Thank you for standing by. And welcome to the Enovix Corporation Fourth Quarter 2022 Earnings Conference Call. Currently, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. As a reminder, today's program will be recorded. And now I'd like to introduce your host for today's program, Charles Anderson, Senior Vice President of Investor Relations. Please go ahead, sir.

Hello, everyone. And welcome to Enovix Corporation's fourth quarter 2022 financial results conference call. With us today are President and Chief Executive Officer, Raj Talluri, and Chief Financial Officer, Steffen Pietzke. We will also be joined today by our Chief Operating Officer, Ajay Marathe, and our Chief Commercial Officer, Ralph Schmitt for the Q&A portion of our call. Raj 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 fourth quarter 2022 shareholder letter after the market closed today. It's available on our website at ir.enovix.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 call all contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are based on current expectations and may differ materially from actual future events or results due to a variety of factors. For discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's shareholder letter and in our filings with the Securities and Exchange Commission. All our statements are made as of today, February 22, 2023, based on information currently available to us. We can give no assurance that the statements will prove to be correct when you do not intend and undertake no duty to update these statements except as required by law. During this call, we will also discuss non-GAAP financial measures which are prepared or not prepared in accordance with Generally Accepted Accounting Principles. You can find the reconciliation of the GAAP financial measures to non-GAAP financial measures in our shareholder letter, which is posted on the investor relations page of our website. I will now turn the call over to Raj to begin. Raj?

Good afternoon. Thank you, Charlie. And thank you all for joining us today. I'm really pleased to report a very strong fourth quarter for Enovix Corporation. We accomplished a number of things in this quarter. We significantly improved our yield of the batteries that we're producing. We made record progress for customers progressing through our funnel. We explained last time that the way we work with our customers is to get them samples of our batteries, which they then test and put into products that they are actually going to launch, moving them along the product creation cycle. Through that funnel, we have gained a lot of new customers and made significant progress to date. I'm proud to report that we generated over $1 million in revenue, ahead of consensus for this quarter. We ended the year with over $322 million in cash. More importantly, our Fab-1 in Fremont is operational, and we are focused on rapidly increasing its output now. The trajectory I see for Enovix is incredibly promising in '23 and beyond. Before Steffen discusses the financials, I wanted to spend some time talking about my background, why I joined Enovix, and the near-term actions I am taking to position the company for success. For nearly 30 years, I've been fortunate to have worked in and led teams in some of the best semiconductor companies in the world, including Texas Instruments, Qualcomm, and Micron. I've worked on products that revolutionized the mobile device experience, including digital camera chipsets, MP3 player chipsets, and the successful OMAP application processor at Texas Instruments, which transformed phones from mere calling devices to true multimedia devices. I was fortunate to lead the team at Qualcomm that developed the Snapdragon application processor, which powers the majority of Android cell phones today and ushered in the era of the modern smartphone. Most recently, I spent five years at Micron running the mobile division, which was one of the largest divisions at Micron with $7 billion of revenue in 2022 and over $2 billion of operating profit that fiscal year. Given my experience, I understand what it takes to launch products at scale and at high volume, and it's given me unique insights into customer needs, as they care about both the end users and the products they launch. One important insight I've had is the critical nature of battery technology in portable devices. It became obvious to me, although it may not be apparent to the average consumer, that the performance of a device is fundamentally throttled by battery constraints. For example, when running performance benchmarks on a smartphone, the CPU, GPU, memory, and camera operate at full throttle to provide outstanding performance metrics. However, in everyday use, these components often operate at reduced speeds to conserve battery life. In essence, consumers often don't realize the full potential of their devices because the battery limits their performance. I believe that the most pressing problem yet to solve in consumer electronic devices is portable battery technology. When I joined Enovix, I conducted due diligence on various battery companies and concluded that Enovix is ideally positioned to address this issue, which drives my passion for being here. I’ve been here for about a month, and I am genuinely impressed by the talent and groundbreaking technology at Enovix. Our technology is highly differentiated across several metrics, including performance, energy density, capacity, thermal performance, battery longevity, charge speed, and safety. We possess significant technology after over 16 years of dedicated work in this space, and there’s substantial headroom to enhance our performance metrics beyond what we currently offer. I see a foundation for a high-growth, highly profitable business with differentiated products that I can devote the next phase of my career to scaling. As you get to know me, you’ll notice that I always place the customer first. I emphasize understanding the user experience, which guides our product development. I think about how wearables, smartphones, laptops, and electric vehicles use batteries and what limitations affect their charging capabilities. This clarity informs our product development strategy. We are undergoing a transformation at Enovix. We have been R&D-focused for years with an immense amount of research invested in creating the fantastic batteries we are currently sampling. We must now pivot to becoming a customer-focused organization that rapidly and profitably transitions this technology into high-volume production. Thankfully, this is not an insurmountable challenge. Many of our team members are experienced in quickly scaling new products to market, and the core technology development is behind us. We owe a significant debt of gratitude to the founders of Enovix for reaching this point. I hold firm that we have room for improvement in high-volume production and recognize that we have not ramped up as quickly as we would have liked. However, I want to assure investors that I will transparently take you through our journey, updating you on production milestones, yield improvements, and efforts to reduce risks surrounding our Gen-2 line, which will manufacture high-volume batteries. While scaling operations is challenging, I have successfully navigated similar circumstances throughout my career in large companies with complex products. It won't be flawless, but we know what we need to do, and we will communicate our status clearly. I see an incredibly promising future. Our Chief Operating Officer, Ajay Marathe, comes with 38 years of industry experience from top companies and previously served as the CEO of Lumileds, where he made substantial production improvements. His team has already made commendable progress in the short time since he joined. I'm confident that we can produce batteries efficiently; we just need to do it faster. With the Gen-2 line, we will not only expedite production but also achieve higher volumes. Lastly, I want to touch on funding and capacity expansion. We've had numerous discussions with customers. The compelling attributes of our battery technology—including energy density and quality—have piqued significant interest from customers, strategic partners, and government entities. These parties are exploring options to inject capital into our company to help increase capacity. This practice is common within the battery industry, and given our advanced technological stage, many partners see it as relatively low risk. We plan to explore all options to find the most beneficial arrangement for our shareholders. I'll now turn the call over to Steffen to discuss guidance, and then we will take questions.

