Enovix Corp Q2 FY2023 Earnings Call

Thank you for standing by, and welcome to today's program, the Enovix Corporation Second Quarter 2023 Earnings Call. After the presentation, there will be a Q&A session featuring Enovix management. With that, I'd like to turn it over to your host for today's program, Charlie Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Thank you. Hello, everyone, and welcome to Enovix Corporation's second quarter 2023 financial results conference call. With us today are President and Chief Executive Officer, Dr. Raj Talluri; Chief Financial Officer, Farhan Ahmad; Chief Operating Officer, Ajay Marathe; and Chief Commercial Officer, Ralph Schmitt. Raj and Farhan will review the operating and financial highlights and then we will take questions. After the Q&A session, we'll conclude our call. Before we continue, let me kindly remind you that we released our second quarter 2023 shareholder letter after the market closed today. It's available on our website at ir.enovix.com. A replay of this 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 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, July 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 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 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?

Thank you. Thank you, Charlie, and thank you, everyone, for joining us today. I'm going to kick off with a few high-level remarks, and then I'm going to introduce our new CFO, Farhan Ahmad, who will make a few comments. After that, we have a very special treat for you all today. Our COO, Ajay Marathe, is in Asia today at our Gen2 equipment vendors. And we are hoping to get him to show you a video of our latest machines and how they're progressing before our factory acceptance test next month. After that, I'll make some closing remarks and then we'll take your questions. Now, first, we had a very proactive second quarter that included some very key milestones along our journey to scale. First, we produced 22,502 batteries in Fab-1. This exceeds the forecast we made last quarter that we were going to make 18,000 sales this year, so we exceeded that. Secondly, we delivered on the commitment to secure the $70 million non-dilutive financing for Malaysia. As a result of that, we are going to lower our CapEx guidance for the year. I'll say a little bit more about that in a little bit. Thirdly, I'm super excited that we actually received a purchase order for our BrakeFlow-enabled cells for the U.S. Army. Now, this is a great testament to the quality of our product, the reliability of the product, and it's a critical step for us towards our mass production and high volume production. Fourth, I visited several customers in Asia in the last month. I am super excited and really happy to report that we now have secured engagements with some key smartphone manufacturers, Vivo, Xiaomi, and Lenovo being three of them. Now, Xiaomi and Vivo are in the top five global OEMs. Lenovo is a Motorola brand and number three in the U.S. Lastly, I do want to bring out that we have built out our leadership team some more with a group of individuals that I've worked closely with in the past at Micron and Qualcomm, and I'm super excited to introduce them to you. On that last note, I'd like to let everyone know that Ralph Schmitt sitting here with me has chosen to retire and he'll be leaving the company effective August 11. Now, after a recent career as CEO of multiple tech companies, Ralph did Enovix a great favor by revisiting his roots in sales and setting up the commercialization engine at Enovix over the last two years. I want to thank Ralph for all his support at Enovix. In order to continue his work, we have recruited some world-class talent to our commercial and product organization. This includes Vice President of Product Management, Samira Naraghi; and Vice President of Sales, Dave Cech; who recently joined us from Qualcomm where we used to work together. With that, I'm going to let Ralph say a few words. Ralph?

Thank you, Raj. I want to thank you, Raj, and Charlie and the Board for having me as part of the leadership team for such an amazing company. I have been lucky enough to work with Raj for over 15 years and been involved in ramping businesses with him, including Cypress, SunPower, and a few others. But Enovix has been the most exciting business opportunity that I've had in my career, and frankly, I've run some pretty interesting tech companies, but I believe there's just amazing opportunity here. The team that I have put together has positively impacted the long-term prospects of the company, but I've never been involved in a business situation where there's insatiable demand for a product that has clear market leadership, and we're engaged with every market leader in the consumer world. So for me, it's a difficult decision to leave, but sometimes life throws things your way and I sort of need to stop and prioritize my health at this point. The go-to-market stewards that Raj mentioned, Dave and Samira, are very experienced and talented. I've known Dave for 20 years; his business acumen and customer engagement are second to none, and it was an absolute honor to work closely with Raj, Ajay, and the entire executive team to progress Enovix to the next stage, essentially the second phase of the company after the technology base was established by the founders. Our customers have validated the technology as sound and have audited our business, and that it's scaling properly due to the actions of the entire team. So it's been an honor to be a part of it, and I'll continue to cheer from the sidelines. So, thanks, Raj.

