Q3 2022 Enovix Corp Earnings Call

November 1, 2022

Operator: Thank you for standing by, and welcome to the Enovix Corporation Q3 2022 earnings conference call. Currently, our participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. As a reminder, today's program will be recorded. Now I'd like to introduce your host for today's program, Charlie Anderson, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you for standing by and welcome to the <unk> Corporation third quarter 2022 earnings Conference call. Currently all participants are in a listen only mode. After the speaker's presentation, there will be a question and.

Answer session.

A reminder, today's program will be recorded.

And now I'd like to introduce your host for today's program.

Charles Anderson.

Vice President of Investor Relations. Please go ahead Sir.

Charlie Anderson: Thank you. Hello, everyone, and welcome to Enovix Corporation's Q3 2022 Financial Results Conference Call. With us today are President, Chief Executive Officer, and Co-founder, Harrold Rust, and Chief Financial Officer, Steffen Pietzke. We will also be joined by our Chief Commercial Officer, Cam Dales, and our Chief Technology Officer and Co-founder, Ashok Lahiri, for the Q&A portion of our call. Harrold and Steffen will review the operating and financial highlights, and then we'll take questions. After the Q&A session, we'll conclude our call. Before we continue, let me kindly remind you that we released our Q3 2022 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.

Thank you Hello, everyone and welcome to our notebooks Corporation's third quarter 2020 financial results conference call with US today are president and Chief Executive Officer, and co founder of Hail Rust and Chief Financial Officer, Stefan Pizza, We will also be joined by our chief.

Commercial officer, Cam deals and our Chief Technology Officer, and co founder of shook with here for the Q&A portion of our call.

Harold and Stefan will review, the operating and financial highlights and then we'll take questions. After the Q&A session and we will conclude our call before.

Before we continue let me kindly remind you that we released our third quarter 2022 shareholder letter after the market close today. It is available on our website at IR at <unk> Dot Com a replay of this conference call will be available later today on the Investor Relations page of our website.

Charlie Anderson: 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 our current expectations and may differ materially from actual future events or results due to a variety of factors. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, 1 November 2022, 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.

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 our 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.

Today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today November one 2022 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 to and undertake no duty to update these statements except as required by law.

Charlie Anderson: During this call, we will also discuss non-GAAP financial measures which are not prepared in accordance with generally accepted accounting principles. You can find a reconciliation of the GAAP financial measures to 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 Harrold to begin. Harrold?

This call. We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.

You can find a reconciliation of the GAAP financial measures to 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 Harold to begin.

Harrold Rust: Thank you, Charlie, and thank you everyone for being on the call today. Enovix made strong progress in the Q3 that advanced our goals to continue commercializing what we believe is the best product in the lithium-ion battery market that will allow our customers to deliver transformational features and products to the world. This is evidenced by the strength of our large revenue funnel and increasing engagement with leaders in portable electronic products and EVs. We have active engagements with six mega cap technology companies, two of which we have design wins with. Today, we are announcing a non-binding MoU with one of these leaders. Under this agreement, Enovix and this customer will work together to leverage our technology across their broad product portfolio and further collaborate on our technology and manufacturing scale-up.

Harold.

Thank you Charlie and thank you everyone for being on the call today.

And Alex made strong progress in the third quarter that advance our goals to continue commercializing what we believe is the best product in the lithium ion battery market that will allow our customers to deliver transformational features and products to the world.

This is evidenced by the strength of our large revenue funnel and increasing engagement with leaders in portable electronic products antibodies.

We have active engagement with fixed Mega cap technology companies, two of which we have design wins with it.

And today, we are announcing a non binding mou with one of these leaders.

Under this agreement and Nova and this customer will work together to leverage our technology across their broad product portfolio and further collaborate on our technology and manufacturing scale up.

Harrold Rust: We believe we are well positioned in the portable electronics market overall, with more than 75 accounts clamoring for our products due to our technology leadership, energy density, and safety. We continue to grow our global reach throughout Asia and have engagements with leading smartphone OEMs in China and major consumer brands in Japan and Korea, including Samsung. We are also seeing strong interest from leading automakers given our fast charge advantages, and in Q3, we shipped production cells for initial testing to a tier-one EV battery supplier and a top 10 global auto OEM. Our task remains to scale the capacity for our revolutionary product with our Gen2 auto line, the engine of growth for the company.

We believe we are well positioned in the portable electronics market overall.

More than 75 accounts clamoring for our products due to our technology leadership and energy density and safety week.

We continue to grow our global reach throughout Asia, and have engagements with leading smartphone Oems in China, and major consumer brands in Japan, and Korea, including Samsung.

We are also seeing strong interest from leading automakers, given our fast charge advantages.

In the third quarter, we shipped production sales for initial testing to a tier one EV battery supplier.

Top 10 global auto Oems.

Our task remains the scale the capacity for a revolutionary product.

With our Gen two auto lines.

The engine of growth for the company.

Harrold Rust: Together with our key vendors, we made excellent progress on Gen2 during the quarter, including placing initial purchase orders for our laser patterning, assembly, and packaging lines for long lead materials, design and proof of concept projects to demonstrate the design improvements built into Gen2. These 47 projects are presently being completed with our key vendors and have thus far validated the design concepts and improved performance of Gen2. We have also placed a follow-on purchase order for the remainder of system fabrication with our packaging equipment vendor and expect to do the same with our and battery assembly vendors in the next several weeks. We believe that we remain on track to land our first Gen2 line in H2 2023.

Together with our key vendors, we made excellent progress on Gen. Two during the quarter, including placing initial purchase orders for our laser patterning Assembly and packaging lines for long lead material design and proof of concept projects to demonstrate the design improvements built into gen. Two.

The 47 projects are presently be completed with our key vendors and it thus far validated by design concepts and improved performance of Gen. Two.

We have also placed a follow on purchase order for the remainder of system fabrication with our packaging equipment vendor and expect to do the same without being in battery Assembly vendors in the next several weeks.

We believe that we remain on track to land our first Gen. Two line in the second half of 2023.

Harrold Rust: In total, over the last nine months, we've incorporated over 120 learnings from Gen 1 into the detailed designs for Gen2, resulting in a line that can assemble and package many more batteries in the same footprint for significantly less capital per battery. I'd like to highlight a few areas that illustrate why and how Gen2 is such an improvement. First, we have a laser pattern electrode form factor that allows us to deliver breakthroughs such as a 100% active silicon anode and safety innovations like BrakeFlow that uniquely address thermal runaway. Laser patterning is at the core of our technology, and we must become a world leader in that field. To support our vision, we announced today a collaboration with IPG Photonics, a global leader in laser technology.

In total over the last nine months, we've incorporated over a 120 learnings from Gen. One into the detailed designs for Gen. Two.

Resulting in a line that can assemble and package many more batteries in the same footprint.

Significantly less capital per battery.

I would like to highlight a few areas that illustrate why and how gen two with such an improvement.

First we have a laser pattern electric form factor that allows us to deliver breakthroughs such as at 100% accurate silicon anode and safety innovations like break below that uniquely address thermal runaway.

Laser patterning is at the core of our technology, and we must become a world leader in that field.

To support our vision, we announced today a collaboration with IPG photonics.

A global leader in laser technology.

Harrold Rust: Our alliance with IPG provides ongoing access to the most advanced laser technologies and has already resulted in our Gen Two lasers having 5x the power of our current Gen One, far ahead of our original scale-up plan. Second, in stacking, we are eliminating a frequent manual alignment of 4 independent punch heads and replacing them with a single punch head that stacks 4 batteries simultaneously. This is an example of one of the proof of concept projects we launched months ago that has already been proven out long before the production tools are even built. Thirdly, we are making a major change in how we transport and process batteries. In Gen One, we use a low-precision, low-speed conveyance system that moves batteries between each assembly station. For Gen Two, we have replaced it with a high-speed, high-accuracy linear motor that has only become recently available.

Our alliance with IPG provides ongoing access to the most advanced laser technologies and.

It has already resulted in our Gen. Two lasers, having five X the power of our current Gen. One far ahead of our original scale up plan.

Second and stacking.

We are eliminating a frequent manual alignment of four independent punches and replacing them with a single timeshare export battery simultaneously.

This is an example of one of the proof of concept projects. We live some months ago that has already been proven out long before that production tools or even bill.

Thirdly, we are making a major change in how we transport and process batteries.

And Gen. One we used a low precision low speed conveyance system that moves batteries between each assembly station <unk>.

For Gen. Two we have replaced it with a high speed high accuracy later linear motor that has only become recently available.

