Enovix Corp (ENVX) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. And welcome to the Enovix's Third-Quarter 2021 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. (Operator Instructions).

I would now like to hand the conference over to your speaker today, Charles Anderson, Vice President of Investor Relations. Please go ahead.

Thank you. Hello, everyone, and welcome to Enovix Corporation's third-quarter 2021 results conference call. With us today are President, Chief Executive Officer, and Co-Founder, Harrold Rust; and Chief Financial Officer, Steffen Pietzke. Harrold and Steffen will review the operating and financial highlights, and then we will take questions. After the Q&A session, we'll conclude the call.

Before we continue, let me kind of remind you that we released our shareholder letter after the market close today. It's available on our website at ir.enovix.com. A replay of this conference call will be available later today on the investor relations page of our website.

Please note that our shareholder letter, press release, and this conference call all contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors. Enovix 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.

We will also discuss certain forward-looking non-GAAP financial measures which are now prepared in accordance with generally accepted accounting principles. We urge you to review the discussion of our non-GAAP financial measures and the risks and uncertainties associated with our business that are described in the Safe Harbor provision for forward-looking statements and our shareholder letter, and in our filings with the Securities and Exchange Commission.

I will now turn the call over to Harrold to begin. Harrold?

Thanks, Charlie. Good afternoon, everyone. In our first conference call as a public company in August, we've reported solid progress and laid out a detailed strategic plan to commercialize our novel battery cell architecture. Today, we are reporting meaningful progress in our first quarter as a publicly traded company.

Our highest priority near-term milestones include shipping production quality customer qualification samples by the end of 2021 and generating first revenue from Fab-1 in the second quarter of 2022. After today's market close, we published our third-quarter shareholder letter which summarizes our milestone progress and financial results. I will briefly discuss key highlights and then turn the call over to Steffen for a recap of our financials.

First and most importantly, Fab-1 in Fremont is equipped, and in September, we produced the first batteries from our first automated production line. This accomplishment marks a major milestone in the 14-year journey of Enovix and highlights the resilience and innovation that are at the core of who we are as a company.

Many in our team have worked together most of their careers and started Enovix with a dream to reinvent the basic way a battery is made, and in doing so, usher in a new level of self-performance. Early on, we realized the importance of developing not only our unique architecture, but also a manufacturing method that could be scaled to high volume. This differentiates us as an advanced battery company and is enabling us to commercialize our technologies sooner than others.

Producing our first battery from the automated line also marks the completion of a set of goals over the last few years, we named the big three. The other goals were meeting all customer requirements for our first product and receiving our first purchase order for ourselves. We celebrated the completion of the big three in September and paid out a company-wide performance-based bonus for this great achievement. With production line 1 well into its qualification phase, we are confident that we will start commercial production in early 2022.

Equally important, we began installing a second production line at Fab-1. This is critical to our growth plan for 2023 and beyond. This line will initially focus on larger cells and manufacture production qualification samples to support programs in the mobile communications and laptop markets. On that note, we recently kicked off a new cell designed for a market leader in mobile communications. The unique characteristics of our batteries will enable our customers to bring to market new form factors and functionalities previously unavailable due to the limitations of conventional cells.

Another accomplishment in Q3 was the development of a new cell design for the augmented reality market. This market requires a high-energy density in a very small form factor. We believe Enovix technology is well suited to serve this emerging market.

During the quarter, we also shipped a unique pack design featuring multiple wearable class Enovix batteries to a strategic customer. We are targeting wearables, computing, and mobile communications as our initial applications where we can deliver meaningful value through high-energy densities. These markets have attractive pricing because their batteries are a small fraction of the bill of materials of these products. The mobile electronic markets also feature shorter design and qualification cycles than electric vehicles.

Customer demand within our initial target markets continues to be very high. At the end of Q3, the potential annual revenue of all programs, either in the active design or design win phase, reached $355 million. As a reminder, these are programs that are through technology evaluation, and design work has begun. In the case of design wins, the customer is funding a custom battery design or qualifying one of our standard batteries for a formally approved product.

