Earnings Call Transcript - ENVX Q3 2021

Operator, Operator

Good day and thank you for standing by and welcome to the Enovix's Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, today's program may be recorded. I would now like to hand the conference over to your speaker today, Charles Anderson, Vice President of Investor Relations. Please go ahead.

Charles Anderson, Vice President of Investor Relations

Thank you. Hello everyone and welcome to Enovix Corporation's third quarter 2021 results conference call. With us today are President, Chief Executive Officer and Co-Founder, Harrold Rust; and Chief Financial Officer, Steffen Pietzke. Harrold and Steffen will review the operating and financial highlights and then we will take questions. After the Q&A session, we'll conclude the call. Before we continue, let me remind you that we released our shareholder letter after the market close today. It's available on our website at ir.enovix.com. A replay of this conference call will be available later today on the Investor Relations page of our website. Please note that our shareholder letter, press release and this conference call can contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors. Enovix 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. We will also discuss certain forward-looking non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. We urge you to review the discussion of our non-GAAP financial measures and the risks and uncertainties associated with our business that are described in the safe harbor provision for forward-looking statements and our shareholder letter and in our filings with the Securities and Exchange Commission. I will now turn the call over to Harrold to begin. Harrold?

Harrold Rust, CEO

Thanks, Charlie. Good afternoon, everyone. In our first conference call as a public company in August, we reported solid progress and laid out a detailed strategic plan to commercialize our novel battery cell architecture. Today, we are reporting meaningful progress in our first quarter as a publicly traded company. Our highest priority near-term milestones include shipping production quality customer qualification samples by the end of 2021 and generating first revenue from Fab-1 in the second quarter of 2022. After today's market close, we published our third quarter shareholder letter, which summarizes our milestone progress and financial results. I will briefly discuss key highlights and then turn the call over to Steffen for a recap of our financials. First and most importantly, Fab-1 and Fab-3 are equipped and in September we produced the first batteries from our first automated production line. This accomplishment marks a major milestone in the 14-year journey of Enovix and highlights the resilience and innovation that are at the core of who we are as a company. Many on our team have worked together for most of their careers and started Enovix with a dream to reinvent the basic way batteries are made, and in doing so, usher in a new level of performance. Early on, we realized the importance of developing not only our unique architecture but also a manufacturing method that can be scaled to high volume. This differentiates us as an advanced battery company and enables us to commercialize our technologies sooner than others. Producing our first battery from the automated line also marks the completion of a set of goals over the last few years we named the big three. The other goals were meeting all customer requirements for our first product and receiving our first purchase order for our cells. We celebrated the completion of the big three in September and paid out a company-wide performance-based bonus for this great achievement. With production line one well into its qualification phase, we are confident that we will start commercial production in early 2022. Equally important, we began installing a second production line at Fab-1. This is critical to our growth plan for 2023 and beyond. This line will initially focus on larger cells and manufacture production qualification samples to support programs in the mobile communications and laptop markets. On that note, we recently kicked off a new cell designed for a market leader in mobile communications. The unique characteristics of our batteries will enable our customers to bring to market new form factors and functionalities previously unavailable due to the limitations of conventional cells. Another accomplishment in Q3 was the development of a new cell design for the augmented reality market. This market requires a high energy density and a very small form factor. We believe Enovix technology is well-suited to serve this emerging market. During the quarter, we also shipped the unique pack design featuring multiple wearable class Enovix batteries to a strategic customer. We are targeting wearables, computing, and mobile communications as our initial applications where we can deliver meaningful value through high energy densities. These markets have attractive pricing because their batteries are a small fraction of the bill of materials of these products. The mobile electronic markets also feature shorter design and qualification cycles than electric vehicles. Customer demand within our initial target markets continues to be very high. At the end of Q3, the potential annual revenue of all programs, either in the active design or design win phase reached $355 million. As a reminder, these are programs that are through technology evaluation and design work has begun. In the case of design wins, the customer is funding a custom battery design or qualifying one of our standard batteries for a formally approved product. In addition, our revenue funnel also includes $914 million of engaged opportunities to find out for a potential annual value of projects with a customer that has decided our batteries are a match for their product and is evaluating our technology. In total, the revenue funnel reached $1.27 billion at the end of the quarter. The speed by which we can break this funnel will be dictated by our ability to design, qualify and ramp custom cells for multiple customers across our first two factories. As we prepare for commercial production in the next few months, we are scaling all aspects of operations, including talent. With the money raised from our business combination, our financial position is strong and we are well-positioned to add capacity and scale our operations. We are on track to generate first commercial revenue in 2022 the next step in our long-term financial plan to achieve over $1 billion of annualized revenue exiting 2025. Let me now turn the call over to Steffen, our CFO who will discuss our financial results. Steffen?