Harrold Rust: This eliminates the need to move batteries on and off the track, increasing throughput and reducing the complexity, size, and cost of the equipment, as we can now process on the track directly. In addition, we expect it to improve our process capability and yield, as the accuracy of the linear motor is often better than the Gen 1 fixturing. Lastly, we have learned in Gen 1 how critical automated vision systems are for both inspection and metrology. They detect issues instantly, drive faster yield learning, and increase equipment uptime. We have added significantly more metrology to Gen 2 with this learning. Given our high and increasing confidence in Gen 2's superior performance, it has become clear to me that we must begin redirecting resources to Gen 2, even at the expense of the ongoing improvement activities of Gen 1.

This eliminates the need to move batteries on and off the track increasing throughput and reducing the complexity size and cost of equipment as we can now process on the track directly.

In addition, we expect it to improve our process capability and yield as the accuracy of the leaner linear motor is often better than the gen. One extreme.

And lastly, we have learned in Gen. One how critical automated data systems are both inspection and metrology. They detect issues instantly drive faster yield learning and increased equipment uptime, we have added significantly more metrology to gen two with us learning.

Okay.

Given our high and increasing confidence in Gen. Two superior performance. It has become clear to me that we must begin to redirecting resources to them too.

Even at the expense of the ongoing improvement activities of January .

Harrold Rust: From the beginning, we knew that improvements and learning in Gen 1 were less about making Fab-1 run better and more about making Gen 2 as perfect as we could. Our goal is to replicate multiple Gen 2 lines in the future directly on our own and indirectly via licensing and joint ventures with our roster of high-profile customers and potentially incumbent battery leaders. For those of you familiar with semiconductor history, it is our blueprint for copy exact. We believe that the result of this change in emphasis will be lower volume from our Gen 1 lines in Fab-1 and Gen 2 until Gen 2 ramps in 2024. It was a tough decision, but I feel it's the right one. Now I'll turn the call over to Steffen, who will discuss our financials, and after that, I'll make some closing remarks. Steffen?

From the beginning we knew that improvement and learning of Gen. One we're less about making fab, one run better and more about making jetblue as perfect as we could.

Our goal is to replicate multiple gentoo life in the future directly.

Directly on our own and indirectly by our licensing and joint ventures with a roster of high profile customers and potentially incumbents battery meters.

For those of you familiar with semiconductor history. It is our blueprint for a copy exact.

We believe that the result of this change in emphasis will be lower volume from our Gen. One life in fab, one and gentle until Jan to ramp in 2024.

With a tough decision, but I feel it's the right one.

Now I'll turn the call over to Stephen who will discuss our financials and after that I'll make some closing remarks.

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Steffen Pietzke: Thank you, Harold. Our detailed financials and the reconciliation between our GAAP and non-GAAP results can be found in our shareholder letter. I will spend my time covering a few high-level topics. We recognized a nominal amount of revenue in Q3 as we focused our efforts during Q3 on optimizing Fab 1 and shipped the majority of our batteries as samples for customer qualifications. Our adjusted EBITDA loss in Q3 was $20.2 million, compared to an adjusted EBITDA loss of $18 million in Q2 2022. Excluding stock-based comp, our non-GAAP operating expenses in Q3 were $19.4 million, down from non-GAAP operating expenses of $19.5 million in Q2 2022, which also excludes stock-based comp.

Thank you, Eric our detailed financials and the reconciliation between our GAAP and non-GAAP results can be found in our shareholder letter.

Spend my time, covering a few high level topics.

We recognized a nominal amount of revenue in the third quarter as we focused our efforts during the third quarter on optimizing fab, one and ship the majority of our batteries as template for customer qualifications.

Our adjusted EBITDA loss in the third quarter was $20 2 million.

Pay up to an adjusted EBITDA loss of $18 million in the second quarter of 2022.

Excluding stock based comp our non-GAAP operating expenses in the third quarter were $19 4 million.

Down from non-GAAP operating expenses of $19 $5 million in the second quarter of 2022, which also excludes stock based comp.

Steffen Pietzke: We closed Q3 2022 with net cash of $349 million, down from $385 million in Q2 2022 due to $20.6 million of cash used operationally and $16.9 million of cash used on capital expenditure. Now let's discuss our guidance. For full year 2022, we now expect to use between $130 million and $150 million of cash, of which we expect roughly 40% will be CapEx. We are lowering our cash use guidance primarily due to the timing of capital expenditure payments for our Agility Line and final payment milestones for our first Gen 2 line.

We closed the third quarter of 2022 with net cash of $349 million.

<unk> from.

<unk> $385 million in the second quarter of 2022 due to $26 million of cash used operationally.

And $16 9 million of cash used on capital expenditure.

Now, let's discuss our guidance.

For full year 2022, we now expect to use between $130 million and $150 million of cash.

Of which we expect roughly 40% will be capex.

We are lowering our cash.

<unk> guidance, primarily due to the timing of capital expenditure payments.

Our agility line and final payment milestones for our first Gen. Two line.

Steffen Pietzke: For revenue, we continue to expect to recognize between $6 million and $8 million for full year 2022, with service revenue being a significant contributor. Before I turn it back to Harrold, I want to highlight that in this quarter's shareholder letter and investor presentation, we are sharing details around the economics of a Gen 2 line. Many shareholders have asked us how to best model our Enovix scale-up, and we believe the Gen 2 economics will allow you to do that. To summarize, we exited the quarter with a very strong balance sheet and with Gen 2 underway and the caliber of customers we have, we believe we have the ingredients to scale and realize our vision of every person being positively impacted by Enovix innovation every day. I will now turn it back to Harrold for closing remarks.

For revenue, we continue to expect to recognize between $6 million and $8 million.

For full year 2022 with.

With service revenue being a significant contributor.

Before I turn it back to Howard I want to highlight that in this quarter shareholder and.

An investor presentation via sharing details around the economics of the Gen. Two line.

Many shareholders have asked us how to best model, our <unk> scale up and we believe that Gen. Two economics will allow you to do that.

To summarize we exited the quarter versus very strong balance sheet and this gen. Two underway and the caliber of customers. We have we believe we have the ingredients to scale and realize our vision of every person being positively impacted by <unk> innovation everyday.

I will now turn it back to Howard for closing remarks.

Harrold Rust: Thanks, Steffen. Our task ahead is clear: continue to push the boundaries of what's possible with our technology while developing and bringing up a world-class Gen 2 manufacturing line to fuel our growth and satisfy our customers. On that first point, I'm pleased to report that we are now far along with a new technology node we call EX-1.5, which sits within our first technology node, EX-1, and our second generation node, EX-2. We have successfully built EX-1.5 wearable-sized batteries in our R&D line that equate to 965Wh/L for a smartphone-sized battery, up from 900Wh/L for EX-1. We anticipate sampling this technology next year to customers. This gives us confidence in our long-term energy density roadmap and our ability to move off the industry's historical trend of meager improvement.

Thanks Stephan.

Our task ahead is clear continue to push the boundaries of what's possible with our technology, while developing and bringing up a world class Gen. Two manufacturing line to fuel our growth and satisfy our customers.

On that first point I am pleased to report that we are now far along with our new technology node, we call <unk>, one five which sits within our first technology note, one and our second generation of <unk> II.

We have successfully built X one by Wearables sized batteries in our R&D line that equate to 965 litres per liter for smartphone sized battery.

From 900 watt hours per liter for Exelon.

We anticipate sampling with this technology next year to customers.

This gives us confidence in our long term energy density roadmap and our ability to move off the industry's historical trend of major improvement.

Harrold Rust: I'm more excited than ever with the progress we've made with our technology, our customers, and our Gen2 manufacturing line. The collaborations we have announced today with industry-leading customers and partners supports our vision and highlights the compelling value we bring to the battery industry. With that, I'd like to turn it back over to the operator for your questions. Operator?

I'm more excited than ever with the progress we've made with our technology, our customers and our Gen two manufacturing lines.

The collaborations we've announced today with industry, leading customers and partners supports our vision and highlights the compelling value we bring to the battery industry.

With that I'd like to turn it back over to the operator for your questions operator.

Operator: As a reminder, to ask a question, please press star one one on your phone. Please stand by while we compile the Q&A roster. Our first question comes from Colin Rusch with Oppenheimer. Your line is now open.

As a reminder to ask a question. Please press star one one on your phone.

Please standby, while we compile the Q&A roster.

Okay.

Our first question comes from Colin Rusch with Oppenheimer. Your line is now open.

Colin Rusch: Thanks so much, guys. You know, you've obviously been testing this equipment and working on it for quite a while now. Can you talk a little bit about the decision-making and some of the triggers for shifting a little bit of the CapEx strategy and deciding to move forward with the Gen2 line in the way that you are?

<unk>.

Thanks, so much guys.

You've obviously been testing this equipment and working on it for quite a while now can you talk a little bit about the decision, making in some of the triggers for shifting a little bit of the Capex strategy and decided to move forward with the Gen. Two line in a way that you are.