In addition, our revenue funnel also includes $914 million of engaged opportunities to find out for potential annual value of projects where the customer has decided our batteries are matched for their product and is evaluating our technology. In total, the revenue funnel reached $1.27 billion at the end of the quarter. The speed by which we convert this funnel will be dictated by our ability to design, qualify, and ramp custom cells for multiple customers across our first two factories.

As we prepare for commercial production in the next few months, we are scaling all aspects of operations, including talent. With the money raised from our business combination [and pipe], our financial position is strong, and we are well positioned to add capacity and scale of operations. We are on track to generate first commercial revenue in 2022, the next step in our long-term financial plan to achieve over $1 billion of annualized revenue exiting 2025.

Let me now turn the call over to Steffen, our CFO, who will discuss our financial results. Steffen?

Thank you, Harrold. Our detailed financials can be found in the shareholder letter, so I will spend my time covering a few high-level topics. Our business combination with Rodgers Silicon Valley Acquisition Corp. closed early in the quarter, and we ended our third quarter with a strong balance sheet, including cash of $339 million. We continue to believe this will allow us to fund the scale-up of two advanced lithium-ion battery production facilities.

Turning to the third quarter results, we did not recognize product revenue in the quarter consistent with our expectations. We continue to expect that we will begin recognizing product revenue from the sale of our batteries in the second quarter of 2022.

Our operating expenses in the third quarter were $19.2 million. Excluding stock-based comp, our non-GAAP operating expenses in the quarter were $16.2 million, up from non-GAAP operating expenses of $12.1 million in the second quarter of 2021, which also excludes stock-based comp. The sequential increase was primarily driven by our continued effort to scale up the business for manufacturing and commercialization to meet demand from our customers. We also recently instituted a company-wide performance-based bonus program, as Harrold alluded to earlier.

Through the end of the third quarter, we have used $66 million of free cash flow, $31.5 million of which was used for capital expenditures. For full year 2021, we continue to expect to use between $110 million and $120 million of free cash flow, of which, roughly 50% will be CapEx.

To summarize, we are heading to the final stretch of 2021 with a strong balance sheet, tremendous demand for our product, and an experienced team. We remain focused on executing our plan which we believe will drive shareholder value.

I will now turn it back to Harrold for closing remarks. Harrold?

Thanks, Steffen. To recap, we made considerable progress in the third quarter of 2021, not only producing our first batteries from our automated production line at Fab-1. We also started installing a second line to support customer qualification work on multiple large-cell projects targeted for 2023. Our task now as we close out the year is to complete the validation of our line and deliver production qualification samples that will lead to deliveries and product revenue next year.

I want to thank our entire team for the hard work towards our vision of manufacturing the world's highest-energy-density battery. While it has taken over a decade and hundreds of millions of dollars of investment to develop our technology and manufacturing processes, I believe we are just getting started in our mission for a better world through innovation and energy storage.

I would also like to welcome Pegah Ebrahimi to our Board of Directors, which we announced today. Pegah is a seasoned technology leader, having served in key leadership positions above Morgan Stanley and Cisco Systems. Her experience helping technology companies scale will be extremely [of] value to us as we enter the next phase of our growth.

To our shareholders, we appreciate your support, and we are dedicated to delivering shareholder value.

With that, we are ready to take your questions. Operator?

(Operator Instructions). Derek Soderberg, Colliers Securities.

Thanks for taking my questions, and congrats on continuing to execute against the strategy. So Harrold, now that you're starting to see more batteries come off the first production line at Fab-1, curious how throughput yield are tracking against your internal expectations. Are you guys have sort of been talking about 45 million battery sales annually from Fab-1? I'm just looking at sort of that first line that's installed. Obviously, you are on track to hit that level of throughput for Fab-1. And then just generally, how are you feeling about the performance of the equipment installed?

