Enovix Corp (ENVX) 2023 Q2 法說會逐字稿

Thank you for standing by and welcome to today's program, the Enovix Corporation Second Quarter 2023 Earnings Call. After the presentation, there will be a Q&A session featuring Enovix management. With that, I'd like to turn it over to your host for today's program, Charlie Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Thank you. Hello, everyone, and welcome to Enovix Corporation Second Quarter 2023 Financial Results Conference Call. With us today are President and Chief Executive Officer, Dr. Raj Talluri; Chief Financial Officer, Farhan Ahmad; Chief Operating Officer, Ajay Marathe; and Chief Commercial Officer, Ralph Schmitt. Raj and Farhan will review the operating and financial highlights and then will take questions. After the Q&A session, we'll conclude our call.

Before we continue, let me kindly remind you that we released our second quarter 2023 shareholder letter after the market closed today. It's available on our website at ir.Enovix.com. A replay of this call will be available later today on the Investor Relations page of our website.

Please note that the shareholder letter, press release and this conference call all contain forward-looking statements and 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 and to the shareholder letter and our filings with the Securities and Exchange Commission.

All our statements are made as of today, July 26, 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 not prepared in accordance in 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 will now turn the call over to Raj to begin. Raj?

Thank you. Thank you, Charlie. And thank you, everyone, for joining us today. I'm going to kick off with a few high level remarks, and then I'm going to introduce our new CFO, Farhan Ahmad, who will make a few comments. After that, we have a very special treat for you all today. Our COO, Ajay Marathe, is in Asia today at our Gen2 equipment vendors. And we're hoping to get him to show you a video of our latest machines and how they're progressing before our factory acceptance test next month. After that, I'll make some closing remarks, and then we'll take your questions.

Now first, we had a very productive second quarter that included some very key milestones along our journey to scale. First, we produced 22,502 batteries in Fab-1. This is exceeding the forecast we made last quarter that we will make 18,000 cells this year. So we exceeded that.

Secondly, we delivered on the commitment to secure the $70 million non-dilutive financing -- funding for the -- in Malaysia. As a result of that, we're going to lower our CapEx guidance for the year. I'll say a little bit more about that in a little bit.

Thirdly, I'm super excited that we actually received a purchase order for our BrakeFlow enabled cells for the U.S. Army. Now this is a great testament to the quality of our product, the reliability of the product, and it's a critical step for us towards our mass production and high volume production.

Fourth, I visited several customers in Asia in the last month. I'm super excited and really happy to report that we now have secured engagements with some key smartphone manufacturers, Vivo, Xiaomi, Lenovo, being 3 of them. Now Xiaomi and Vivo are the top 5 global OEMs. Lenovo is Motorola's brand. They're #3 in the U.S.

And lastly, I do want to bring out that we have built out our leadership team some more with a group of individuals that I've worked closely in the past at Micron and Qualcomm, and I'm super excited to introduce them to you.

On the last note, on that last note, I'd like to let everyone know that Ralph Schmitt, sitting on stage here with me, has chosen to retire, and he will leaving the company effective August 11. And now after a recent career as CEO of multiple tech companies, Ralph did Enovix a great favor in revisiting his roots in sales and setting up the commercialization engine at Enovix over the last 2 year. I want to thank Ralph for all his support Enovix.

In order to continue his work, we have recruited some world-class talent to commercialize -- to the commercial and our product organization. This includes Vice President of Period Management, Samira Naraghi, and Vice President of Sales, Dave Cech, who recently joined us from Qualcomm where we used to work together.

With that, I'm going to let Ralph say a few words. Ralph?

Thank you, Raj. I want to thank you, Raj, T.J. And the Board for having me as part of the leadership team for such an amazing company. I have been lucky enough to work with T.J. For over 15 years and been involved in ramping businesses with him, including Cypress and SunPower and a few others. But Enovix has been the most exciting business opportunity that I've had in my career. And frankly, I've run some pretty interesting tech companies. But I believe there's just amazing opportunity here. The team that I have put together has positively, I think, impacted the long-term prospects of the company. But I've never been involved in a business situation where there's an insatiable demand for a product that has a clear market leadership. And we're engaged with every market leader in the consumer world. So for me, it's a difficult decision to leave, but sometimes, kind of life throws things your way, and thus, I sort of need to stop and prioritize my health at this point.

The go-to-market stewards that Raj mentioned, Dave and Samira, are very experienced and talented. I've known Dave for 20 years. His business acumen and customer engagements are second to none. And it was an absolute honor to work closely with RJ, Ajay and the entire executive team to progress Enovix to the next stage, essentially the second phase of the company after the technology base was established by the founders. Our companies have -- our customers have validated the technology as sound and have audited, actually, our business and that it's scaling properly, basically due to the actions of the entire team. So it's been an honor to be a part of it, and I'll continue to cheer from the sideline. So thanks, Raj.

Thank you, Ralph. Now for my remarks today, I'd like to spend a little bit of time actually talking about the Enovix value proposition as it relates to the mega trends are witnessing in the market today. Now if it wasn't clear already, news and events the last few months have driven home the point that there's ton of investment being made in record towards AI. Artificial intelligence, AI. We've learned -- also learned in the last couple of months, there are many, many revolutionary computing platforms that are enabled by high performance cameras, high performance memories, image processors, sensors, displays that marry all this together along with AI.