Thank you, Ralph. For my remarks today, I'd like to spend a little bit of time actually talking about the Enovix value proposition as it relates to the mega trends we are witnessing in the market today. Now, if it wasn't clear already, the news and events in the last few months have driven home the point that there's a ton of investment being made towards artificial intelligence, AI. We also learned in the past couple of months that there are many revolutionary computing platforms enabled by high-performance cameras, high-performance memories, image processors, sensors, and displays that marry all of this together along with AI. But this has also revealed a dirty little secret in our industry; none of these new devices being launched will really deliver on the promise to the end consumer until they have much better batteries. I want to substantiate that today with a bit more data on the kind of performance in battery that AI needs. And this is literally why I joined Enovix. Now, first, let's talk about AI a little deeper. For those of you who don't know, I did my Ph.D. in Computer Vision and AI, and I've spent quite some time in that area. I asked my team here to test what the power budget is needed if you actually run a true generative AI application on a battery-operated device, either a smartphone or a laptop, versus running it on the cloud, because a lot of people want to run these applications on their devices natively due to cloud costs and latency issues. Now, we ran Stable Diffusion, which is a very popular text-to-image generating program. We found that in 68 minutes when we ran this program to produce images, the laptop died. Now, if you just ran it on the cloud, you could go for 11 hours, but it costs a lot to run it on the cloud, you need a subscription, and privacy issues arise. The resolution is not as high as you want. You already paid for this expensive laptop, and you'd like to use it, but the problem is, you can't because the battery goes down. So AI and Edge are where the industry is going, but AI and Edge will not happen like we want until there's a breakthrough in battery technology. We tried another application; a popular one for photography and image processing is Adobe Lightroom. Adobe always had a great noise filter where you take a picture in low light and try to filter the noise out. They had a standard noise filter, but a few months ago Adobe released an AI-powered noise filter. I was amazed by how much better the AI-powered noise filter was in terms of clearing up noise. But when we ran the AI noise filter and measured the battery draw, that filter needed 30 times more battery. It's compelling why the world needs a much better battery to realize these great AI innovations coming. I've written a blog on this; you can look at it at enovix.com/ai, and I really encourage all of you to check it out so that you can see this data. Now, let's talk about mixed reality, another application that's becoming very popular. We've seen tremendous advances in processes, tremendous advances in memory, displays, sensors, camera technologies that enable use cases we've always ramped up. I mean, having true mixed reality devices is really amazing, but unfortunately, the battery has not kept pace. This point was solidified to me when I was in Asia visiting customers and I talked about the Enovix battery and asked if there’s a way we can start working with them on this. The interest level I saw in advanced battery technology was amazing because they also know that as AI moves to the Edge into phones, laptops, and wearables, you just need a better battery. Now, I also visited a lot of investors recently, and they often ask, 'Enovix's business model assumes that we will command a premium for our battery technology when we provide this increased energy density to our customers.' The question I ask is, 'Why do you think you'll get that?' I'm now even more convinced that as new devices come out that are not delivering on performance due to battery constraints, the supplier who makes the breakthrough will be the one who has the right to command a premium price with strong margins. I truly believe that Enovix has that opportunity. Now, this is not that different from what I've seen in my past life. Over my 30-year career in semiconductors, I witnessed the price of processors go from $15 to $65 because they delivered a better user experience to the end user. Phones built-in cameras, video, GPS, audio functionalities increased the value delivered by processors. Similarly, at Enovix, as we increase our value in energy density, cycles, charge rate, safety, and more, our customers will be able to take that technology to market and produce much more compelling products, which the end users will pay a premium for, valuing the performance we're able to provide. Much like my experience in my career, I devoted significant time understanding customer needs and how to optimize batteries. When they win, we win. Providing a better battery facilitates better products, premium pricing, and improved outcomes for all. As I mentioned before, I was super excited that we are now able to begin programs with leading phone OEMs while advancing our design-ins in wearables, IoT, and computers. This collaboration will guide us in architecting batteries that deliver great value. With that, I'd like to introduce our new CFO, Farhan Ahmad. Farhan?

