Q1 2023 Enovix Corporation Earnings Call
Before we continue let me kindly remind you that we released our first quarter 2023 shareholder letter after the market close today. It is available on our website at IR at <unk> Dot Com a replay of this video call will be available later today on the Investor Relations page of our website.
Please note that the shareholder letter press release and this 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 files.
<unk> with the Securities and Exchange Commission all our statements are made as of today April 26, 2023 based on information currently available to US we can give no assurance that these statements will prove to be correct and we do not intend to 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 the GAAP financial measures to the non-GAAP financial measures in our shareholder letter.
I'll now turn the call over to Raj to begin rush.
Thank you Charlie and thank you everyone excited joining our call today I'm.
I'm delighted to communicate to you that debt and then it makes it had executing really well and it's been a solid quarter me today. He did a lot of key milestones this quarter.
First Steve you produced a 12500 batteries.
Fab one here in Fremont. This is head off our forecast of 9000 batteries that we talked about last time.
Now we also completed a.
The rigorous design approval of thought or a gen. Two other lines and we did this ahead of schedule. We completed the purchase orders for both the high volume Gen. Two other line and also the agility line, which we will use for sampling our customers for qualifying their products.
Now we also chose a site in Malaysia, but at Fab two and we did this also ahead of schedule.
Now I'm Super excited also to tell you that we hired our leadership team there and 25 engineers already and we see a path for a non dilutive financing of our first production line now I'll expand on that in a moment as we go through the presentation.
Then after the quarter, we closed a $172.5 million convertible debenture.
Which is intended to fund our gen two.
Two three and four other lines, we did it at the very minimum dilution to our shareholders. So very excited by that debt offering that was that we closed.
Lastly, this quarter, we made a number of leadership positions they are.
Cited by some really strong people that joined our teams.
From a from a previous associations and now I believe we are totally set up the scale.
Now we are already seeing the impact of the people that we've hired with strong progress in all our R&D programs and also in our in the in the manufacturing that we're making.
No flatbed wise Ah I really wanted to cover two topics today.
And then Dan will happened to Q&A and answer any questions you have firstly in the last three months that I've been here.
I didn't see it most number of questions about about two things and I'm going to get get to dose. The first question was that I received many times is Oh why do we believe that our gen. Two line will be successful and we will be able to produce millions of batteries into high volume manufacturing given that we had some early missteps, what gentlemen production.
Your line.
So I'm going to talk about that now.
Now I've been here a little over three months and Ajay has been here about five.
And I can tell you, but again I have a tremendous experience for many many decades in the semiconductor industry.
And drawing from that we've come to the conclusion after looking at our manufacturing dynamics manufacturing process that these can absolutely scale and actually they have some inherent advantages even to making chips and I'll tell you why here in a few minutes.
Now in semiconductors, if you look at manufacturing chips really there are two processes. There's a front end process in Nebraska process. The front end process is where you make the wafer fabrication.
Which is a very complicated process that we use are very expensive machines to make the wafers then there's a back end processes.
Just basically assembly and test here you take the die is there to cut it into small pieces in this small dies and then you put them in a package the front end is.
Deep Submicron manufacturing and the backend process is actually a lot more forgiving here the mechanical tolerances to which you have to do actually in single digit microbes.
Now if you.
Apply that analogy of semiconductor manufacturing to how analytics makes batteries.
The front end process of the semiconductor manufacturing.
It's very similar to the materials that go into the battery.
And the cathode and that looked like and so on.
They come in big roles of corporate electrodes.
What we do then is with laser pattern them, we stack them apply and mechanical constrained and that is really similar to the backend process and in semiconductors now Theres one big difference one big difference the tolerances to which we have to make these batteries the tolerances to which we have designed our machines and execute.
This manufacturing.
Isn't the 50 micron range as I mentioned in backend semiconductors typically just in the <unk> range. So that's kind of a long way of saying, it's an order of magnitude simpler problem and mechanical tolerances. This is why I joined I believe is absolutely we'll be able to do this and we'll be able to manufacture at scale.
Now the proof of that is what you're seeing in the operational.
Improvements that you're seeing from US you can see how we are executing on fab one continuing to produce thousands of batteries and we'd also hitting all the key milestones I'm getting the gen two up and running now.
Jan do compared to Gen. One is really all about adding speed, adding speed and automation and parallelism. So that we can handle more tasks at once.
To give you a feel for what Gen two looks like compared to Gen. One.
They made a short video of it describes how this works and there is a link to the video in the shareholder letter that you received and it shows you present things side by side, how does work of Gen. One and Gen two machine.
Great to all of you to please click on that and take a look at that the short video, but it does really illustrate the point that I'm trying to make here.
