Yahoo Finance Enovix Corporation (NASDAQ:ENVX) Q3 2023 Earnings Call Transcript
Enovix Corporation (NASDAQ:ENVX) Q3 2023 Earnings Call Transcript November 7, 2023
Operator: Thank you for standing by, and welcome to the Enovix Corporation Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. 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.
Charles Anderson: Thank you. Hello, everyone, and welcome to Enovix Corporation's Third Quarter 2023 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 third 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 the conference call all contain forward-looking statements that are subject to risks and uncertainties.
These forward-looking statements are based on current expectations that may differ materially from actual future events or results due to a variety of factors. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, November 7, 2023, based on information currently available to us. We can give no assurance that these statements will prove to be correct, and we do not intend and undertake no duty to update these statements, except as required by law. During this call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
You can find a reconciliation of the GAAP financial measures to 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. Raj?
Raj Talluri: Thank you, Charlie, and thank you all for joining us today. I'm going to kick it off with a few high-level remarks, and then I'll pass it to Farhan to cover some of our financials and the outlook. After that, I'm going to make some closing remarks, and then we'll take your questions. Now as you can see from the recent announcements that we made €“ that we've been making, we've been super busy in this quarter. We started the factory acceptance testing or the FAT as we call it, our Gen2 equipment on time. And we have the fast equipment landing in Malaysia in November, and we remain on track to go into production in April next year with fast batteries from that line. Now a little bit earlier today, we posted a video of Ajay on site at one of our Gen 2 vendors.
Please go check out that video. It's very exciting to see the new machines coming online and how everything is going on. Now in , we achieved our strategic objectives in Fab1 here in Fremont during this quarter, which allowed us to transition from this expensive 24/7 manufacturing in Fab1 to converting it into a more of a center of innovation focused on R&D and customer qualifications. This allowed us to shave off $22 million of our annual burn. Now this quarter, we also completed the acquisition of Routejade, a company in Korea, which vertically integrates our manufacturing process from electrode coating all the way to making battery packs. Now earning our own coating, as I mentioned before, is a highly strategic thing for us. It reduces our CapEx, increase our margins, enhances our manufacturing capability, speeds up access to the new materials so that we can bring new products to the market much faster.
Now we also gained complementary business from Routejade, who are shipping products into leading IoT and military customers. This gives us cross-selling opportunities to be able to sell Enovix, current Enovix silicon batteries also into those customer base. We announced that Enovix enabled a product in the market, an FDA approved portable multivital sign monitor. This will be sold in CVS, Walgreens and Walmart next year. And last but not least, we shipped breakthrough enabled batteries, which is our proprietary technology for keeping batteries safe to the U.S. Army under contract, which drove up this quarter's revenue. Now before I pass it to Farhan, I'd like to take a few minutes to make some big picture comments on how we are positioning the company to seize this tremendous opportunity in batteries that's in front of us.
As I mentioned in my first call as Enovix CEO, it's almost 10 months ago now, that my management philosophy is to really start with the customers, their products, how our products enable their products and move backwards to making great products on our site. This is exactly what has happened during the last many months. We have rebuilt our management team. We have driven much deeper relationships with the key decision-makers at customers, and now we understand their unique product requirements. Now we received consistent feedback from some of the leading smartphone OEMs that the Enovix architecture offers industry's best path to high-energy density batteries matched with cycle life and fast charge. All three care abouts are very important to our customers.
If anything, what I noticed all the time I've been the CEO here, is our competitive position in energy density and consumer electronics is actually even better than when I joined the company. I'll talk a little bit more about it in a few minutes. Our relationship with our smartphone OEMs is strengthening and have managed to now understand exactly where our competition is and what kind of batteries our customers are currently using. Based on this belief, I believe that Enovix is capable of delivering multiple billions of dollars of revenue with strong margins, similar to the businesses have been associated with Qualcomm and Micron. With a superior product that we are going to make here in the portable electronics market, which the market size exceeds over $20 billion.
Now we're also seeing strong interest from the EV OEMs, where the market is much larger than the consumer electronics market. But the question to us, how do we get that most efficiently? And how do we live up to that promise? Now I first want to today show you the reason why we are so focused on the smartphone market. I want to show on this slide what has happened in the smartphone market from 2025 to 2023. Now I've been involved in this market very intimately from my time at Texas Instruments and Qualcomm and Micron. If we look at 2025, the smartphones had a 2-inch TFT display, close to a couple of hundred-megahertz CPU, 3G modem, single megapixel camera. And we had like a 900 mAh of battery which was about 8 ml, if you would say. Now as you transition to the right, what has happened is the CPUs got much more powerful, and there's multiple CPUs now.
Now today, in 2023, there's Octo-Core processors in multiple gigahertz shipping in these phones. The displays have gone from the 2 inches to 6.8 inches, HDR 10. I'll talk a little bit more about the displays in a minute. Multiple cameras, 5G cellular. And you can see the transition along the way. Now the phones themselves have got increasing capability. You can now take great pictures. You can watch 4K videos. You can do your GPS-based navigation with maps, you can make purchases and so many other things, which has really helped the smartphone market grow because of these innovations that have been launched with the processing power and the displays and cameras to almost 200 million units. Now the battery, what has happened to the battery? During the same period of time, you can see the battery capacity.