Thanks, Raj. I'm thrilled to be here at Enovix, and I want to thank the entire Enovix team for the warm welcome that I've received so far. I was drawn to Enovix by its highly differentiated technology delivering leading energy density across the industry and a team with a strong track record of operational excellence. The addressable market opportunity here is large; breakthrough innovation with a silicon mindset can deliver increasingly differentiated products. Like Raj, I also strongly believe that we can command a premium price and deliver strong margins. I'm looking forward to connecting with investors and sharing the Enovix story with all of you, as it's highly compelling. Raj will touch on the guidance, but at a high level, I aim for Enovix to be a careful steward of shareholder cash and to make the investments needed to grow this into a great business that delivers strong growth and an attractive margin profile. With that, I'll turn it back to Raj.

Thank you, Farhan. It's great to work with you again. As I mentioned earlier today, Ajay is going to join us from Asia. He's going to give us an update on our Gen2 Autoline as it's getting ready for factory acceptance testing. We're actually going to stream this live from Asia, but let's hear from Ajay. Ajay?

Thank you, Raj. I hope you can hear me okay. It's an exciting time here. I'm sitting at one of our suppliers, and as you can see in the background, there's a lot of equipment. You're wondering, what is this equipment? What is it doing? Why am I excited? Six in the morning, I'm talking with a lot of energy, but there's a reason for it. Gen2 equipment, which we have been working on, as you have reported, has made a lot of progress. I want to show you personally the progress we have made on the line. So you can see it for yourself and hopefully, you can gain the same confidence I have built regarding where we are right now. So let's review three or four important steps in what I'm going to show you right now in battery making. One of the first steps is laser patterning done in other equipment. Here we have equipment that takes the laser pattern rolls, placing them on these what I call stackers; we have seven stackers on the line, five of them stacking mid-stack electrodes and two doing the end stacker, all currently in debug mode. You can see this machine is becoming more real and will soon be operational. We are targeting very high UPH rates, achieving 13,50 UPH in size, and with very little labor content; roughly 25 people per shift will run this operation, producing 9 million batteries a year. Each of these machines has built-in inline metrology with minimal human intervention, ensuring what we produce is of very high yield. The next equipment showcases the AO Print, which attaches aluminum oxide film on the side of the cells, insulating the cathode and anode. Next, we measure the cathode to anode offset to ensure it's within specification tolerances. I want to show you the constraint attach, which is the most important piece from our suppliers; it has a glue film attached. You can now see how the cycling works to attach accurately and precisely with inline metrology. The last tool I want to highlight is the Busbar Insert tool, which has been significantly improved compared to Gen1 that faced issues; it's a key component for enhancing speed. All of this equipment is currently in debug mode and ready for factory acceptance testing. Factory acceptance is the most critical step in the equipment procurement process, and after that, it will be shipped to Malaysia to our site at the Penang Science Park. This gives me confidence that the equipment is real and operational, and I thought coming here to share the progress was a good idea. Okay, over to you, Raj.