No.
What is this advantage that intermix batteries have compared to semiconductors.
You know one of the Aha moments for me in the last quarter since I've been heading out of Opex.
Is realizing that.
We can produce.
Higher density and much better capacity batteries with the longer cycle life.
Without having to change our manufacturing process.
It's actually very important to understand now in my experience in semiconductors, Let's say you wanted to make a high performance processor at a higher density memory.
You pretty much most of the time have to buy brand new machines and go from one process node to the other and again. These are deep submicron lithography machines that cost hundreds of millions of dollars.
And sometimes the fab has to be kind of you know I've got it and rebuild do really a housekeeping machines.
What do we find the dynamics is that the manufacturing lines that are building synthetic into the backend manufacturer.
As we make advances and getting better electrodes better cathodes better.
Silicon based anodes battery electrolytes, which we have.
Our electronic them instead of working on an in sourcing them and making them.
Experiments with them, we can use the exact same machines that we are building to make those batteries in other words as we make advances in electrochemistry and we make advances and higher energy density our manufacturing footprint totally scales. It's not like we have to build completely new batteries in your manufacturing facilities. Every time, you wanted to improve that and you didn't.
This is a fundamentally a huge advantage for the way we manufacture batteries.
So.
That is what I believe will make this business ultimately very profitable in the long run.
No. The second major topic I wanted to talk to you about is the capacity build out now that I've gotten a lot of questions on this in a as I talked to investors over the last quarter.
I mentioned last time that we will have multiple options to raise money I.
Get that get the financing we need to build our capacity.
No we are now executing towards that.
This quarter we.
<unk> got a nonbinding LOI or letter of intent from our manufacturing partner by UBS International in Malaysia.
This L O I has Y B S working on giving us an existing building space in Penang Science Park, the house or high volume manufacturing lines up to four lines with dedicated personnel to staff that line. This is very similar to how we would use the semiconductor backend Assembly subcontractor.
No why B S.
In addition to this is working with our syndicate of local banks to make a significant investment in our Gen. Two auto lines.
This is subject to some purchase commitment from from analytics now while we are negotiating all the details what I can share with you is that we are seeking at least 70 plus million dollars of non dilutive financing to fund the first line.
As I said earlier this funding is not secured yet, but we are very encouraged by all the discussions that you have to date with them.
Securing this funding now would elevate that would alleviate us from spending the $120 million full year Capex forecast I gave you last time now will provide an update for you on this in the next quarterly call.
Now beyond that funding, we recently closed a private offering of $172 $7 million convertible senior notes that gives us the capex the capital we need to make the gen. Two outlines two three and four.
So in other words, we're now set up to be able to bill for the auto lines in Malaysia in terms of in terms of Capex that we need.
Now, let me close with our outlook.
There's a few opening remarks here.
For the full year of 2023.
We continue to expect to produce 180000 cells that I mentioned last time.
Including 18000 cells in second quarter.
Once again, we're not forecasting any service revenue at this point because this tends to be episodic and based on milestones.
Now I want to reiterate our full cash guidance of $240 million are spent half from capex and half from operationally running the company.
We do plan to revise the guidance in our next quarterly call as we get more visibility on the ABS transaction. In addition to our own efforts to internally operate a lot more efficiently.
In closing we're off to a fast start we're making substantial improvements in fab one we're hitting all the milestones we set for ourselves and that I communicated last time deal in our journey to scale in fab two in Malaysia.
They're working to fund our capacity build outs, while we're protecting while protecting our cash and limiting our distribution now.
No I really wanted to thank all in of its employees for their hard work this quarter, along with the investors who actually are supporting us.
Right now we have a busy year in front of us, but I'm, even more confident today than I was when I joined that we have the right product and the right team.
Our goals and enhance shareholder value with that I will turn it to Q&A.
We will now begin the Q&A session. Please note that this call is being recorded if you have joined via the zoom application. Please use the raise hand functionality to ask a question. If you have joined via the audio line. Please press Star night questions will be answered in the order there.
Please ask one question and one follow up question at most we will now pause a moment to assemble the queue.
Yeah.
Our first question comes from Bill Peterson from Jpmorgan.
Yeah, Hi, Thanks for taking my question I noticed you said you sample to a 106.
Customers I don't recall, what the number was in the fourth quarter or even what you're saying it is but I look back and it was like 25 in the third.
Third quarter of last year, So I guess based on that how many are.
We have qualified how many do you expect to be qualified later this year or I guess, how many of your waiting for post I guess lined to radios before the qualification.
Uh huh.
[laughter].
Yesterday. The question is about our customers and our customer sampling of qualification.