Steffen Pietzke, CFO

Thank you, Harrold. Our detailed financials can be found in the shareholder letter, so I will spend my time covering a few high-level topics. Our business combination with Rodgers Silicon Valley Acquisition Corp closed early in the quarter, and we ended our third quarter with a strong balance sheet, including cash of $339 million. We continue to believe this will allow us to fund the scale of two advanced lithium-ion battery production facilities. Turning to the third quarter results, we did not recognize product revenue in the quarter consistent with our expectations. We continue to expect that we will begin recognizing product revenue from the sale of our batteries in the second quarter of 2022. Our operating expenses in the third quarter were $19.2 million excluding stock-based compensation. Our non-GAAP operating expenses in the quarter were $16.2 million, up from non-GAAP operating expenses of $12.1 million in the second quarter of 2021, which also excludes stock-based compensation. The sequential increase was primarily driven by our continued effort to scale up the business for manufacturing and commercialization to meet demand from our customers. We also recently instituted a company-wide performance-based bonus program as Harrold alluded to earlier. Through the end of the third quarter, we have used $66 million of free cash flow, $31.5 million of which was used for capital expenditures. For the full year 2021, we continue to expect to use between $110 million and $120 million of free cash flow, of which roughly 50% will be CapEx. To summarize, we are heading to the final stretch of 2021 with a strong balance sheet, tremendous demand for our product and an experienced team. We remain focused on executing our plan which we believe will drive shareholder value. I will now turn it back to Harrold for closing remarks. Harrold?

Harrold Rust, CEO

Thanks, Steffen. To recap, we made considerable progress in the third quarter of 2021, not only producing our first batteries from our automated production line at Fab-1. We also started installing a second line to support customer qualification work on multiple large-scale projects targeted for 2023. Our task now as we close out the year is to complete the validation of our line and deliver production qualification samples that will lead to deliveries and product revenue next year. I want to thank our entire team for the hard work towards our vision of manufacturing the world's highest energy density battery. While it has taken over a decade and hundreds of millions of dollars of investment to develop our technology and manufacturing processes, I believe we are just getting started in our mission for a better world through innovation and energy storage. I would also like to welcome Pegah Ebrahimi to our Board of Directors, which we announced today. Pegah is a seasoned technology leader having served in key leadership positions at Morgan Stanley and Cisco Systems. Her experience helping technology companies scale will be extremely valuable to us as we enter the next phase of our growth. To our shareholders, we appreciate your support and we are dedicated to delivering shareholder value. With that, we are ready to take your questions. Operator?

Operator, Operator

Thank you. Our first question comes from Derek Soderberg with Colliers Securities. Your line is open.

Derek Soderberg, Analyst

Hi, guys. Thanks for taking my questions and congrats on continuing to execute against the strategy. So Harrold, now that you're starting to see more batteries come off the first production line of Fab-1, I'm curious how throughput yields are tracking against your internal expectations. You have been talking about 45 million battery sales annually from Fab-1? I'm just looking at that first line that's installed. Obviously, you are on track to hit that level of throughput for Fab-1. And then just generally, how are you feeling about the performance of the equipment installed?

Harrold Rust, CEO

Yes. Thanks, Derek, for the question. I think overall we are pleased with where we are. It's still early in terms of the bring-up of the line. The focus right now is really on running qualification experiments to make sure the line is well-characterized and ready to deliver the qualification samples by the end of this year. That said, I think our progress is encouraging and in line with our expectations. So we're on the plan that we set out, and we feel pretty good about that.

Derek Soderberg, Analyst

Got it. And then sort of related to that in the shareholder letter, you guys were talking about investing in the next generation of manufacturing equipment. I was wondering if you could share with us more detail on that. It sounds like you guys are finding ways to optimize the production process. But I guess I'm wondering, is the next generation a pretty substantial change from the equipment installed in Fab-1 today? Where is that new equipment going to be installed? Just any color on the next generation will be great.

Steffen Pietzke, CFO

Yes, sure. I think the first line is in the building. We are starting to run it now. As you'd expect, there is a lot of learning involved. We went from our pilot line that was relatively manual to a fully automated line. As we made that learning, we've been making improvements even on the first line that's here. We want to take that learning and move it into subsequent lines. I would view it as probably more incremental in nature than a new substantial change. It will still look like a similar line but it'll have better performance metrics. Over the next year or so, we will be adding capacity both here in Fremont, but also ordering lines for our second facility, Fab-2; both of those would feature improved manufacturing environments compared to what we have now.

Derek Soderberg, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Our next question comes from Gus Richard with Northland. Your line is now open.

Gus Richard, Analyst

Yes. Thanks for taking my questions. I'm just curious, when you look at your pipeline, can you give us a sense of how much was coming from mobile, compute, and what they are calling the metaverse these days?