If you talk about the capacity of battery in milliampere-hours, has gone from 900 milliampere-hours to almost 5,450 milliampere-hours in a few of the very, very high-end devices. However, an interesting thing to note is that as the battery milliampere-hours grew, the size of the battery also grew, which means this increase in energy has been achieved by making the battery bigger and bigger. So the battery grew 7% CAGR. The battery capacity grew 11%. But if you actually think of the energy density of the battery, which is how much has the capacity grown per liter, it's only grown 4%. This is clear if you look at the most recent batteries, how little increase is that. Now why is this a problem? This is a problem because now, the increase in energy capacity in smartphones has been achieved by making the batteries bigger and bigger.
It's a little bit modest increase in energy density. The problem is now you can't make the phones any bigger. Because we make the phones any bigger, they don't quite fit in your pocket anymore. Now we have a problem, how do we continue to increase and supply the demands of these increasing smartphone applications without increasing the size of the battery? Now if you look at the next slide here, it's going to show you that the emerging use cases haven't stopped. I talked a little bit about the AI and machine learning use cases that are happening at the edge, talked about multiple displays, larger displays, foldable phones. And if you look at the mixed reality headsets, if you look at all these new applications that are coming and recently, you've seen announcement from other chipmakers and an even much higher performance process and much higher performance memories and better displays.
But the battery is not keeping up and the phone cannot get any bigger. So there is a problem. That's why customers are very interested in working with us at Enovix because our technology is one of the few ones that can actually enable smartphones to continue that growth curve of this [indiscernible] demand by increasing the energy density. This slide shows you our battery technology. On the left more side, I show the average capacity of conventional batteries, which are the graphite batteries, upsell leading smartphones are actually shipping in 2023. We use that as a baseline. Our EX1, which is actually the currently shipping product that we have, has over 18% increase in capacity over that. Now it only goes up to 500 cycles and stages at a standard rate.
So it's used in some IoT applications but not in smartphones. To be able to be used in smartphones, you need to get to 1,000 cycles and be able to charge much faster. Our EX2 has that capability. So in our EX2 technology road map, we will be able to increase the capacity by 30-plus percent of the baseline, but actually still continue and also gave the 1,000 cycles in fast charge. That is super exciting for all the smartphone OEMs because that's an area where people really need this and it changes the game on how smartphones will be used when we get to that. This product is extremely well received by customers, and we plan to sample this next year and ramp to high-volume production in Malaysia in the millions of units. With the changes we've made, Enovix is now a vertical business, which means it's focused on a few large customers with our products that are aligned in form fit and function to what they need.
This contrast with how our previous strategy at Anemic was, we were making a horizontal business primarily focused on standard-sized batteries to hundreds of customers. The beauty of the vertical first strategy is that the majority of the industry's volume happens to be concentrated in 6 to 12 large customers, five to six to seven smartphone customers, a few PC OEMs, a few variable customers. So by being successful there, this results a large business by meeting the demands of these high-volume customers, but our product portfolio can be a lot more focused and our operational expenses can be a lot less and much more targeted in delivering value and performance to markets that need it most. Now we are very well suited for this vertical strategy because of the tight customer relationships we have forged over multiple decades.
Me, myself and many members and our team have been working with this industry-leading OEMs for a long time. We are well positioned in smartphones. That is a market that we are going after really with a lot of intent because of the requirements there. From then, clearly, we will move from smartphones into PCs. Along the way, with the Routejade's acquisition, we'll also continue to sell into the IoT and wearable markets. And I'm confident that with this EX2 type technology, we will be able to launch smartphones in '25, '26, time frame, and that will help us scale into multiple models of smartphones and PCs in 26 multiple lines with a solid path to profitability. Now with that, I will turn over to Farhan to discuss our financials and give some guidance for next quarter.
Farhan Ahmad: Thanks, Raj. So I'll keep my comments at a high level. And just talk about the quarter and the guidance. And most of the details of the order and the guidance can be found in our shareholder letter and the press release. So first, talking about the quarter. We delivered record product revenue in the quarter on the strength of the Army contract and the shipment to Army for that. And we continue to manage the OpEx tightly and keep control on our spending and ended the quarter with $370 million of cash and equivalents. We plan to continue to manage our spending tightly. And as we disclosed previously, the strategic realignment of Fab1 will lead to annual savings of about $22 million. And as a result, we are lowering our cash use for the year.
Operational cash use for the year, $210 million. Now looking ahead to the fourth quarter of 2023, we forecast revenue to be in the range of $3 million to $4 million, driven by a partial quarter of Routejade's revenues and continued strength from the Army contract. And I'll now turn it back to Raj for closing comments.
Raj Talluri: Thank you, Farhan. In closing, we had a very productive third quarter. We accomplished quite a few things as we talked about in the beginning. We remain on track to begin high-volume manufacturing in Malaysia next year while bringing industries-leading batteries to our customers to allow their products to differentiate and excite the consumers, who ultimately will be the ones buying these products. Now, we made significant moves to lower our cost structure, as Farhan mentioned, while at the same time, we're also speeding our technology development and enhancing our manufacturability. Now we put in place the right go-to-market strategy, I feel, to deliver on the promise of getting our leading-edge technology to the market most efficiently. Now with that, I'll open up to questions. Operator?
Operator: We will now begin the Q&A session. Please note that this call is being recorded. Before we go to questions, we are going to read the two most highly voted questions submitted by shareholders ahead of this call during the call registration. The first question is, when can we expect Enovix to start generating meaningful revenue?
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