Yes. Thanks, Derek, for the question. I think overall, we are pleased with where we are. It's still early up in terms of the bring-up of the line. The focus right now is really on running our qualification experiments to make sure the line is really well characterized and ready to deliver the qual samples by the end of this year. That said, I think our progress is encouraging, and it's in line with our expectations. So I think, we're on the plan that we set out, and we feel pretty good about that.

Got it. And then sort of related to that, in the shareholder letter, you guys were talking about investing in the next generation of manufacturing equipment. I was wondering if you could share some more detail on that. It sounds like you guys are finding ways to optimize the production process. But I guess I'm wondering, is the next generation a pretty substantial change from the equipment installed in Fab-1 today? Where does that new equipment could be installed? Just any color on the next generation will be great.

Yes, sure. I think I would've -- you know, first line is in the building. We are starting to run it now. As you'd expect, there is a lot of learning, right? We went from our pilot line that was relatively manual to a fully automated line. And so, as we made that learning, we've been making improvements even on the first line that's here. And we want to basically take that learning and move it into subsequent lines.

So, I would view it as probably more incremental in nature than -- it's still going to look like a similar line, but it'll be better. It will have better performance metrics. And over the next year or so, we will be adding capacity both here in Fremont, but also ordering lines for our second facility, Fab-2. Both of those would have a manufacturing environments improved upon what we have right now in the building.

Gus Richard, Northland.

Yes. Thanks for taking my question. I'm just curious, when you look at your pipeline, can you give us a sense as to how much was coming from mobile, compute, and you know, what they're calling metaverse these days?

Yes. (multiple speakers). I would say, Gus, it's pretty broad across the whole spectrum of product segments, the market segments. I mean, that's one thing that I think has been pretty encouraging to us given that was kind of our strategy from the get-go. I wouldn't handicap maybe one versus the other. I do think some of these markets like the AI market is still kind of in its early stages. We think it's going to be very significant market for us, and we are well positioned.

But at this stage, they're still -- [as formation changes], so some of the more kind of classical wearables and some of the mobile communication stuff are still the big markets today. But I think that level change over time, and I think we're doing all the groundwork to be prepared with customers to capitalize on all those markets as they develop.

Got it. And then I've been talking to other battery manufacturers. I'm just curious in your perspective. I know you're doing some custom cell designs and packs for some of your customers. And I'm just wondering, when you think of the value you bring to the customers, how much of it is in the energy density? And how much is in the customization?

I think it depends. I think, there's plenty of cases where even kind of standard designs we make really have a significant value to that customer, and so, I think we realize that in terms of how we can price the product. So, it's not necessarily that custom things are more valuable. It just depends on the application. And I think you'll see us having products out there of both kind of standard things and also custom stuff. And I believe both of those could have pretty high value for our customers.

And then, the last one for me, just in the competitive landscape. Are you seeing anybody else -- the silicon anode [pop up] in terms of just anything, even in the ballpark of what you guys are doing?

I'd say, yes and no, I think, to that question. I mean, there are definitely companies today that are starting to commercialize kind of low levels of silicon and a conventional graphite anode. We think that's great. Obviously, we're big fans of silicon, and we think it kind of validates kind of the mission we've been on for quite a while.

I think the differentiator is that if you look at what others are doing, most people are putting in small amounts of silicon mixed in with the graphite, whereas we're at 100% active silicon. And that really drives kind of the step change we can achieve in performance and energy density.

And quite honestly, if you're only using a small fraction of silicon in your battery, you're really not harnessing silicon's full potential. So, we think it's actually great. And we think it just kind of validates the mission we're on, and we like where we stand in the silicon space.

Colin Rusch, Oppenheimer.

So in this active designs, some design wins market, can you give us a sense of how that breaks out, and how many customers are in that, both on the active design and full design wins?

