Thank you for standing by and welcome to the Enovix Corporation's First Quarter 2024 Earnings Conference Call. As a reminder, today's program will be recorded. And now, I'd like to introduce 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 first quarter 2024 financial results conference call. With us today are President and Chief Executive Officer, Dr. Raj Talluri; Chief Financial Officer, Farhan Ahmad; and Chief Operating Officer, Ajay Marathe. Raj and Farhan will provide an overview and then we'll take your questions. After the Q&A session, we'll conclude our call. Before we continue, let me kindly remind you that we released our first quarter 2024 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 current expectations and may differ materially from actual future events or results due to a variety of factors. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, May 1, 2024, 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'll 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, which is posted on the Investor Relations page of our website. I'll now turn the call over to Raj to begin. Raj?

Thank you, Charlie, and thank you to everyone joining us today. For our format today, I'm going to start with a recap of our recent results, how we are progressing against our strategy before I turn it over to Farhan for the financials and the outlook. I'll also have a few closing comments and then we'll take your questions. We're off to a great start in 2024. To recap our recent achievements, first, we delivered a Q1 revenue of $5.3 million, which was above our forecast due to strong performance from the IoT category. And thanks to the higher revenue and favorable product mix, we reported positive non-GAAP gross margins for the first time in the company's history. Second, we completed the Factory Acceptance Testing of our Gen2 Agility line and the vast majority of the machines are already in Malaysia and the Site Acceptance Test is well underway. As a result, we are on track to produce our first battery samples of the EX-1M technology this quarter. Now I'll also note that the FAT for the high volume, the Gen2 Autoline is nearly complete. Given that it's based on the exact same process kernels as the Agility Line, for the unique and challenging portions of our battery manufacturing process, such as laser dicing and stacking, our yields are already at upwards of 95% in our Gen2 machines. Big picture, manufacturing is in a great place. We are confident we can scale the Gen2 process given the amount of rigor we put into getting these qualification steps right. Now, let's talk about customer progress. Let's start with smartphones, the largest portion of the battery market and consumer electronics. We are deeply engaged with market leaders given the value they see in our architecture to enable silicon and increase battery performance. As we talked about previously, our process has been to work with these OEMs to gather the specific requirements for the smartphone market, and then develop a product that's tailored to the needs of this market. This is exactly what we've done with EX-1M. I am thrilled to update you that we have now begun producing samples of EX-1M in Fremont for initial testing, which you can see on the cover of our shareholder letter. It's super exciting for us. Now the samples of EX-1M will go out shortly. Customers are really eager to kick off the qualification process of these samples with their products in mind for a 2025 launch. What does this mean and where are we with these customers? As you can see on the slide, the smartphone battery leadership opens a $12 billion opportunity for Enovix. The top 8 OEMs represent 1 billion units which is 80% of the volume. Of the $12 billion lithium-ion battery total addressable market in smartphones, $9.5 billion is among this top 8. Collectively, they produced 280-plus models of smartphones, which means an average smartphone unit volume of 3.5 million units per model. So 3 or 4 models will take a full line of ours. Now 6 of the top 8 OEMs are going to receive samples of EX-1M smartphone battery from us. So that $7.5 billion of smartphone battery total addressable market is actually represented here. So we're in great shape, as you can see with the market leaders, something that was a priority for me when I joined the company last year to focus on the largest part of the battery market. Now customer interest has extended to conversations with OEMs about formalizing our relationship with them as we started making progress over the course of the last year. Some have expressed desires to be the first to market with products in 2025 and beyond. To that end, I am really pleased today to announce our first development agreement with a top 5 smartphone OEM by volume. This agreement reflects a progression of our technology relationship with this company and a mutual plan from both the company and us to bring out our technology into users' hands, a very exciting development that has happened in the last quarter. We see similar interest and collaboration from other customers who are also sampling our EX-1M technology in the coming months. Our goal is very straightforward. We begin with a handful of SKUs from this group of customers, ramp EX-1M to production in '25, then further differentiate with our EX-2M, a battery that samples later this year for product launches in '26. As I have highlighted in the past, there is secular demand for increased battery capacity with every smartphone generation. Enovix may be the only company that can help leading smartphone OEMs keep up with the demand for higher energy density needs of the batteries because of all the AI applications coming into the smartphone, particularly for all the on-device AI applications. Let’s recap what products we plan to bring to market on the next slide. We’ve shown this slide to you before. EX-1 is our current technology that we were sampling last year. EX-1M is a new technology that we will be sampling in the second quarter this year. This technology is comparable on energy density to EX-1, but we've made a few important advancements. We've increased our cycle life and our capability to charge fast, both of which are very important in the cellphone market. We plan to sample EX-2M, which is the generation after this, where we continue to make improvements on energy density, cycle life, and fast charge capability. Our R&D teams have already started working on EX-3M, where we will further increase improvements over EX-2M in all these vectors. Our plan is to sample them in 2025. Once we bring a leading smartphone battery to market, our view is that this gives us a foothold to win in other large parts of the battery market, namely in IoT and computing. There is another $12 billion of total addressable market in those two markets. The reason is that a smartphone battery has the highest bar of all consumer batteries. The demands of on-device AI are very high, so it needs higher energy density, and higher cycle life, plus a fast charge rate, which consumers desire. People like to keep their smartphones for a while, while safety is paramount since it's a device they carry with them all the time. When we produce a battery that meets these requirements, all the other markets are attainable for us. This is actually the same thing I saw at Qualcomm. When I was at Qualcomm, we built a significant mobile phone business, but very quickly, we were able to sell Snapdragon into IoT businesses afterward. The logos you saw in the previous slide of the smartphone OEMs are the same logos of some of these customers who are leading in IoT markets like wearables, tablets, and computers. So proof positive of our strategy is that once we qualify with a smartphone customer, when they take our EX-1M sample, they are not only qualifying us for smartphones but also for smartwatches and similar products. We are continuing to make inroads into multiple other IoT customers. We apply our selective markets philosophy to engage with a few high-volume opportunities with leading OEMs that are products benefiting from higher energy density and better battery performance of EX-1M and EX-2M. Presently, our commercial team is focused on select IoT design opportunities targeted for 25 and '26 for higher density batteries. As we look forward, we’re approaching key milestones this quarter as production begins in Fab2 and we get samples of our EX-1M going out to customers. Our scale strategy was outlined in slides we've presented before. In Q2 '24, we'll be sampling our first EX-1M batteries from our Agility Line to some of the smartphone and IoT customers. The second half of '24 is when our Fab2 will be fully ready for production. By Q4 of '24, we expect to sample the EX-2M, the next generation of the battery. This setup means we will likely see product launches in '26. In 2025, our goal is to acknowledge multiple smartphone and IoT customers with our EX-1M battery. Our research and development is working diligently to reduce the cost of our lines. We're targeting the CapEx per line to be in the $60 million range in out years, with a throughput goal of 1,650 units per hour. This equates to approximately $150 million in revenue per production line. With the higher energy density batteries, there’s also an opportunity to increase the average selling price. Customers desire a higher energy density battery since that helps them better differentiate their products. We expect our cash gross margin to exceed 50%, with a projected payback of each line at about 1 year. We're very excited for the future as we scale manufacturing. As you can see, we are making tremendous progress and have a clear path alongside very attractive long-term financials as we scale this business. None of this would be possible without the collective success of our global teams, from the operations team in Malaysia readying our Fab2, to the team in India reducing R&D cycle times, to the team in Korea improving our coding capability. Based on this progress, we are now accelerating plans to identify additional efficiencies as we scale while leveraging our global footprint. Our aspiration is to reduce fixed costs by more than a third, or more than $35 million annualized, by year-end. This significantly reduces our capital needs and accelerates our path to profitability. With that, I'm going to turn it over to Farhan.