Harrold Rust: Yeah, Colin, thanks for that question. You know, I think it's really not a question of shifting CapEx focus. It's really a question more of, as we get further and closer to Gen 2, we wanna make sure from a resource, internal resource standpoint, we've got all the talents on that we need to make that successful. You know, we spent a lot of time the last 2 quarters extracting all the learning out of Gen 1, and I'm, you know, pleased to say I think we're not seeing additional learnings come out, so I mean that effort is kind of timed out. We've basically, you know, as a part of that, solved the big problems we think that were in Gen 1 that go away in Gen 2.

Yes, Tom Thanks for that question, Yes, I think it's really not a question of shipping Capex focus Thats really a question more of as we get further in closer to Gen. Two we want to make sure from a resource internal resource standpoint, we've got.

All of the talent that we need to make that successful. We spent a lot of time the last two quarters extracting all the learning out of Gen. One.

Pleased to say I think we're not seeing additional learnings come out so that effort is kind of timed out.

And we basically as a part of that solve the big problems. We think that we're in Gen. One that they go away and Gen. Two and so we want to make sure. We sufficiently staffed gen. Two to make sure that that comes in to hit his objective and timeline.

Harrold Rust: We wanna make sure we sufficiently staff Gen two to make sure that comes in to hit its objective and timeline. That's what we gotta do. That in my mind is the most important thing for the company right now because that's the blueprint for how we scale our business going forward.

That's why we got to do that and in my mind is the most important thing for the company right now because thats the blueprint for how we scaled our business going forward.

Colin Rusch: Perfect. That's actually quite helpful. Shifting gears towards the customers, obviously there's an awful lot going on and you've talked a little bit about having to prioritize customers. Can you talk a little bit about how you're moving through the qualification process with those folks and the designing process? You know, the numbers haven't shifted too much in the funnel, but I'm assuming that you've made some meaningful progress and discussions in moving through some of those technical details and planning, you know, and in their planning process.

Okay.

Perfect.

Quite helpful. So then shifting gears towards the customers. Obviously, there is an awful lot going on and you've talked a little bit about having prioritize customers, but can you talk a little bit about.

How you are moving through the qualification process with those folks and the design in process. The numbers haven't shifted too much in the funnel, but I'm assuming that you've made some meaningful progress in discussions and moving through some of those technical details and climbing.

Harrold Rust: Yeah. I'll just briefly comment and let Cam pipe in. You know, I think from a manufacturing standpoint, we've delivered a lot of samples out of Fab-1 in support of the customer qualifications. Those parts have been hitting specifications and those qualifications have been progressing quite well. I'll let Cam add a little bit of color to that.

In your planning process.

Yes.

Comment on lab camp My opinion I think from.

The manufacturing standpoint, we have delivered.

A lot of samples at S fab, one in support of the customer qualifications.

Those parts have been hitting specifications and those qualifications progressing quite well and I'll, let Cameron a little bit of color to that sure. Thanks. Thanks Harold.

Cam Dales: Sure. Thanks, Harrold. And hello, Colin. Yeah, to give you a little bit more of a sense of where things are in the funnel, you know, the overall funnel is relatively stable in terms of the total dollar value, and we've been focusing on moving programs from kind of design opportunities at the top down into active design and then design wins. I think we're up to nine design wins now. You know, as those programs progress through those stages, it really goes from sampling, you know, R&D cells originally, and now most of our samples are actually coming off of Fab One. I think we shipped to 25 different companies today off of the Fab One line.

Hello, Colin.

Yeah to give you a little bit more of a sense of where things are in the funnel.

The overall funnel is relatively stable in terms of the total.

Dollar value and we've been focusing on moving programs.

Kind of design opportunities at the top down into active design in design wins.

I think we're up to nine design wins now so as those programs progress through through that those stages. It really goes from sampling R&D sales originally and now with most of our samples are actually coming off of fab. One I think we shipped to 25 different companies today off of the Fab one mine.

Cam Dales: Customers run those cells through their test programs, you know, really matching them up against their own requirements on their products. The focus switches to either using a standard cell, which, you know, we have a couple that have been defined off of our lines or to move to a customization program where we build a cell specific to customers. We've launched a number of those. It really comes down to moving into full manufacturing qualification. Part of that is testing and, you know, kind of detailed reliability on cells off of the factory line, as well as, you know, the auditing and the managing of our quality systems in the factory.

Customers run those cells through there through there.

Test programs really matching them up against their own requirements on their products.

Then the focus switches to either using a standard cell.

Which we have a couple that have been defined off of our lines or to move to <unk>.

Our customization program when we build build to sell specific to customers. So we've launched a number of those.

And then it really comes down to moving into full manufacturing qualification part of that is.

Testing and kind of detailed reliability on sales off of the factory line as well as.

The auditing and.

The managing of our quality systems in the factory. So I would say most of our focus now with these programs is kind of in those latter stages.

Cam Dales: I would say most of our focus now with these programs is kind of in those latter stages. A lot of effort going into the quals and certifications from a quality perspective on the line in preparation for you know, more meaningful volume shipments next year. Really through next year, a number of significant qual programs, which ultimately will be planned to launch in 2024, on the Gen 2 line set at you know, significant volume.

A lot of effort going into the quarles and certifications from a quality perspective on the line in preparation for.

More meaningful volume shipments next year.

And then really through the through next year.

A number of significant qual programs, which ultimately will be planned to launch in 24 on the Gen. Two lines at <unk>.

Significant volume.

Colin Rusch: Great. Thanks so much, guys.

Great. Thanks, so much guys.

Operator: Please stand by for our next question. Our next question comes from Bill Peterson, J.P. Morgan. Your line is open.

Please standby for our next question.

Yeah.

Our next question comes from Neil <unk> J P. Morgan Your line is open.

Bill Peterson: Yeah. Thanks for taking my questions. Wanted to get some clarification around what is left to, I guess, be solved for Gen 2. It sounds like you still are on target for H2 2023, but I guess how much more work, if you can quantify, or what types of areas need to be completed in order to be ready for shipping in the second half of next year? I guess sort of related to that, you talk about now gens and lines and fabs, but you really didn't talk about, you know, where this is gonna be going, I guess, in terms of a fab footprint. Are you still thinking about the potential for two fabs, or is this, I mean, how much of this will be internal capacity or maybe partnership, finance or other means?

Yes, thanks for thanks for taking my questions.

So clarification around what is.

Yes, the Salford Gen. Two it sounds like you still are on target for second half of 'twenty three.

How much more work if you can quantify or what types of areas need to be completed in order to be ready for shipping in the second half of next year and I guess sort of related to that you talk about Dow Jones in line and Fabs that you really didn't talk about.

But wireless is going to be go on I guess in terms of our fab footprint are you still thinking about the potential for two fabs or is this I mean.

How much does the internal capacity, maybe partnership finance or other means.

Harrold Rust: Yeah, thanks for that question, Bill. I think relative to your first question, you know, Gen two is pretty far along in the design process, I would say detailed design process. We expect that we'll be kind of going into final detailed design review towards the end of this year, right? You know, we've got high confidence given the interactions which are very regular that that's gonna pan out well. That's kind of your final checkpoint where, you know, you've looked at every single part and you're ready to proceed. Kind of simultaneously with that, we're gonna finish up the last of the proof of concepts to just validate the design thing. I think things are all on track and those vendors are moving very quickly.

Yeah. Thanks for that question Bill so.

I think relative to your first question.

Gen. Two it's pretty far along in the design process I would say detailed design process and we expect that will be kind of going into final detailed design review towards the end of this year right.

So we've got high confidence given the interactions which are very regular that that's going to pan out well, but thats kind of your final checkpoint where.

You've looked at every single part and you're ready to proceed kind of simultaneously with that we're going to finish up the last of the proof of concepts to just validate the design things. So I think those things are on track and those vendors are moving very quickly. So I'm quite confident it will be in a position to get through that and then have that equipment show up in the second half of <unk>.

Harrold Rust: I'm quite confident we'll be in a position to, you know, get through that and then have that equipment show up in the H2 of next year as we've talked about. Relative to your second question, Fab-2, you know, for us, the equipment is really the long pole in the tent. While we've continued to look at facilities and we have multiple options, we haven't made a decision yet. We'll do so. You know, we're gonna do it in a time that makes it advantageous to us, but rest assured it'll be, you know, before that equipment needs to have a home.

<unk> as we've talked about.

Relative to your second question Fab two.

No.

For us the equipment is really the long pole in the tent and while we've continued to look at facilities and we have multiple options. We haven't made a decision yet.

We will do so.

We're going to do it and the time that it takes it advantageous to us, but rest assured it will be before that equipment needs to have a home.