But you know what? It also kind of reveals a dirty little secret in our industry. None of these new devices that are being launched will really deliver on the promise to the end consumer until they have a much better battery. And I want to substantiate that today with a little bit more data on the kind of performance in battery that AI needs, and it's literally why I joined Enovix.

Now first, let's talk about AI a little bit deeper. For those of you who don't know, I did my PhD in computer and AI, and I've spent quite some time in the area. I asked my team here to test what the power budget that's needed if you actually run a true generative AI application on a battery operated device, either smartphone or laptop, what is running on the cloud, because a lot of people want to run these applications on their device natively because cloud costs a lot of money, and there's latency issues and so on.

Now we ran Stable Diffusion, which is a very popular text-to-image generating program. And we found that in 68 minutes when we ran this program to produce images, the life top on the laptop died. And if you just ran it on the cloud, you could go for 11 hours. But it costs a lot of money to run it on the cloud. You need a subscription. There's privacy issues. The resolution's not high as you want. You already paid for the expensive laptop. You'd like to use it. But the problem is you can't use the hardware very well because the battery goes down.

So AI at the edge is where the industry is going. But the AI at the edge will not happen like how we all want it until there's breakthrough in the battery technology. We tried another application, a popular application in -- for photography and for image processing is Adobe Lightroom. Adobe always had a great noise filter where you take a picture in low light, which happens a lot of times when you're shooting, and then you try to filter the noise out. They are a standard noise filter. And a few months ago, Adobe released an AI-powered noise filter. I was actually amazed by how much better the AI-powered noise filter was in terms of clearing up the noise. But when we ran the AI noise filter and we measured the battery draw, that filter needed 30x more battery. It's actually pretty compelling why the world needs a much better battery to be able to realize these great AI innovations that are coming. I've written a blog on this, and you can look at Enovix.com/AI. And I really encourage all of you to check it out so that you can see these data.

Now let's talk about mixed reality, another application that's becoming very popular. We had some great mixed reality products announced and soon to be in the market. Now I go into much more details on this, another blog that's also at Enovix.com. I'd like you to -- I'd like to encourage you to read it. But a really high level, we've now seen some advances in processes, some advances in memory, displays, sensors, camera technologies that are enabling use cases we always dreamt of. Having a true mixed reality device is really amazing. But unfortunately, the battery has not kept in pace.

Now at this point, as actually was further certified to me recently, when I was in Asia and I was visiting all these customers, and I visited some of the customers and I talked to them about Enovix battery and asked that is there a way we can actually start working with them on this. And the interest level I saw from them for advanced battery was amazing to see. Because they also know that AI moves to the edge into phones, into laptops, into wearable devices. You just need a better battery because the next-generation use cases, it's very hard to support them with the current use cases.

Now I also visited a lot of investors in the last many months. And one of the questions I get many times is Enovix business model assumes that we will get a premium for our battery technology when we provide this increased energy density to our customers. The question they asked is, why do you think you'll get that? Actually, I'm even more convinced now with all these new devices that come out that are actually not diluting on their performance because the battery. That when we delivered this battery, and battery is no longer the barrier for the performance, the supplier who makes the breakthrough in this is the one who will have the right to command a premium price with strong margins. And I truly believe that Enovix has that opportunity.

Now this is not that different from what I've seen in my past life or my 30-year career in semiconductors. I watched the price of processors that we sell into phones go from $15 to $65. And they did that because they delivered a better use experience to the end user. Phones built-in cameras. Phones could do video. Phones could do GPS. Phones could play audio. And the processor got more and more value as it provided more end user experience. I experienced the same thing with displays and cameras and memories at Enovix. Similarly, as we increase our value in energy density in cycles, in charge rate, safety, among other things, our customers will be able to take that technology and deliver much more compelling products into the market, which the end users will pay a premium for the performance, which is a premium we believe we will be able to realize.

Much like I've done throughout my career, I've spent a lot of time with customers, understanding what their needs are, understanding what the key parameters are. And simply put, when they win, we win. And we provide a better battery, they can make a better product, and we get the premium, and they'll make the cells better. As I mentioned before, I was super excited by the fact that we're now able to start programs with leading phone OEMs while continuing to advance our design-ins in wearables and in IoT and computers. This collaboration we're establishing with the customers will actually help us understand all the different ways we need to architect the battery to really deliver the great value.

With that, I'd like to introduce our new CFO, Farhan Ahmad. Farhan, would you like to say a few things?

Thanks, Raj. I'm thrilled to be here at Enovix. And I would like to thank the entire Enovix team for the warm welcome that I have received so far. I was really attracted to Enovix by its highly differentiated technology that delivers leading energy density across the industry, and a team that has a strong track record of operational excellence. The addressable market opportunity here is large. Breakthrough innovation with silicon mindset can help deliver increasingly differentiated products. And like Raj said, I also strongly believe that we can command a premium price and deliver strong margins. I'm looking forward to connecting with the investors and sharing the Enovix story with all of you, and I think it is highly compelling.

Raj will touch on the guidance, but at a high level, I aim for Enovix to be a careful steward of shareholder cash and to make the investments to grow this into a great business that delivers strong growth and attractive margin profile. With that, I'll turn it back to Raj.

