Enovix Corp (ENVX) 2021 Q4 法說會逐字稿

Thank you for standing by and welcome to Enovix Corporation's Fourth Quarter and Full Year 2021 Earnings Conference Call. (Operator Instructions) As a reminder, today's program will be recorded.

It is now my pleasure to introduce your host for today's program, Charles Anderson, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Hello everyone, and welcome to Enovix Corporation's fourth quarter and full year 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 kindly remind you that we released our Q4 and full-year 2021 shareholder letter after the market closed 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 the shareholder letter, press release, and this conference call, all contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are based on current expectations, and may differ materially from actual future events or results, due to a variety of factors. For a discussion of factors that could affect our future financial results and business, please refer to disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, March 3rd, 2022, based on the information currently available to us. We can give no assurance that these statements will prove to be correct and we do not intend and undertake no duty to update these statements, except as required by law.

During this call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. You can find a reconciliation of these non-GAAP financial measures to the 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 Harrold, to begin. Harrold?

Thank you, Charlie. Good afternoon to everyone. We're looking forward to updating you on our progress today. We do so with a heavy heart, given the current situation in Ukraine. Our thoughts are with those affected by the ongoing conflict, including our employees from Ukraine, and those with friends and family from the area. While Enovix does not currently have direct business ties to the region, today, we are thinking of the people at Antonov Airlines, a Ukrainian airline who helped us deliver critical factory equipment from Asia to San Francisco in the spring of 2021, to mitigate supply chain disruptions. Without this hard-working crew from Ukraine, we would not be where we are today. We remain grateful for their assistance and our thoughts are with them, their families and their loved ones during this difficult time.

2021 was quite a year for Enovix, one that validated the technical and commercialization strategy we have pursued since our founding. We entered 2022 with ever-increasing demand for our batteries, which we believe offers the highest energy density for the mobile computing market, and most importantly, we are on track to begin commercializing in the coming months.

Our shareholder letter posted on our website details our accomplishments in 2021 and our focus for 2022. Let me call out some of the highlights here, then Steffen will do a review of the financials. After that, we'll take your questions.

In January, we began shipping production qualification samples from our automated production line of Fab-1 in Fremont to customers. By doing so, we continue to expect recognizing first product revenue in the second quarter of 2022. Hitting this significant milestone, will distinguish us from competitors who claim technology breakthroughs, but are years away from commercialization. I want to thank our entire team and especially our operations group for bringing up our first line at Fab-1. It was by no means an easy task.

Indications of demand for our battery remain well above what we can supply for several years. Our revenue funnel increased by roughly $200 million sequentially in Q4 2021 to $1.5 billion. End markets and applications continue to be broad based, but we would highlight incremental contribution to the revenue funnel from new industrial applications and new engagements in Asia, as a result of additional resources we are devoting to the region.

The speed by which we can capture this demand comes down to how fast we can qualify customers, improve our manufacturing process and bring on capacity. We have generated a tremendous amount of learning from bringing up our initial production line and immediately fed this into designs for our next-generation equipment. These designs will enable lines that are faster, smaller, more energy-efficient and ultimately lower cost.

First, in response to increased customer engagement and demand for custom cell designs, we will soon order a next-generation pilot line, based on these learnings in order to speed customer qualification. Second, we also plan to order in the coming months, the first of our next-generation production lines based on these same learnings. This line will allow us to bring additional capacity online for revenue by the middle of 2023.

It has long been our view, that the proper time to scale up is when we have optimized our manufacturing process and believe our next-gen lines give us the best opportunity to do just that. Our shareholder letter also details important third-party validation. Notably, we were an innovation award honoree at the Consumer Electronics Show in January, quite an achievement considering the 1,800 products evaluated by an elite panel of judges. We further strengthened our balance sheet, with the redemption of our outstanding public warrants, which has added another $130 million.

Last, I'm pleased to announce 2 recent data points that demonstrate our progress in commercializing our battery for the electric vehicle or EV market. Today, we are announcing the addition of Patrick Donnelly as Vice President of Strategic Business Development, focused on EVs. Pat joins us from Samsung SDI, where he led a commercial team that secured several multibillion-dollar contracts for lithium-ion batteries, with both established auto OEMs and emerging EV OEMs. Also, today, in our shareholder letter, we are showing updated progress on our Department of Energy program, to demonstrate our 3D architecture and 100% active silicon anode with an EV class NMC cathode.