I think Ralph is on the call and he is below the streets or Alex if you want to take that.
Yeah.
For the question.
So yes, we've seen.
Even a bigger acceleration of the number of customers looking at our product and evaluating the technology.
We haven't laid out the exact numbers as you ask for them for the mill.
But as you as you saw in the release, both the active and the design category that we have in our funnel has increased to about $718 million.
Take numerous quarters two of those qualifications are done.
But we're still on schedule exactly how we thought that in the back half of this year, we'll start seeing customers put products into the market with our with our batteries in them.
Okay. Thanks for that.
My follow up question is related to new product development and somewhat related to the final question I guess when do product such as Vietnam Dx one 1.5.
Two when do those intercept and I guess, just get moved to fab two and I don't think you mentioned breakthrough.
Similar type of question when do these get qualified in fab two.
And then central customers for either falsification or or I guess, ultimately muscle calling for high volume production revenue.
Yeah sure I can talk about that is that as I mentioned.
In my opening remarks.
It's really exciting our manufacturing strategy that we can continue to improve our process technology and continue to improve the energy density of it.
Some of you may or may not know it yet one yeah cause 1.5 E checks to our our radius.
All.
Participants are process technologies that actually improves energy density and cycle life and so on.
We're on target on all of those are yes, one five we expect to.
Sample towards the end of the year and we expect to run all of those are in our in our factories in Malaysia, Malaysia factory as I mentioned will produce samples like in April next year and get into high volume manufacturing towards the end of the year. We will continue to run as we make progress in our.
Our process technology, we will run them through our Malaysia factory and that's what break floor I'm very excited by break fluids, a phenomenal piece of technology. There you know as we as you put more and more energy density batteries safety is just paramount importance and breakthrough technology that intermix has that really provides a great theft.
By not allowing the battery to go into into thermal runaway and outlined in Malaysia.
We'll have great flow integrated and when we make these batteries and in fact, we are sampling batteries it break flow now.
Thanks.
Our next question comes from Colin Rusch from Oppenheimer. Please go ahead.
Oh, thanks, so much guys.
Separate from the engagement and design activity.
Can you speak to the incremental specificity that you're being able to gain on customer needs and adequacy of the current product roadmap to meet those needs as you've gone through the last call it four months or so.
Yeah, I'll make a few comments and again I'll ask Alex to comment on this because there's just a lot closer to it one thing I found as I visited a lot of customers as I have been spending more and more time here and as you guys know the customers. We are now talking to at the same customers that have shipped for many many years when I was at Ti and Qualcomm and.
And so on I've got solid feedback from many of them that the battery technology that we have is superior and it produces higher energy density than anything they have today.
The more now the requirements that are getting actually a lot more specific.
Did mentioned that we hired more people I had samira, who has actually used to work at Qualcomm before who is the head of product reporting to me now she's able to you know.
Along with Ralph and his team meet the customers and get more precise requirements on <unk>.
How is the battery charges for example, what voltage is discharged at what are the different waveforms that are used to charging psyche.
Cycle life, what is the energy density tradeoffs are getting more specific on the shape and size of the batteries that fit in variables what is computers.
Phones.
So we're getting a lot more detailed specific requirements that is really helping us drive a much stronger product roadmap now if you wanted to add more to it. Please do.
Yeah, I think you covered it well, but what I'll say is our expectation has been that the current technology that we have an airline that we're running is really meant to be targeted towards the Iot space in the wearable products.
So we're very very well aligned with that because we're way down the path.
The other markets that Raj mentioned, both mobile and laptop we've been engaged for multiple years at this point with those customers and have their niche.
Needs as well and their requirements.
And we continue to add.
Or slightly change things as we move forward to better address those market requirements, but it's still the same strategy and we're very well aligned with the market needs.
Needs in each of those kind of <unk> and.
In different stages, Wearables, where frankly, you know close to a production stage global and laptops or just after that.
And maybe just add a little bit more to that.
Maybe I'll just add a little bit more to that the fact that we're able to sample and give a lot more batteries now is really helping us get much better feedback too because now theyre running hundreds of.
But they have hundreds of batteries from us that they're testing. So the feedback is just much much more much stronger. So it's so important to be able to make these batteries now in sample customers.
Excellent and then just looking at the ecosystem of equipment suppliers as you start playing for lines two or four can you talk about how much opportunity you're seeing for Capex reduction optimization second suppliers things like that so that there's your derisking and shortening the timeframe on the ramp and then solve that equipment.
Yeah, Let me, let me ask Jay to comment on that directly.
So very good question, indeed actually as we started a ramp as we go into high volume production you wouldn't hear in fab. One in Q3 Q4, we have a lot of second sources lined up under qualification right now but.
