Earnings Call Transcript - ENVX Q1 2023

Operator, Operator

Thank you for standing by, and welcome to today's program, the Enovix Corporation First 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, Charles Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Charles Anderson, SVP of Investor Relations

Thank you. Hello, everyone, and welcome to Enovix Corporation's first quarter 2023 financial results conference call. With us today are President and Chief Executive Officer, Dr. Raj Talluri, Chief Financial Officer, Steffen Pietzke, Chief Operating Officer, Ajay Marathe, and Chief Commercial Officer, Ralph Schmitt. Raj will give an overview and then we will take your questions. After the Q&A session, we'll conclude the call. Before we continue, let me kindly remind you that we released our first quarter 2023 shareholder letter after the market closed today. It's available on our website at ir.enovix.com. A replay of this video call will be available later today on the investor relations page of our website. Please note that the shareholder letter, press release, and this call all contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are based on 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, April 26, 2023, based on information currently available to us. We can give no assurance that the 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 the non-GAAP financial measures in our shareholder letter. I will now turn the call over to Raj to begin. Raj?

Raj Talluri, CEO

Thank you, Charlie, and thank you, everyone, for joining our call today. I'm delighted to communicate to you that at Enovix, we are executing really well, and it's been a solid quarter. We did hit a lot of key milestones this quarter. Firstly, we produced 12,500 batteries in our Fab-1 here in Fremont. This is ahead of our forecast of 9,000 batteries that we talked about last time. Now we also completed a rigorous design approval of our Gen2 Autoline, and we did this ahead of schedule. We completed the purchase orders for both the high-volume Gen2 Autoline, and also the Agility line, which we will use for sampling our customers for qualifying their products. Now we also chose a site in Malaysia for our fab two, and we did this also ahead of schedule. Now I'm super excited also to tell you that we hired a leadership team there and 25 engineers already and we see a path for non-dilutive financing of our first production line. Now I'll expand on that in a moment, as we go through the presentation. Then after the quarter, we closed $172.5 million convertible debenture, which is intended to fund our Gen2, 3 & 4 autolines. We did this with a very minimal dilution to our shareholders, and I'm super excited about that offering that we closed. Lastly, this quarter, we made a number of leadership additions; I'm very excited by some really strong people that joined our teams from our previous associations. And now I believe we are totally set up to scale. Now we are already seeing the impact of the people we have hired with strong progress in all our R&D programs and also in the manufacturing that we are making. Now format-wise, I really wanted to cover two topics today. And then, we'll hop into Q&A and answer any questions you have. Firstly, in the last three months that I've been here, I've received the most questions about two things. The first question that I've received many times is, why do we believe that our Gen2 line will be successful and we'll be able to produce millions of batteries and do high-volume manufacturing, given that we had some early missteps of our Gen1 production line. So I'm going to talk about that now. Now, I've been here a little over three months, and Ajay has been here about five. And I can tell you that both Ajay and I have tremendous experience for many, many decades in the semiconductor industry. And drawing from that, we've come to the conclusion after looking at Enovix manufacturing process, that these can absolutely scale. And actually, they have some inherent advantages even to making chips. And I'll tell you why here in a few minutes. Now, in semiconductors, if you look at manufacturing chips, really there are two processes: there's a front-end process and a backend process. The front-end process is where you make the wafer fabrication, which is a very complicated process where we use very expensive machines to make the wafers. Then there's the backend process, which is basically assembly and testing. Here, you take the dies and cut them into small pieces, the small dies, and then you put them in a package. The front-end is in a deep sub-micron manufacturing, and the backend process is actually a lot more forgiving. Here, the mechanical tolerances to which we have to do are actually in single-digit microns. Now, if you apply that analogy of semiconductor manufacturing to how Enovix makes batteries, the front-end process of semiconductor manufacturing is very similar to the materials that go into the battery, these are the anodes and the cathodes, the electrolytes, and so on. Now, we at Enovix don't manufacture those; we actually buy them from the best suppliers in the world. They come in big rolls of coated electrodes. What we do then is we laser pattern them, we stack them, apply mechanical constraint, and that is really similar to the backend process in semiconductors. Now there's one big difference: the tolerances to which we have to make these batteries, the tolerances to which we have to design our machines and execute this manufacturing is in the 50 microns range. As I mentioned, in backend semiconductors, typically, it is in the 5-microns range. So that's kind of a long way of saying it's an order of magnitude simpler problem in mechanical tolerancing. This is why Ajay and I believe we will be able to do this and we'll be