As many of you know, low cycle life is one of the killer problems, that has held back the adoption of 100% active silicon anodes. We believe the Enovix 3D architecture uniquely solved this problem, and we are happy to report that these cells are approaching 800 cycles and only have lost 4% of their capacity. These are very encouraging and exciting results, and we look forward to updating you, as they progress. Please be sure to read our shareholder letter for more details on these significant achievements.

Now I will turn the call over to our CFO, Steffen, who will discuss our financials. Steffen?

Thank you, Harrold. Our detailed financials can be found in our shareholder letter. So I will spend my time covering a few high-level topics. We closed the fourth quarter of 2021 with net cash of $385.3 million, which does not include the incremental $52.8 million of cash we received in January from the remaining exercise of our public warrants.

Turning to the fourth quarter results; we did not recognize product revenue in the quarter, consistent with our expectations. As Harrold mentioned, we continue to expect to begin recognizing product revenue for the sale of our batteries in the second quarter of 2022, consistent with our previously reported goal. Our operating expenses in the fourth quarter were $24.8 million. Excluding stock-based comp, our non-GAAP operating expenses in the quarter were $20.8 million, up from non-GAAP operating expenses of $16.2 million in the third quarter of 2021, which also excludes stock-based comp. The sequential increase was the result of our efforts to scale up the business for manufacturing and commercialization, to meet demand from our customers.

Turning to the full year 2021 results; we used $95.3 million of free cash flow, which included $43.6 million of capital expenditures. Cash use came in below our forecast of $110 million to $120 million, due to timing of equipment payments, some of which slipped into early 2022.

Now let's discuss our expectations for 2022. As noted earlier, we expect to recognize our first product revenue in Q2 2022. For full year 2022, we expect to generate revenue between 6 and $12 million. We expect that our revenue will consist of both product revenue and non-recurring engineering, or NRE service revenue. Keep in mind that in addition to producing cells for product revenue, our lines will also be heavily occupied this year, producing qualification samples to support future revenue ramps.

For full year 2022, we expect to use between USD 190 million and USD 210 million of cash, of which we expect roughly 55% will be CapEx. As Harrold mentioned earlier, we are bringing on a next-gen pilot line in 2022 to respond to the need for increased customer qualifications. We are also continuing to build out Fab-1 and will order our next-generation production line. Not surprisingly, like the rest of the industry, we are not immune to the inflationary pressures impacting battery production equipment, given the surge in demand for lithium-ion batteries.

To summarize, we enter 2022 with a very strong balance sheet and are investing to commercialize our groundbreaking 3D battery architecture, which uses 100% active silicon anode. We are 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 outstanding progress in 2021. We are now building and shipping batteries to Tier 1 customers. In 2022, our priorities will be responding to a growing customer base, driving transformative product enhancements and improving our manufacturing process based on the learnings from Fab-1.

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

(Operator Instructions) Our first question comes from Colin Rusch with Oppenheimer.

Can you talk a little bit about the number of customers you've gone through the full qualification on, for moving into the designing phase? And then I have a follow-up question around capacity expense.

Yes, Colin, thanks for that question. This is Harrold. We shipped our qualification samples for our first customer, and we're working on qualification samples for others right now. As we've mentioned in the comments earlier, we expect to start recognizing revenue from one of those customers in the second quarter '22.

Okay. And then you talked about the capacity expansion, but clearly, demand is running at a pretty healthy clip. I'm curious about your thoughts on potentially doing a slightly larger facility, as you decide on this next phase and how far along you are, in terms of identifying that location and potentially entering into an agreement you can talk about?

Yes. Yes. Thanks for that comment. As you mentioned, we're seeing an increasing and growing demand for our product, both across products and customers, and obviously, want to translate that into revenues as fast as possible. As you actually think of this, one of the things we're actually starting to think about, is whether we need to establish an earlier global footprint for how we manufacture. And so we're basically -- right now, we're evaluating both domestic and overseas locations to do that.