Harrold Rust, CEO

Yes, I would say, Gus, it's pretty broad across the whole spectrum of product segments. I mean, that's one thing that I think has been pretty encouraging to us given that was kind of our strategy from the get-go. I wouldn't handicap one versus the other. I do think some markets, like the AI market, is still kind of in its early stages. We think it's going to be a very significant market for us and we are well positioned. But at this stage, still, some more classical wearables and some of the mobile communication stuff are still the big markets today. I think that will change over time, and I think we're doing all the groundwork to be prepared with customers to capitalize on all those markets as they develop.

Gus Richard, Analyst

And then I've been talking to other battery manufacturers. I'm curious, in your perspective, I know you're doing some custom cell designs and packs for some of your customers. How much of the value you bring to customers lies in energy density and how much is in customization?

Harrold Rust, CEO

I think it depends. There are plenty of cases where even standard designs may provide significant value to that customer. So, it's not necessarily that custom products are more valuable; it just depends on the application. You'll see products out there of both standard and custom designs. I believe both can offer pretty high value for our customers.

Gus Richard, Analyst

And the last one for me, just in the competitive landscape. Are you seeing anyone else with silicon-anode tech in terms of anything even in the ballpark of what you guys are doing?

Harrold Rust, CEO

I'd say, yes and no. There are definitely companies today that are starting to commercialize kind of low levels of silicon and a conventional graphite anode. We think that's great. We're fans of silicon and we believe it validates the mission we've been on for quite a while. The differentiator is that, if you look at what others are doing, most are putting in small amounts of silicone and mixing it with graphite, whereas we're using 100% active silicon. That really drives a significant step change we can achieve in performance and energy density. If you're only using a small fraction of silicon, you're not harnessing it at full potential. We think it's great and it validates our mission, and we like where we stand in the silicon space.

Operator, Operator

Our next question comes from Colin Rusch. Your line is open from Oppenheimer.

Colin Rusch, Analyst

Thanks so much guys. In this active designs, some design wins bracket, can you give us a sense of how that breaks out and how many customers you have in both active design and full design wins?

Harrold Rust, CEO

Colin, we've kind of shied away from talking about specific customers and each of the price of the funnels. Rather, we just look at the funnel at large. I think we had good improvement in terms of the funnel moving from and if you look at the lower part, we've got design wins; we moved a decent amount of revenue into that category as well as expanded the overall funnel. For us, that's a primary metric. We had a broad set of customers across all these market segments, and we are adding some new ones. But more importantly, is the overall size of the funnel increasing to support our growth plans.

Colin Rusch, Analyst

Excellent. And in terms of the increments capacity, you guys have been looking at this for a little bit of time, but as you got deeper into that process of evaluating locations, can you give us a sense of how far down the road you are in terms of diligence on potential facilities? How many options are you looking at right now?

Harrold Rust, CEO

Yes, sure. Just for everyone, as a reminder, Fab-2 is our second production facility. It's larger in terms of output and revenue than the current Fab, Fab-1. This is key to reaching our $1 billion revenue run rate by 2025. We're currently in active negotiations on several attractive options. This is a big focus of the Company and me personally. From a timing standpoint, our plan contemplates that we get first revenue from Fab-2 by the second quarter of 2023. If you look at lead times of equipment being what they are, that means we need to be likely ordering equipment by early next year. That gives you a sense when we need to finalize things. I believe the options before us will hit the mark in terms of our ability to fund our capacity growth and hit our targets.

Colin Rusch, Analyst

Okay, that's super helpful. And then, just in terms of the qualification process, it's great to see you sending out samples already. Can you talk about any surprises you're seeing in that process? Are you progressing according to plan, or are you ahead of plan with the qualification and the throughput on balancing the factory?

Harrold Rust, CEO

Yes, I would say, no surprises. I mean, we expected there would be about 100 things we have to learn. Little things that don't work quite as you want, or you have to tweak, and that's been kind of the story. We've actually tried to push the line hard now and really flush out issues and get them taken care of while we're doing the qualification work ahead of when the factory needs to start ramping to be a full volume factory. My expectation is exactly what's been happening. We didn't think it would be easy; we planned for that. There are no shortcuts. We're actually doing the hard work to test the equipment and run all the experiments to ensure we have a solid process that can build good products for our customers. That's exactly what we're seeing today.

Operator, Operator

And our next question comes from Gabe Daoud with Cowen. Your line is now open.

Gabe Daoud, Analyst

Hey, good afternoon everyone. Thanks for taking my questions. Harrold, in the shareholder letter on the market expansion section, you mentioned continued progress on electric vehicle progress in evaluating the use of materials with cell architecture. Could you maybe just give us a little more color on that? Where are you seeing this, and just where you are currently with the technology and scaling it for EV applications?