Thank you, Ajay. I hope that was useful for all of you. And you can see the excitement in Ajay's face and the team's faces there. We've been working hard to build these machines, and the factory acceptance process is on track. We're super excited to move forward. Now, I want to talk about our outlook. For the third quarter of 2023, we are forecasting that we will produce approximately 36,000 units from our Fab-1. Our plan for the rest of the year is to manufacture as many small cells as needed to support the commercial launches of the customers and qualifications of those customers who have integrated our products. But we also want to focus on higher value projects and opportunities that we've come across from building larger cells and with BrakeFlow, a technology crucial for safe batteries for the U.S. Army and other customers. Notably, the total size of the U.S. Army order for pre-production cells is nearly $600,000 for this year, predominantly in Q4. But this is just a first step in what we hope will lead to a significant business in the multiple tens of millions of dollars in the years to come, which is very exciting for us as we work to make these projects a reality in Fab-1. Now, regarding our cash usage, for the full-year of 2023, we are lowering our full year cash usage guidance from $240 million to $190 million. This reduction is mainly because of the decrease in our CapEx forecast from $120 million to $70 million due to the Malaysia transaction and the benefits we will see next year from the YBS transaction. We've entered into a manufacturing agreement with YBS, our assembly subcontractor, where they are financing $70 million towards the first Gen2 Autoline that Ajay mentioned, supported by funding from OCBC Bank. In closing, we are preparing for high volume products in Malaysia, and as the facilitation of Fab-2 is underway, we've hired a strong team in Malaysia, and they have come here to Fab-1 for training on the equipment in Fremont. We look forward to sharing our progress over the remainder of the year. With that, let me open up for any questions. Operator?

We'll now begin the Q&A session. Please note that this call is being recorded. Before we go to live questions, we're going to read the two most highly voted questions submitted by shareholders ahead of this call during registration. The first question is, out of the 180,000 batteries being produced this year, what percentage is for testing and what percentage is made for end use?

Yes, absolutely. As I mentioned, we are guiding to another 36,000 batteries in the next quarter. These batteries go to our customers for testing new products to launch next year. Some are also for products we expect to launch later this year, requiring inventory to ensure customer comfort when moving to production. It's difficult to state the exact percentage for production versus testing. Honestly, we've had many opportunities, particularly with the new large sales prospects that we're focusing resources on for the U.S. Army.

The second question is what needs to happen for a qualifying customer to announce that they'll be locking a contract to use Enovix batteries?

Thanks, Raj. Yes. I think Raj described very well how we're approaching the market with customers building some early products. We're expecting some releases of lower volume products in the second half of this year based on the amount of cells we can produce. Most customers, I should say, some customers will allow us to announce them using our batteries and some will not. So it's unclear exactly how many will do so and the timeframe, but they will not do that until they have these products available either publicly or for sale, which should happen later this year.

We'll now go to the queue. Questions will be answered in the order they're received. Please ask one question and one follow-up question at most. We'll now pause for a moment to assemble the queue. Our first question comes from Derek Soderberg from Cantor.

Yes. Hey guys, thanks for taking my questions and Farhan congrats on the new role. Ajay, I wanted to start with you. I'm curious how many proof of concepts do you have left to complete? And can you talk about some unique challenges associated with factory acceptance testing compared to the proof of concepts? What risks exist that parts of the equipment that passed the proof of concepts won't meet the testing requirements?

Sure, absolutely. We have actually run more than 40 proof of concepts on about 13 or 14 different pieces of equipment. Most of them ran smoothly after one or two learning cycles. Some did come back for redesign; there were a couple of recent examples I looked at yesterday, which completed redesigns. I would say we’re under 10 proofs of concepts left before the factory acceptance test is done, and most important ones have been completed as expected.

Got it. And as a follow-up, Ralph, sad to see you go and best wishes to you, but I wanted to ask about some AI applications using 30% to 50% of battery capacity with those applications. It seems like you might need five, six, seven or more large battery cells. Is that the case? Are some of these customers in laptops signaling that you are the only ones who can potentially enable some of these applications?

Yes, I can take that. The points I want to make are, number one, customers are realizing that the applications coming in are so compelling, current battery technology can't keep up. For example, using the AI noise filter in Lightroom, you can't go back to traditional noise filters after experiencing the improved performance; it's just not feasible. This situation is early stages; it's likely the first time anyone has presented data on battery consumption when running AI applications. Our customers are realizing this will evolve in two ways. They'll either buy more batteries, which increases form factor size, or they'll use our increased energy density to preserve form factor while delivering more energy. It's hard to say how many batteries will be needed, but the applications coming in will definitely require more than we initially predicted due to demand.

The next question comes from Colin Rusch from Oppenheimer.

Thanks so much, guys. Can you speak to the strategy around rolling out the standard cell, the customer interest depth, and how that will potentially impact revenue ramp as some of your customers look at that standard cell rollout?

