Yes, you are currently absolutely right on track for that UPH that you just talked about, [30] and 50 UPH and all the equipment. Yeah, there were some high-risk areas, which we had pointed out earlier. We double drove them in some cases, but we -- most all of the proofs of concepts now are leading to believe that we are going to get that UPH.

Our next question comes from Sean Milligan.

Hey, guys. I guess, Marc asked earlier about outside funding or funding from customers and governments. Trying to understand here, obviously, you have a lot of confidence in the Gen2 design, with the idea that you're going to add additional lines next year. So how do you -- what do customers or funding parties need to see in terms of Gen2 design to be willing to fund that? Do they need to see the production coming off the line first, or are they willing to do that ahead of time?

Yes, so good question. I think different funding partners are in different stages of that. So like I said, in some cases, if it is kind of like governments, then they just want to know that we do have the demand and we will be successful with this. So they won't invest ahead, they are okay. If it is more like customers, then they would like to see some pieces of equipment running, get some samples from it and so on. So different people have different stages of that. And I really hope that I'll be able to communicate better next time. And I am kind of cautiously trying not to say much about it, because we are in the middle of these negotiations and it's never good to talk about it now.

There are no further questions at this time. With that, I'd like to turn it over to Raj for closing remarks.

Yes. I mean, absolutely. Thank you all for this time and thank you for listening to us and your support of Enovix. Fantastic company, super excited to be here. I want to take a few minutes to -- a few seconds to thank all the employees at Enovix. I mean it's a fantastic place to work. People come in real early and work really hard and long hours, and a big shout out to the founders who built this company. But you'll hear more and more from me in every quarter and as I get to see you guys more as I travel. Thank you.