Thank you, Farhan. It's great to work with you again. As I mentioned earlier today, Ajay is going to join us from Asia to give us -- Ajay's going to join us from Asia. He's going to give us an update on our Gen2 Autoline as it is getting ready for factory acceptance testing. We're actually going to stream this line from Asia, and we'll see how that works. But Ajay, let's take a --

Okay. Thank you, Raj. I hope you guys can hear me okay. It's exciting time here. I'm sitting here at one of our suppliers. As you can see in the background, there's a lot of equipment. You're wondering what is this equipment? What is it doing? What am I excited 6:00 in the morning? I'm talking with a lot of energy. But there's a reason for it. Gen2 equipment, which we have been working on, as you have heard, we have reported, we have made a lot of progress on the Gen2 equipment. I want to show you personally what progress we have made here on the line so you can see it for yourself and hopefully can get the same confidence that I have now built in terms of where we are right now.

Okay. So let's first go 3 or 4 important steps in what I'm going to show you right now in the battery making. So one of the first steps is laser patterning, but that's done in other equipment. Here what we have is equipment which takes the laser pattern rolls, puts them on these, what I call the stacker. We have 7 stackers here on the line. 5 of them stacking mid-stack approach and 2 of them doing the end stacker. All of these are in a debug board right now as we speak, and we'll show you the next important step.

So you can see this machine is becoming more and more real and soon will be in the debug board. You can see in between here, as well as some of the overhead stuff, the transportation and access from machine to machine, these machines or this equipment, this line is made for a very high UPH, 1,350 UPH to be precise, and has very little labor content in it. Roughly 25 people per shift running and making 9 million batteries in a year. That's the kind of rate of speed that we are working on. Each of these machines is built with in-line metrology, very low human touch, making sure what we produce is at a very high yield.

The next equipment I wanted to show you here, I think a glimpse of it. It's in the debug mode and cycling. As you can see, the parts are moving. This is really the AO print, very important step in attaching aluminum oxide trim on the side of the cells, which basically insulates the cathode anode. The next step is to measure the cathode to anode offset, making sure that is within the tolerance of what we need.

Then this equipment right here is what is called the AO or the constraint attach. So you can see, now we will open it. Again, it is cycling. You can see it's in the debug mode. And again, all built with linear motors, granite block, in-line metrology, very low human touch and very high UPH. And you can see this is the in-line baking or curing.

The next step I want to show you is the constraint attach process. As you know, the constraints in our battery are the most important pieces of material basically that we get from a supplier, which are -- which has a glue film attached to it. And then this card, this card right here rolls, ducks into this machine, and now you can see what's going on inside this machine. This is a constraint attach. Attaches on one side. Goes to the other side, attaching to the second. Very highly accurate, very highly precise placement, and again, in-line metrology. So this is a constraint attach tool.

And the last one I want to show you, again, which is again very exciting for us. Here, we can see the -- again, the cycling going on from the other side of the machine. But the busbar insert tool, which has been in Gen1, has been a problem. We are learning from the Gen1 issues that we have had, why we weren't able to do much higher speed. This basically takes care of that. This is a busbar insert tool, which basically inserts the busbar at a very high speed, flips it and completes the cell.

So this -- again, all this equipment, we'll show you in a panoramic view now. It's ready for -- it's completely in a debug board and ready for what is called a factory acceptance test. Factory acceptance test is the most important step in the equipment -- procurement equipment process. And after this, it goes and ships to Malaysia where we have announced today our site at -- in the Penang client park.

So that's the glimpse. This gives me the confidence that the equipment is real. It's working. For people who wanted to actually get -- this was a good idea for me to just come here since I'm spending the time here anyhow to do this live and show you what's going on with the Gen2 equipment. Okay. So over to you, Raj.

Thank you, Ajay. I hope that was useful for all of you and you share the excitement that we all have, and you can see the excitement in Ajay's and the team's face there. We've been working super hard to actually build these machines. And the last time I went up there a month ago, I gave a small glimpse of it, but now you can see they're real, we're building them up, and factory acceptance is on track. So we are super excited by that and looking forward to giving you more updates as we continue to make our journey to scale.

Now I want to talk about our outlook. For the third quarter 2023, we are forecasting that we will produce approximately 36,000 units from our Fab-1. Our plan for the rest of the year is to make as many small cells as needed to support the commercial launches of the customers and also qualifications of the customers that have designed in our product from Fab-1. But we also want to focus on higher value projects and higher volume opportunities that we have recently come across that have come to us from building larger cells with BrakeFlow, a technology that's very, very important and provide safe batteries to U.S. Army and the other customers.

Now we noted that the total size of the U.S. Army order for pre-production cells, these are pre-production cells that they're going to put into early prototypes of their vest, is nearly $600,000 for this year, predominantly in Q4. But this is just the first step in what we hope will be a very significant business in the multiple tens of millions of dollars in the years to come. And that's why we are super excited by this opportunity, and we are working on making these things happen in our Fab-1.

Now let's talk about our cash use. For the full year of 2023, we're now going to lower our full year cash use guidance from the $240 million to $190 million. This is mainly because of lowering our CapEx forecast from $120 million to $70 million due to the Malaysia transaction and YBS. And this -- some more benefit of the Malaysia -- of YBS transaction will realize next year. We have entered into a manufacturing agreement with YBS, and they're our assembly subcontractor. At a high level, YBS is financing $70 million towards the first Gen2 Autoline, the one that Ajay just talked about. And they're -- with funding they're obtaining from the OCBC Bank.

Now in closing, we are preparing for our high-volume products in Malaysia as the facilitization of Fab-2 is underway. We hired a lot of strong team in Malaysia, and that team members have come here to Fab-1 and undergone our training on the equipment in Fremont. Now, we are really looking forward to updating you on the progress over the rest of the year. With that, let me open up for any questions. Operator?