Yes. Colin, we actually -- we've kind of shied away from kind of talking about specific customers in each of the parts of the funnel. Rather, we just look at kind of the funnel at large. We had -- I think we had good improvement in terms of the funnel moving from -- and if you look at the lower part, we've got the active designs and design wins. We moved a decent amount of revenue into that category as well as expanding the overall funnel.

So for us, that's kind of a primary metric. I mean, as we talked about earlier, we've got a pretty broad set of customers across all these market segments. And we are adding some new ones. But I think more importantly is the overall size of the funnel increasing to support our growth plans.

Excellent. And in terms of the incremental capacity, you guys have been looking at this for a little bit of time, but as you've gotten deeper into that process of evaluating locations, can you give us a sense of how far down the road you are in terms of diligence on those potential facilities? And how many options you may have later if you're looking at right now?

Yes, sure. So just maybe for everyone, as a reminder, Fab-2 is our second plant production facility. It's larger in terms of output and revenue than the current Fab, Fab-1, and it's key to reaching our $1 billion revenue run rate by 2025. We're currently -- and I would say, very active negotiations on several attractive options. This is a big focus of the Company and me, personally.

From a timing standpoint, what I can say is that our plan contemplates that we got first revenue from Fab-2 by the second quarter of 2023. And if you just look at lead times of equipment being what they are, that means we need to be likely ordering equipment by early next year. And that gives you kind of some sense when we have to kind of make a finalization.

And I think we're on track to do that, and I think that the options before us will hit the mark in terms of our ability to fund our capacity growth and hit our targets.

Okay, that's super helpful. And then, just in terms of the qualification process, it's great to see you sending out samples already. But as you're qualifying any tools and looking at going from operating to operating at the speed that you need them to, I guess, can you talk about any sort of surprises that you're seeing in that process? Or are you progressing according to plan? Or are you ahead of plan with the qualification and the throughput on balancing the factory?

Yes. I would say, no surprises. I mean our expectation are there, be it about 100 things we have to learn, little things that don't work quite as you want, or you have to tweak or -- and then that's been kind of the story.

We've actually tried to push the line pretty hard now and really flush out all those issues. And get them taken care of now while we're doing kind of a qualification work ahead of when the factory needs to start kind of ramping to be a full-volume factory, as we go through all the next year, right?

So, I think my expectation is exactly what's been happening. We didn't think it was going to be easy. We kind of planned on that. There's no short test. We're actually doing the hard work to test the equipment and run all the experiments to make sure that you've got a really solid process that you can build good product for your customers. And I would say that's exactly what we're seeing today.

Gabe Daoud, Cowen.

Thanks for taking my questions. Harrold, maybe I was just curious. In the shareholder letter under the market expansion section, you mentioned continued progress on electric vehicle progress and evaluating the use of materials of your architecture. Could you maybe just give us a little more color on that? And what you're seeing and just where you are currently with the technology and scaling that for EV application?

Sure, yes. So we've got a couple of things going on there. One, we mentioned in the letter, we've been -- we're in the middle of a three-year program funded by the Department of Energy where we're essentially building cells of our architecture with the material sets that you'd find in electric vehicles, which tend to be different than consumer devices. That activity is going on well, and I think the results there will speak for themselves when we publish them. So that's one -- the one angle.

The other is that we've been pretty active in terms of sampling ourselves to players within the EV space, so they can get comfortable about our technology and validates its performance. I think that's a good traction.

And the third, we've started really strongly looking for some talent, both from the business standpoint also from technology standpoint, to really be at the foundation of the organization, the Company that's going to drive that. And so that's a big focus right now.

As we have mentioned in the past, our goal is to push these engagements forward and the workforce such that we need to be positioned over the next several years to have a significant EV program that, in the 2025 frame, starts generating some incremental revenue on top of the plan.

