Enovix Corp

NASDAQ:ENVX

Earnings Call Analysis

Enovix Reports Revenue Growth and Key Partnerships

Enovix reported Q2 2024 revenue of $3.8 million, surpassing forecasts, and expects substantial revenue growth in the second half of the year. Noteworthy achievements include new agreements with a Fortune 200 company and an auto OEM. Their Malaysia operations commenced with initial battery production, while U.S. manufacturing costs were reduced. For Q3 2024, Enovix projects revenue between $3.5 million and $4.5 million and an adjusted EBITDA loss of $23 million to $29 million. The company remains optimistic about their progress and anticipates continued engagement with major smartphone OEMs and expansion into IoT and automotive markets.

A Strong Q2 Performance Sets the Stage

In the second quarter of 2024, Enovix Corporation reported revenue of $3.8 million, exceeding expectations as it fell into the upper half of the guidance provided. This positive outcome highlights the company's ongoing recovery and strategic shifts, providing a foundation for potential revenue growth in the future. The non-GAAP EBITDA loss for the quarter was $23.1 million, better than the anticipated loss range of $26 million to $32 million, showcasing cost management measures’ effectiveness. Moreover, the company ended the quarter with approximately $250 million in cash, affirming its robust balance sheet that assures sufficient liquidity to navigate upcoming product launches and operational expansions.

Strategic Shifts and Operational Developments

Significant strategic actions have been taken, including relocating production to Malaysia and enhancing operational efficiencies. The new Agility Line in Malaysia is operational, enabling the production of advanced batteries while reducing reliance on the previously high-cost California facility. These moves not only optimize costs but also position Enovix to better meet increasing consumer demand, particularly in smartphones and IoT devices. Furthermore, the establishment of a R&D team in Malaysia, which the company intends to double by year-end, signifies a commitment to innovation and technical leadership in battery technology.

Market Engagement and Future Revenue Growth

Enovix is experiencing increased engagement with major players in the smartphone and automotive markets, including key agreements with prominent technology companies. These collaborations are projected to lead to significant revenue potential, particularly as smartphones evolve to require larger, higher-capacity batteries driven by advanced features such as AI. For the second half of 2024, the company forecasts revenues between $3.5 million and $4.5 million. This projection is bolstered by expected substantial revenue growth as new models come to market, with the adjusted EBITDA loss anticipated to range between $23 million and $29 million. These figures not only reassure stakeholders but also align with the positive sentiment surrounding product readiness and market acceptance.

Innovative Product Developments Await

The company has validated the production of its EX-2M batteries with high energy density, reaffirming its competitive edge in high-performance battery technology. The potential to significantly outpace traditional graphite solutions with silicon-based batteries sets a compelling narrative for sustained interest from technology partners and customers. Additionally, advancements in energy density and management systems will cater to evolving market demands, ensuring that Enovix remains at the forefront of the battery manufacturing landscape. As noted by executives, the successful rollout of samples and future agreements with customers will be instrumental in driving this segment.

Look Ahead: Key Milestones and Strategic Guidance

As the company prepares for the third quarter of 2024, stakeholders are encouraged to watch for key milestones related to production calibration and customer engagements. Enovix expressed plans to ramp up operations based on customer feedback and predefined qualifications within the coming months. Notably, initial samples from the Malaysia facility are targeted for release in Q3 2024 to ensure alignment with customer specifications, which is critical for future demand fulfillment. Furthermore, the company emphasizes a flexible approach to its business models, preferring licensing arrangements to mitigate capital expenditure in emerging electric vehicle (EV) markets, where it retains active engagement.

Cautious Optimism Amid Challenges

While the outlook is positive, the company acknowledges the challenges posed by competitive dynamics and external geopolitical factors affecting supply chains. Their robust intellectual property portfolio offers reassurance against potential competitive pressures. Moreover, increased interest in North American-made batteries amidst rising geopolitical tensions presents an opportunity for Enovix to solidify its market position. The company's commitment to maintaining high operational standards and its strategic focus on large verticals will dictate its long-term success in capitalizing on these emerging market dynamics.

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by and welcome to the Enovix Corporation Second Quarter 2024 Earnings Conference Call. [Operator Instructions] 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.

[Charles Anderson, executive]

Thank you. Hello, everyone, and welcome to Enovix Corporation 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.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 conference call all contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are based on current expectations and may differ materially from actual future events or results due to a variety of factors. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All of our statements are made as of today, July 31, 2024, based on information currently available to us. We can give no assurance that these statements will prove to be correct, and we do not intend and undertake no duty to update 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'll now turn the call over to Raj to begin. Raj?

[Raj Talluri, executive]

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; and 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. 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 make sure all the equipment we're installing meets our rigorous specifications. We now have an Agility Line that has cleared the SAT, the site acceptance test, and is producing first 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 show off this progress at our Malaysia grand opening next week. And many customers, including some big name customers with lots of 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've 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 work closely with the top 5 OEMs we identified in our last call to clear the first 2 key milestones in the development agreement that we signed. As noted in the last call, we broadly engaged with the leaders in this market and continue to discuss more formal agreements and arrangements like this, similar to the one we announced in May.

As we all saw over the course of the last quarter, leading OEMs are now starting to announce AI features, which will become native and standard in the next-generation smartphones. Clearly, we were early in pointing out this trend last year as we engaged with the customers and saw where these product roadmaps were heading. As I sit here and observe what's happening, it's my belief that the 4,000, 5,000 milliampere-hour battery in the smartphones in our pockets today will soon go to more than 6,000 milliampere-hour and beyond due to AI and other enhanced features.

Now, this is really good news for the battery industry broadly and especially for us at Enovix. That's because we offer the customers in our target markets what we believe is the only path forward to fully replace graphite with silicon to boost the energy density in order to keep up with this rapidly increasing power needs, without unduly increasing the size of the battery.