able to manufacture at scale. Now, the proof of that is what you're seeing in the operational improvements that you're seeing from us. You can see how we're executing on Fab-1 and continue to produce thousands of batteries. And we're also hitting all the key milestones on getting the Gen2 up and running. Now Gen2 compared to Gen1 is really all about adding speed, adding speed and automation and parallelism, so that we can handle more tasks at once. To give you all a feel for what Gen2 looks like compared to Gen1, we made a short video where Ajay describes how this works. And there's a link to the video in the shareholder letter that you received. It shows you Ajay presenting side-by-side how these work with Gen1 and Gen2 machines. I encourage all of you to please click on that and take a look at that. It's a short video, but it really illustrates the point that I'm trying to make here. Now, what is this advantage that Enovix batteries have compared to semiconductors? One of the aha moments for me in the last quarter since I've been here at Enovix is realizing that we can produce higher density and much better capacity batteries with a longer cycle life without having to change our manufacturing process. This is actually very important to understand. Now in my experience in semiconductors, let’s say you wanted to make a higher-performance processor or a high-density memory, you pretty much most of the time have to buy brand-new machines and go from one process node to the other. And again, these are deep sub-micron lithography machines that cost hundreds of millions of dollars. Sometimes the fab has to be kind of upgraded and rebuilt to really house these machines. What we find at Enovix is that the manufacturing lines we are building, since they’re akin to the backend manufacturing, as we make advances in getting better electrodes, better cathodes, better silicon-based anodes, better electrolytes, which we have, our electrochemists are working on sourcing them and making experiments with them. We can use the exact same machines that we are building to make those batteries. In other words, as we make advances in electrochemistry and in higher energy density, our manufacturing footprint totally scales. It's not like we have to build completely new batteries in new manufacturing facilities every time we want to improve energy density. This is fundamentally a huge advantage for the way we manufacture batteries. So that is what I believe will make this business ultimately very profitable in the long run. Now, the second major topic I wanted to talk to you about is the capacity build-out. Now that we've gotten a lot of questions on this, as I talk to investors over the last quarter. I mentioned last time that we will have multiple options to raise money or to secure the financing we need to build our capacity. Now we are executing towards that. This quarter, we got a non-binding LOI (Letter of Intent) from our manufacturing partner, YBS International, in Malaysia. This LOI has YBS working on giving us an existing building space in Penang Science Park to house our high-volume manufacturing lines, up to four lines with dedicated personnel to staff that line. This is very similar to how we would use a semiconductor backend assembly subcontractor. Now, YBS, in addition to this, is working with a syndicate of local banks to make a significant investment in our Gen2 autoline. This is subject to some purchase commitment from Enovix. Now, while we are negotiating all the details, what I can share with you is that we are seeking at least $70 million of non-dilutive financing to fund the first line. Now, as I said earlier, this funding is not secured yet, but we are very encouraged by all the discussions we've had to date with them. Securing this funding now would elevate us from spending the $120 million full-year CapEx forecast I gave you last time. Now we'll provide an update for you on this in the next quarterly call. Now beyond that funding, we recently closed the private offering of the $172.5 million convertible senior notes. That gives us the CapEx, the capital we need to make the Gen2 autolines 2, 3 & 4. So, in other words, we are now set up to be able to build four autolines in Malaysia in terms of the CapEx that we need. Now, let me close with our outlook, with a few remarks here. For the full year of 2023, we continue to expect to produce the 180,000 cells that I mentioned last time, including 18,000 cells in the second quarter. Now once again, we're not forecasting any service revenue at this point because this tends to be episodic and based on milestones. Now, I want to reiterate our full cash guidance of $240 million of spend, half from CapEx and half from operating costs for running the company. We do plan to revise this guidance in the next quarterly call as we get more visibility on the YBS transaction, in addition to our own efforts to internally operate a lot more efficiently. In closing, we're off to a fast start. We're making substantial improvements in Fab-1; we're hitting all the milestones we set for ourselves and that I communicated last time to you, our journey to scale in Fab-2 in Malaysia. We are working to fund our capacity build-outs while protecting our cash and limiting our dilution. Now I really want to thank all the Enovix employees for their hard work this quarter, along with the investors who are supporting us in our efforts. Now we have a busy year in front of us. But I'm even more confident today than I was when I joined that we have the right product and the right team to achieve our goals and enhance shareholder value. With that, I will turn it to Q&A.

Operator, Operator

We will now begin the Q&A session. Please note that this call is being recorded. Our first question comes from Bill Peterson from JPMorgan.