Thanks, Raj. All the relevant financials are in the quarterly report in the shareholder letter. I’ll keep my comments high level, then provide the outlook. For Q1, we delivered revenue of $5.3 million, which was ahead of our expectations. We also had our first positive non-GAAP gross margin, as Raj mentioned. The EBITDA – the non-GAAP EBITDA came in at a loss of $26.3 million, better than the midpoint of our guidance. Non-GAAP EPS came in at a $0.31 loss, a penny better than the midpoint of our guidance. We ended the quarter with $262 million in cash and equivalents. For Q1, CapEx was $15 million, and we used about $35 million in operations. Our balance sheet remains strong, and with the reductions Raj mentioned, it provides us strong liquidity into 2026. We've accelerated depreciation of Fab1 equipment as we converted it for product development. In Q1, you see that R&D expenses had about $18.5 million of accelerated depreciation. This won't occur in Q2, and we expect to return to a normalized level of expenses in Q2. We expect a decline in the back half of the year and into 2025 as we reduce spending in high-cost geographies. For guidance, for Q2 2024, we forecast revenue between $3 million to $4 million, an adjusted EBITDA loss of $26 million to $32 million, and a non-GAAP EPS loss of $0.22 to $0.28. As we highlighted on the last call, Q2 tends to be the seasonally low quarter for the battery business acquired last year, and we expect strong revenue growth from Q2 levels in the back half of the year. With that, I'll now turn it back to Raj.