Bill Peterson: Okay. It sounds like that won't be the long pole, but that's good to hear. I guess sort of pivoting, when you think about your funnel and design wins, you know, I'm assuming this is primarily against conventional lithium-ion batteries. You're taking the steps to really focus on, you know, getting ready for the, I guess, line two and new fabs. I guess one of the risks is that competition could catch up or other, you know, your customers and interesting customers may need to be looking at other means. What are you seeing from the competition? What are the risks that are associated with having other, let's say, higher energy density silicon anode companies out there trying to intercept the market in 2024?

Sure.

Okay.

It sounds like that won't be go on Cobra.

Good to hear.

I guess sort of pivoting when you think about your funnel and design wins.

Im assuming this is primarily a guys can best of lithium ion batteries, you are taking the steps to really focus on getting ready for the slide two.

But I guess one of the risks are as that competition could catch up on the weather.

Sure.

Your customers are interested customers may need to be looking at other means I guess what are you seeing from the competition what are the risks that are associated with.

Have another let's say higher energy density Silicon anode companies out there trying to intercept the marketed 24, just trying to get a feel for how the competitive landscape could evolve in the absence of having product meaningful product in the market today and really not that much next year either.

Bill Peterson: Just trying to get a feel for how the competitive landscape could evolve in the absence of having product, meaningful product in the market, you know, today and then really not that much next year either.

Harrold Rust: Yeah. Let me let Cam field that, and I've got kind of one comment after that.

Yeah, Let me, let me, let canfield that and I've got kind of one comment after that.

Cam Dales: Yeah, sure, Bill. With respect to competition, particularly in the consumer space, we're not seeing a shift in, you know, the competitive dynamics from what we've experienced over you know the last year or many years, really. You know, the industry continues to move forward at its sort of steady material-based set of improvements in terms of energy density. We, you know, we also are moving forward, I think at a rate that's faster than the market. In our communications, we talked about, you know, kind of our next node of performance being EX1.5, getting us up to, you know, 965Wh/L. What I see with the specific customers we're talking to is that that is extremely competitive.

Yes, sure Bill so with respect to competition, particularly in the consumer space.

We're not seeing a shift in the competitive dynamics from what we've experienced over the over the last year or many years really.

The industry continues to move forward that it's sort of steady material based set of improvements in terms of energy density.

And we also are moving forward I think at a rate that's faster than the market. So.

In our communications, we talked about.

Our next node.

Performance being <unk>, one five getting us up to 965 watt hours per liter. So.

What I see with specific customers, we're talking to is that that is extremely competitive.

Cam Dales: We don't really see any, you know, anything that's kind of out of the historical norms from the industry, and people remain focused on our solution as really kind of their best bet to move the needle in terms of competitive advantage.

We don't really see any anything thats kind of out of the.

The historical norms from the industry and people remain focused on our solution is really kind of their best bet to to.

To move the needle in terms of competitive advantage.

Bill Peterson: Sorry.

Harrold Rust: Hey, Cam, you actually added on what I was gonna add on. You answered the question. Sorry. My bad.

Sorry can you actually added on what I was going to add on.

To answer that question I'm, sorry, my bad.

Bill Peterson: Just to be clear, you're not seeing other sort of silicon anode newer players being in the competitive space at the moment. It's more, you know, they're looking to work with you and lock in with you in the sort of 2024 timeframe.

Just to be clear youre, not seeing other sort of silicon anode Newark.

Your players being in the competitive space at the moment, it's more.

They are looking to work with you and lock in with you in that sort of 24 timeframe.

Cam Dales: Yeah. I mean, we certainly do see the industry as a whole continue to adopt, you know, silicon materials on the anode side. What we see is that most of those are, you know, blended with carbon. You know, ironically, as you kind of plot the improvement in energy density at a kind of global view, it kind of just essentially adds to the 4.5% increase that you see every year in the space. That's something that we've always anticipated would happen. We didn't always know how it would happen.

Yes, I mean, we certainly do see the industry as a whole continue to adopt.

Silicon materials on the anode side, what we see is that most of those are blended with carbon and ironically as you as you kind of plot.

The improvement in energy density at kind of a product global kind of global <unk>.

<unk>.

It kind of just essentially adds to the $4 five 5% increase that you see every year in the space and so that's something that we've always had anticipated would happen we didn't always know how it would happen.

Cam Dales: If you know, if you kind of look at where we're at and our trajectory in terms of improving energy density, you know, we still remain kind of that five years ahead of where the industry is today.

And if you if you kind of look at where we're at in our trajectory in terms of improving energy density.

We're still remain kind of that five years ahead of where the industry is today.

Bill Peterson: Okay. Thanks for the color.

Okay. Thanks for the color.

Operator: Please stand by for our next question. Our next question comes from Alex Potter with Piper Sandler. Your line is now open.

Please standby for our next question.

Yes.

Our next question comes from Alex Potter with Piper Sandler Your line is now.

Alex Potter: Great. Thanks a lot. I appreciate the new color on CapEx guidance. I just wanna ask a couple clarifying questions there to make sure I'm understanding it correctly. It looks like $50 to 70 million in CapEx for a single Gen2 line, and you can make 9 million cells. My interpretation is that that's like smartphone, cell phone size cells, assuming 80% yield. Is that the right way to think about that?

Great. Thanks, a lot.

So I appreciate the new color on Capex guidance I, just wanted to ask a couple of clarifying questions. There to make sure I'm understanding it correctly, it looks like $50 million to $70 million in Capex for a single Gen. Two line and you can make 9 million cell by my interpretation is that that.

Smartphone.

Cell phone size cells, assuming 80% yield is that the right way to think about that.

Harrold Rust: Yeah. I think you're right. It can make 9 million smartphone-sized cells. The OEE is a combination of yield and basically equipment availability. That's basically how many good cells you're getting out of, you know, possible 100% you could get out of every moment of every day you're running. I think you've got it right.

Yes, I think youre right. It can make 9 million smartphone side itself.

<unk> is a combination of yield and basically equipment availability. So that's that.

Basically how many good sales youre getting out of a possible 100% you could get out of every moment of every day you are running so I think you've I think you've got it right.

Alex Potter: Okay. Great. You also mentioned sort of in that same paragraph that you could make in the same footprint a similar line that can make 4 times as many cells if you are focused on smartwatches. Is the CapEx for something like that also in that same range?

Okay great.

And then you also mentioned sort of in that same paragraph that you could maintain the same footprint a similar line that can make four times as many sell if you are focused on smart watches the capex.

For something like that also in that same range.

Harrold Rust: I would say, we're still in the middle of kind of doing the proof of concept of it. My guess is it would be slightly higher, but I think economically it would still be, you know, a significant advantage over where you would be with a single battery per line design.

Yes.

I would say, we're still in the middle of kind of doing the proof of concept that my guess it would be slightly higher but I think economically it would still be.

A significant significant advantage over.

Where you would be with a single single battery per line.

Alex Potter: Okay.

Harrold Rust: Does that clarify?

Okay. Okay.

Bill Peterson: Yeah. Alex, it's Steffen. Maybe to give you a little bit more color, the way you have to think about it, we gave you the CapEx for a universal line, right? It can make small cells and large cells, and certainly, from the gross margin perspective, like, more larger cells are more attractive, right? When we start deploying the Gen2 line, my expectation is that it gravitates from the mixed perspective towards the large cells. From a dedicated line that Harrold was alluding to on a variable size, my expectation is that the CapEx will be higher, but the gross margin will look better, overall.

Steffen Pietzke: Yeah. Alex, it's Steffen. Maybe to give you a little bit more color, the way you have to think about it, we gave you the CapEx for a universal line, right? It can make small cells and large cells, and certainly, from the gross margin perspective, like, more larger cells are more attractive, right? When we start deploying the Gen2 line, my expectation is that it gravitates from the mixed perspective towards the large cells. From a dedicated line that Harrold was alluding to on a variable size, my expectation is that the CapEx will be higher, but the gross margin will look better, overall.

Yeah, Alex as Stephan.

Maybe to give you a little bit more color.

The way you have to think about it and we gave you the capex for Universal line right. It can make.

Small and large and certainly.

On the gross margin perspective.

Largest had its a more attractive right when we start deploying that Gen. Two line my expectation is that it's gravitates from the mix perspective towards the large says.

From a dedicated line at Harold was alluding to on the variable size. My expectation is that the capex will be higher but the gross margin will look better.

Okay.

Oh boy.

Alex Potter: Okay. Just so I'm clear, in Fab-2, you've not yet disclosed how many of these lines you contemplate building. Is that accurate, or would you just start with one line?

Okay, Okay, and just unclear in fab two.

We've not yet disclosed how many of these lines you contemplate building is that accurate or would you just start with one line.