Bill Peterson, Analyst

Yes. Hi, thanks for taking my question. I noticed you said you sampled to 106 customers. I don't recall what the number was in the fourth quarter, or even if you stated it, but I look back and it was like 25 in the third quarter of last year. So I guess based on that, how many of your customers have you qualified? How many do you expect to be qualified later this year? And I guess how many are you waiting for once line two is ready before the qualifications will be finished?

Raj Talluri, CEO

Yes, absolutely. The question is about customers and customer sampling and qualification. I think Ralph is on the call, and he's closest to this. So Ralph, if you want to take that.

Ralph Schmitt, CCO

Thank you for the question. So yes, we've seen an even bigger acceleration of the number of customers looking at our product and evaluating the technology. We haven't laid out the exact numbers as you asked for them, Bill. But as you saw in the release, both the active and the design category that we have in our funnel has increased to about $718 million. All the cells we've been shipping over the last few quarters are now in qualification and take numerous quarters until those qualifications are done. But we're still on schedule, exactly how we thought that in the back half of this year, we'll start seeing customers put products into the market with our batteries in them.

Bill Peterson, Analyst

Okay, thanks for that. My follow-up question is related to new product development and somewhat related to prior questions. I guess, when do products such as EX-1 to 1.5 and EX-2 move to Fab-2? And I don't think you mentioned brake flow, but similar type of questions: when do these get qualified in Fab-2 and then send the customers through their qualification? Or I guess, ultimately, most importantly, for high-volume production and revenue?

Raj Talluri, CEO

Yes, sure. I can talk about that. As I mentioned in my opening remarks, it's really exciting. Our manufacturing strategy allows us to continue to improve our process technology and continue to improve the energy density with, as some of you may or may not know, EX-1, EX-1.5, and EX-2 are our various recipes or process technologies that actually improve energy density and cycle life and so on. We're on target on all of those. EX-1.5, we expect to sample towards the end of the year, and we expect to run all those in our factories in Malaysia. The Malaysia factory, as I mentioned, will produce samples by April next year, and get into high-volume manufacture towards the end of the year. We will continue to run as we make progress in our process technology; we will run them through our Malaysia factory. And as for brake flow, I'm very excited about brake flow. It's a phenomenal piece of technology where, as you put more and more energy density into batteries, safety is of paramount importance. And brake flow is a technology that Enovix has that really provides great safety by not allowing the battery to go into thermal runaway, and outlined in Malaysia will help integrate brake flow when we make these batteries. In fact, we are sampling batteries with brake flow now.

Operator, Operator

Our next question comes from Colin Rusch from Oppenheimer. Please go ahead.

Colin Rusch, Analyst

Thanks so much, guys. You are separate from the engagement and design activity. Can you speak to the incremental specificity that you're being able to gain on customer needs and the adequacy of the current product roadmap to meet those needs as you've gone through the last four months or so?

Raj Talluri, CEO

Yes. I will make a few comments. And again, I will ask Ralph to comment on this because he is just a lot closer to it. One thing I found as I visited several customers, as I've been spending more and more time here, and as you guys know, the customers we're now talking to are the same customers that I've shipped for many, many years when I was at TI and Qualcomm and Micron and so on. I've got solid feedback from many of them that the battery technology that we have is superior, and it produces higher energy density than anything they have today. Now the requirements we are getting are actually a lot more specific. I did mention that we hired more people, including Samira, who used to work at Qualcomm before, who is the Head of Products, reporting to me. She is able to, along with Ralph and his team, meet with customers and get more precise requirements on how the battery is charged, for example, what voltage it is charged at, what the different waveforms are that are used to charge, cycle life versus energy density trade-off, and getting more specific on the shape and size of the batteries that fit in wearables versus computers versus phones. So we are getting a lot more detailed specific requirements that are really helping us drive a much stronger product roadmap. Ralph, do you want to add more to it? Please do.

Ralph Schmitt, CCO

Yes. I think you covered it well. But what I'll say is our expectation has been that the current technology that we have in the line that we're running is really meant to be targeted towards the IoT space and the wearable products. And so we're very, very well aligned with that, because we're way down the path. The other markets that Raj mentioned, both mobile and laptop, we've been engaged with for multiple years at this point and have their needs and requirements. We continue to add or slightly change things as we move forward to better address those market requirements. But it's still the same strategy, and we're very well aligned with the market needs in each of those categories, just at different stages. Wearables are frankly close to the production stage, mobile and laptops are just after that.

Raj Talluri, CEO

Maybe I will add a little bit more to that. The fact that we're able to sample and give a lot more batteries now is really helping us get much better feedback too because now they have hundreds of batteries from us that they're testing. So the feedback is just much stronger. It's so important to be able to make these batteries now and sample them to customers.

