Thank you for standing by and welcome to the Enovix Corporation's Second Quarter 2024 Earnings Conference Call. Currently, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. 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 second 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 second quarter 2024 shareholder letter after the market closed today. It's available on our website at ir.inovix.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 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 of our statements are made as of today, July 31st, 2024, based on information currently available to us. We can give no assurance that these statements will prove to be correct and we undertake no duty to update the 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, which is posted on the Investor Relations page of our website. I will now turn the call over to Raj to begin.

Thank you, Charlie, and thanks to everyone for joining us today. For our format today, I'm going to start with a recap of our recent results and some of our recent milestones before I turn it over to Farhan for the financials and the outlook. I'll have a few closing comments, and then we'll take your questions. Now, we had a very productive second quarter. To recap some of our recent achievements, first, we delivered a Q2 revenue of $3.8 million, which was above the midpoint of our forecast, and we expect significant revenue growth in the second half of the year from the first half. Second, we had some very important commercial successes, starting with an agreement we announced in June with a leading California-based technology company in the XR market. Then today, we're announcing a collaboration agreement with a Fortune 200 company, and also our second deal with an auto OEM. Lastly, we moved into operational mode in Malaysia as we began building batteries on the agility line while ramping down our high-cost manufacturing operation in the U.S. We did this after completing the first batch of EX-1M samples, which we've now sent to some of our customers. Now, Malaysia has come along very nicely. To the extent we've taken a little bit longer than we planned, this has been due to our previously stated desire not to cut any corners and to ensure all the equipment we're installing meets our rigorous specifications. We now have an agility line that has cleared the Site Acceptance Test and is producing fast runs of our EX-1M batteries. Our high-volume line is right behind it, having cleared the FAT of all the key modules and is in the process of arriving and being installed at our site. We are super excited to showcase this progress at our Malaysia Grand Opening next week. Many customers, including some major customers with significant revenue, including smartphone customers and some cloud OEMs, have now begun scheduling visits to our facility, and we'll be welcoming them next week to showcase our factory. We believe everyone who sees it will be amazed by the quality of the factory we have built and the quality of the team we have hired. Now, speaking of customers, our engagement activity continues to strengthen. In the smartphone market, we are working closely with the top five OEMs we identified in our last call to clear the first two key milestones in the development agreement that we signed. As noted in the last call, we are engaging broadly with the leaders in this market and continue to discuss more formal agreements and arrangements similar to the one we announced in May. As we have seen over the course of the last quarter, leading OEMs are now starting to announce AI features that will become native and standard in the next generation smartphones. Clearly, we were early in pointing this trend out last year as we engaged with the customers and saw where these product roadmaps were heading. As I sit here and observe the situation, I believe that the 4,000 to 5,000 mAh battery in the smartphones in our pockets today will soon transition to more than 6,000 mAh and beyond due to AI and other enhanced features. This is excellent news for the battery industry broadly and especially for us at Enovix. That's because we offer customers in our target markets what we believe is the only path forward to fully replace graphite with silicon to boost energy density in order to keep up with this rapidly increasing power needs without unduly increasing the size of the battery. Notably, we've already made early prototypes of our EX-2M batteries here in Fremont, and we have validated the high energy density through the next generation chemistries that we've been working on. We are super excited about this result. We also see incremental growth opportunities for the conventional battery business we acquired last year in Korea, called Routejade. Specifically, these batteries have very high rate capabilities, which have proven very useful for the Korean military and a number of industrial IoT applications. We see this capability being applicable to other allied military forces, including the U.S., and this high rate capability is also designed in other product categories, such as power tools. It's important also to realize that we are investing heavily to support lasting technical leadership to build out a roadmap. For example, our core R&D spending at the end of the second quarter was nearly double that of a year ago, and that's excluding the R&D team we added through the Routejade acquisition. If we include the Korea R&D team, our R&D headcount is up nearly 170% year-on-year, and we intend to keep growing. For example, we now have a core R&D team in Malaysia that we intend to double by the end of the year. We have done all of this while simultaneously taking actions to significantly reduce our fixed costs by exiting the expensive California manufacturing. We also bolstered our strong balance sheet via the ATM. This gives us a strong runway and plenty of time to validate our manufacturing along with our customer acceptance of our leading battery. With that, I'm going to turn it over to Farhan for the financials.