Thank you, Raj. Our financials are available in our shareholder letter, which includes a GAAP to non-GAAP reconciliation, so I will focus my commentary on high-level guidance. For '23, we are guiding by units produced rather than revenue guidance, as our annual revenue is highly influenced by the timing of our episodic service revenue, which isn't necessarily a strong indicator of our progress in scaling operations. For example, for Q1, we do not expect to recognize service revenue. For the full year '23, we are projecting production of 180,000 revenue-quality units in Fab-1, with an expectation of 9,000 units in Q1. Our plan is to at least double that production sequentially each quarter for the entire year. Regarding capital expenditures for 2023, we expect to spend $120 million, primarily for the Gen-2 line, facilitating Fab-2 in Southeast Asia, and the introduction of an agility line—an automated R&D line to Fremont, which will expedite customer qualifications and focus on custom cell development. Additionally, we anticipate $120 million in operational cash spend in 2023. Although we aim to keep operational expenses flat, we will redirect more costs toward the cost of revenue as we ramp up production volume in Fab-1 and begin Fab-2 in Asia later in the year. For financial modeling, I want to highlight that we expect to see increases in cash and non-cash expenses as we shift costs associated with goods sold versus operating expenses, particularly as we transition resources from R&D to manufacturing. This higher cost of revenue shift will materialize in Q1, with an anticipated $4 million increase in costs, compared to a $2 million decrease in operating expenses, both on a non-GAAP basis. In conclusion, we've made significant strides in manufacturing, have a robust balance sheet, and our dedicated team is fully committed to building shareholder value. With that, operator, we can commence the Q&A session.

We will now begin the Q&A session. Please note that this call is being recorded. Our first question comes from Ananda Baruah. Please unmute yourself and ask your question.

Hey, thanks, guys. Good afternoon. Raj, good to hear from you, and thanks for the remarks. I have a quick two-part question if I could just piggyback off your Gen-2 remarks. Can you remind us when we can first expect Gen-2 revenue and volume, and what the early ramp might look like? I have a quick follow-up afterward. Appreciate it.

Yes, absolutely. Thank you for asking the question about Gen-2! We are in the process of completing the design of Gen-2. As mentioned last time, we expect to approve the design in mid-March during the board meeting. Subsequently, we'll start collecting POs, and we anticipate equipment will start arriving, with buildout commencing by early next year. Therefore, mid-next year is when we will likely begin seeing Gen-2 revenue.

Got it; very helpful. I didn't hear about the EV measures yet. Can you just share your thoughts on the milestones for EV development this year, and where some of your EV investments might be pointed? I appreciate it.

Thank you for the question about EVs! As many of you are aware, the EV market is particularly exciting for us. Our battery technology offers significant advantages, such as superior energy density and faster charging capabilities. Additionally, because of our battery's mechanical structure, we can manage heat dissipation better than much of our competition. We've been engaging with various automotive companies and have noted considerable interest in our technology. We are currently strategizing on joint development agreements with multiple partners and will keep you updated as we make progress. So far, the feedback on our consumer batteries from the automotive sector has been very positive.