Colin Rusch, Analyst

Excellent. And then just looking at the ecosystem of equipment suppliers. As you start planning for lines two and four, can you talk about how much opportunity you're seeing for CapEx reduction, optimization, second suppliers, and things like that? So that there's de-risking and shortening the timeframe on the ramp and install of that equipment?

Raj Talluri, CEO

Yes. Let me ask Ajay to comment on that. He's right here.

Ajay Marathe, COO

Okay. So a very good question indeed. Actually, as we start our ramp, as we go into higher volume production, even here in Fab-1 in Q3, Q4, we have a lot of second sources lined up under qualification right now. But that's just for the 180,000 batteries. But going forward for the Malaysia factory, we have a big list of second and third sources lined up, which we will be qualifying through a rigorous qualification process. As for equipment, you mentioned equipment as well. What we are doing is we are relying really on the semiconductor value chain, rather than just a battery value chain, again, bringing in that mindset, and we will localize a lot of that in Malaysia as we set up the high-volume operation there. So both are in the works.

Operator, Operator

Our next question comes from Derek Soderberg from Cantor. Please go ahead.

Derek Soderberg, Analyst

Raj wanted to start with you. Maybe this one's for Ralph. But I'm curious whether or not you guys have funding now in place for the four production lines. With a more or less certain timeframe in place, does having that allow for certain customer orders or negotiations to move forward that otherwise wouldn't have?

Raj Talluri, CEO

I mean, I think what actually has always been in the path of customer orders has been getting enough samples for them to qualify, getting them to be able to test it and say, yes, it looks good in our product, and then getting feedback from them on the right sizes of the batteries, right dimensions, if you will. And that's really been what's in the critical path. And again, that, as I mentioned, we have the Agility line coming in November this year, November-December, and that's when we will be able to sample them. Then we get samples from our high-volume manufacturing line in April. And that will go through the process of qualification with our customers. We expect those products to go to manufacture late '24 and through '25. So in that sense, that's really the timeline that we've laid out. This fundraise, and getting the capital is for us to make sure that we are ready, and we have the funding in place to meet that rather than accelerate anything else; the timeline will be the natural order of things.

Derek Soderberg, Analyst

Got it. That's helpful. And then as my follow-up, Steffen, you guys have put out a range of estimates for battery production up to four lines. You've got an agreement with your manufacturing partner. I was wondering if you could update us on how we should think about the longer-term gross margin outlook.

Steffen Pietzke, CFO

So, Derek, thanks for the question. We really don't think it has changed on the long-range outlook; we still think the 50% gross margin business is what we are aiming for.

Raj Talluri, CEO

Yes. Just to add a little bit more color to that. I mentioned this last time, I think it's worth mentioning it again because I get this question quite often. I want to add a little color. The cost of the battery, 60% to 70% is actually in the materials; I think that's important to understand. And as Ajay mentioned, as we get multi-sourcing in place, as we scale and make millions of batteries, we see those costs coming down. The cost of the constraints we add on top of that is actually a small piece of it. But with local manufacturing capability in Malaysia, we expect that to bring those costs down as well. Another very important thing I think for everyone to see, as I mentioned in my talk, is that the factories we're building will last for quite a long time. Because we can amortize those over millions of batteries due to the backend assembly and testing approach we're taking. I've seen operations run the backend assembly for ten years. So it's important to understand that this will be a profitable business. And as Steffen said, we're not changing our outlook on that. It's just really a question of getting to scale.

Operator, Operator

Our next question comes from Gabe Daoud from Cowen. Please go ahead.

Gabe Daoud, Analyst

Thanks for all the remarks so far. Maybe just going back to the mobile phone and laptop batteries. You noted in the shareholder letter that the focus or go-to-market strategy for the majority of this year and next year is on the wearable side and the IoT market. So just curious when could we expect first revenue being generated by mobile phone and laptop batteries? And could you just remind us where we are on the tech roadmap in terms of cycle life? I think maybe the larger phone and laptop batteries have higher cycle life requirements.

Raj Talluri, CEO

I think it's important to highlight the timeline I've outlined. We will obtain samples from our Agility line by the end of this year in the appropriate form factor, as our current batteries are not designed for laptops or phones. The smaller batteries we create are suited for IoT applications. As we develop batteries tailored for phones and laptops, we expect to have that capability by the year's end, with further sampling in April of next year. After that, our customers will begin validating these batteries within their own product lines. This process will extend through the end of next year, with revenue anticipated in 2025 from these high-volume applications, which is necessary to ensure the batteries meet the required specifications and undergo validation from our customers. We will continuously enhance energy density and cycle life, which will align with our latest technologies in 2025 when they enter production.