Thanks, Raj. All the relevant financials are in the quarterly report and the shareholder letter, so I'll keep my comments relatively short. We delivered second quarter revenue of $3.8 million, which was in the upper half of the guidance range. Non-GAAP EBITDA was a net loss of $23.1 million, which was above our guidance of a loss of $26 million to $32 million. Non-GAAP EPS came in at a loss of $0.14, also above our guidance of a loss of $0.22 to $0.28. We ended the quarter with roughly $250 million in cash and equivalents. Our balance sheet is very strong, and as Raj mentioned, it provides us with strong liquidity. Now for the guidance, turning to the third quarter of 2024, we forecast revenue in the range of $3.5 to $4.5 million, an adjusted EBITDA loss in the range of $23 million to $29 million, and a non-GAAP EPS loss in the range of $0.17 to $0.23 per share. As Raj mentioned, we expect substantial revenue growth from the first half of 2024 to the second half of 2024. With that, I'll turn it back to Raj for closing comments.

Yes, thank you, Farhan. As you can see, it's been a great quarter. We made substantial progress in many areas, particularly Fab2 going operational. We took very decisive actions to extend our runway. Now we are deeply engaged with leaders in the smartphone market. As the industry hits the inflection point towards larger power requirements due to AI features, this will greatly aid us in getting our batteries into production in the smartphone space. In IoT and auto, we secured two important agreements with market leaders. We were also able to prove out that we can make the EX-2M batteries with high energy density here in Fremont. These are early samples, and we are excited by the results with the next generation chemistries. With that, we can now go to questions.

We will now begin the Q&A session. Please note that this call is being recorded. Before we go to live questions, we will read the two most highly voted questions submitted by shareholders ahead of this call during the registration. The first question is, what are some of the measures you have taken to prevent Chinese companies from pirating your technology? And if a new U.S. administration significantly increases tariffs against China, how will this play out for Enovix?

Yes, thank you for this question. Firstly, you know, Enovix has been working on making high energy density silicon batteries for a long time, almost 16 years now, and we have a very, very strong patent portfolio on this technology that we've built, both in the way to make batteries and manufacturing, and so on. More importantly, we have a tremendous amount of trade secrets on how to actually make these, and we've been perfecting these for some time now. So I feel confident about our intellectual property and our strong technology leadership. But you know, this is a competitive space, and we have to keep innovating and moving forward to ensure that we maintain a technological lead over all our competitors, not just those from China. Regarding the second comment on the tariffs, it's very difficult for me to comment on the geopolitical landscape and how that will evolve. However, I can tell you that we are seeing a lot of interest from many customers now for a battery produced by a North American battery company. As you know, we are among the few that can manufacture high-quality consumer electronics batteries, and we are very excited about our position in this regard.

The second question is, what is the status of EX-2M and EX-3M in terms of timelines and their capacity in watt-hours per liter and milliamp hours? What is the strategy with the Elentec partnership? Is this only for battery packs, or are we looking beyond that?

Yes, on the first question regarding the roadmap, as I mentioned, we are super excited that we were able to create a few samples of the EX-2M to prove out that we can achieve the energy density increases we discussed. But, as I mentioned before, most customers, depending on the market segment we are in, whether it's smartphones, IoT, or XR devices, optimize the batteries not only for energy density but also for the ability to fast charge, cycle life, battery size, shape, and more. Thus, it is challenging to compare batteries based solely on one metric like energy density. However, we are very confident in what we've been able to achieve so far, and with next generation electrochemistries and materials on the horizon, we have a robust roadmap for continued advancements beyond the EX-2M into next generation batteries. Regarding the Elentec partnership, I mentioned when we first made the Routejade acquisition that it was crucial to have the ability not only to own our coating but also to manufacture packs. Many customers desire not only cells but also batteries with battery management systems in packs. We have some capability to create these packs thanks to the Routejade acquisition, but we need a multitude of partners with pack manufacturing capabilities to address various markets. The Elentec partnership is one step towards building our channel to reach multiple markets, not only smartphones but also IoT, industrial IoT, XR, and others.

We'll now pause a moment to assemble the queue. Our first question comes from Ananda Baruah of Loop Capital Markets.

Hey, guys, can you hear me?

Yes, go ahead, Ananda.