But that's just for the I don't know 80000 batteries, where going forward for the Malaysia factory, we have yet, but you know big.
List of second and third sources, which we have lined up actually.
Richard will be qualifying going through a rigorous qualification process and then for your equipment, you mentioned equipment as well.
And what we're doing is we're relying really on the semiconductor value chain. If you will rather than just the battery value chain again, bringing in that mindset.
And we will localize a lot of that in Malaysia, as we set up our high volume operation. There. So both both are in the works.
Yeah.
Excellent.
Our next question comes from Derek Soderberg from Cantor. Please go ahead.
Yeah, Hey, guys. Thanks for taking my questions Raj wanted to start with you maybe this one's for Ralph but.
I'm curious whether or not you know you guys have funding now in place for the ore production lines.
The more or less certain time frame in place.
Does having that allow for certain customer orders or negotiations to move forward on that otherwise wouldn't have.
I mean, I I think what actually as always been.
In the in the path of customer orders has been getting enough samples for them to qualify getting them, we'd be able to test it and say, yes. It looks good and our product and then getting feedback from them on that.
The sizes of the batteries.
Dimensions, if you will and that's really been what's in the in the typical path and <unk> and again as I mentioned, we have the agility line coming in November this year, but December is when we will be able to sample them. Then we get samples from from our a high volume manufacturing line in April and that will go through the process of qualification at our customers.
And ER and we expect those products to go to manufacturer late late 'twenty, four and $3 25, so in that sense. That's really the timeline that we've laid out this fundraise and getting the capital is due for us to make sure that we are ready and we have the funding in place to meet that rather that accelerated anything else the timeline.
Will be the natural order of things.
Got it that's helpful. And then as my follow up stuff and you know you guys had put out a range of estimates for battery production up four lines you know you've got an agreement.
What's your manufacturing partner I'm wondering if you can update us on how we should think about the longer term gross margin outlook.
But Eric Thanks for the question, we really don't think it has changed on the long range outlook, we still think the 50% the higher profit of a business that is what we are aiming for.
Because I get this question quite often and I want to add a little color the cost of the battery, 60% to 70% is actually in the materials I think that's important to understand and as Ajay mentioned as we get multi sourcing in place as we get to scale, where we're making millions of batteries, we see that cost coming down the cost of the constrained we add on top of that is actually a small piece of it but.
Local manufacturing capability in Malaysia, and Sean will bring their costs don't do it.
And another very important thing I think for everyone to see as I mentioned in my talk is that the factories are building will last for quite a long time, because we can amortize those over millions of batteries because it is like the Bakken and test and I've seen people run the backend is desk machines Mckenzie 10 years, even so it's important to understand that this will be a profitable business.
As Stefan said, we're not changing our outlook on that is just really a question of getting to scale.
Great. Thanks, guys.
Our next question comes from Gabe Daoud from Cowen. Please go ahead.
Thanks to everybody. Thanks for all the remarks, so far.
Maybe just going back to the mobile phone or laptop batteries.
You noted in the.
Shareholder letter the focus of our go to market strategy for majority of this year and next year is a on the wearable side in the Iot market. So just curious why and when could we expect first revenue are being.
Being generated by mobile phone or laptop batteries and could you just remind us where we are on the tech roadmap in terms of cycle life I think maybe the larger.
Phone and laptop batteries had higher a cycle of life requirements.
Yeah. So I think the most important thing to remember here is the the.
Timeline, which I laid out which is we will get samples end of this year from our agility line in the right form factor because of current batteries, we make don't fit into laptops or phones and form factor and the small ones and the big ones that we make they really fit in the Iot space as we make the batteries that are more specific to phones and laptops, we will get there.
Capability by end of this year and sampling again in a in April next year, and then start the process for our customers to actually start validating them in their own product lines in there.
In their own phones, and laptops and so on that will take us through you know that'll.
That will be end of next year and 25 years is when we expect to see revenue from those kind of high volume applications. Because that's the time it takes to actually make these batteries in the right form and get the validation and get the qualification from our customers. We will continue to improve your density will company to improve our our cycle life and and that'll naturally intersect.
With the latest technology, we have in 'twenty five when they get to production.
Thanks, Ron that's helpful. Okay, and then if we could just maybe.
Or is this something where they're saying hey make sure I'm thinking about the timing correctly. So gen. Two auto line begins to arrive in Malaysia in November this year, So I guess.
With factory acceptance, taking maybe a quarter or two.
Start of production is.
The <unk> 24, and then still expecting four lines that two by four to 24 is that how we should be thinking about the ramp.
I know the way the way I mentioned that as we ordered one line and that's the line that will be there.