Gabe Daoud, Analyst

Thanks, Raj. That's helpful. Okay. And then, if we could just maybe, or just I want to say, makes sure I'm thinking about the timing correctly. So Gen2 Autoline begins to arrive in Malaysia in November this year. So I guess, with factory acceptance taking maybe a quarter or two, starting production is 2Q '24. And then still expecting four lines in Fab 2 by 4Q '24, is that how we should be thinking about the ramp?

Raj Talluri, CEO

I know the way I mentioned that is, we ordered one line. And that's the line that will be there. As you said, we ordered one part of that line twice. So what’s called the Agility line, which will come here to Fremont in November-December. The same stuff will go to Malaysia too. The Agility line here will help us sample our customers with custom-sized batteries. Meanwhile, the Malaysia build-out happens in parallel. The Malaysia build-out happens in such a way that by April next year, we'll be able to get samples from the Malaysia line. Now, we only committed to building one line through '24. We have the ability to build more now that we have the CapEx sorted out. But we will pull the trigger on those as we see the right customer demand come in. And the most important thing in running a manufacturing company is to match the supply and the demand. As the customer qualifications progress, we'll have better visibility into when to build that. One thing Ajay and the team have done is make sure that the facility we are setting up in Malaysia with YBS has the ability to host all four lines and has the facility to run them. We have set that up. We also talked to our suppliers that we will probably need much more than one line, so please be ready for it. But we're not making any commitments on when exactly we'll pull the trigger on that.

Operator, Operator

Our next question comes from Alex Potter from Piper Sandler.

Alex Potter, Analyst

So I had a question. Regardless of how long it takes to ramp, I guess once we're up and fully scaled in Malaysia, I know that there is some nuance here about what exactly a unit is. But in the shareholder letter from today, you mentioned between 38 million and 75 million batteries per year in the aggregate coming out of Fab-2 in Malaysia. If you divide that by four, right, it's between 9.5 million cells and almost 19 million cells per line. So this could be semantics, I know because there are small cells, there are big cells, but to me, when I first saw those numbers, it seemed like an upward adjustment versus your expectations for per line output versus what you historically said. Is that correct or am I reading that incorrectly?

Raj Talluri, CEO

Ajay, I want to let you answer that.

Ajay Marathe, COO

Yes, that's a good observation and accurate calculations. Let me clarify how we are designing our production lines. The first line is focused on universal lines, allowing us to handle a variety of customer engagements. It can accommodate both small and large form factors, which means it can cover a wide range of corner cases. This approach does require some compromise in capacity for the first line. However, starting from the second line, we will optimize for a more specific range of dimensions, resulting in significantly greater capacity per line. That's why, as Raj mentioned in the investor letter, we expect between 9.5 million to 19 million batteries produced per line. The actual number of lines needed will depend on how we align supply with demand, which should help clarify the volume you mentioned.

Alex Potter, Analyst

Okay. That's very helpful. And then maybe the follow-up question to that: then if I wanted to take those unit numbers and translate that into revenue capacity, to the extent you're comfortable talking about this, right, if I know that $5 has always been assumed for a wearable and maybe $10 for a cell phone size battery or something like that. Could you take those $5 to $10 unit ASPs and multiply it by the range of those unit numbers and get to something in the neighborhood of $375 million, $380 million of annual revenue capacity out of Fab-02? Is that in the ballpark?

Raj Talluri, CEO

Yes. That's a good first-order approximation. Again, it just depends on which ones we sell how much, but that's a good first-order approximation.

Operator, Operator

Our next question comes from Gus Richard from Northland Capital Markets. Please go ahead.

Gus Richard, Analyst

Yes. Thanks for taking my questions. What run rate do you have to hit in manufacturing before one of your customers commits to production?

Raj Talluri, CEO

It's not only about the run rate; there are multiple factors at play. What truly matters for our customers is our ability to provide them with adequate samples and demonstrate that we have sufficient backlog and inventory to meet their needs as they begin to increase production. Currently, there are customers testing our small and large cells and are ready to move into production this year and next. If our product volume is in the millions, we won't have the capacity this year, but we aim to produce millions of units next year. This will make large-volume customers more comfortable. Essentially, if the product's run rate is in the millions, we need to ensure we have that ability. If it's in the tens of thousands, we are equipped to handle that now. Additionally, we must provide the battery in the correct form factor for testing in their products, which is crucial for them to decide on proceeding. Those are the two main factors.