Okay, great. I have a quick question and a clarification. First, congratulations on the recent progress. My question is this: based on the announcements from the last 90 days, it seems like you're expanding your engagement and the scope of your progress. Raj, there have been a couple of IoT announcements, and you referenced power tools in the shareholder letter. You are also advancing your phone OEM partnerships, and now you've announced a second auto MOU this quarter. Can you provide some context regarding this broadening engagement across different sectors? Additionally, in light of Farhan's comments, is it reasonable to suggest there might be potential revenue growth as a result of this before you start shipping to smartphone OEMs? I have a quick clarification after that. Thank you.

Yes, sure. Thanks, Ananda. As I mentioned before, in the last call, one of the toughest batteries to manufacture in the consumer electronics space is actually for smartphones. This is due to the size of the market, the high demands on performance, large displays, power-hungry application processors, and the new AI requirements. Factors like long cycle life, fast charging, energy density, and space constraints all come into play. As we begin making batteries for that, we are making steady progress with the OEMs, and the technology we develop for smartphones can be leveraged in other markets. For example, the XR market and other consumer electronics markets, as we have announced. The reason is, when we meet the most stringent requirements, other markets generally have less demanding standards. I witnessed this in my past experience at Qualcomm, where we manufactured application processors for smartphones, which quickly transitioned into the IoT and auto markets because the smartphone requirements were more rigorous. Thus, what you're observing with our recent announcements is a reflection of the deserved entitlement of the company when we pursue the smartphone market. We are very excited by this branching out. My goal, and the company's goal, is to target large high-volume verticals rather than numerous small ones, as that could fracture R&D and yield lower returns for a manufacturing company. On the auto side, this is indeed an exciting development. After announcing our first auto OEM, we now have another validating our ability to prevent battery swelling and charge quickly, which is very encouraging. We are working jointly with them to elevate that technology to the next level.

Ananda, on your second question regarding the revenue bridge, it will depend on the pace of ramp and the qualifications. However, the IoT growth can serve as another revenue opportunity for the company.

All right, great. Thanks, guys. And then the quick clarification is, Raj, there was mention in your prepared remarks of smartphone and cloud customers being in Malaysia next week. Will they actually be at the event next week?

Yes, I mean, we cannot comment on the specifics of when the customers will be there, but there are a number of customers scheduled to visit us next week. However, we cannot disclose who they are. Many customers are eager to attend the event, and some will come a bit ahead; others a bit later. I do expect that as we construct these factories, we will have numerous customers plan their visits. We are very excited about the list of customers that want to visit us next week.

Our next question comes from Colin Rusch of Oppenheimer.

Thanks so much, guys. Can you speak to any potential collaborations with semiconductor or chip companies that you're potentially working on to optimize device-level performance?

Yes, absolutely. As you anticipate, the performance of the battery and how it interacts within devices, such as smartphones, requires close collaboration with the processor and the power management system. For example, in a smartphone, when the 5G modem activates, it draws a significant amount of power; in standby mode, it draws less. Thus, there are many design considerations to ensure the battery performs well within a smartphone or IoT device based on the processor and power management system involved. With my extensive experience with Qualcomm and TI, I am familiar with these requirements. One notable shift is that silicon batteries operate at a lower voltage, such as 2.7 volts, allowing for higher energy density. This shift is encouraging since we are seeing chip manufacturers like Qualcomm, MediaTek, and Samsung adjusting their application processors and power management systems to accommodate silicon batteries at a reduced voltage. We are fully engaged with all of them. Thanks to our interaction with customers and the deep connections we have in that ecosystem, we are growing increasingly proficient in optimizing battery designs for next-generation products.

Thanks so much. And then as a follow-up, can you give us a sense of what you're anticipating as initial yields on Fab2 and how we should be thinking about ramp and scrap expenses as we get to the balance of this year and early 2025?

Yes, let me attempt to address this, and then Ajay can provide further insights. Regarding ramping yields, our strategy is to focus heavily on producing cells from the agility line first, as they are essential for our customers' samples. The high-volume line is being prepared to align with this. Our goal is to make both lines operational by the end of the year while ensuring we are ready for high-volume production in the next year. A lot of energy is now directed toward optimizing the agility line to produce EX-1M samples and prepare for EX-2M production. Perhaps Ajay can shed more light on scrap as well.