Yes. We're trying to replicate what we see in other battery segments in the marketplace. In the pouch cell, it's unusual to see a standard cell, but we've had enough customer interest across various IoT applications to see this as a viable approach. Typically, a general rollout attracts smaller customers unable to develop custom cell sizes. We've seen considerable uptake of this standard cell, and you will see more in the future of different sizes.

I'll add a bit more color to that. This is similar to my experience at Qualcomm when we ran the IoT business. Transitioning to a horizontal business where customers buy through distributors and in small numbers means they are more willing to adjust the form factor for the standard cell. However, with very high volume applications, like smartphones, customers want a perfectly fitting battery for maximum energy throughput. Therefore, we aimed to support smaller volume per socket opportunities while providing higher energy cells. This strategy is common in semiconductors; the idea is that customers may later shift from standard to high-volume opportunities as their products succeed, bringing them back for custom cells.

Okay. Thanks so much. And on the material supply chain, we see dislocation on the capital side, as well as with oil and gas and silicon. Can you talk about how your customers engage with those supply chains and prepare for a potential steep ramp as you approach 2024 and into 2025?

Yes. I have been fortunate to spend a lot of time with battery material suppliers in recent months. There's a lot of innovation underway; the number of suppliers claiming better silicon anodes and cathodes has surged, driven largely by the huge EV opportunity. This is exciting for us as we can take advantage of their investments in these areas and utilize anodes and cathodes best suited for our battery architecture, allowing us to provide higher energy density, better cycle life, and rapid charge capabilities. The emerging diversity in our supply chain is beneficial, offering us the flexibility to work with multiple suppliers to optimize costs.

Okay. I've got a couple follow-up questions, but I'll take them offline. Thanks, guys.

Thank you, Colin.

Our next question comes from Bill Peterson from JPMorgan.

Yes, hi, good afternoon, and nice to see things are on track with Fab-2. Farhan, welcome to the team and good luck in the role, and Ralph, good luck in your retirement. My first question is I wanted to check on the smartphone announcements. I’d like to get a better understanding of what you mean with the term engagements. I mean, do you have volume purchase agreements? Is pricing set? Are these for new form factors? Should we consider these large batteries for smartphones as customized parts, or are you looking to standardize these parts?

Yes, a lot of questions there. Firstly, most smartphone batteries will be custom products in the sense that every smartphone maker's battery is a specific size. Close enough, but specific. One area we see a lot of opportunity is in foldable and flip phones. This has become a popular category in China, as they allow for much larger displays that support multiple applications simultaneously. With 5G, users can have different windows open at once, running different AI applications. While customers enjoy this form factor, meeting the power demands of larger displays has been a challenge—they typically need one battery on each side. Our technology allows for the possibility of replacing two batteries with one Enovix battery, making flip phones thinner, or enabling foldable phones that match the thickness of regular devices. Regarding engagements, we’re addressing the form factors, intended launch timelines, and battery sizes, working to understand charging and discharging requirements, and coordinating on sample timelines. It's a process reminiscent of what I've experienced with processors and memory, and the excitement surrounding our battery tech reflects its substantial opportunity market-wide—across smartphones, wearables, and more.

Great. Nice to see the interest there. Also, you mentioned your confidence in getting premium prices, and there's considerable investor inquiry regarding your cost structure compared to competitors in Asia. How should we view the current Gen2 along with current throughput and material set? How does that compare to high-volume competitors today? More importantly, what opportunities do you see to drive down line costs, increase throughput, and optimize materials to close the gap with high-volume competitors?

Absolutely. The cost structure of battery production is heavily influenced by material costs, constituting about 60% or more, which includes anodes, cathodes, electrolytes, separators, and other components. Our current cost structure is clearly not at its optimum and probably won't be even with one production line built. Achieving scale by producing tens of millions allows us to negotiate considerably better material costs. We’re actively finding ways to lower our costs while increasing performance. Ajay has been working with a robust supply chain team to ensure material costs decrease with the production ramp-up. Machine costs also matter; we're exploring which aspects of machinery can be cost-reduced. The initial line we’re building can accommodate various battery sizes, but we plan to optimize future lines specifically for customer needs, enabling us to reduce costs as our products grow. I'm optimistic about our long-term gross margins as we ramp volume and refine our processes.