Gus Richard, Analyst

Okay, I got it. And then, on the first half, you can produce 30,000 batteries, if I can add two numbers together. And for the full year, you can do 180,000 batteries. It's a pretty big jump in the second half. Could you just talk about what's going to accelerate that volume, just so we understand what needs to happen?

Raj Talluri, CEO

Yes. I'll have Ajay comment on that; he lives it every day.

Ajay Marathe, COO

Absolutely. Again, very good question. Yes, as you saw in Q1, we produced 12,500, and we're saying we'll do 18,000 in Q2, which we are in already. The ramp is pretty steep. The ramp is driven mostly from the confidence that we are going to get to that ramp. We're doing a couple of things right. One is the yields. While we don't talk in detail about our yields, all I can say is we are making significant improvements in yields throughout the year. The proof points are sort of behind us, so that gives us confidence about the second half. That's one. Second is uptime, and mean time between failures of the equipment. So essentially, is the equipment getting a little bit more predictable? Both those things we are making good, solid progress day after day after day, which is giving us. So between now and the end of the year, we feel very strong that our assumptions are quite accurate, and we are going to do the 180,000.

Operator, Operator

Our next question comes from George Gianarikas from Canaccord.

George Gianarikas, Analyst

Hey, everyone. Thanks for taking my question. I'd like to ask about the slides that TJ presented in January that discussed the issues needing resolution as we move from Gen1 to Gen2, which were categorized by red, yellow, and green. I noticed a red line here related to an insert and slot fill. I'm curious if there are any updates on the progress made in changing those reds to yellows and those yellows to greens? Thank you.

Raj Talluri, CEO

Yes. I mean, I'll give you a high-level color. We've made significant progress on those. In fact, I was looking back at that presentation the other day when someone asked me a question. We're actually on track to almost everything that was said there. That's the reason why we were able to get the approval to make the purchase order for the Gen2 equipment, because we made solid progress in each of those. I think clearly, the team has worked really hard, and Ajay, with all his experience, and the team he has brought in, we've been able to solve most of those issues. So we feel pretty confident about that. Ajay, anything else you want to add?

Ajay Marathe, COO

Yes. Just very quickly, the way we test whether we are making progress, are we solving real root causes of what was stopping us from feeling a whole lot more confident? What we're doing is we’re building proofs of concept. There are several POCs, in upwards of three dozen POCs, which were in motion from January, literally January 4, until yesterday. Most all those POCs are doing extremely well, showing us that whatever we assumed to confirm the UPH that we're expecting are all being met. So that's how we progress. It's a rigorous way of approving the next step in that approval cycle. As Raj mentioned, we're feeling pretty good after the POCs.

George Gianarikas, Analyst

Thank you. My next question is about the two silos in your revenue funnel, specifically engaged opportunities. I noticed that there was a slight decrease in this area sequentially. Should we interpret this as engaged opportunities moving into active designs? Is that the correct way to think about it?

Raj Talluri, CEO

Yes. Ralph, you want to take that? That's kind of my understanding, but Ralph can cover.

Ralph Schmitt, CCO

Thanks for the question. That's the simplest way to think about it, that we're trying to progress these customers into more active and real design wins. That movement was happening faster than getting new customers into the front end of that funnel, the engaged part. Really, exactly what you want to happen in order for us to get them to a revenue state.

Operator, Operator

Our next question will come from Ananda Baruah from Loop Capital Markets. Raj Talluri, the CEO, stated that Ralph could address this further. Ralph Schmitt, the CCO, responded by thanking the questioner and explaining that the goal is to advance these customers towards more active and real design wins. He noted that this progress was occurring more rapidly than the influx of new customers into the engaged part of the process, which is precisely what is needed to reach a revenue-generating state.

Ananda Baruah, Analyst

Yes. Just a couple, if I could. I guess the first is on processing and getting Gen2 mobility lines stood up. Will you be giving us any updates on equipment delivery, and any updates through the year on the way to getting them? Do you want to be around particular metrics or anything of that nature? And then, I have a quick follow-up? Thanks.

Raj Talluri, CEO

Yes. We will continue to give you updates in these meetings as we move forward in the different stages and where that is. I think the next big milestone for us is the factory acceptance test, which will come up in August, I believe. After that, we'll have site acceptance when it actually is delivered to our site. We will give you updates on both those milestones. So far, we are very pleased with the progress. Our teams are visiting, and our suppliers come here. Ajay and I see this all the time. I even saw a video of one of our Gen2 machines working yesterday; it's pretty exciting to see the progress being made by the team.