The other thing I would say is, in addition, we've had such valuable learning off our first production line. And that's really given us the opportunity to design the next-generation line, that is more efficient in terms of throughput and capital and floor space, and we're really looking at what's the best way to move the company forward, and how do we expand. And both of those have a factor on kind of what type of facility and where we want to locate it. We remain actively engaged with one of the largest real estate firms that's out there. They specialize in manufacturing sites, and we've been working it for quite a while, and we actually have submitted a couple of LOIs on several candidate properties already. So I think stay tuned for that. We expect to move forward soon with this first next-gen line and then after that, announce a location for it.

Our next question comes from Anthony Stoss with Craig-Hallum.

Harrold, I'm curious with the new process that you identified, you've talked about it being more efficient and faster, et cetera. Will that raise the potential revenue in plant 1 when it's up and operational and cranking? And then a follow-up question, the 35 customers that you highlighted, you sampled to, how much is that up from the last quarter, and can you give us a sense of kind of what markets, is there any new markets that you're sampling into?

Yes. Thanks for the question. So first question was -- sorry.

Fab-1 capacity.

Yes. So I think, certainly, to the extent these new lines are more efficient from a footprint utilization space, that gives us an opportunity to increase the capacity here, should we choose to. I think we're looking at where we put capacity a bit more broadly, thinking about where our customers are. So we may decide to add more capacity here. We might decide to have more capacity somewhere else. I think that's an active discussion we'll go through. Ultimately, I would just think about, how do we install enough [aggregate] capacity in our locations to satisfy the customer demand, and I think we're going to be flexible about that, and really look at what makes the most sense for the business and our customers.

Your second question, if you was -- sorry, if you could repeat that, I'd appreciate it.

Yes, the 35 customers that you sampled to, in total you guys -- how many you had last quarter, if there's any new markets?

Yes. So I would say the funnel continues to grow impressively. It grew roughly $200 million during the quarter. I think growth is both broad across all the markets we've been targeting already. But I think we've also seen some new interest in a couple of segments. One is the industrial market, where energy density has a pretty high value prop as well. And so that's one area, which I think is new relative to what we've been seeing in prior quarters.

If I could just sneak in one other quick one, just again on the new process. Is there brand-new equipment that you haven't dealt with in the past, and is there any kind of material additional lead times? I'm curious when you think you can have everything in and qualified for the new process?

Yes, I think it's a combination. I think in some cases, these are improvements on equipment with existing vendors, right, where we've learned enough, we know we can make a much better piece of equipment. In some cases, we're looking at some new vendors as well. We're pretty far along in those discussions. So from a lead time standpoint, we have a good sense of what those are, and we believe that we'll have that first next-generation line, on the ground at the facility, sometime in the first quarter next year, and have it producing revenue -- second quarter, which is consistent with what we've been saying for the last several quarters.

Our next question comes from Derek Soderberg with Colliers Securities.

So just on the second production line at Fab 1, you guys started putting that in, I think, late in last quarter, you were talking about it, so late in the year. I guess, what inning are we sort of at with that line, and do you expect that second line to be fully up and running and ready to ship battery cells by the end of the year, or what's sort of the time line for that one? And will that one be using -- that second line using the new manufacturing equipment or not? And should that second line at Fab-1 be sort of the last line using the prior generation equipment? Sorry, that was kind of a lot there.

That's okay. So you're right. We've got -- we have not -- we have 2 essential production lines here in the Fremont facility. One has been here longer. It's the one that has produced the qualification cells that we shipped in, in January, which will be in production in the second quarter. The second one is a bit behind time-wise, it landed later. And its big role this year, if you think about kind of through the summer is, doing qualification work for some of the larger cell products. And we do expect that towards the end of the year when that qualification work is done, that line will be available for doing production deliveries. But I would say that, from a true revenue standpoint, most of the revenue work will be done on the first line, because it's the one that's actually producing the product we're qualifying right now with our customers.