We will now begin the Q&A session. Please note that this call is being recorded. Before we go to live questions, we're going to read the 2 most highly voted questions submitted by shareholders ahead of this call during the call registration.

The first question is, out of the 180,000 batteries being produced this year, what percentage is for testing and what percentage is made for end use?

Yes, absolutely. When we -- as I mentioned, we are guiding to another 36,000 batteries in the next quarter. When we make these batteries, these go into our customers for basically testing into new products that will come out next year. Some of them are used by our customers for products we expect to launch later part of the year. And for those products that actually go to the later part of the year, we need to build some inventory to make sure that the customers are comfortable when they go to production that we have enough supply.

It's really hard for us to say what percentage is actually for the customers going to production and what percentage is for testing. Honestly, we've had so much opportunities now coming our way, particularly with the new large cells opportunities that we are focusing some of our resources also in making sure that we can support that for the U.S. Army.

The second question is, what needs to happen for a qualifying customer to announce that they will be locking a contract to use Enovix batteries?

Yes. Actually, Ralph, do you want to take that? I know you're pretty close to that.

Thanks, Raj. Yes. So I think Raj described very well how right now, we're going to market with customers where they're building some products early. And we're expecting some releases of lower volume products in the second half of this year based on the amount of products -- the amount of cells that we can produce. Most customers -- no, I should say some customers will allow us to announce them using our batteries and some will not. So it's unclear exactly how many and in what time frame. But they will not do that until they have these products available either publicly or available for sale. And so that should be coming later this year.

(Operator Instructions) Our first question comes from Derek Soderberg from Cantor.

Farhan, congrats on the new role. Ajay, I wanted to start with you. I'm curious, how many proof of concepts do you have left to complete? And then can you talk about some of the unique challenges that are associated with factory acceptance testing compared to the proof of concepts? Like what's sort of the risk that parts of the equipment that passed the proof of concepts do not meet the requirements under the factory acceptance testing? Can you help us understand some of that?

Sure. Absolutely. So we have actually run more than 40-plus proofs of concepts on, call it, 13, 14 different piece of equipment. All -- most of them ran pretty good after 1 or 2 learning cycles. Some of them do come back actually in the design and then get redesigned. Like there were a couple of examples which I looked at yesterday, which were in the redesign where we signed off as completed. To do proofs of concepts, I would say under 10 are required, actually further, before the factory acceptance test is complete. And so yes, that's where we are right now. Most of the important ones are completed and actually ran to the expectation. 1 or 2 came back and we had to redo the design.

Got it. Got it. And as my follow-up, Ralph. Sad to see you go and best wishes to you. But wanted to ask a bit more about some of the AI applications using 30 to 50 times the battery capacity with some of these applications. It seems like potentially, you might need 5, 6, 7 or more large battery cells. Is that the case for some of these applications and some of the inbound requests that you're getting? And are some of these customers in laptops saying that you guys are the only ones who can potentially enable some of these applications, just as you've said with some of the AR/VR stuff. Is that the case?

Yes, I can take that. So the points I wanted to make were, number one, I think customers are now realizing that the applications that are coming in that people want are so compelling that the current battery technology is not able to keep up. I'll give an example. If you do the noise filter like using some Lightroom and you use the AI noise filter, it's almost impossible to go back to using the traditional noise filter. I mean you just -- there's not going back because you kind of see what's possible. And by the way, Lightroom also runs on smartphones. So you will see the same problem that when you start using it, you get used to it, there's not going back. So what this is doing is this is actually very early stages. I mean it's probably the first time that actually anybody has put data out there that I know of, of what -- how much the battery is consumed when you run an AI application. So I think our customers are also realizing that.

I think it's going to be -- it's going to happen in 1 of 2 ways. Either they're going to buy more batteries, like as you mentioned. But the problem with more batteries is the form factor gets destroyed. It becomes bigger, heavier, fatter, and so they don't want to do that. So that's when we have an advantage that we can either provide increased energy density and keep the same form factor but provide more energy, or help them reduce the form factor and provide them same energy. So it's happening in 1 of 2 different ways. But it's hard to say exactly how many more batteries will be needed, but I can definitely say that it's going to be a lot more than what we expected just because of the applications that are coming down.

The next question comes from Colin Rusch from Oppenheimer.

Can you speak to the strategy around rolling out the standard cell, the depth of customer interest and how that potentially impacts revenue ramp as some of your customers look at that standard cell getting out into the market?

Go ahead.

Yes. So we're trying to replicate what we see in some of the other battery segments in the marketplace today, and that is, in the pouch cell, it's very unusual to see a standard cell. But we've had enough customer interest across many different IoT applications that we see that as a viable way to go to market. Typically, what you see when you do a general availability like that, it's usually smaller customers that can't afford or be able to drive a custom cell size. So we're seeing quite a bit of uptake on this standard cell that we're putting out there, and you will see others in the future that will be of different sizes, et cetera.

Yes. Maybe the other questions --

Okay. And then on the -- go ahead.

I'm just going to add a little bit more color. It's very similar to what I've seen when I was at Qualcomm that when we ran the IoT business, from a vertical business, when you go into something called a horizontal business where you don't really know the customer. They buy through a distributor. They buy a small number of units. What happens is they're a lot more willing to adjust the form factor to accommodate the standard cell we have. Whereas a very high-volume application like a smartphone or like a watch, you do want to put the perfect size battery to eke out the maximum amount of energy they can get out of that. But unless you have large volume, people are not going to make a custom cell for them.