Ananda Baruah, Analyst

Awesome, Raj. Thanks. That's helpful. Yes, we look forward to that. And then, I guess the follow-up question is, how would you like us to think about incremental capacity? I know you just got Malaysia okay in place, and you're just starting to get the purchase orders in, waiting for the equipment. But I'm sure we'll start all getting asked about incremental capacity plans and, at some point, incremental funding plans like that. So anything you can help us out with context-wise around that will be grateful. Thanks.

Raj Talluri, CEO

Yes. As I mentioned, I have a lot of experience in high-volume manufacturing businesses. So, the most important thing is to make sure your supply and demand are tied out, and you don't have too much supply or too little supply, and match that with the demand. This takes a lot of planning both on the demand side with the customers, as well as when we order the equipment, what are the long lead times. It's a complex problem, and both Ajay and I have a lot of experience running this. The way we're going to do this is, first, we secured the funds ensuring that we have the capability to buy them as we need them. Second, we secured the site, and are in the middle of getting the facilitation done with our partner. We give heads up to our suppliers on when they need to come. We start sampling our customers, as I said, we are set up for the first four lines now. As we get to that stage, we will see the progress in the next couple of years, both on the customer side and with our machines running. We will continue to optimize those and will look to expand beyond those four as the demand shows up.

Operator, Operator

Our next question will come from Marc Cohodes from Alder Lane. Marc, your line is open. Feel free to unmute.

Marc Cohodes, Analyst

So Raj, you've been there for three months, and Ajay a little more than five months. What gives you guys the incremental confidence that you can actually manufacture these batteries at speed? Because everyone constantly hears it's hard to do; it's impossible; it's pie in the sky. But you guys are sounding more and more confident. So what has exactly happened that gives you that confidence? That's question one. And question two is when are you guys going to start building batteries for inventory to actually ship commercially for these new products? Thank you.

Raj Talluri, CEO

Yes. Thank you for that question, Marc. Firstly, I think as I mentioned, the reason that we are increasingly getting more confident, the more time we spend here, is really because of a couple of things I mentioned in the call. The way Enovix manufactures batteries is really like backend semiconductor manufacturing. It is a backend assembly test kind of technology that we have to master and do. That technology is there, and many people have done it. Even then, the tolerances to which we need to make is an order of magnitude less stringent than what's done in chips. You can see the progress we're making in the number of batteries we're producing over the last few quarters. We went from almost nothing to 4,000 to 9,000 to now 12,500. We are committing to 18,000 next quarter. The progress we are making in producing batteries as we learn that. Our understanding of the actual mechanisms and the machines that produce this and the tolerances to which they need to function give us a lot of confidence. Thirdly, all these proof-of-concept experiments we have been running, are targeted at what went wrong with Fab-1 when we did it, where we lost yield, lost throughput, and lost machine uptimes. We created targeted experiments to make sure that those don't happen in Gen2, and those experiments have proven successful. We've picked a new set of suppliers who are very capable of producing machines like this, and we are not paying them all the money upfront. They have a lot of skin in the game, as we only paid 10% on the first approval, and we incrementally pay the money as the yields go up and the machine throughput improves. Different milestones are in place to check that. We followed this well-known process, the EPR process, which helped us order the right machines. All those things give us a lot of confidence, and we feel strongly that we can get this done. As for your second question about inventory, we are now building. In consumer electronics markets, when you start giving units to customers, they want to ensure that if their product is successful, we have the supply to be able to support them. That's what we're doing through the year. We are, of course, sampling a lot of customers with the batteries we make. But we're also building a reasonable healthy level of inventory. If the products that our customer wants suddenly start selling well, we don't want to be in the middle or be the bottleneck to not be able to supply them with batteries. So it's a responsibility we take seriously, and we're handling that. Ajay, anything else you want to comment on the machines?

Ajay Marathe, COO

Just very quickly on the Gen2, I think Raj alluded to it, but just from my personal perspective, I'm an operations guy; data is the only thing that matters. The yield uptime of the Gen1 is what's giving us the confidence, as I told you earlier. More so in Gen2, I personally have visited all the suppliers, all of them who are making these POCs. I've spent good time with them, looked through each of these suppliers, and studied the methodology they're using to build the machine. I’m looking at the POCs myself. That gives us confidence. As Raj said, this is all about backend semiconductor-type technology, tolerances, etc. Now we are seeing the ramp up with the ongoing progress, which gives us confidence.

Operator, Operator

Our next question comes from Sean Milligan from Janney. Please go ahead.