And then your second question is Line 2 kind of the last of the current generation. I would say the answer to that is yes. There is some additional equipment coming in, to support that. But overall, I would say, [Gen-1] is kind of what we have, where there were a few more pieces showing up. We will -- we've done is use all the learning on that, which has been super valuable. In fact, I would say we're more than pleased in all we've learned, because it really helps us to design a next-generation line that is quite a bit better and we're excited to turn that into these next lines, that we can really grow [company-wide].

Got it. And then as my follow-up, you guys spoke to sort of prioritizing customer qualifications and improving your manufacturing equipment ahead of scaling capacity. It doesn't sound like that priority is changing the time line to Fab-2 time line to revenue there. Just curious if that relates to -- that commentary is related to your JV licensing strategy and just trying to sort of bulk up the throughput of the equipment. Is that a good way to think about some of that commentary?

Yes. I would think a little bit about the partnership stuff as being on a parallel track, right? I mean, we're squarely focused on getting the production lines that we've built ourselves, are known to hit their goals and then working on a second-generation line. At the same time, obviously, we're talking -- we do talk on a somewhat regular basis with customers and potential partners for how we could grow faster. A key piece of that is our Fab-3 strategy, which is what we've talked about, which is further out in time and geared maybe more towards the EV space, because we feel that approach to JV or license is the right way to enter that market. And so with the addition of Patrick Donnelly, we talked about, he'll be someone who's actually going to be helping, have some of those conversations with the players in that space, to try to push those discussions forward.

And our next question comes from Gabe Daoud with Cowen.

Maybe just back to the manufacturing capacity and capabilities. I think Harrold initially, Fab-1 was expected at scale to deliver 45 million cells a year. Just curious, how many lines of that -- how many lines did that assume? And then just -- because I'm just trying to get a sense of like how much products you could actually deliver today from the lines that you have today?

Yes. So thanks for the question, Gabe. So certainly, we've talked about our ability to significantly ramp the capacity here. That's beyond the 2 lines that are in place, and that would be something we would do in the future. Certainly, consistent with our strategy for these next-generation lines, maybe the generation beyond the ones we have right now. I would say that, our decision to increase the capacity here, we'll judge over time, as we look at how our Fab-2 strategy rolls out, right, and whether it makes sense to do more here, less here and more at some of these other locations, I think we want to be flexible on that, with respect to where our customers are and what the opportunities are for these other locations.

So I think we'll adapt dynamically and I'm sure whatever we would say today is, probably slightly different than we'll end up executing on. Ultimately, we just want to make sure we can deliver the overall capacity to meet our customers' needs.

Understood. Thanks Harrold. And then maybe shifting gears a bit and just looking at some of the cycle life data you showed on the EV battery. Could you just talk about -- I know there's a target as part of the DOE program to get to watt hours per liter figure of 700. Can you just talk about what the energy densities on those cells on watt hour per kilogram? And if EV partners are more interested in the gravimetric or the volumetric energy density?

Yes, I would say there's interest in both from a customer standpoint. It turns out that in cars today, in some ways, the space is as valuable as the weight. The specific cells that we've built now were not super aggressive from an energy density standpoint. That's somewhat on purpose, because the objective was to establish the long-term cycling capability of our unique 100% active silicon add on the architecture. And I think thus far, the data on that is pretty exciting, and I would say that people would struggle to show active silicon stuff, in the past, it looks as good, so we're excited about that.

We do believe that if we were designing 2 high-energy cells for that market, we could have a compelling product, either from a volumetric or a specific gravity standpoint. And we've had some data out on our website, that talks about what that might look like.

Thanks Harrold. And then just curious, as those cells have cycled now and hit close to 800 cycles, how much did they swell? Was it like less than 5%?

Yes, I would say, in general, with the architecture and our unique in-strain system, we see very little actual swelling of the batteries.

(Operator Instructions) Next question comes from Sean Milligan with Williams Trading.

As you look to build out the EV sales process, I know you're bringing on Patrick, just curious if he's brought anything with him, how that team is going to build out over the next year or 2?

So I would say it's -- I don't know the answer to those questions. Patrick has just come on board, and I'm sure he has some thoughts on how to build that stuff out. I would look for us to make some comments on kind of how that org going to shapes up over the next several quarters. But to be honest, I don't have the actual answers of those in front of me right now.