Yes, regarding the modeling of costs, there are many variables involved. Our cost reductions will primarily drive cash burn and operational cash flow. Q3 should surpass Q2, and Q4 should be stronger than Q3 overall. This takes into account costs connected to scrap and yield ramping. Throughout the year, while our COGS may rise, our OpEx should decline; in aggregate, the overall costs will start to impact us.

Thanks so much, guys.

Our next question comes from Bill Peterson of J.P. Morgan.

Yes, hi, thanks for taking the questions. Just on the smartphone market, and you've given a lot of detail in the last few calls. If you're anticipating a ramp towards the latter half of next year and then more meaningfully into 2026, could you outline the milestones between now and, say, a year from now, when some customers will qualify? First, when will you be sampling EX1 across all smartphone makers this year, and will you have samples of EX-2M later this year, with more volume to follow in the coming year? Additionally, could you clarify how we should interpret your progress towards more formal agreements mentioned earlier?

Yes, sure. Absolutely. Let me recap. We made some samples before we shut down the Fremont factory to prove that we could achieve the EX-1M form factor. We discussed that previously. Those samples were sent to a few customers, but moving forward, most customers want samples from our Malaysia facility, where production will occur. Our goal is to provide those samples in Q3. Once those samples are sent, they will perform testing on their side, and we will receive feedback regarding battery size, shape, and requested milliamp hours. Since the phone models next year will likely feature different battery shapes, we will need to adjust our tooling accordingly. Following these adjustments, they will test the samples in their phone models, and if everything meets their standards, they will place orders, enabling us to ramp up production. I want to emphasize that we are collaborating with multiple customers, and while many will receive samples, this is a step-by-step process. Concurrently, we are pursuing agreements that will formalize this process we just outlined.

Yes, thanks, Raj. Regarding the newly announced IoT agreement with a Fortune 200 company, does this company produce other form factors like smartphones? Is this something synergistic with what you're doing, or is it for smaller or larger batteries? Also, I'm curious about the financial implications of this agreement, including timing and economic factors like milestone payments.

Yes, that's a great question. As you can imagine, we are somewhat limited in what we can disclose due to working with large companies, which often have existing suppliers. However, I can share that there is significant interest in our battery technology because their current suppliers cannot deliver what we offer. This project concerns a product already established in the market, meaning it is not a new category; we'll be enhancing their existing battery supply. Many of our agreements now include milestone-based payments, which underscores the value of the technology we provide and the differentiation we can offer to our customers. While I understand your inquiry for more details, we will provide as much information as we can, keeping customer confidentiality in mind.

Additionally, as noted in the press release, the customers in this case prioritize energy density and are willing to pay a premium for it over what's more broadly available in the market.

Thanks, Raj and Farhan.

Our next question comes from Jed Dorsheimer, William Blair.

Hi, thanks for taking my question, and congrats on the Fab. I'm looking forward to seeing the progress. My first question concerns Ajay's commentary indicating that yields would be similar to Fremont. Is that specific to the agility line? Or is that because the high volume will be more in the 95% range? Is the 60% from Fremont the starting point that will increase, or are you thinking of something different?

Yes, I'll address yields and then let Ajay provide some insights as well. The fundamental goal is to achieve yields exceeding 95% when we reach high volume production. That's crucial for the business. The focus is on starting from where we ended in Fremont and increasing from there based on what we learned.

Yes, to clarify, it's not necessarily appropriate to differentiate between the agility and HVM lines. Both kernels are identical, and as we gain insights from the agility line, we will apply that knowledge to the HVM line, which is slightly behind. We've already completed the FAT for the HVM line, and the equipment is being installed. The objective is to ramp yields to the desired levels for both lines in a streamlined manner.

Got it. That's helpful. Thanks. As a follow-up, Farhan, given the various moving parts here as you ramp IoT on agility, how should we think about underutilization and allocating costs as the high volume line ramps? Does that trigger recognition for sampling, or is it tied to sales?

The devil's in the details, Jed. Ultimately, it will depend on the contracts and technical accounting policies. In reality, it's a non-cash charge, which means it won't affect cash flow significantly. Depreciation will start once the tool is recognized as being in production, and we are still finalizing exactly how that will be handled.

Thanks. I will jump back in the queue and look forward to next week. Thanks.

Our next question is from Gabe Daoud of Cowen.