You said that actually the first two pieces, we ordered one line, but we are.
One part of that line into a twice so what is called the agility language will come here at the Fremont in November December and the same stuff will go to Malaysia to the agility line here will help us sample our customers did custom sized batteries. Meanwhile, the Malaysia build out happens in paddle lead and the Malaysia build out happens in such a way that April next year, we'll be able to get.
The militia line now we only commented on building one line through 'twenty four.
We have the ability to build more now that we have the capex stuff sorted out, but we will pull the trigger on those as and when we see the right customer demand come in and the most important thing in running a manufacturing company is to match the supply and the demand and as the customer qualifications progress, we'll have better and better visibility into and to build that.
The one thing that Ajay and team have done is to make sure that the facility that we are we are doing.
Doing in Malaysia with White.
Yes has the ability to host all four lines and has the vessel utilization to run them. So we have setup and we also talk to our suppliers that have you probably need much more than one line and you know and so please be ready for it but we're not making any commitments on when exactly we'll pull the trigger on that.
Okay got it got it alright, thanks, a lot guys.
Our next question comes from Alex Potter from Piper Sandler.
Perfect. Thanks, very much guys.
So I had a question regardless of how long it takes to ramp I guess once we're up and fully scaled in Malaysia.
I know that there is some nuance here about what exactly a quote unquote unit is but in the shareholder letter from today.
You mentioned between 38 million and 75 million batteries per year in the aggregate coming out of fab two in Malaysia.
If you divide that by four right is between $9 5 million cells, and almost 19 million cells per line.
So this could be semantics I know because you know there are small cell therapy cell, but to me when I first saw those numbers it seemed like an upward adjustment versus your expectations for per line output versus what you've historically said is that correct or am I reading that incorrectly.
But I'll, let Diane.
Again, good observation and bird calculations, but let me just direct you towards.
The smaller the rabies designing over lines as the first line is more for Universal life, because we have so many engagements with multiple customers first line would be able to do small and large boats uniform factory in other words. The corner cases are pretty wide in terms of what can be done on the first so we for that'd be give up a little bit.
Capacity on the first slide with second line onwards still be highly optimized scores.
Mayor or window, all the dimensions and therefore, we'll have a lot more capacity for language is why I've been Raj said it I mean, what's the letters between nine and a half but might be it in a half million batteries for life. So you can you know.
Depending on again, but demand and how we match the supply to the demand. That's that's how you'll get to the number of lines required for the volume, but you just stated that's how I would I would look at it.
Okay. That's very helpful. And then maybe the follow on question to that then if I wanted to take those unit numbers.
And translate that into revenue capacity to the extent you're comfortable talking about this right. If I I don't know if I noticed $5 I've always historically assume $5 for wearable and maybe $10 for a cellphone battery or something like that you could could you take those five to $10 unit Asps and multiply it by the range of those unit numbers.
And get to something in the neighborhood of 375 $380 million.
Annual revenue capacity out of fab two is that in the ballpark.
Yeah. That's a that's a good if I started off that transformation again, it just depends on which ones we sell how much but that's a good first start approximation.
Very good I appreciate it thanks, a lot guys.
Our next question comes from Gus Richard from Northland Capital Markets. Please go ahead, yes. Thanks for taking my question.
Yeah.
You know what run rate do you have to hit in manufacturing before you know one of your customers commits to production.
Yeah, I mean, it's not that simple as run rate that's not the only factor that besides I think are the most important thing for our customers is that we'd be able to well, let me comment a little bit there's a lot of customers today that are actually Ralph is sampling that are comfortable going into production with our small cells and big cells and we'll see that when you.
From them they see it in next year. So in that sense, we already have customers, who are comfortable going to production with what we're producing.
Customers are more comfortable so it really depends upon the run rate of a particular product right. If the product run rate is in the millions we need to have that capability with the tens of thousands.
We are ready today, so that's kind of like how I look at it and the other variable is we need to give them the battery in the right form factor and ship that they can test it in the product that they're putting it in to be able to comfort to be able to say, okay. You know what I think we should go with it but those are the two big variables.
Okay I got it and then.
In the first half you can produce 30 K batteries, if I can add two numbers together and for the full year you can do 180 K batteries.
You know, it's a pretty big jump in the second half could you just talk about what you know what's going to accelerate that volume just so you know what needs to happen.
Yeah, I don't have I can't comment on that he lived in every day [laughter].
Absolutely in a very good question and yes as you saw in the Q1, we did a 12500, you're saying they'll do it in thousands in Q2 the quarter. We're in already and the ramp is pretty steep ramp is driven mostly in the confidence that we're going to get to that ramp is growing by a couple of things right.