Thanks for sharing your insights, and best wishes to Farhan and Ralph.

Thank you.

Our next question comes from George Gianarikas from Canaccord.

Hey, everyone, thanks for taking my questions. First, can you provide any updates on the EV opportunity, specifically regarding fast charging based on your battery structure?

Yes, as I mentioned, we are making steady progress in that area. We've been able to quantify the benefits of our architecture regarding fast charging. We're working with several EV OEMs to align their material preferences with our architecture to get them samples. While I don't have new milestones to share today, I am optimistic we will have more data by the year's end.

Thanks. As a follow-up, can you give us an overview of your capital structure? You have lowered capital needs for this year, but what does 2024 look like concerning requirements for the next 12 to 24 months?

We are not providing guidance for next year's CapEx at this point, but I can tell you that we have a lot happening next year. We will be completing the Gen2 Autoline and the agility line as well. CapEx will increase this year, but we won't provide specifics until the year's end; we will share more then.

Our next question comes from Alex Potter from Piper Sandler.

Thanks, guys. Just a quick follow-up on that. I know you might not share specific numbers, but qualitatively, have you considered timelines for starting additional dedicated high-volume customer-specific lines in Malaysia? How much will these lines cost? Are you in discussions with customers about expected delivery timelines?

Yes. Our customers span across multiple form factors. While we have been developing a universal line for flexibility, customer engagement is essential for streamlining production. We're eager to optimize upon securing customer commitments, and we'll build new lines to adapt to their needs. I wish I had more precise answers, but visibility will improve with time; rest assured, we're in active discussions for timely implementations.

Regarding funding for these new lines, how are you arranging financial backing? Could customers help fund such developments, and what concessions might arise from this?

Yes. I mentioned previously there are three capital raise options. First, we seek favorable funding from Asian partners since they want our factories. Second, we may leverage capital market opportunities when available. Lastly, we can involve customers to help fund certain lines, which may affect margins and pricing. All options are still available, and we’re fortunate not to make immediate decisions due to the capital structure in place, especially with YBS securing further runway.

Okay. Thanks. Sounds like a perfectly easy job. I’m looking forward to working with you.

Thanks.

Our next question comes from Gabe Daoud from Cowen.

Hey, thanks, everyone. I was hoping Raj could provide an update on the MOU announced last November for the smartwatch program. Is there notable progress to comment on today?

Yes, I believe Ralph can comment on that since he was involved in the MOU.

Yes, the MOU wasn't solely for smartwatches, but it involved deploying our technology across multiple platforms moving forward. Progress is ongoing; customers are qualifying the product, and we should see some outcomes in 2024 or early 2025 regarding volume production.

One comment I'll add, Gabe, is that although the MOU is one thing, after returning from Asia, I noticed much interest in our technology and products from many customers with large volume opportunities. We need to complete the qualifications and build our factories to meet the demand springing from those opportunities.

Great, that's helpful. A quick follow-up: if you shipped 10,000 cells and generated $42,000 in revenue, it implies an ASP over $4, whereas you had previously disclosed $5 for the small cells. What's driving this delta?

I mentioned before that cells going to customers were often samples, and we sometimes don't charge for these samples to encourage usage and validation. Occasionally, we charge a premium for samples. Thus, taking revenue numbers to determine ASP by dividing cells by revenue isn't accurate, since this early production phase focuses on customer qualification. Nevertheless, I'm confident about our ASPs due to the value generated through our products.

Our next question comes from Ananda Baruah from Loop Capital Markets.

Thanks for the questions. With regards to Fab-2, Gen2, and launching initial production by April, can we expect updates on milestones between earnings calls? What are those milestones?

Yes, absolutely. The April date for samples from the Gen2 Autoline in Malaysia remains our target. The next huge milestone is factory acceptance testing next month, and we hope to provide updates on those results. Additionally, we will share updates when the agility line arrives and when the equipment goes into our Malaysian facility, given we have secured the contracts and prepared the site.