So what we did was general availability announcement is to support all those other smaller volume per socket opportunity, but still do them as higher energy cell. That's kind of what the strategy was. And I think it's a popular strategy in semiconductors and people who make DSPs or processors and so on. It hasn't been done as much in batteries, but I really felt that we have a great product and we should try to get more people to use that. And one thing I found is those customers may actually end up moving from there to a high-volume opportunity as their products do well, and they may come back to us and ask for a more custom cell.

Okay. And then guys, on the material supply chain, we're seeing some dislocation, whether it's on the cathode side or even now with oil and gas and some of the silicon side. Can you talk a little bit about how your customers are engaging with those supply chains and some of those material procurements and preparing for what looks like a potentially steep ramp as you get through 2024 into 2025?

You're talking about battery materials? Are you talking about --

Yes, exactly. Both anode and cathode materials.

Yes. I was actually -- I've been fortunate to spend a lot of time with a lot of battery material suppliers in the last month or 2. And what I found is that there's a lot of innovation going on and the number of people who are now coming out and saying, we've got a better silicone anode and or we got a better cathode. And for us, it's super exciting. There's a lot of announcement coming up with the company in Australia I saw recently, a company in England recently. So the supply chains of the material production in both anodes and cathodes is diversifying a little bit more and a lot more innovation going on there.

Of course, quite a bit because of the huge EV opportunity that a lot of people see. But for us, it's tremendous because we are able to take advantage of all the investment that is going in into those spaces and use those anodes and cathodes which are best suited for us in our battery architecture and take advantage of that and provide much higher energy density, much better cycle life, much better fast-charge capability. So I think it's a really exciting time for us. And the diversity of the supply chain is also helping us because we are now able to work with multiple suppliers, and that helps us in our cost of goods, too.

Next question comes from Bill Peterson from JPMorgan.

Nice to see things are on track with Fab-2. Farhan, welcome to the team, and good luck in the role. And Ralph, good luck in your retirement. My first question is, I wanted to check in on the smartphone announcements. I'd like to get a better understanding by what you mean with the term engagements. I mean, do you have -- are these volume purchase agreements or is pricing set? Could these be for new form factors? And I guess, should we think of these large batteries for smartphones as custom parts, or are you looking to standardize these parts?

Yes. A lot of questions in that. Firstly, more smartphone products will be custom products in the sense that every smartphone maker's battery is a specific size. Now close enough to the other ones, but specific. One of the key areas that we are seeing a lot of opportunity is actually in an area called foldable phones and flip phones. As you might recall, this has become a very popular category now, particularly in China, because it just provides a much larger display that you can use. And the advantage is you can run multiple applications at the same time. With 5G, you can have different windows open, running at the same time, different AI applications in different one. People love that. People love the form factor. Now a flip gives you a smaller device that you can put in your pocket without compromising on display. A fold gives you a regular sized device but with twice the display. So both the form factors are very popular.

The problem, though, is that to support such a big display, you need one battery on each side. So flip typically needs 1 battery on the back and 1 battery on the front and folds in the middle. A fold needs 2 batteries, one on each side. The advantage we have with the Enovix battery technology is -- or at least what the customers were telling me when I met them was, hey, it's now possible to take 1 Enovix battery and replace 2 of those batteries. So now you can actually have a flip phone where the top is really thin, for example. Now when you fold it, it's much smaller and much thinner. Or you can have a foldable phone. The problem with a foldable phone today is that it's twice the thickness of a regular phone. You can now put 1 battery or 2 thinner batteries from Enovix that can actually make that foldable phone the same form factor as a regular phone. So that's one example of where customers are using.

In terms of engagements, typically the way this works is we are working on what is the form factor? What time frame in the launch? What size battery do they need? How do they charge it? How do they discharge it? Which process does it connect to? When do we need to give them samples? When we do to make the first demonstration? So it's kind of like an engagement that typically would happen with a processor or with a memory, which I'm very familiar with over the last many, many years. So super exciting and super exciting to see that they're all going down the same path of how I've gone before. And all these customers also make wearables. So the same battery technology can also be used in the wearables. And some of them also make notebooks. So it's kind of a broad brush strokes opportunity for us across all of them.

Great. Nice to see the interest there. Also, you mentioned that about your, I guess, confidence to get premium prices, and you mentioned that there's a lot of investors asking about your ability to achieve that. Another thing we also hear from investors is how to think about your cost structure vis-a-vis competitors in Asia. So I guess today, how should we think about the current Gen2 line with the current throughput, the current cost structure around $50 million? As well as the current material set, how does that compare to high-volume competitors today? And maybe more importantly, like what opportunities do you have in terms of driving down line costs, increasing throughput and material optimization in order to close the gap with your high-volume competitors?

Yes, absolutely. So I've answered this question a couple of times on investor calls. I'm happy to go through it again. Typically, the cost in a battery making is majority of the cost, like 60% or even higher, is material cost. And these are anodes, cathodes, electrolytes, separators and so on. Now currently, our cost structure is clearly not where it should be, and it probably won't be where we want it to be even when we build like one line. So you have to get the scale, build batteries in the tens of millions to really get those purchase agreements to the part where the material cost is very competitive. And we are finding that.