One is the yields and we while we don't talk in detail about our yields which you know nobody really knows who their yields all I can say is we're making significant improvements in yields throughout the year and it is the proof points are sort of behind us. So that gives us confidence about the second half that's one second.
The uptime yeah.
Meantime between failures of equipment right essentially is the equipment and getting a little bit more predictable and both of those things, we're making good solid progress there for day after day, which is what is giving us.
So between now and into the end of the year.
You feel very very strong that our assumptions are actually fairly accurate Andrew.
And we're going to do the 180000.
Got it thanks, so much.
Our next question comes from George <unk> from Canaccord.
Hey, everyone. Thanks for taking my question.
I'd like to ask about the slides that T J presented.
In January .
About they had red and yellow.
And green in terms of just the issues that were.
Needs to be fixed going from Gen. One to gen. Two.
Some of those included like I see a red line here for bus bar in search.
Phil and I am curious if there's.
Any update on any progress that you've made in turning those Reds yellows and those yellow to green. Thank you.
Yeah, I mean, I'll I'll give a high level color. We are we made significant progress on those and in fact I was looking back at the presentation. The other day when someone asked my question and we're actually on track to almost everything that was set there and that's the reason why we were able to get the approval to make the purchase order for that.
Jen do equipment, because we made solid progress in each of those.
And so I think.
Clearly the team has worked really hard Nigeria with all his experience and the team. He has brought in a.
We're able to solve most of this those issues. So we.
We feel pretty confident about that I'd say anything else you want to add just very quickly the way we kind of test that you know I'll be making progress are we solving real root causes of Ford was stopping us from feeling a whole lot more gone from what we're doing is we're building proofs of concept reintroduced that lost time in the January 3rd reading.
Called up you'll see there are several people sees an.
Upwards, so free doesn't P O sees which were in motion all the way from January literally January 4th until.
Yesterday I can give you the update.
Most all of those people CS are doing extremely well showing us that what they were with zoom.
To confirm the U P. H that'd be we're expecting are all <unk>.
<unk> met so that's all good progress, it's a pretty rigorous way of Oh of approving the next step and the next step et cetera in that pool cycle as Rod mentioned, so we are feeling pretty good up after the POC.
Thank you.
Next question just on the I noticed that your you have these two silos.
That you have in your revenue funnel and one of them is engaged opportunities that was slightly down sequentially is that was that because engaged opportunities moved into act.
Active designs.
But the right way to think about it.
Yeah, Ralph do you want to take that that's kind of my understanding but all of them coming out sure. Yeah. Thanks for the question yes.
The simplest way to think about it is that.
We're trying to progress these customers into more active and real design wins and.
That was moving faster than getting new customers into the front end of that fund will be engaged.
Really exactly what you want to happen.
In order for us to get them to revenue stream.
Thank you.
Our next question comes from Ananda Baruah from loop capital markets.
Hey, guys.
Well that's it.
Yeah, just a couple if I could I guess the first is on <unk>.
So the process and getting again to the mobility lie.
Will you be giving us any updates on equipment delivery and any any update.
Through the year on the way to getting them to where you wanted to be around a particular metrics or anything of that nature.
A quick follow up thanks.
Yeah, we will continue to give you a bit in these meetings as we move forward in the different stages and where that is I think that that's a big milestone for us as a factory acceptance test.
Which will come up like in August I believe and then after that we'll have site acceptance than it actually been delivered to our site. So we'll give you updates on both of those milestones, but so far we are really pleased with the progress and we get our teams that are visiting our suppliers' suppliers come here again. It is all the time and even yesterday I saw a video of one of our Gen two machines than U S. One.
Working pretty exciting very exciting to see the progress being made by the team.
Yeah.
Awesome Raj. Thanks, that's helpful. Yeah, we look forward to that and then I guess.
The follow up question is.
What like how would you like us to think about.
Incremental capacity I used to do.
I know you just you just got Malaysia.
Like in place.
And you're just starting to get sort of.
Get the purchase orders in relating to the equipment.
But I'm sure we'll start all getting asked as you move forward about.
Incremental capacity plan and at some point incremental funding plan.
Like that so anything you can you can help us out with contact lives around that would be grateful.
Yes, I mean as I mentioned, you know I have a lot of experience in the in the high volume manufacturing businesses. So the most important thing is to make sure your supply and demand at tight out and you don't have too much supply or too little supply in line with demand, which takes a lot of planning made if it takes a lot of planning and in the demand side.
The customers a lot of planning and when we are or they could have been one of the long lead time months and facilitation. So it's a complex problem, but again have a lot of experience running this so the way we're going to do this is our first we secured the funds to make sure that we have the capability to buy them as we need them second thing and we know we secured the site and are in the middle of getting there.