Okay. And then on the EV side, with the DOE program, I think you're testing NMC technology if I am correct. Have you sampled any cells with EV players, with other technologies to this point?

Yes. So what we've done in the past, we have 4 kind of standard sizes of batteries today, which are kind of targeted more for the consumer electronics space. And so we've sampled cells from those suite of batteries into the EV space already. Those tend to have a lithium cobalt oxide cathode, a as opposed to NMC. But it gives the customers in that space a good sense of what our technology is capable of and how it performs. And so that's something we've been doing over the last half year, if not longer.

Great. And then one last question, I guess, around the -- you mentioned 35 customers that you've sampled cells to. Just kind of curious, if you're able to talk to a win rate that's in that product pipeline, and then maybe how long you're seeing it take from sampling to first revenue?

I don't have the figures off the top of my head, and I don't think we've commented specifically on how many is in each part of the funnel. I would say that -- our ability to move people into the of the part of the funnel is really more driven by our ability to engage with the kind of demand we're seeing. One of the things that we're actually doing this year, which I think is a pretty big initiative, is we're spending some capital to put in place a whole next-generation pilot line, which is roughly 10x the throughput of the line we have right now. So obviously, the raw horsepower to deliver samples to customers, is much better. It's also going to be highly flexible, so our ability to deal with lots of custom designs is significantly better.

And then one thing that's also super exciting about that, is that it's really designed around kind of the same production kernels as the new gen -- the next-gen manufacturing line. And the hope there is that we can cut some of the qualification time out with our customers, by having something that really reflects what manufacturing looks like, and not have to go through multistep qualifications for products. So we think all those things will increase our ability to drive stuff to the bottom part of the funnel, and also increase our -- reduce our time to market with some of these customers. So that's a pretty big initiative, and we think it's a real critical thing the company is doing, which will give us an advantage going forward.

And the pilot line is mid-year or...

It will be coming in the end of this year, right? So I would look at towards the end of this year, that's starting to have a significant effect on how fast we can engage with customers and move people down and also give us a promise to be quicker, in terms of converting opportunities into actual revenue.

Okay. Great. And then just one more, Harrold. In terms of the early customers that you've had and sort of the land-expand strategy, are you starting to see customers sample cells across different product lines, or you know -- it maybe you would have sampled with one product initially and now they're starting to bring it into other products?

Yes. I would say, in general, we've had increase in terms of customer traction, across multiple customers. But even within specific customers, we are starting to talk with customers about follow-on products to the initial products already. So those discussions are happening, which is, I think, a very encouraging sign for kind of their view of our relationship. And obviously, one of our decision factors around customers, we can't necessarily service everyone, is to pick customers where there is kind of that extending life, and we can ride with these customers through multiple evolutions of products. And we're starting to see that stuff materializing.

Okay. Great. And the cycle life on EV, what's the target that -- like what's the target that we should look for, if you're approaching 800 now, what's the number of cycle lives that you need to get to?

Yes. So the stated goal that the DOE has set out in this program was 1,000 cycles. Right now, we're just short of 1,000 cycles to 20% fade or 80% initial capacity. Right now, we're sitting just short of 800, and we've got only about 4% capacity [sales]. So we're pretty encouraged with those results, and we think we'll have additional good news to report on that later.

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

Thank you, everybody, for your time today and listening to our earnings call. We're super excited of where we're going and the progress we made this past year. This has been a long journey for this company to really fundamentally change how batteries are made. And we think -- we've proven a lot of that. Shipping qualification samples out of our first production line is a huge milestone for us that we think differentiates us from many others in the battery space, that talk about technologies, but have yet to commercialize. And we realize that reducing things of practice and making a product, is ultimately what it's all about.

We've got a product that works. We've proven we can make it. We've had customers that are lined up to take and we think that's a great position to be in. So we're very excited. We look forward to inform you about our progress going forward. We have -- every employee in the company runs around with our badge -- with a list of our core values, but also the vision for this company. And that vision, is that every person is positively impacted by Enovix innovation every day, and we're dead set to make that happen, and we're excited about the journey we're on, and the progress we're making, and we look forward to having you along for the ride.

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