Harrold Rust: We are proceeding with one line right now that will land in the H2 of 2023. Our plan is to actually add additional lines that would come in in 2024 into that Fab-2 location.

Yes. So that we are we are proceeding with one line right now that will land in the second half of 2003, our plan is to actually add additional lines.

That would come in.

24 into that top tier location.

Alex Potter: Okay, great. I'll take the rest of this.

Okay great.

Harrold Rust: More than one line running by the end of 2024.

Correct.

More than one line running by the end of 'twenty four.

Alex Potter: More than one by the end of 2024. Perfect.

Harrold Rust: Yeah.

Alex Potter: Okay, thanks very much. Thanks very much, guys.

Martin one by the end of 'twenty quarter perfect. Okay. Thanks, very much thanks very much guys.

Operator: Please stand by for our next question. Our next question comes from Anthony Stoss with Craig-Hallum. Your line is now open.

Please standby for our next question.

Okay.

Our next question comes from Anthony Stoss with Craig Hallum. Your line is now open.

Anthony Stoss: Thanks. Harold, I wanted to follow up on the new track transport system.

Thanks, Harold I wanted to follow up on the the new track transport system and it seems relatively through and I understand the laser side much much much more difficult can you quantify maybe how much risk that this may introduce and then secondly.

Harrold Rust: Yeah.

Anthony Stoss: It seems relatively new, and I understand, you know, the laser side must be much more difficult. Can you quantify maybe how much risk that this may introduce? And then secondly, I'd love to hear your thoughts since BrakeFlow has been out a couple of months. I wanna hear kind of the early customers that weren't afforded BrakeFlow out of the gate, you know, now that they have a little bit of time, can they come back or what's the reception been? And do you think most of your customers will opt to go with BrakeFlow?

I'd love to hear your thoughts since breakthrough has been out a couple of months.

Here kind of the early customers that weren't afforded break a lot of the gate.

They are a little bit of time can they come back or what's the reception been and do you think most of your customers while optical with breakthrough.

Harrold Rust: Sure. On the first point around the track, even though this technology is new, it's being made by a very reputable company, right? That technology, even though it's new, I think is already out in the market and works quite well. I think it's a very low-risk thing in my view. The difference is that, you know, these kinds of systems were around a few years ago; they just didn't have the same performance. It allows us essentially to eliminate having to move parts on and off this track for processing. There's just a bunch of overhead time you take out of the manufacturing process, which is great because it's not value add. I don't think there's a risk there.

Sure. So on the first point around the track.

Even though the technology is new it's being made by a very reputable company right and so that technology, even though it's new I think is already out in the market and works quite well. So I think it's it's a pretty it's a very low risk staying in my view.

The difference is that these kinds of systems are around a few years ago. They just didn't have the same performance and it allows us essentially to eliminate having to move parts on and off the track for processing. So it was just a bunch of overhead time, you take out of the manufacturing process, which is great because thats not value add.

Harrold Rust: I think it's actually a much better way to run the line, and we're super excited to be able to do it. I'll let Ashok talk a little bit about BrakeFlow or maybe and Cam about kind of from a customer standpoint and technology standpoint. I don't know which...

I don't think there is a risk there I think it's actually a much better way to run the line and we're super excited to be able to do it.

I'll, let Chuck talk a little bit about about.

Break flow or maybe and camera about kind of from a customer standpoint, and technology standpoint, I don't know which sure.

Cam Dales: Sure. Happy to jump in. You know, on BrakeFlow, you know, the plan for launching that is to launch that with the launch of our larger size cells. Essentially smartphone-sized cells and up will have BrakeFlow built into it. As we're currently not thinking about, you know, offering this as a menu item for people. We think this is something that's inherent in the technology, and it's part of our overall value proposition for the product. With respect to customers that would not have it, you know, the launch of our wearable cells today don't have BrakeFlow associated with it. Of course, the amount of energy in that cell is lower. Over time, we expect that all of our products will incorporate BrakeFlow.

Happy to jump in on break flow.

The plan for launching that is to launch that with the launch of our larger sized cells. So essentially smartphone size cells and up will have break slow built intuitive.

We are currently not thinking about offering this as a menu item for people. We think this is something that's inherent in the technology and its part of our overall value proposition for the product so with respect to customers that would not have it.

The launch of.

Our wearable cell today don't have break flow associated with it but of course the amount of energy in that sale is lower over time, we expect that all of our products will incorporate break flowing.

Cam Dales: You know, it's our hope that this becomes kind of a standard expectation from customers like, "Why wouldn't your cell be, you know, resistant to thermal runaway?" We think it's an important foundational technology there.

It's our hope that this becomes kind of a standard expectation from customers like why wouldn't yourself b.

Resistant to thermal runaway.

We think it's an important foundational technology there.

Anthony Stoss: Great. Thank you, guys.

Great. Thank you guys.

Harrold Rust: Thanks.

Thanks.

Operator: Please stand by for our next question. Our next question comes from Gus Richard with Northland Capital Markets. Your line is now open.

Please standby for next question.

Our next question comes from Gus Richard with Northland Capital Markets. Your line is now and then.

Gus Richard: Yes, thanks for taking my question. Next year, I think a majority of your or a significant portion of your revenue is gonna be professional services. Is that just NRE, helping your customers design in your batteries, or is there something else related?

Yes, thanks for taking my question.

Next year I think majority of your significant pushes revenue is going to be professional services can you. Just is that just NRA, helping your customers designing your batteries or is there something else related.

Harrold Rust: Yeah. I can comment a little bit. I mean, I think each of these programs has some amount of NRE around them. I think next year is a combination of production output, and NRE.

Yes.

I can't comment on a little bit I mean, I think each of these programs has some amount of energy around them and so I think next year is a combination of production output.

Cam Dales: Yeah, Gus, this is Cam. I don't know whether I'd characterize it just as NRE, but these are essentially product development programs where we're customizing batteries specific to somebody's requirements. Those programs can vary from, you know, a simple size change to, you know, enhancing the product with respect to, for instance, its temperature, you know, capabilities, et cetera. You know, they're all typically around developing products to meet customer-specific requirements.

And then Hari.

Yes, Gus this is cam.

I don't know what I would characterize it just as <unk>, but these are essentially <unk>.

Development programs, where we're customizing batteries specific to somebody's requirements and so those programs can vary from.

Simple size change too.

Enhancing the product.

With respect to for instance, its temperature.

Capabilities et cetera.

But they're all typically around <unk>.

Developing products to meet customer specific requirements.

Gus Richard: Got it. Then in terms of the MOU you guys announced, you know, what is that program, I guess, for lack of a better term, sort of entail? What are you working with exactly with that customer?

Got it and then in terms of the Mou you guys announced.

What is what is spent.

Program I guess.

For lack of a better term sort of entail what what are you working with exactly with that customer.

Cam Dales: Yeah. So, thanks for that question. We're super excited about this. You know, this is another step in kind of a you know kind of a long-term relationship with this particular customer. It's one of our strategic accounts. In fact, it's the same customer that we announced purchasing wearable cells for their next generation smartwatch in Q2. You know, since that time, we've been working with them to try to put in writing the vision of the two companies of how we would work together, and that's the MOU as a result of that. While it's non-binding, it's really the roadmap and the framework for working together towards definitive agreements that you know move forward commercially on each of these areas.

Yes. So thanks for that question, we're Super excited about this.

This is.

This is another step in kind of a kind of a long term relationship with this particular customer. It's one of the our strategic accounts in fact, it's the it's the same customer that we announced purchasing wearable sells for their next generation smartwatch.

In Q2, and so since that time.

We've been working with them to try to.

Put in writing division of the two companies of how we would work together and Thats. The Mou is a result of that and while it's nonbinding, it's really the roadmap and the framework for working together towards definitive agreements that move forward commercially on each of these areas.

Cam Dales: You know, the areas that we're collaborating on together, first is batteries for multiple products within different kind of vertical segments of their product lines. So wearables, mobile phones, you know, laptop computers, and other mobile products. Second is customization of cells to their specific requirements, you know, often around these specific product categories. Third is collaborating with them in the area of proprietary active materials. So think about, you know, better performing cathodes or electrolyte systems that they would like to incorporate into their specific products. Then fourth, collaborating with them on manufacturing and scale-up in order to enhance our ability to support their volumes over time, which if we're successful here, you know, could be quite substantial.

So the areas that we're collaborating on together first is.

Batteries for multiple products within different kind of vertical segments of their product lines, So wearables mobile phones.

A laptop computers and other mobile products.

Second as customization of cells to their specific requirements.

Often around the specific product categories.

Third is collaborating with them.

In the area of proprietary active materials, so think about.