<unk> done with our partner and then we give a heads up to our suppliers and when they need to come and then we start sampling our customers and like I said, we are set up for the first four lines now and as as we get to that stage, we will see the progress in the next couple of years, both on the customer side and both of them are machines are running.
And we will continue to optimize the machines and we'll continue to look to how to expand beyond those four as the demand shows up.
Okay. Okay, great that's great I appreciate it thanks a lot.
As a reminder, if you'd like to ask a question you may use the raise hand button at the bottom is usually an application or if he's joined us by phone by Dialling Star nine.
Our next question will come from Mark <unk> from Alder Lane.
Mark Your line is open until Sichuan mute.
Okay. Thanks for taking my question, so Raj you've been there for three months and Asia, a little more than five months, what gives you guys the incremental confidence.
That you can actually manufacture these batteries that speed because everyone constantly here, it's hard to do it's impossible pie in the sky, but your you guys are sounding more and more confident so what what exactly happened that gives you that confidence. That's question. One and question. Two is what are you guys.
It's going to start building batteries for inventory to actually ship commercially for these new products. Thank you.
Yes. Thank you for that question Mark you know firstly I think as I mentioned the reason that we are increasingly getting more and more confident and more time. They spend here is really because of a couple of things I mentioned in the call.
The way I don't think it's manufacturers' batteries.
Is it really <unk>.
Like the backend semiconductor manufacturing it is a it is a backend assembly test kind of technology that we have to master and do and that technology is being is there and maybe it may people have done it and even then the tolerance as to which we need to make is an order of magnitude less stringent than what's done.
And chips, and and and and you can see the progress you're making in the number of batteries at producing over the last few quarters. I mean, we went from almost nothing to 4000 something to 9000, now 12500, and we're coming into 18000 next quarter. So progress we are making in producing batteries as well.
That's our understanding of the actual mechanisms in the machines that are produced isn't the tolerances to which they need to do I think those are two things that really give us a lot of confidence and thirdly. All this proof of concept experiments that we've been running where what targeted at at what went wrong with the fab one when we did it where did we lose you there bill.
The throughput they did we lose you.
Machine uptime, and we did some might be created targeted extra months to make sure that those don't happen in Gen. Two and we are we are though that's meant brought out and we are confident now we pick the new set of suppliers, who are actually very capable of producing machines like this and and we are not paying them. All the money upfront. There's a lot of skin in the game on the air side because.
We only paid 10% on the first approval and then incrementally we pay them money as the yields come up and as a machine throughput comes up and there's different milestones that we that we used to check that.
And we followed this.
You know our process the EPA process that actually helped us make sure that we're ordering right machines. So all of those things give us a lot of confidence and we feel fairly strongly that we can get this done.
And and I ask for your second question on inventory, we are now building as you know.
So in this in this kind of.
Consumer electronics market, when you start giving units to customers they want to make sure that if their product is successful we have the supply to be able to support them and and that's kind of what we're doing through the year. We are of course sampling a lot of customers to the batteries remake, but we're also building.
Reasonable healthy level of inventory, if if the products that our customers and suddenly start selling really well, we don't want to be in the middle we weren't run really the bottleneck there not be able to supply them with batteries. So I'd say, it's a responsibility we take seriously and we are handling that is there anything else you want to comment on that machine.
Very quickly on the Gen. Two I think Raj alluded to it but just you know from my personal.
Oh, I feel confident I'm, an operations Guy I did I was the only thing that matters. So yield uptime of the Gen. One is what is giving us the confidence as I told you earlier, but more so in the Gen. Two I personally have visited all of the suppliers all of them who are making these P. O sees these machines spend good time with them.
Look through each of these each of these suppliers.
Methodologies that they're using to build the machine looked at the P O excuse myself.
That is what is giving us the confidence.
As Raj said you know this is all about backend semiconductor type of technology.
Tolerances et cetera, and now you're seeing the you know the ramp up in the upswing of the ramp that we are producing that gives us the confidence.
Thank you very much.
Our next question comes from Sean Milligan from Janney. Please go ahead.
Hey, guys. Thank you for taking my questions.
First I get asked a lot about you know who is why we asked them and what is the background there and so I know you touched on it earlier Raj and that they are used.
A lot.
And backend semi processing, but can you kind of maybe touch a little bit more on kind of how that relationship came to be about and what gives you confidence in <unk> ability to execute on financing.
Yeah. So a couple of things you know look I mean, I think if you look at southeast Asia.
There's a there's a lot of our contract manufacturers.
And we you know AJ has decades of experience in Malaysia, and I came from Micron that built the last factory in Malaysia on on that.