Our next question comes from Bill Peterson.

Thanks for the overview, and I apologize, I think I was mute. I wanted to inquire about your progress towards 180,000 units. You previously mentioned targeting around 60% yields, and I was curious about how those are progressing as we enter this early part of the year. Is that still the right way to think about yields as we exit Q4, 2023?

Absolutely, I'll address that. Our yields have been steadily improving since we last presented, and we are on track to meet our expectations by year-end. We are pleased to report that we're more than doubling our battery production each quarter. Therefore, we are confident that we will achieve the 180,000-unit target without any issues. In fact, we've occasionally produced more than that due to customer qualification needs, which I view positively.

Okay, great, thanks for that. My second question pertains to a point mentioned by TJ in the previous call. There was brief mention of product returns due to swelling. Could you clarify whether this is indeed an issue and if it pertains to a single product or something broader? I'm trying to gauge if this is something we need to be concerned about.

Yes, indeed. There was just one specific cell that was returned by a customer, and upon inspection, we determined that the swelling was caused by mechanical damage to the cell, likely occurring post-shipment from Enovix. We are currently conducting extensive quality tests and investigating various potential failure causes, but we have not observed similar issues elsewhere. Our architecture remains quite robust, which reassures us in this regard.

Our next question comes from Gabe Daoud.

Hey, good afternoon, everybody. Thanks for the prepared remarks! I’d like to return to the technical side. You mentioned scaling your 1,000-watt-hour-per-liter battery for the mobile phone and laptop sizes, particularly optimizing for extended cycle life. Could you remind us where we currently stand on that tech roadmap and what remains to be done?

That's an excellent question! In my month here, I've confirmed we are tracking well on our technological roadmaps. We've made considerable advancements in materials and technology development that enhance our energy density, ahead of our competition, and we continue to improve cycle life. However, it's important to note that fictionalizing batteries by one or two characteristics doesn’t encapsulate their utility effectively. We want to shift our focus to customer experiences, as these insights help guide our metrics beyond just simple performance numbers.

Thanks, Raj. That's really helpful. As a follow-up, can you shed some light on how conversations are progressing with cell manufacturers and traditional automakers about EVs? Are there concerns regarding performance scaling for EV-sized batteries, and what are the latest thoughts on form factors given some headline shifts towards cylindrical approaches?

First, I want to emphasize the importance of form factors across various products, not just EVs. Each application requires different battery shapes to fit their specific designs. We're building our manufacturing lines to facilitate customization to various form factors quickly. As for EVs, our discussions are promising—our test samples have received positive feedback from automotive companies. While it's too early to define specific business models, we are examining several approaches, including manufacturing and collaborative development agreements.

Our next question comes from Colin Rusch. Please unmute yourself and ask your question.

I wanted to gather more details on design activity and wins—specifically, how we are progressing towards those design qualifications and how quickly you’re moving through those cycles. This might be crucial for our estimates heading into late '24 and '25.

Certainly! I’m pleased to report that our design activity has improved significantly. Our last quarter was stellar as we've provided more cells for testing and samples to customers that are currently in the testing phase. We're successfully helping them gain confidence in our batteries compared to their existing options. Ralph, would you like to add more detail?

Thanks, Raj! What’s exciting is that we've seen a remarkable increase in active designs and wins, up by $200 million in just the last quarter. This demonstrates that customers are fully engaged and have taken our batteries through their own qualifications, which is a critical milestone.

Could you provide more color on the tool set for the Gen-2 line? Are there any concerns with a lack of backup suppliers for timely access to essential equipment, particularly given the timeline constraints?

Great question! We are currently establishing relationships with several suppliers for our Gen-2 line, especially after learning from our experiences with Gen-1. We are engaging semiconductor vendors and battery manufacturers to ensure we have the best technology. Ajay, would you like to elaborate more?

Sure! We have multiple suppliers across the Gen-2 supply chain. We've learned invaluable lessons from our Gen-1 experience, and are focused on resolving any challenges from that phase. We've conducted proof-of-concept tests with promising results, and our relationships with suppliers have strengthened; we aim for the equipment's schedule and cost to align effectively.

Thanks, everyone.

I wanted to follow up on the capital expenditures you mentioned. I recall that you previously outlined approximately $70 million for each Gen-2 line, with plans for four lines in the Southeast Asia fab. Are these figures still accurate based on your current conversations?