Thank you, Farhan. As you can see, we have a very busy quarter ahead of us as we begin production in Malaysia and start getting EX-1M samples out the door to our customers. Customer enthusiasm is very high, and our relationships continue to grow stronger. We have a number of customers. We're in the middle of scheduling visits to our Fab2 in Malaysia over the summer. We are planning for a grand opening of our factory with key stakeholders, customers, and investors in about the August timeframe. We'll share more details later on; it should be a very exciting event. I'm excited to showcase this facility. I was recently in Malaysia, and I'm particularly impressed with what the team there has accomplished. With that, we can move to questions now. Operator?

Please note this call is being recorded. Our first question will come from Mark Shooter of William Blair.

This is Mark on for Jed Dorsheimer. Congrats on the JDA, that's great news, a nice surprise for us. Speaking of them, I know that the target is for 2025 launch. But does that give you any indication on when you'll need to see a PO to achieve that timeline?

Yes. The question is on the PO for the launch in 2025. In consumer electronics, typically the POs are placed a couple of months before production. From now, we'll give them samples. They'll qualify these samples and provide feedback. We'll then need to provide them the exact battery size that they need for a specific phone model. As soon as they finalize the model and it passes all the necessary EVT and PVT tests, that’s when we will receive the PO. So I'd say it really depends upon the launch, probably a couple of months prior to it, so that's likely in the second half of next year.

For the follow-up, I’ll ask another one here. It seems as though you’re employing a land-and-expand model with these customers. Do they all have different performance tiers? Do you think the customer is looking to get you into the top-tier or do you think you can be in multiple models by the end of 2026 with this customer?

Yes. As I said, we are sampling multiple customers. We’ve closed the JDA with one, but there are multiple engagements happening. Typically, my experience with smartphones is they start by qualifying you for one model, and then if the evaluations go well, it can really shorten the cycle for subsequent models across different tiers. Once you're qualified by the customer, you quickly become one of the chosen battery vendors, and I expect it to accelerate once we get in.

Our next question will be from Colin Rusch of Oppenheimer.

As you've gone through the equipment testing and done everything installed and you've talked about starting out at roughly a 65% yield. Can you talk about any surprises or positive incremental movement as you've completed the acceptance testing?

Yes. I'll let Ajay handle that one.

Sure, Colin, good question. The FAT is a rigorous process. We go through several critical quality parameters as well as marathon runs, uptime, and yield. No surprises. We are expecting high yields, and that's what we have been seeing at FAT. More fine-tuning will continue through SAT, but I'm particularly excited about the performance of the equipment during the FAT cycles we’ve run. The yields have met our expectations and then some. So overall, very positive.

With customer engagement, you are engaging deeper with customers. Can you talk a little about the cadence of performance they’re demanding?

Yes. We're noticing customers want higher energy density. They’re now asking for batteries with capacities of 6,000 milliamp hours and higher. The push for higher capacity is significantly driven by generative AI applications, which consume more power. In my previous discussions, I’ve shown comparisons of battery consumption via different applications. Customers are confirming their desire for increased energy density and quick charging capabilities. The battery industry hasn't kept pace for years, making our entrance with a higher energy density battery very timely.

Our next question will be from Bill Peterson of JPMorgan.

In the technology and products section of the shareholder letter, you mentioned you're working with two leading smartphone OEMs on a launch for next year. Is one of these actually part of the development agreement, or is that a separate thing?

Yes, so in smartphones, we mentioned one of the top OEMs we're working with, and we have others in testing phases. We’re sampling six of the top eight. The discussions are ongoing, so there's a chance that some customers may qualify faster, while others might take a little longer. The actual number of productions next year remains dependent upon how these qualifications progress.

Can you elaborate on the expected backlog and volumes from the first line as it ramps? Can we expect it to support more than 11 million units, or will it be more oriented toward 9 million units?

I'll let Ajay handle the first part, and I'll address CapEx.

The first line is flexible and can adapt quickly to produce different cell sizes. We've targeted 1,350 units per hour, and during FAT, we've clocked that at 1,350 effective yield, which gives us approximately 9.5 million units a year for the first line. Beyond that, we are removing bottlenecks, improving efficiencies, and working towards over 1,650 units per hour.

Regarding the second line, as we develop our manufacturing capacity, we’re assessing which aspects of our lines need early orders to ensure that capacity ramps in sync with customer qualifications. We will keep you updated as we progress through this year.

For this year, CapEx remains as previously stated, focused on the first line. For next year, we'll align CapEx to demand and qualification timelines. It’s flexible, and we strive to maintain that flexibility.

Our first line emphasizes versatility, with adjustments made based on customer feedback to ensure optimal production output.

Our next question comes from Derek Soderberg of Cantor.

I have a question on the shareholder letter. You were discussing the smartphone customers and the internal samples. Beyond FAT and SAT, do you need to complete internal battery cell qualifications before shipping samples this quarter?