I'm really test of Ssds, so we understand that ecosystem, we understand who the people are that do it well and.
<unk> has got a.
A good track record of actually supplying.
Manufacturing, but many.
Top tier Oems and they have that capability and again they have the strong connections to the key people in Malaysia and.
I gave it to them and they came here, we talk to them and they are a solid company and we feel very strongly that they will be successful and so.
So we we are you know based on our experience and what everything they've done I feel very good that this will get done and it's not something that's obvious to everybody who doesn't live in that part of the world, but we spend a lot of time in southeast Asia. So we feel good that that will get done, but maybe Jay can comment a little bit more because he goes that lot often than me.
Yeah sure so a y B S.
Company I've known now actually for quite some time.
They are indeed, exactly as I said in the backend manufacturing sub contracting business I know the CEO and the team there, which she runs.
So I've been kind of studying them actually for some time you want them in my in my previous life.
They have a very good the uniqueness about them is they have.
Actually the talent that we would meet the localized someone for Oh.
Supplier supply constraints.
Constrains as and a few other mechanical things we're really good at that so then I localize them to you know where I can make them right next door.
That is when I would get my cheapest you know.
Cost and costs will be reduced so why he is bringing a lot more value than just being a contract manufacturer. They're also going to help us with our ecosystem of of various components that go into the bedroom.
Okay, Great no that's great feedback and then.
My follow up would just be Raj I, just wanted to clarify something you said earlier and it kind of relates to a gen. Two line two three for the execution on those.
You mentioned that.
Where previously I think that the.
Conversation talked about theres being their body or ordered or delivered.
In Malaysia by the end of next year, you were looking to line those up more with demand.
Obviously, the pipeline that you have as robust. So I just wanted to clarify is that lining up making.
One all wearables to optimize margins in that line or is it really just filling the demand funnel needs to fill to have those lines come in.
Yes, I mean again, if if if that's what we wanted to make happen, which is pull the trigger and get them. All out next year. If that's what makes most business sense, we will do that I'm not saying, we want to do that I'm, just saying you know I'm I'm just in general.
A more of a supply demand matching kind of guy so the way I look at it as well.
We have various customers that are actually qualifying our product in Iot devices, they're quantifying it in a smartphone has had quite a good paying them in variables. They are qualifying them in laptops and when we pull the trigger on a line you want to make sure you're pulling the trigger on the right line that produce the right kind of batteries for the right customer so it's not that.
It's not all I mean this is the beginning of this year, it's not absolutely clear to me, which one will be the first one which shouldnt come next and what timeframe. It will come as you guys know that the demand for batteries and the total Tam is huge but we just wanted to make sure we build the right one at the right margin at the right. The right thing that makes money for the company and Thats kind of where that is.
Talking about matching supply and demand.
Okay, great. Thank you for taking my questions.
And our next question comes from Chip Moore from EF Hutton.
Yes, thanks for taking the question I actually wanted to go back to I guess real.
Real quickly.
Imagine semi equipment orders and the recent financing where we help them in their discussions around local is financing tax incentives and things like that.
Just on your commentary around regarding Opex next quarter. It sounds like we should expect something fairly soon so just just curious anything to bear in mind. There and then my follow up would be are you.
Seen any more interest in similar type of pattern.
Or is it.
Sure.
Thanks.
Yeah, I didn't hear it fully well, but I think the question was on <unk> how.
How are you feeling about <unk> financing and like I said in my prepared remarks.
We talk to them constantly and they're making good progress it's going through the approval process that they need to go through their public company and and its going like how we thought it would so no cause for concern on our side. We are in close contact with them, they're just going through the due diligence and we're going through the all the right steps to make sure it's done right.
There are other options like that and we thought this was the best one that we should pick now.
And that's about all I want to comment at this point is that we do have what we need for the next four lines with this one once this one gets worked out.
And I and I still reiterate the comment I made before which is Oh, there's a lot of interest from customers as we begin to scale as batteries, where they want their surety of supply. There is interest from other parties like like we talked about <unk> and so on and we will explore all of them and I also mentioned that we'll be opportunistic about capital markets than we were and we were able to accomplish that.
So I'm just continuing to execute do what I told you guys I would last quarter.
Okay I appreciate it thanks.
There are no further questions at this time with that I'd like to turn it over to Raj to Larry for closing remarks.
Yeah, I I really wanted to take just a couple of minutes to thank you all for joining in and all of the elevated questions phenomenal team of dynamics, we've done really well this quarter and will a lot of work ahead of us, but we are committed to executing this and really appreciate all the support of our partners and investors to allow us to do what our what we're trying to do thank you.
Goodbye.