Now as we start building our factory, Ajay and his team, he's got a terrific supply chain team, and he's hired some very strong supply chain and also material procurement people that are getting those costs down. And so in that sense, the comment I want to make is as we ramp into volume, the material costs will come down. And we are seeing a lot more competition, as I mentioned, now in the whole material stack. So we are able to dual source or even multi source in some of these to get the cost down.

The other one is the cost of the machines itself, and Ajay and his team have done a lot of work in figuring out what aspects of the machinery we can further cost reduce. For example, when we talked about this first line, which is the line we are building, it's a universal line in the sense that it can make batteries from very small watch batteries to much bigger smartphone or laptop batteries. But as we are making progress in design wins with our customers, we will be able to optimize those lines so that the line cost comes down.

But the variable, the battery size it needs to make, may not have to go all the way from very small to very big. It could be a big battery, maybe 10% variation of that, so we can support all the smartphone cells, for example, on that line. And another line could run much higher throughput and support the watch sales. So we are in the middle of that of how to optimize the lines in terms of line cost and line throughput and also in terms of how to get the material costs down. I'm very optimistic that long term, it's going to be a very healthy gross margin business as we get scale and as we get lines more and more optimized to the end products.

Our next question comes from George Gianarikas from Canaccord.

First, maybe to focus on anything new that's happening with the EV opportunity. You specifically mentioned in the release of fast charging based on the structure of the batteries you're building. So any update there would be appreciated.

Yes. As I mentioned, we're making steady progress in that area. We now have -- we're able to further quantify as we fast charge, what is the benefit of our architecture in terms of fast charging. And as I mentioned last time, we are working with a couple of EV OEMs in working with the material stacks that they would like and how we can put them in our architecture and get them some samples. It's moving. And I don't have any new milestones to share today, but I'm optimistic that we'll be able to give more data before the end of the year.

And maybe as a follow-up, just to focus on the capital structure. You lowered your capital needs for this year. Can you just sort of remind us what 2024 looks like and what the requirements will be for you over 12 to 24-month period?

Okay. I'm going to get Farhan to take the call as his first CFO.

So yes, we're not guiding to CapEx needs for next year. But what I can tell you is that we have a lot of things going on next year. We will be completing the Gen2 line. We also have the Agility Line also coming in. So CapEx will be higher than this year, but not guiding to CapEx. You have to wait until end of the year, and then we'll probably be able to share more.

Our next question comes from Alex Potter from Piper Sandler.

So maybe just a quick follow-up on that one. I know maybe you can't specify in terms of specific numbers here, but maybe qualitatively. I know that you're focused initially on the Agility Line and then getting the first lines up and running in Malaysia. But I'm wondering if you've begun sort of contemplating when you'll start building additional maybe dedicated high-volume and customer-specific lines in Malaysia as well as how much those lines will cost. And like I said, I know you don't have to maybe put a fine point on exactly a dollar number there. But are you at least having conversations with customers about when they can expect deliveries from custom lines like that? And in your mind, have you started thinking about what those will cost and when you'll start building those lines?

Yes. So I think we talked about this before. So mainly, we -- our customers are now in multiple form factors, right? I mean we have customers in smartphones. We have customers in laptops. We have customers in watches. And we have to optimize the line for each of those. Now again, we are now working at different models. Like when you talk about a line, the line has multiple zones. That's the other thing you got to remember. Some of the zones are laser machines, which maybe we can optimize for multiple ones. Some of the lines are more, as Ajay mentioned, constraint stuff.

Then there's zones that do buffering and things like that in the back end. So we're now trying to figure out the right optimization where we leave most amount of flexibility for us in terms of satisfying all 3 of these markets. But at the same time, we're financially also optimal in terms of not making just universal lines for all of that. So I think that's where it's going. I wish I had a more precise answer for you. But I think we'll have better visibility as the year goes along. But rest assured, we're having all of those conversations you mentioned with our suppliers, which are the long lead term ones, which one we get sooner and which one we get later and so on.

Okay. And then maybe just a follow-up to that. In terms of who will pay for these new lines and how those lines will be financed, I know that there's sort of multiple different options. You could get your customers to help pay for it. There might be price concessions associated with that or dilution associated with that. How far along are you in those discussions regarding how funding will be arranged for these new lines beyond the initial several lines that you already have planned?

Yes. So I mentioned when I just took over the job that there are 3 options for us in capital raise. The first one clearly was that we are going into Asian countries where people want us to be there, and there is the ability to get favorable funding options because those countries want us to put our factories there and bring the technology there and provide jobs. And as you can see from the announcement today, we were able to deliver on that. The second one I mentioned was that whenever opportunity arises and the capital markets help us, we will work on raising capital.

And we've done that, and we've capitalized the company with the convert earlier in the year. The third one I'll mention is that customers would like to fund some of our lines. And as I mentioned, that will come with some, I guess, things associated with margin, price and so on. All 3 are open. And honestly, at this time, we don't have to make one of those decisions because we have capitalized the company, and with the most recent announcement of YBS, we have some more runway. So Farhan's here now, and he's going to figure out the right optimal path to get the CapEx for the next step.

(Operator Instructions) Our next question comes from Gabe Daoud from Cowen.

I was hoping, Raj, could you maybe give us an update on the MOU that was announced last November for a smartwatch program? Is there any notable progress that you could comment on today?

I guess maybe Ralph can comment about it. I think he was involved in that MOU.