Hey, guys. Sorry about that. I was on mute. Thanks for taking my questions. Hoping we can revisit Bill's question about cadence. If you shipped sales from Fremont in May and assume a nine to twelve-month qualification period, could we expect the first purchase order from a potential customer by next May or June? Is that still accurate?

Yes, again, this is heavily contingent upon customer qualifications. I detailed the process of providing samples, testing, and the feedback loop we engage with customers. Typically, purchase orders are placed when they confirm the product's qualifications within their devices. I maintain the assertion that we can anticipate orders in the latter half of next year. We are continuously monitoring developments as we move forward.

Great. So it is fair to assume multiple lines might be in place by 2026?

Yes, expanding our production lines will depend on customer ramp-up speed, product volumes, and production schedules. We do have the capacity for up to four production lines, and we are proactively managing long-lead items for those setups, aiming for multiple lines by 2026.

Understood. Thank you. Regarding top-spec Chinese mobile phones, with approximately 800 watt-hours per liter, could you quantify what EX-1M and EX-2M compare to that? You've mentioned that prototypes of EX-2M have met energy density goals, but could you share initial figures?

It's essential to note that comparing batteries by a single figure can be misleading. Energy density is just one of many factors, such as cycle life and fast charge rates. When examining existing smartphone batteries, you'll notice significant variability in their energy density figures. Our customers collaborate with us due to our competitive energy density and the clear roadmap we offer. Once we enter production and phones are accessible, we can measure their performance based on customer decisions.

Yes. Hey, guys. Thanks for taking my questions. I'm looking forward to seeing the facility next week. Raj, you mentioned smartphone OEM milestones. How should we interpret those milestones against the nine to twelve-month qualification timeline? Will they expedite the timeline?

You should interpret this as progress that aligns with our expectations. The contract outlined specific milestones we need to meet by particular times, and we are on track. The process involves sample testing, safety evaluations, and overall compatibility assessments. If all goes smoothly, we can transition to production quickly.

Great. Lastly, you mentioned industry trends in diversity regarding suppliers. Can you elaborate further? Which markets are most affected? Is it more focused on smartphones? How does this trend relate to your scaling strategy?

The comment arises from customer preferences to engage with North American battery manufacturers amid geopolitical uncertainties and tariffs, showing a shift towards diverse suppliers. We are one of the few capable of developing batteries for consumer electronic devices in this market. Overall, we are experiencing favorable conditions as a result, which the comment references.

Hey, everyone. Thank you for taking my questions. As you pursue new customers moving into 2025 and 2026, how do recent conversations, particularly the latest announcement, shape your cash gross margin and overall margin targets?

Yes, the IoT customers we shared previously have pricing models that support healthy margins as technology scales. Their price points also validate our assumptions in our long-term models.

Thank you. As a follow-up, what discussions have you had with EV OEMs? If you have any visibility, what model years should we expect batteries to emerge in vehicles? Additionally, what business model are you leaning towards for EV batteries?

Yes, I’d be happy to address that. EV batteries generally take longer to produce. Our recent announcement highlights our battery's significant advantages for the EV market—fast charging without excessive heat and controlled swelling. Two EV OEMs are already in collaboration to develop this technology further. It will take a couple of years to reach production. If asked today, I'd favor a less capital-intensive licensing model as we develop consumer electronics batteries. However, we remain flexible. We'll evaluate other business models if they prove beneficial, but currently, the licensing royalty structure seems appropriate.

One thing I would add is that having these two EV OEMs validates the value proposition we've been discussing, which is very encouraging for our prospects.

Yes, hi, thanks for taking the follow-up question. In the press release, you indicated meaningful revenue growth in the second half relative to the first half. Could you discuss the drivers between the conventional business acquired from Routejade versus early IoT revenue, and any revenue from customer sampling?

Yes, the revenue ramp from Q3 to Q4 will be significant. This will be driven by both Routejade and our battery outputs from Malaysia, along with some fees related to customer sampling milestones. Although Routejade's growth is a significant contributor, both areas will help drive revenue. In terms of margins, many variables come into play. As I noted earlier, there will be increased depreciation costs impacting gross margins from Q2 to Q4.

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

Yes, thank you all for listening to the call. It’s been a really nice quarter, and I look forward to speaking with you all next quarter. Thank you.