Better performing cathodes or electrolyte systems that they would like to incorporate into their specific products and then fourth collaborating with them on manufacturing at scale up in order to enhance our ability to support their their volumes over time, which.

Our successful here could be quite substantial.

Gus Richard: You mean.

Cam Dales: You put it all together, it's a non-binding MOU. It's non-binding, but, you know, we've spent 3 hard weeks or months negotiating, you know, every word of that agreement, so that it accurately captures what both companies want to do together, and we use that as a roadmap towards, you know, the specific commercial agreements to come.

So you put it all together.

It's a non binding Mou, it's non binding, but we've spent three hard weeks.

Months negotiating every word of that agreement.

So that accurately captures what both companies want to do together and we use that as a as a roadmap towards.

The specific commercial agreements to come.

Gus Richard: Got it. On the last element of that MOU, the manufacturing scale-up, this sounds like a roadmap in order to get the products that they want, ending in, you know, assuming this is one of the mega cap companies, your ability to sort of meet or your mutual ability to meet, you know, their significant demand. Do I understand that correctly?

Got it and then the last element of that Mou.

Manufacturing scale up there it sounds like a roadmap in order to get the products that they want ending in.

Assuming this is one of the Mega cap companies.

Our ability to sort of meet or your mutual ability to meet me there.

There is significant demand.

I understand that correctly.

Cam Dales: Yes, that's exactly right. This is one of the mega cap companies, what we call a strategic account. You know, given the volumes we're talking about, we don't expect to be able to support this customer's complete volume needs on our own. This is a piece of our model going forward as we look at joint venture partners and potentially licensing to hit those volumes.

Yes, that's exactly right and this is one of the Mega cap companies, what we call strategic account and and so given the volumes we're talking about.

We don't expect to be able to support this customer's complete volume needs on our own and so this.

This is a piece of our model going forward as we as we look at joint venture partners and potentially licensing.

To hit those volumes.

Harrold Rust: I think.

Cam Dales: I-

Harrold Rust: Even dedicated capacity in place. Yeah.

And I think even.

You didn't dedicated.

Cam Dales: Yep.

Yes, yes.

Gus Richard: Got it. Then just one housekeeping question. I think at the end of 2023 line or Gen 1 equipment will produce a little bit less than 1 million units. Is the second line in Fab 1 considered Gen 1 or Gen2 or Gen 1.5?

Got it and then just one.

Housekeeping question in I think at.

At the end of 'twenty. Three line are 10, one equipment will produce a little bit less than a million units.

Is the second line and SAB, one considered Jim one or 10, two were 10 one five.

Harrold Rust: It's Gen 1.

Its gen one.

Gus Richard: Okay. Okay, very good. Thank you so much.

Okay. Okay very good thank you so much.

Operator: Please stand by for our next question. Our next question comes from Ananda Baruah with Loop Capital. Your line is now open.

Please standby for next question.

Our next question comes from Ananda Baruah with loop capital. Your line is now open.

Ananda Baruah: Hey. Yeah, good afternoon, guys. Thanks for taking the question. Yeah, a couple if I could, really. The first is clarification from the shareholder letter. In the language where you talk about Fab-1's focus on a handful of high-profile customer launches and then also qualification programs of strategic accounts in 2023, are those one and the same?

Hey, good afternoon, guys. Thanks for taking the question.

Yes, a couple if I could really the first is a clarification from the shareholder letter.

In the in the language when you're talking about fab line to focus on a handful of high profile customer launches and then also qualification programs with strategic accounts in.

In 2003 are those one and the same.

Harrold Rust: Cam, why don't you field that one?

Yes, Ken wanted to I want you to feel that one yes. So.

Cam Dales: Yeah. No, those are not one and the same. You know, in 2023, the earliest programs that are gonna reach market are typically not the strategic accounts. Those are longer term programs. You know, we're working with some pretty exciting products with some well-known brands that, you know, we hope to have on the market in 2023, and we can support those volumes out of the Gen 1 factory. The strategic accounts, we're looking to start scaling those in 2024 with significantly more volume than we can produce in Fab-1. The focus for Fab-1 from a strategic account perspective is really working through qual on a number of different programs with...

No those are not one and the same so in 2023.

The earlier the earliest programs that are going to reach market are typically not the strategic accounts.

Those are longer term programs, but we're working with some pretty exciting products with some well known brands.

We hope to have on the market.

In 2023 and can be we can support those volumes out of out of the Gen. One factory.

The strategic accounts, we're looking to start scaling those in 2024.

With significantly more volume than we than we can produce in an fab one and so the focus for fab one from a strategic account perspective is really working through qual.

On a number of different programs with I think we've said, we're working with fixed strategic accounts at this point.

Cam Dales: You know, I think we've said we're working with six strategic accounts at this point and have reached tech qual with four of them, and design wins with a couple of them. There's a lot of activity there. It's supporting their prototyping and qualification efforts through 2023 and anticipating, you know, volume production in 2024.

And our.

Reach tech qual with four of them.

And design wins with a couple of them. So theres a lot of activity there it's supporting there.

Their prototyping and qualification.

Efforts through 'twenty, three and anticipating volume production in 'twenty four.

Ananda Baruah: Great. Cam, could you do initial volume production with any of the big strategic accounts? Could Fab One accommodate that in 2023?

Okay.

Kim could you do initial volume production with any of the big strategic accounts.

Gamblin accommodate that 2023.

Cam Dales: Potentially. It depends on the specific, you know, product selections and the volumes that, you know, are contemplated in that type of a program.

Potentially it depends on the specific product selections in the volumes.

That are contemplated in that type of a program.

Ananda Baruah: Awesome. A quick follow-up, guys. There was, I guess sort of another clarification. There was a remark to an earlier question that Gen2 will gravitate towards larger cells. I guess just sort of can you sort of add some context for us there, given it also sounds like, Cam, you know, Gen2, just sort of your remarks a moment ago about Gen2 really being used to ramp some of the big strategics. Though it seems like some of the smartwatch business will also be some of the initial big strategic business. Can you just split that with the remark earlier, Gen2 will gravitate towards the larger cells?

Awesome and then quick follow up guys. There is I guess sort of another clarification. There was a remark to an earlier question on T will gravitate towards larger sellers.

<unk>.

Yes, just sort of can you.

Can you sort of that in context for us there.

Given it also sounds like Tam Gen two.

Just sort of your remarks, a moment ago about gen, two really really being used to ramp.

The big strategic.

It seems like some of the smartwatch business will also be some of the initial big sticky yet.

Business can you just split that with the remark earlier egencia will gravitate towards the larger so yes I think.

Harrold Rust: Yeah, I think, you know, I would say if you think, Ananda, over the longer term, think of a factory that'll have, you know, small cells predominantly running on these four X lines that we talked about earlier. I mean, in the initial days with the first lines, I would view that we'd be doing those both small and large cells on those first lines. But then-

I would say if you think over the longer term.

Think of a factory, but it'll have small cells predominantly running on these forex lines that we've talked about earlier.

In the initial days with our first lines I would I would view that we'd be doing both small and large cells on those first lines, but then.

Ananda Baruah: Mm.

Harrold Rust: As you get into 2024 and 2025, you'll have dedicated lines tuned for the small cells, and then this other Gen 2 line will become, you know, kind of your standard for the larger cells, 'cause economically that's what's gonna make the most sense.

You get into 'twenty four 'twenty five youll have dedicated lines tuned for the small cells and then.

And then these.

This other gen. Two line will become kind of your standard for the large yourselves because economically that's what it's going to make the most sense.

Ashok Lahiri: Yeah, that's helpful.

Cam Dales: in 2024, I would expect we'll be doing both of those things off that, those lines, probably. Undoubtedly.

Okay, Great that's helpful, but in 'twenty four I would expect we'll be doing both of those things off that those lines probably.

Ashok Lahiri: Appreciate that. Awesome. Thanks, Cam.

Undoubtedly I appreciate that.

Awesome. Thanks, Ken.

Operator: Please stand by for our next question. Our next question comes from Derek Soderberg with Cantor. Your line is now open.

Please standby for our next question.

Okay.

Our next question comes from Derrick Sonnenberg with Cantor. Your line is now open.

Derek Soderberg: Yeah. Hey, guys. Thanks for taking my questions. It's great to be back on these calls with you guys. On the comment that Gen2 could be improved by up to 10x in terms of output, I think the wording around that was that it's gonna lower the cost per unit. I think you guys put out a similar gross margin estimate target of 50%. I'm wondering if you can help me square that commentary. You know, Steffen, are you guys sort of managing towards 50%, or can Gen2 equipment sort of drive margins beyond 50%? I guess, how should we think about the impact Gen2 equipment's gonna have on margins? Thanks.

Yeah, Hey, guys. Thanks for taking my questions and it's great to be back on these calls with you guys.