Yes. So it wasn't necessarily specifically for a smartwatch, but using our technology in multiple platforms moving forward. And we have made progress there where the customers have been qualifying the product, and it's just an ongoing process for us. We should see some outcome of that either next year, most likely into 2024 or early 2025 from a volume production perspective. But it's progressing along sort of as we expected it to.

Yes. One comment I'll make, Gabe, is that clearly that MOU is one thing that we talked about. But after coming back from Asia recently, it's just a tremendous amount of interest in our technology and products from many, many customers with large volume opportunities. So we just have to get the qualifications done and build our factories to satisfy the demand that's coming up.

Got it. Got it. Great. That's helpful. That's helpful. And then just a quick follow-up. And I know this probably doesn't matter today, but if you ship 10,000 cells in 2Q, generated $42,000 in revenue, it implies a little over $4 in an ASP versus you previously disclosed $5 for the small cells. I'm just curious, what's the -- maybe what's driving the delta there?

I mentioned before, cells are going into customers that actually will -- we are sampling. Sometimes we don't charge for samples because we'd like for them to use our products and test and validate and then move forward. Sometimes we charge a lot for samples. And so you can't just multiply the revenue number -- take the revenue number, divide by the units and get an ASP. That probably wouldn't give you an accurate answer. This is early-stage production, and this is really customer qualifications, and so that's not a good time -- that's not a good way to calculate ASPs. But I can tell you this much, though. We feel very good about our ASPs because the value we provide. And that's something I'm even more encouraged now than ever before.

Our next question comes from Ananda Baruah from Loop Capital Markets.

And Farhan, welcome. Look forward to working with you. Ralph, sorry to see you go. Really enjoyed working with you. Hey, Raj and Ajay. How are you? Yes, just a couple just real quickly. With regards to Fab-2, Gen2 and getting it going between now and I guess is it -- Raj, is it still April time frame you're expecting to have initial production project -- product out? Is -- should we expect from you, sort of you update us on certain milestones in between the earnings calls? And what might those sorts of things be that we could expect from you, if there is anything? And then I have a quick follow-up.

Yes. Absolutely. The date is still mid-April to get samples from our Gen2 line in Malaysia that we can send to our customers. And the big next milestone is factory acceptance in next month. And Ajay feels confidence. He's out there. And we hope to be able to give you an update on that when that's done. Then we have milestones on when the Agility Line comes in, I think you'll see that. And then we'll have milestones on when equipment goes into our Malaysia facility, now that we got the contract done. We have a site and we have people and all that. That will be really good to see. Yes. I think lots of exciting things to report as the year goes by.

All right. Awesome. That's helpful. And then just quick follow-up. How should we think about aspirations for EV MOUs as you move through the year? Is this year still -- is that still a goal that you have in mind? And do you need to -- I know -- I think there's been conversation about actually getting an EV battery sample made also. Is that something that's necessary for EV MOUs to occur?

Yes, that is absolutely the goal. I mean honestly, I think our challenge right now is the number of opportunities we have. This Army opportunity that came up, the EV opportunity that is making good progress, and then we announced the general availability of the cells. We have customers qualifying those things. We have the Malaysia line coming up. It's just really a question of sequencing all those things in the right time fashion so that it's most profitable for the company. That's absolutely the goal, but we kind of have to balance all the stuff we got going on now.

Our next question comes from Sean Milligan from Janney.

I guess the first question is, how can we think about a Fab-2 ramp in terms of once you get this first Gen2 Autoline in and running and you start to see some production orders, how should we think about the ability to add additional lines at a pace? Like is it 1 per quarter, 1 every 6 months? What's a realistic pace for us to think about that, come 2026, I guess 2026?

Yes. Look, we -- if we wanted to, we could buy -- we could build 4 universal lines and build them as quickly as we can. But as I mentioned before, that's not a very good strategy because we want to optimize the line for the customer. And that's where we are spending all of customer opportunity so that we get the most amount of margin for each product. We are working feverishly on what are the long lead pole issues so we can get working on those. We are working on how to optimize the line even more so that each subsequent line costs lesser. So those are all things we are working through. And I hope to be able to give you more color as the year goes by on how we plan to do that in 2024 and in 2025. So at this point, I don't have much more details than what I mentioned last time.

Okay. And then with -- since the YBS announcement is out, the $100 million, that covers basically the facility plus the first line. Can you talk about how many lines you think you can ultimately fit in that facility?

Yes. That facility itself has space for 4 lines. And we are facilitate -- we're making sure the facility can hold in terms of electricity, dry room and all that kind of stuff up to 4 lines. And that is super exciting. So we got that worked out, and we got the first line going in. Now we're just trying to figure out the sequencing of the next few lines as profitably as we can.

Our next question comes from Gus Richard from Northland Capital Markets.

Can you talk a little bit about where you are with commercial terms, so YBS? And have those been nailed down at this point?

Yes. We signed the manufacturing supply agreement. So I think it's nailed down, signed by us, signed by them. And that puts in all the terms there in terms of exactly what the uplift is and how it comes and so on. So the terms between us and YBS are signed.

Okay. I appreciate that. And then I just want to make sure the Agility Line is still expected to be up and running in November of this year by year-end and be able to produce samples for customers?

Yes. They're still on track. We believe by year-end, we'll have that. Yes. So we are building on 2 lines, really. We're building the Agility Line. They're also building the Line 1 of the Gen2.