Great to hear. As a follow-up, do you still aim for a significant number of EV MOUs this year? Is producing an EV battery sample necessary for securing these MOUs?

Yes, that's absolutely our goal. The challenge we face is the abundance of opportunities for the army, EV projects, and the recent general availability announcement of our cells. All these customer qualifications must be balanced thoughtfully to maximize profitability for our company.

Our next question comes from Sean Milligan from Janney.

Hey, guys, thanks. My first question is how should we consider the Fab-2 ramp? Once the Gen2 Autoline is installed and running, what pace can we realistically expect for adding additional lines?

If desired, we can expedite building four universal lines simultaneously, but this isn't a very effective strategy; we want to optimize our lines for customer-specific needs. We’re addressing long lead issues to move as quickly as possible while ensuring our lines remain optimized for maximum profitability. I can't provide more details at this moment, but I plan to do so as the year progresses.

And regarding the YBS announcement, the $100 million covers the facility plus the first line. How many lines do you think can ultimately fit in that facility?

That facility can accommodate four lines, and we are ensuring the infrastructure can support all necessary requirements to facilitate that.

Our next question comes from Gus Richard from Northland Capital Markets.

Can you talk a bit about where you are with commercial terms? You talked about YBS, and have those been finalized?

We signed the manufacturing supply agreement with YBS, so those terms have been established. We have a clear understanding of the uplift and all associated details.

I want to ensure the agility lines are still expected to be operational by year-end and available for customer samples.

Yes, that's still on track. We believe by year-end we'll have that completed.

Just to clarify, the first line is a universal line, meaning we've sacrificed some UPH optimization. This first universal line will produce 9 million of any battery type.

That's correct.

Thanks for that clarification; that's all for me.

Thank you, Gus.

Our next question comes from Chris Souther from B. Riley.

Thanks for taking my question here. Regarding production from Fab-1, you exceeded expectations, now targeting 36,000 for Q3. Are we still targeting 180,000 for the full year? Does ramping some larger laptop phone batteries change that target? Are there any specific actions needed over the next few months to achieve that number? And should we expect significant contributions from the agility line this year?

Great question. Our manufacturing progress is indeed excellent thanks to Ajay and his team. We're still targeting 180,000 batteries this year, and as opportunities arise, particularly with higher value projects like the U.S. Army, we must balance the right production mix. Agility line contributions will depend on its timely commissioning and relation to demand, but I'm excited about our trajectory.

Thanks, that's helpful. I appreciate the color on customer engagements regarding the funnel plan you shared in January. How do you think that $737 million in active design and design wins breaks down as customers progress through the stages P1K, P10K?

Yes, we haven't shown that graph in a while, but we're indeed moving customers from QS 100, the early sampling stage, toward P1K, the production units section. That journey typically leads to full revenue capture in higher volume production, further dependent on how many units we can provide. As we build inventory for upcoming launches, we've broadened our funnel with various emerging clients drawn to Enovix.

Our next question comes from Tim Moore from EF Hutton.

Thanks, and the equipment line video walkthrough was insightful. My main question is, as you're innovating in energy density and light-weight batteries, do you see more customers recognizing a 50% increase in amp hours? Is awareness growing among customers regarding your offerings?

Yes, certainly. Customers recognize the value of enhanced energy density. The applications they foresee emphasize the necessity for more robust battery performance. For instance, the Apple mixed-reality headset currently has only two hours of battery life; achieving four, six, or eight hours will positively affect user experience, which is critical. We're increasing customer engagement and iteratively refining their understanding of battery performance parameters.

We shouldn't lose sight of the recent quarterly release announcement regarding Raj's engagement with mobile phone customers, especially those in China, who are eager and willing to engage us as partners due to their necessity for battery uplift. They need to enable features that current technology cannot support.

Thank you, Ralph. I appreciate that highlight.

There are no further questions at this time. With that, I'd like to turn it over to Dr. Raj Talluri for closing remarks.

Thank you, everybody, for listening to us, and thank you for all your questions. Really exciting times and a great quarter. I look forward to speaking with you again next quarter. Thank you.