So on the comment that Gen <unk> could be improved by up to 10 X in terms of output.

The wording around that was that kind of lower the cost per unit, but I think you guys put out a similar gross margin estimate target of 50%.

Wondering if you can help me square that commentary Stefan how are you guys sort of managing towards 50%.

Or can gen two equipment sort of drive margins beyond 50% I guess, how should we think about the impact Gen. Two equipment is going to have on margins.

Speaker 15: Thanks, Derek. From a Gen2 perspective, the way you have to think about the margin, our long-term model is the 50% gross margin and 30% EBIT. The larger cells will have exceptional margin at that target range. The smaller cells at the four X that Harrold was talking about will have larger gross margins blended with the product mix between small cells and large cells and phasing out the single small variable lines. That's what we are targeting to get to the 50%. It's a blended range. It's a blended number that's 50%.

Harrold Rust: Thanks, Derek. From a Gen2 perspective, the way you have to think about the margin, our long-term model is the 50% gross margin and 30% EBIT. The larger cells will have exceptional margin at that target range. The smaller cells at the four X that Harrold was talking about will have larger gross margins blended with the product mix between small cells and large cells and phasing out the single small variable lines. That's what we are targeting to get to the 50%. It's a blended range. It's a blended number that's 50%.

Thanks, Derrick so format.

From a gen. Two perspective do you have to think about the margin. Our long term model is the 50% gross margin and 30% EBIT.

The largest sellers.

Would have.

Exceptional margin.

At that target range the smallest.

At the fall off that Howard was talking about would have larger gross margins blended was the product mix that means.

<unk> has in large says and.

And phasing out the single small there the lines.

What we are targeting to get 2% to 50% blended range, it's a blended number at 50%.

Derek Soderberg: Got it. That's helpful. I also wanted to ask about the EV announcement on some of the progress you guys are having with the DOE program. I think you guys have said 1,500 cycles while retaining 88% capacity. I guess I'm curious, how does that compare to other batteries on the market today? I mean, is that a differentiator for you guys potentially? I'm curious, you know, where are you guys tracking on a watt-hour per liter basis on those EV test cells at this point?

Got it got it that's helpful.

And then I also wanted to ask about the <unk> announcements on some of the progress you guys are having with the <unk> program. I think you guys have said 500 cycles, while retaining 88% capacity I guess I'm curious how does that compare to other batteries on the market today I mean is that a differentiator for you guys potentially.

And then also I'm curious where are you guys tracking.

Our per liter basis on those EV test cells at this point.

Cam Dales: Yeah. Thanks, Derek. I'll let Ashok kinda talk to this one as he's been kinda driving a lot of this effort.

Yes, Thanks, Doug I'll, let I'll, let us kind of talk to this one is just on kind of driving a lot of this effort.

Ashok Lahiri: Sure. Hi, Ananda. Yes, certainly 1,500 cycles for a high silicon blend, let alone a 100% active silicon blend, as well as a 10-year calendar life are exceptional numbers for an EV class cell. It really shows the power of our architecture. It is definitely differentiated from, I think, other products on the market. You know, in your second question, how would this manifest itself into a product? You know, I think I'll let Cam kind of answer that question, but you know, we have a dedicated team that is taking this information and this data and translating it into a product that customers can use.

Hi, Amanda so yes.

Certainly 500 cycles for a high silicon blend, let alone 100% active silicon plant as well as.

10 year calendar life are exceptional numbers.

Sure.

And EV class Sal.

And it really shows the power of our architecture.

So it is definitely differentiated.

I think other products on the market.

Tim.

Your.

Kind of your your.

Second question is how will this manifest itself into a product.

I think I'll, let cam kind of.

Answer that question, but we have a dedicated team that is taking this information in this data.

And and translating it into a product that customers can use.

Cam Dales: Yeah. Thanks, Ashok. You know, as we announced maybe a couple of quarters ago, we created a dedicated business unit called Enovix Mobility. Their charter for this year has been to you know establish relationships with the major automotive OEMs worldwide, and then to start working with them on essentially translating our core technology capabilities that have been proven on the consumer side and then translate them into an optimum product in the automotive side with the goal of early next year, essentially picking our dance partner or partners, you know, from the OEM side. You know, I think they've been making really excellent progress there.

Yeah. Thanks, <unk>, so as we announced maybe a couple of quarters ago, we created a dedicated.

Business unit called in notebooks and mobility, they're charter for this year has been too.

Established relationships with the major automotive Oems worldwide.

And then to start.

Working with them on essentially translating our clear technology.

Capabilities, they've been proven on the consumer side, and then translate them into an optimum product in the in the automotive side with the with the goal of early next year.

Essentially picking our dance partner or partners.

From the OEM side, so I think they've been making really excellent progress there one of the interesting point is that it turns out.

Cam Dales: One of the interesting points is that it turns out, perhaps one of the most important advantages to the architecture that we've developed is its thermal properties and its ability to enable fast charge. When you add, you know, the silicon anode piece for energy density, the cycle life, which Ashok commented on, and you add that to a cell architecture that is just extremely beneficial from a thermal fast charge perspective, we think we have a really winning product here, and we're getting some great feedback along those lines.

Perhaps one of the most important advantages to the architecture that we've developed as it is thermal properties and its ability to enable fast charge and so when you add.

The silicon anode piece for energy density the <unk>.

Cycle life, which <unk> commented on.

And you add that too.

<unk> architecture that is just extremely.

Beneficial from a thermal fast charge perspective, we think we have a really winning product here and we're getting some great feedback along those lines, yes, and just one last comment in terms of volumetric energy density we will easily beat b.

Ashok Lahiri: Yeah. Just one last comment. In terms of volumetric energy density, we will easily beat the kind of the long-term DOE goal of 750 Wh/L by scaling up those that chemistry into larger cells.

The long term goal of 750 <unk> per meter.

Scaling up.

Those that chemistry into large ourselves.

Derek Soderberg: That's great. Thanks, guys.

That's great. Thanks, guys.

Operator: Please stand by for our next question. Our next question comes from Chip Moore with EF Hutton. Your line is now open.

Please standby for our next question.

Our next question comes from Chip Moore with <unk> Partners. Your line is now open.

Speaker 16: Hi. Thanks for taking the question. Wanted to ask on the Gen 2 auto line, getting to that 9 million cell level you laid out in the shareholder letter, is there a good way to think about that ramp as you build that out?

Chip Moore: Hi. Thanks for taking the question. Wanted to ask on the Gen 2 auto line, getting to that 9 million cell level you laid out in the shareholder letter, is there a good way to think about that ramp as you build that out?

Hi, Thanks for taking the question.

Wanted to ask on the Gen two auto lines.

Getting to that 9 million cell level, you laid out in the shareholder letter is there a good way to think about that ramp.

As you build that out.

Harrold Rust: Yeah. You know, we've got those first lines hitting the floor in the second half of next year, right? Towards the end of the year, early part of 2024, they're shipping qualification samples to customers, which doesn't actually consume that much capacity. It basically just starts to clock, you know, on those quals, which could be, you know, a month or several months. Then you're basically ramping that capacity throughout, you know, 2024 in terms of the line's capability. I would kind of think of it as a bit linear throughout the year. And, you know, you'll be probably still working on some of those improvements into 2025, but a significant amount of that capacity growth will happen in 2024.

Yes, so we've got those first lines hit.

Hitting hitting the floor in the second half of next year right towards the end of the year early part of 'twenty for their shipping qualification samples to customers, which doesn't actually consume that much capacity basically just starts to clock on those calls which could be.

<unk> for several months and then you basically ramping that capacity throughout 'twenty four in terms of the line's capabilities. So I would kind of think of it as a bit linear throughout the year.

And you'll be probably still working on some of those improvements into 'twenty five significant amount of that.

Capacity growth will happen in 'twenty four.

Speaker 16: Yeah, even those lines.

Chip Moore: Yeah, even those lines.

Harrold Rust: Yeah.

Speaker 16: Yeah.

Chip Moore: Yeah.

Yes.

Harrold Rust: As we talked about earlier, our plan is actually to land some additional lines in that same space in 2024 as well.

Okay.

Harrold Rust: As we talked about earlier, our plan is actually to land some additional lines in that same space in 2024 as well.

Yes, and as we talked about earlier, our plan is actually to land some additional lines in.

In that same state by an 24 as well.

Speaker 16: Okay. No, that's very helpful. I just wanted to ask on just the increase in throughput, the 10x increase. Maybe you can talk about just the flexibility that gives you, whether it's on, you know, form factors for new markets where maybe there's limited volumes up front. Just what that potentially gives you.