Harrold Rust, CEO

Sure, yes. We've got a couple of things going on there. One, we've been in the middle of a three-year program funded by the Department of Energy, where we're essentially building cells of architecture with the material sets used in electric vehicles, which tend to be different from consumer devices. That activity is going well. I think the results will speak for themselves when we publish them. That's one angle. The other is that we've been pretty active in terms of sampling ourselves to players in the EV space, so they can become comfortable with our technology and validate its performance. I think we're gaining good traction. Third, we've started really strongly looking for talent, from both a business and technology standpoint, to drive that aspect of the organization. It's a big focus right now. As we've mentioned in the past, our goal is to push these engagements forward and position ourselves to build a significant EV program that, in the 2025 timeframe, starts generating incremental revenue on top of our plan.

Gabe Daoud, Analyst

Got it. Thanks, Harrold. That's helpful. And then maybe the follow-up just back to Fab-2 and as you get closer to nailing down a location. Could you just talk about your initial expectations in terms of initial size? I know Fab-1 is 45,000 cells annually, but what were your initial thoughts around capacity coming out of Fab-2? Given quicker qualification times for consumer electronics and wearables, is there potential to accelerate and even increase the size of Fab-2 compared to initial expectations, given the strong demand?

Harrold Rust, CEO

Yes. We planned for Fab-2 to make roughly 89 million cells when fully set out and ramped, which is about twice the capacity we envision for Fab-1 in Fremont. Fab-2 will likely be targeted for larger cells disproportionately compared to Fab-1. The absolute revenue of Fab-2 is more than twice that of Fab-1. We're very cognizant of looking at the demand funnel regarding how we can grow the Company quickly, and that's a key factor when we're looking at the alternatives for Fab-2. We want to be prepared to grow the Company as quickly as possible, and that's one of many factors that go into that decision process.

Gabe Daoud, Analyst

Got it. Thanks. Just one last question: Friday, the Bipartisan Infrastructure bill was passed and should be signed shortly. Could you maybe just talk about Enovix's ability to continue winning some grants for manufacturing here in the U.S.?

Harrold Rust, CEO

Our view is that the current administration aims to promote faster manufacturing in the U.S., and batteries are one of the key technologies they want to keep in the country. We believe we are a poster child for some of these initiatives. We are in contact and working with governmental agencies to explore those opportunities, and we'd love to take advantage of them. That would be a benefit to our shareholders. So, there's an active program going on there.

Operator, Operator

Thank you. Our next question comes from Sean Milligan with Williams Trading. Your line is open.

Sean Milligan, Analyst

Hi, guys. Thanks for taking my question. When you look at the design wins and potential awards coming, can you talk a little bit about whether that's from new potential customers or if you're expanding the opportunity set with existing customers that you have now, or existing customers in the pipeline?

Harrold Rust, CEO

I think it's a combination of all those things, Sean. We've seen cases where we're in discussions with customers now about additional products that we might not have discussed before, which is encouraging as it provides an additional validation point. But we're also actively working with new customers entering the funnel as well. It's a combination of both. I think if you think about us as a company, there is literally no one that won't discuss our batteries with us because we have such a distinguished product. That has resulted in the funnel growing in various dimensions, I would say.

Sean Milligan, Analyst

Okay, great. And we've seen, especially on the EV side, a move to more localized battery production. I'm curious if you're also seeing that trend in your customer base on the consumer technology side, in terms of localized production?

Harrold Rust, CEO

It's very customer-dependent in the markets they serve. We announced in the last quarter a program we're working on with a department in the U.S. Army, and certainly, in that market, there's a desire for domestic manufacturing of those cells. We're working to exploit that opportunity. Other customers share similar desires, so we will capitalize on those opportunities and serve those markets in the U.S. as much as we can.

Sean Milligan, Analyst

And one last question is kind of more of a clarification type of question. When you share the revenue funnel and active design, design wins, and you mention the $355 million for design wins, that's a potential run rate revenue case for those design wins. Is that correct?

Harrold Rust, CEO

Yes, it's an annualized revenue of those opportunities.

Operator, Operator

Thank you. At this time, I'm currently showing no further questions in the queue. I'd like to hand the conference back to Mr. Harrold Rust for any closing comments.

Harrold Rust, CEO

Thank you, and thank you, everyone for attending our earnings call today. We certainly appreciate your attendance. As we talked about, we're focused on bringing up our first of a kind automated battery line to satisfy our customers and the strong demand we're seeing. We're excited about the progress we're making towards our mission for a better world through innovation and energy storage, and we're excited and happy to have you as investors. So thank you very much.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.