Got it. Thanks, Harrold. That's helpful. And then maybe to follow up, just back to Fab-2 and as you get closer to maybe nailing down location, could you just talk about what your initial expectations were in terms of initial size? I know Fab-1 is 45,000 cells annually, but what was your initial thoughts around capacity coming out of Fab-2? And then just give me quicker qualification times for consumer electronics and wearables, et cetera. Is there a potential to accelerate and even increase potentially the size of Fab-2 versus initial expectations, just given the strong demand that you're seeing?

Yes. I mean, what we planned on for Fab-2 is it roughly it can make 89 million cells when fully sit out and rent. That's about twice the capacity we are envisioning here in Fab-1 in Fremont. Fab-2 likely will be targeted for larger cells disproportionately compared to here. And so, if you look at the absolute revenue of Fab-2, it's more than twice the revenue of Fab-1. I can't remember the exact number.

Certainly, we're very cognizant looking at the demand funnel about how we can -- how the capacity to grow the Company quickly, and that is a key factor when we look at what the alternatives are for Fab-2, right? We want to be prepared to grow the Company as quickly as possible. That's one of a bunch of other factors that go into that decision process.

Got it. Got it. Thanks. Just one -- last one. Friday, the bipartisan infrastructure bill was passed and should be signed shortly. Could you maybe just talk about Enovix's ability to maybe continue to win some grants for cell manufacturing here in the US?

Yes. Our view -- if you look at kind of what the current administration is trying to do, is foster manufacturing in the US. And batteries is obviously is one of the areas they've mentioned as being a key technology they want to keep in the country. We think we are poster child for some of these initiatives. And we are in contact, working with governmental agencies to look at those opportunities, and obviously, we'd love to take advantage of those. It's a benefit to our shareholders. So, there's an active program going on there.

(Operator Instructions) Sean Milligan, Williams Trading.

Thanks for taking my question. When you look at the design wins and potential awards coming, can you talk a little bit about whether that's from new potential customers or you're expanding the opportunity set with existing customers that you have now, or existing customers in the pipeline?

I think it's a combination of all those things, Sean. I think, certainly, we have seen cases where we're in discussions with customers now about additional products that we might not have been talking about before, which is obviously encouraging. That's kind of an additional validation point. But we're also actively working with new customers going into the funnel as well, right?

So, it's a combination of both of that. I think if you think about us as a company, there is literally no one that won't talk to us about our batteries because we have such a distinguished product. And that's resulted in the funnel growing kind of in various and all dimensions, I would say.

Okay, great. And we've seen, I guess, especially on the EV side, there are moves to more kind of localized battery production. And just curious what you're seeing from your customer base on the consumer technology side, if you're also seeing that want to move to more localized production?

I think it's very customer dependent in the markets they serve. We announced, I think in the last quarter, a program I'm working that ends up with a department -- with the US Army, and certainly in that market, in particular, there's a desire to have domestic manufacturing of those cells. And so that's something that's certainly having this first time in Fremont. It's something that we can exploit. And there's other customers that have similar desires. And so, we'll definitely try to capitalize on those things and serve those markets out of the US to the extent that we can.

Great. And one last question, kind of more of a, I guess clarification type of question. So when you share the revenue funnel in active design, design wins, and you share the 355 million for design wins, that's a potential run rate revenue case for those design wins. Is that correct?

Yes, it's an annualize revenue of those opportunities.

Okay. And is there a way to think about -- I haven't seen you put this out there. But relative to the revenue forecasts, can you publicly [just track] what years that 355 would kind of slot into?

Yes. I think if you look at -- the 355 is an opportunity to carry us for a couple years, at least probably.

Thank you. And at this time, I'm currently showing no further questions. I'd like to hand the conference back to Mr. Harrold Rust for any closing comments.

Thank you. And thank you, everyone, for attending our earnings call today. We certainly appreciate your attendance. As we talked about, we're pretty singularly focused on bringing up our first-of-a-kind automated battery line to satisfy our customers and the strong demand we're seeing. We're excited about the progress we're making towards our mission for a better world for innovation and energy storage. And we're excited and happy to have you as investors. So thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.