Chip Moore: Okay. No, that's very helpful. I just wanted to ask on just the increase in throughput, the 10x increase. Maybe you can talk about just the flexibility that gives you, whether it's on, you know, form factors for new markets where maybe there's limited volumes up front. Just what that potentially gives you.

Okay.

Helpful.

And then I just wanted to ask on <unk>.

Just the increase in throughput the Tenex increase maybe you could talk about just the flexibility that gives you weather.

Form factors for.

New markets, where maybe there's limited volumes upfront.

Just just what that potentially gives you.

Harrold Rust: Yeah. I mean, it certainly opens up a world of possibilities. I think, you know, there's we obviously understand kind of the established markets and products, but there's some emerging markets that are coming at us that I think will give the opportunity to really leverage that. Certainly also the four X kind of wearable cell line is gonna be a game changer for some of these markets, like augmented reality when they take off. I think that effort is really directed at being ready for those opportunities when they arrive. We think that's the right investment for the company to make.

Yes, I mean, it certainly opens up a world of possibilities I think there is.

We obviously understand kind of the established markets of products, but there are some emerging markets that are that are coming at us that I think will give the opportunity to really leverage that.

Certainly also the.

The Forex kind of wearable cell line is going to be a game changer for some of these markets like augmented reality when they take off so I think that effort is really directed at being ready for those opportunities when they when they arrive and we think that's the right investment for the company to make.

Speaker 16: Got it. Great. Thank you.

Chip Moore: Got it. Great. Thank you.

Got it alright, thank you.

Operator: Please stand by for our next question. Our next question comes from Marc Cohodes with Alder Lane. Your line is now open.

Please standby for our next question.

Our next question comes from Mark cohorts with all Guerlain. Your line is now open.

Operator: Thanks, guys. Did I hear you correctly saying you had design wins from some of the $200 billion customers? Is that right?

Marc Cohodes: Thanks, guys. Did I hear you correctly saying you had design wins from some of the $200 billion customers? Is that right?

Thanks, guys.

So did I hear you correct, saying you had design wins from some of the $200 billion customers right.

Harrold Rust: That's correct.

That's correct.

Operator: Okay. We take that concept, and these customers are obviously smart, and they know that Fab-1 was a beta plant all along, proof of concept plant all along. If these guys have design wins, they must have a schedule of when these products are coming out, right?

Marc Cohodes: Okay. We take that concept, and these customers are obviously smart, and they know that Fab-1 was a beta plant all along, proof of concept plant all along. If these guys have design wins, they must have a schedule of when these products are coming out, right?

Okay.

We take that concept and these customers are obviously smart and they know that fab one was a beta plant all along proof of concept plan all along.

So Kevin design wins, they must have a schedule of when these products are coming out right.

Harrold Rust: That'd be a good assumption.

That'd be a good assumption.

Operator: What prevents them from funding their own Gen 2 lines right now?

Marc Cohodes: What prevents them from funding their own Gen 2 lines right now?

No.

Prevents them.

From funding their own Gen two lines right now.

Harrold Rust: Yeah. Mark, I mean, obviously, we can't get into specific discussions around specific customers, but that's certainly part of our vision. If you look at the MOU that we just signed, you know, one of the provisions there is to look at exactly that.

Yes, so mark I mean, obviously, we can't get into specific discussions around specific customers, but.

Yes, that's certainly part of our vision and if you look at the Mou that we just signed one of the provisions. There is is to look at exactly that Hey, Mark This is Stefan.

Speaker 17: Hey, Marc, this is Steffen. I think you need to look at this as a capital-light opportunity for us to bring multiple Gen 2 lines in very quickly.

Steffen Pietzke: Hey, Marc, this is Steffen. I think you need to look at this as a capital-light opportunity for us to bring multiple Gen 2 lines in very quickly.

I think you need to look at this as a capital light.

Fortunately for us to bring might have a gen two lines in very quickly.

Operator: Under that concept, though, Cam, why wouldn't these $200 billion customers simply fund Gen two lines right now? I mean, it sounds like Gen two is ready to go, and if you guys are ordering equipment for Gen two, why couldn't the $200 billion customers order equipment and you guys run them? Why can't that happen tomorrow?

Marc Cohodes: Under that concept, though, Cam, why wouldn't these $200 billion customers simply fund Gen two lines right now? I mean, it sounds like Gen two is ready to go, and if you guys are ordering equipment for Gen two, why couldn't the $200 billion customers order equipment and you guys run them? Why can't that happen tomorrow?

So under that concept, though cam.

Why wouldn't these $200 billion customers simply fund Gen two lines right now.

I mean, it sounds like Gen. Two is ready to go and if you guys are ordering equipment for Gen. Two why couldnt $200 billion customers order equipment and you guys are on them.

Why can't that happen tomorrow.

Harrold Rust: It could. This is Harrold. I would say, Marc, you know, we wanna get through this final design checkpoint, right? In the next couple of months, right? So that we've got that locked and loaded. I think, you know, we would have the confidence at that point to move forward with additional lines, if customers are willing, you know, to help do that. We'll do some of it our own, but I think we won't shy away from customers wanting to be a part of that solution.

This is Harold I would say mark.

<unk> got we wanted to get through this final design checkpoint right in the next couple of months right. So that we've got that locked and loaded I think.

We would have that confidence at that point to move forward in additional lines.

Customers are willing to help do that and we'll do some of it our own but I think we won't shy away from customers wanting to be a part of that solution.

Operator: You're potentially 2 months away from the good to go on the Gen2 line. Is that it?

Marc Cohodes: You're potentially 2 months away from the good to go on the Gen2 line. Is that it?

So essentially two months away from the good to go on the Gen two lines.

Harrold Rust: I think we're looking at getting kind of sign off, end of this year, early part of next year, but you know, in that ballpark.

I think we're looking at getting kind of sign off end of this year early part of next year, but.

In that ballpark.

Operator: Okay. Cool. Thanks, guys.

Marc Cohodes: Okay. Cool. Thanks, guys.

Okay.

Harrold Rust: Thank you.

Cool thanks, guys.

Thank you.

Operator: I would now like to turn the conference back to Mr. Rust for closing remarks.

I would now like to turn the conference back to Mr. Ross for closing remarks.

Harrold Rust: Thanks for everybody's time today. I just wanted to kind of wrap up and kind of hit on, I think kind of the three major takeaways that I want you guys all have about the company. You know, the first is, you know, customers continue to tell us we have the best battery out there. You know, the work we talked about on EX-1.5, which is this new kind of intermediate technology node, is just kind of evidence of us continuing up that energy density curve in support of our long-term model. We think that's super powerful and, you know, puts us on a curve that others can't be on, which is great. We've also made a lot of progress, I think, in the technology with some of our key partners.

Thanks for everybody's time today I, just wanted to kind of wrap up and kind of hit on I think kind of the three major takeaways that I want you guys still have about the company.

The first is.

Customers continue to tell us we have the best battery out there.

The work, we talked about on the X one five which is this new kind of intermediate technology known as this kind of evidence of us continuing at that energy density curve in support of our long term model. We think Thats Super powerful then puts us on a curve that others can't be on which is great.

We've also made a lot of progress I think the technology with some of our key.

Harrold Rust: We mentioned the IPG partnership today, which we think is very critical because we're gonna be the big, huge laser consumer, and that's a big part of our business, and we need to be world leaders in that space. Second is that, you know, we've got the world's biggest customers on us to make products for them, and we wanna capitalize on that demand. We're just very well-positioned with our customers. The third is that we're ready to go with this Gen 2 line. We've done a lot of hard work on Gen 1. That's been loaded into Gen 2, and we're gonna be ready to execute on that to grow this company over the next couple of years.

Our key partners and we mentioned in the IPG partnership today, which we think is very critical because we're going to be a big huge and laser laser consumer and that's a big part of our business and we need to be world leader in that space.

Is that.

We've got the world's biggest customers.

Honest to make products for them and we want to capitalize on that demand and so we're just very well positioned with our customers.

And the third is that we are ready to go with this gen. Two line we've done a lot of hard work on Gen. One that's been loaded into Gen two and.

We're going to be ready to execute on that to grow. This company over the next couple of years and so we think that puts us in a fantastic position.

Harrold Rust: We think that puts us in a fantastic position to satisfy our customers, and deliver value for our shareholders in the future. With that, I think I'll wrap up.

Satisfy our customers.

And deliver value for our shareholders in the future.

And with that I think I'll wrap up.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Yes.

This concludes today's conference call. Thank you for participating you may now disconnect.

Operator: The conference will begin shortly. To raise your hand during Q&A, you can dial star one one.

The conference will begin shortly.

Raise your hand during Q&A, you can dial star one one.

[music].

Okay.

[music].

Okay.

Yes.

Sure.

Q3 2022 Enovix Corp Earnings Call

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