Great question! We still believe that maintaining that capacity and the required space for potentially four or more lines is critical. We'll kick off our initial ability to produce custom cells using the agility line, which shares components with the Gen-2 line. As demand increases, our aim is to scale up efficiently. Ajay, do you want to add more?

No major changes to previous cost estimates, Alex. While we anticipate our costs to decrease due to economies of scale as more lines are introduced, the figures remain consistent with what we've previously shared.

Thank you!

I have a question regarding the impairment charge you took for equipment. Could you clarify the rationale and how it relates to the output of line one?

Certainly! The $4.8 million charge was taken for a piece of equipment that we decided not to develop further due to its high output capability that exceeded our line's efficiency needs here in Fremont. We are not expecting this to happen again.

That's helpful, thanks. I wanted to ask how you evaluate potential partnerships with customers interested in joint ventures or factory buildouts.

Good question! We are in discussions with various customers and government entities regarding potential partnerships to build out manufacturing capacity. The decision to partner depends on several strategic factors, including alignment with our company's direction. We're focused on mutually beneficial outcomes regarding technology and product offerings tailored to high-growth markets.

I’d like to ask your perspectives since joining about your observations on areas for improvement or changes in methodologies?

Absolutely! I am very impressed by Enovix’s differentiating technology; it’s rare to encounter such a compelling architecture! My focus will be on aligning product strategies with customer needs, understanding their desired outcomes, and setting manufacturing processes to match them closely. We'll need to be selective in prioritizing the right customer relationships moving forward.

What competitors do you see encountering similar products, if any?

Our main competition consists of traditional lithium-ion batteries, and we have yet to identify any products closely matching the performance characteristics of our technology. This gives us a considerable opportunity to make noticeable impacts as customers shift away from older technologies.

We will now prompt our next question from Derek Soderberg.

Raj, can you clarify current yield, now that we’ve exited the year at 42.9? Have those figures changed? And how does this compare to the S-curve principle?

Yes, our yields are indeed continuing to follow the S-curve model as expected, and we are on track to reach our projections. I'm thrilled with our progress, and while I won’t disclose specific numbers, I can assure you we are moving in a favorable direction as we aim for our production goals.

Thanks for that. I noticed commentary in the shareholder letter regarding enhancing cycle life. You indicated you were at 500 cycles for consumer batteries and working on newer electrolytes—could you clarify if customers are actively requesting this?

Different applications have varying cycle life requirements. We are focused on improving cycle life, based on feedback from our customers. However, cycle life isn't solely about extending numbers; it’s about understanding how users interact with their devices during typical usage, which shapes our development efforts.

We’ll move on to our next question from Tony Stoss.

I don’t have further questions. Thank you.

Thanks for taking my question. Raj, congratulations on your new role! I'm curious about your funding strategies with partners and governments; can you provide more detail on what assistance you’re exploring?

Thank you for your kind words! It's a bit early to disclose specifics, as we are in ongoing discussions. Traditionally, governments provide financial incentives for establishing manufacturing operations, mainly focused on job creation and economic growth. Our customer discussions revolve around ensuring sufficient manufacturing capacity so they can secure their demand. It's vital that we carefully select partners who align with our growth strategy, as there’s considerable interest in our technology.

How do you perceive the increase in design wins and backlog amidst ongoing production setbacks?

The technology has always excited our partners. This past quarter, providing larger samples has been key to gaining customer traction. Our ability to deliver thousands of units now enhances design partnerships, building confidence in our products moving forward.

Next, we’ll hear from Chris Souther. Please unmute yourself.

With your projection of 180,000 batteries for revenue, can you break down how many go into end products vs. being used for customer testing?

All units are indeed products customers are paying for; however, some may still be in early pre-production phases. I don’t have a strict split, but we expect approximately half to be tied to launched products—dependent on customer timelines.

Can you elaborate on the 13 changes you noted in your January commentary? Are there developments in the higher-risk areas worth discussing?

We are precisely on track with all changes indicated and our UPH targets. We've actively worked on addressing high-risk areas, and proof-of-concept results are encouraging across the board.

We will now return to ask questions from Sean Milligan.

Regarding the outside funding interest you referred to, how do your customers and funding partners gauge the Gen-2 designs before committing? Are they waiting for production evidence?

Indeed, it varies by partner. Government entities typically want assurance of our demand. Customers often seek confirmed production samples before they invest. Therefore, we will maintain diligence in our negotiations to satisfy varied expectations.

There are no further questions at this time. Raj, would you like to offer closing remarks?

Thank you all for your time, and for your support of Enovix. I want to acknowledge the fantastic efforts of our team, who work diligently to drive our innovations forward. A big shout out to the founders, whose hard work has brought us to this stage. I look forward to updating you more in future calls. Thank you!