Right. Right. And Line 1 is Gen2. The rated throughput's 9 million units per year?

9 million are the bigger batteries or 18 million of the smaller batteries. 9 point something, but roughly round numbers, yes.

Got it. All right.

Raj, so just to clarify, the first line is the universal line, right? So we've given up a little bit on the UPH optimization for this first. The universal line will build [9 million] batteries of any kind.

That's correct. That's correct. Thank you for that.

Our next question comes from Chris Southern from B. Riley.

Maybe on the production from Fab-1. Came in ahead of the target in the second quarter, targeting 36,000 in the third quarter. Are we still targeting 180,000 for the full year, or does the acceleration of some of the larger laptop phone batteries change that target? Just are there any specific things you'd call out we would need over the next few months to hit 180,000, if that's what we're still looking for? And is there any significant expectation from the Agility Line this year?

Yes. Great question. We absolutely -- with the way the manufacturing is going on, Ajay and his team have done a phenomenal job. We can make those 180,000 batteries if we wanted to at this point, absolutely. That's the goal. But now that we have these opportunities for higher value from both these larger cells for the Army and for laptops and other areas, and as the question was asked, what do we do about the EV stuff. We're getting a few other ones. And we only have one fab here, and the Agility Line is coming. So based on how quickly the Agility Line comes in and how to optimize the ones, the fab here, we're going to update you on exactly what we want to do for the rest of the year. But it's a good mix problem we have that we have more opportunities to work on, and we have to make sure we want to build the right ones.

Got it. Okay. Makes sense. And then on the customer side, I appreciate the color on some of the larger phone and laptop customer engagement. If we go back to the customer funnel plan for 2023 that you provided on the January 3 presentation, I just wanted to see how you think you're tracking as far as accounts moving towards some of those later stages, P1K, P10K. Any metrics you could provide breaking down the $737 million in active design and design wins by where we are in some of those milestones?

Yes. Ralph, you want to take that one?

Yes. So we haven't really shown that graph again, but you memorized some of the milestones very well. So yes, we are moving customers from what was called kind of QS-100, which is sort of a very early sampling stages into that P1K, which is the production 1,000 units or more. And that's sort of the path until we get to real revenue and high volume, which again, based on how many units we're getting out of the fab, happens later this year and then into next year as well.

So we've got -- as Raj has pointed out, we've got plenty of opportunities stacked in that pipeline. It's a matter of us getting the right mix of the right amount of product, which is why you're seeing us not ship all of our units that we put together as we build up a little bit of inventory for some of these customer product launches moving forward. But the funnel is progressing well. And even the front end of the funnel, which honestly, because we have so much opportunity, we've spent less time on, we're getting a bunch of new customers coming in with new opportunities that keep increasing the funnel.

I appreciate the details. Congratulations, Ralph, on your retirement.

Thank you.

Our next question comes from Tim Moore from EF Hutton.

And the equipment line video walkthrough tonight was insightful. My main question is, you're clearly innovating and pushing the envelope on energy density and lighter weight batteries. More than just the U.S. Army is going to appreciate that. Are you seeing more customers or prospects maybe appreciate the roughly 50% lift in more amp hours? I know that's a wide range for capacity. But whatever it is compared to their technology that they've previously been using, I'm just wondering if the awareness by customers for the amp hour lift from your offerings, or even marketing accelerating by you is starting to really shine through the last couple months and accelerate?

Yes. I mean, absolutely. The customers truly appreciate the fact that we're providing more energy density. And again, this is really driven by the new applications that they see coming that need much more battery. I think that is just a classic of what's happening. I mean, I wrote in my blog, if you see, for example, the new Apple mixed reality headset, you can see 2-hour battery life. It would be beautiful if you could get that to 4 hours or 6 hours or 8 hours. So we are seeing that across the board. And also as AI moves from the cloud into the edge, you just need more and more because of the immediacy. So energy density is totally appreciated.

I think as our customer engagement is moving to the next level, where we have joint programs with them, they're testing our batteries, they're putting them in the form factor, we are also gaining a lot more appreciation for the various, how should I say it, the different parameters over which you optimize the use of a battery. For example, we need to provide energy density. We also need to provide cycle life. We also need to provide the ability to charge really quickly. We also need to provide the ability to get into the heat fast, charge and discharge at different voltages.

So we're just moving to the next level of the customer engagement where we're really able to work closely with them on how the battery fits in the framework, how it interacts with the processor, how it interacts the OS. It's just fascinating to see. And we're able to roll that now back into our product road maps. So our next-generation batteries, when they come out with the next-generation technology, they will be even more optimized to all these different requirements in addition to providing higher energy density, which is really the transition of the technology.

Thanks, Raj. That's really --

Just to add a little more. I was just going to say, we shouldn't lose sight of what was sort of announced in this -- as far as this quarterly release goes. With Raj's involvement in some of these mobile phone customers mostly out of China being much more aggressive, and actually allowing us to talk about them as being customers and being involved, they're the ones seeing the absolute need for this uplift because, to the points that Raj has been making all day, is they need to enable features, and they just can't do it with the existing technology that exists out there. So they are pushing very hard and want to partner with us to make that a reality and mostly in mobile platforms today.

Yes. Thank you, Ralph. Thank you for that highlight.

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

Yes. Thank you, everybody, for listening to us, and thank you for all your questions. Really exciting times and a great quarter. Looking forward to speaking with all of you again next quarter. Thank you.