Sean Milligan, Analyst

First, I get asked a lot about who is YBS and what is the background there? I know you touched on it earlier, Raj, and that they're used a lot in backend semi-processing. But can you kind of maybe touch a bit more on how that relationship came to be and what gives you confidence in YBS's ability to execute on financing?

Raj Talluri, CEO

Yes. So a couple of things. Look, I mean, if you look at Southeast Asia, there's a lot of contract manufacturers. Ajay has decades of experience in Malaysia, and I came from Micron, which built their last factory in Malaysia on assembly testing of SSDs. We understand the ecosystem and know the people who do it well. YBS has a good track record of supplying and manufacturing for many top-tier OEMs, and they have that capability. Again, they have the strong connections to key people in Malaysia. Ajay visited them, they came here, we talked to them, and they are a solid company. We feel very strongly that they will be successful, and it’s not something obvious to everyone who doesn’t live in that part of the world. We spent a lot of time in Southeast Asia, so we feel good about that. But maybe Ajay can add more as he goes there more often than I do.

Ajay Marathe, COO

Yes, absolutely. I've known YBS for quite a while now. They operate in backend manufacturing and subcontracting, just as you mentioned. I’m familiar with the CEO and the team there, and I've been following them for some time, even back in my previous role. What stands out about them is that they possess the exact talent we need to localize some of our supply constraints and other mechanical aspects. They're quite skilled in that area. By localizing production next to us, I can achieve the lowest total cost, which will lead to a reduction in expenses. YBS adds significant value beyond being just a contract manufacturer; they will also assist us with our ecosystem of various components that are essential for the battery.

Sean Milligan, Analyst

Okay, great. Noted. That's great feedback. And then, my follow-up would just be, Raj, I just wanted to clarify something you said earlier, and it kind of relates to Gen2 lines 2, 3, and 4, the execution on those. You mentioned that previously, I think that conversation talked about those being there ordered or delivered in Malaysia by the end of next year. You were looking to line those up more with demand. Obviously, the pipeline that you have is robust. So I just wanted to clarify, is this lining up making one all wearables to optimize margins that line or is it really just filling the demand funnel needs to fill to have those lines come in?

Raj Talluri, CEO

Yes. I mean, again, if that's what we want to make happen, pulling the trigger and getting them all out next year, if that makes the most business sense, we will do that. I'm not saying we won't do that. I'm just saying I'm just in general, a more of a supply-demand matching kind of guy. The way I look at it is, we have various customers that are qualifying our product in IoT devices. They are qualifying it in smartphones. They are qualifying them in wearables. They are qualifying them in laptops. When we pull the trigger on a line, we want to make sure we're pulling the trigger on the right line to produce the right kind of batteries for the right customer. It's not all in it. In the beginning of this year, it's not clear to me which one will be the first, which will come next, and what timeframe it will come. As you know, the demand for batteries is huge, but we want to make sure we build the right one at the right margin that makes money for the company. That's kind of where I was talking about matching supply and demand.

Operator, Operator

And our next question comes from Chip Moore from EF Hutton.

Chip Moore, Analyst

Actually wanted to go back to YBS real quickly. I imagine seeing the equipment orders and the recent financing probably helped them in their discussions around localized financing and tax incentives and things like that. And based on your commentary around revising CapEx next quarter, sounds like we should expect something fairly soon. So just curious, anything to bear in mind there? And then my follow-up would be, have you seen any more interest in similar types of conversations?

Raj Talluri, CEO

Yes. I didn't hear it fully well, but I think the question was on how we are feeling about YBS financing. Like I said in my prepared remarks, we're talking to them constantly, and they're making good progress. It's going through the approval process that they need to go through; they're a public company, and it's going like we thought it would. So no cause for concern on our side. We are in close contact with them. We're just going through the due diligence and going through all the right steps to make sure it's done right. There are other options like that. We thought this was the best one that we should pick now. That’s about all I want to comment on this point; we do have what we need for the next four lines with this once this one gets worked out. I still reiterate the comment I made before, which is there is a lot of interest from customers as we begin to scale these batteries, where they want a surety of supply, there is interest from other parties like YBS and so on, and we will explore all of them. I also will mention that we'll be opportunistic about capital markets, and when we were, we achieved what we could. So I'm just continuing to execute on what I told you guys I would last quarter.

Operator, Operator

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

Raj Talluri, CEO

Yes. I really want to take just a couple of minutes to thank you all for joining in and for all the great questions. We have a phenomenal team at Enovix. We've done really well this quarter, and there’s a lot of work ahead of us. But we are committed to executing this, and I really appreciate all the support of our partners and investors to allow us to do what we are trying to do. Thank you.