Yes, absolutely. The qualification has two aspects: equipment qualification through FAT and SAT, and battery testing to ensure safety, cycle life, performance, and fast charging. We are executing that testing now. Once completed, we'll be ready to ship the batteries. We want to fully vet everything before shipping to customers to avoid surprises.

What was the reason for the development agreement? Did the OEM feel confident about your production capabilities?

We've provided early samples from our Fremont facility. The customers have tested our batteries, visited us in Fremont, and assessed our manufacturing viability. They’ve expressed interest in further optimizing the battery for their specific phone models. Each customer employs the battery slightly differently, and our agreement enables us to customize our battery to their actual specifications. We anticipate similar agreements with other customers.

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

Congratulations on the progress. Can you walk through how you're thinking about raising capital? And how should we think about timing and various methods available?

As mentioned previously, we're experiencing discussions with customers regarding potential financial support to take us to the next level. We're also exploring opportunities with governmental agencies for support.

It won't be a challenge once we have everything squared away. Several customers have expressed a desire to assist financially once the demand is confirmed. We are also considering conversations with sovereign wealth funds and related options. However, at this time, the stock isn't at a level where we can consider capital fundraising, plus our recent action to cut costs has given us a long runway before requiring additional capital.

Just a clarification on yield. Are you still tracking for 90% yields by the end of the year, and are you on track for that?

We are currently achieving yields above 95% in key areas like laser dicing and stacking, as discussed earlier. We’re aiming to maintain or improve yields as we continue to optimize processes. I’m optimistic about attaining our yield targets by the year-end.

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

When will you start sending samples to customers from Fab2? Will this start in Q3 or will it need to wait until Q4?

Samples will be sent out in Q3. We are finishing FATs and will be ready for SAT afterward. The samples will go to the same customers we have referred to.

We currently are producing samples of EX-1M in Fremont. As they undergo testing and provide feedback, we will adapt our production based on their input, aiming to start shipping from Fab2 in Q3.

Our next question comes from George Gianarikas from Canaccord.

Can you update us on materials-related conversations, specifically with Group14? What performance improvements do you observe with their materials compared to conventional options?

We are a material-agnostic company, testing different materials, including graphite batteries. Our architecture is key to maximizing silicon use and optimizing energy density. We aim for a 5% to 8% increase in performance and are focusing on how to minimize swelling to leverage silicon effectively.

Our next question comes from Ben Johnson of Piper Sandler.

I don't have a question at this moment.

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

It seems that we are gaining confidence in the economics of the manufacturing process and pricing strategy. Regarding customers financing future lines, does the less than 1-year payback alter that approach?

Yes, it fundamentally influences our financing strategy. We've engaged with customers about potential financial support, as well as assessing Asian banking options for project financing. If demand is confirmed, financing shouldn't be a heavy lift with well-aligned economics. Our unique battery performance offers substantial differentiation in the market.

Our next question comes from Sean Milligan of Janney.

I logged on a bit late, so I apologize if this has been addressed. I believe on the last call, we discussed a 9 to 12-month qualification timeline for the smartphone customers. Seeing that you're starting to deliver samples to 6 of 8 in Q2, can you clarify that 9 to 12-month qualification timeline?

Yes, we are currently able to deliver samples. The 9 to 12-month timeline starts from when we begin shipping our samples, which will commence this summer. Therefore, we could see production happening in the second half of next year. This timeline reflects our caution due to the extensive testing that needs to be done for safety, and the need for detailed evaluations and qualifications.

So, ideally, you anticipate having volume production in consumer phones in the second half of next year rather than early '26?

Our target is indeed to have them in phones in the second half of next year. That is our focus and aspiration.

Our next question comes from Tim Moore of EF Hutton.

Now that you've established a development agreement with the top 5 smartphone OEM, how do you evaluate and prioritize capacity allocation for future customers?

This is early-stage work. There are several factors affecting prioritization, such as which phone models, early testing outcomes, etc. My experience indicates it hinges on how everything unfolds through the end of this year and early next year, so it's too early to be definitive.

Could you clarify the expectations of accelerated depreciation for the income statement over the rest of the year?

The accelerated depreciation associated with the restructuring in Fremont and moving operations to Malaysia occurred over two quarters, impacting Q4 and Q1. That $18.5 million won’t occur in Q2, allowing for normalization in R&D expenses thereafter.

Thank you, everyone, for your questions, and thank you for tuning in. Before we wrap, I want to highlight that we'll have a live stream of Ask Me Anything on our YouTube channel on Monday, May 6. If your question didn't get answered today, please feel free to submit your questions for next week, and we look forward to what should be a great dialogue, and thank you once again.