Now, notably, we've already made early prototypes of our EX-2M batteries here in Fremont, and we were able to validate the high energy density through the next-generation chemistries that we've been working on. We are super-excited by this result. We also see incremental growth opportunities for the conventional battery business we acquired last year in Korea, the company called Routejade. Specifically, these batteries have very high-rate capabilities. Now, these high-rate capabilities have proven very useful for the Korean Military and also a number of industrial IoT applications. We see this also being applicable to other allied military forces, including the U.S. And this high-rate capability is also desired 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 our road map. For example, our core R&D head count at the end of second quarter was nearly double the level a year ago. And that's excluding the R&D team we added through the Routejade acquisition. Now, if we include the Korea R&D team also, our R&D head count 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 now intend to double by the end of the year.

Now, we've done all this while in parallel taking actions to significantly reduce our fixed costs by exiting the expensive California manufacturing. We also topped up our strong balance sheet via the ATM. This gives us a strong runway and plenty of time to prove out 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. Farhan?

[Farhan Ahmad, executive]

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, above our guidance of loss of $26 million to $32 million. And non-GAAP EPS came in at a loss of $0.14, also above our guidance of loss of $0.22 to $0.28. We ended the quarter with roughly $250 million of cash and equivalents. And our balance sheet is very strong and, as Raj mentioned, 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 million to $4.5 million and 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 to provide the closing comments.

[Raj Talluri, executive]

Yes, thank you, Farhan. As you can see, it's been a great quarter. We made substantial progress in many things, particularly Fab2 went operational. We took very decisive actions to extend our runway.

Now, we are deeply engaged with leaders in the smartphone market, and as the industry hits the inflection point towards larger power requirements due to the AI features, this will really help us get our batteries to production in the smartphone space.

In IoT and auto, we struck 2 important agreements with market leaders. We also were able to prove out that we can make the EX-2M batteries with high energy density here in Fremont. These are early samples. We're excited by the results with the next-generation chemistries.

With that, we can now go to questions. Operator?

[Operator]

[Operator Instructions] Before we go to live questions, we're going to read the 2 most highly voted questions submitted by shareholders ahead of this call during the call 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?

[Raj Talluri, executive]

Firstly, 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 tremendous amount of trade secrets of how to actually make these, and we've been perfecting these for some time now. So I feel good about our intellectual property and our strong technology leadership. But this is a competitive space, and we have to keep innovating and keep moving forward to make sure that we have a lead in technology ahead of all our competitors, not just from China.

As for the second comment on the tariffs, it's very difficult for me to comment on the geopolitical landscape and how that's going to go. But I can tell you this, we are seeing a lot of interest from many customers now for a battery that's made by a North American battery company. And as you know, we are one of the few ones that can actually make high energy density consumer electronics batteries, and we are seeing a lot of interest for that nowadays. So we are very excited by the position we have there.

[Operator]

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 milliampere-hours? What is the strategy with Elentec partnership? Is this only for battery pack, or are we looking beyond that?

[Raj Talluri, executive]

Yes. On the first question on the road map, 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 make the energy density increases that we talked about. But as I mentioned before, most customers, based on the market segment we are in, whether it's smartphones or IoTs or XR devices, optimize the batteries for not just energy density, but energy density, the ability to charge fast, the ability to go for number of cycles, the size of the battery, the shape of the battery, and so on. So it's hard to compare battery just on one metric like ED, but we are very confident with what we've been able to do so far. And with the next-generation electrochemistries and next-generation material coming, we have a strong road map of continuing to increase beyond EX-2M into next-generation batteries.

As for the comment on Elentec, I mentioned, I think, when we first made the Routejade acquisition that it was important for us to have the ability not only to own our own coating, but also the ability to make packs. Because in many markets, customers actually want not just cells, but batteries with the battery management system and so on in a pack. We have some capability to make packs because of Routejade acquisition. But the market is big, and we need a lot of partners that have the capability to make packs to address various markets. And the Elentec one is one step in the direction of actually building out our channel so we can address multiple markets, not just in smartphones, but IoT and industrial IoT and XR and other markets.

[Operator]

[Operator Instructions] Our first question comes from Ananda Baruah of Loop Capital Markets.

[Ananda Baruah, analyst]

Hey, guys, can you hear me?

[Raj Talluri, executive]

Yes.

[Ananda Baruah, analyst]

Okay, awesome. Yes, quick question, and then I have just a quick clarification as well. And congrats on the announced progress here. The question is, it seems like based on the announcements, seemingly in the last 90 days, that you guys are widening your aperture of engagement, or at least your aperture of progress. There's, Raj, a couple of IoT announcements. You had in the shareholder letter a reference to power tools. You're moving forward with the phone OEM engagements, and then now you've announced the second auto MOU this quarter. So I guess, could you give us some context around what seems to be broadening engagement across verticals? And then also just with regards to Farhan's comments, is it appropriate to view there being some revenue bridge potential as a result of this between now and whenever you might start shipping to the smartphone OEMs? And I have just a quick clarification after that.

[Raj Talluri, executive]

Yes, sure. So I've mentioned before, I think in the last call, one of the toughest batteries to make in the consumer electronic space is actually the battery for the smartphones, because it is the largest market, the demands are very high, it's got a big display, power-hungry application processors, memories, the AI requirements are coming in strong. There's things like long cycle life, there's things like fast charge, there's things like energy density, and there's space constraint. So that is the toughest space. And as we embark upon making batteries for that, and as you can see from our comments, we're making steady progress there with the OEMs. That battery technology can now be parlayed into many other markets; for example, the XR market; for example, the other consumer electronic markets as we announced here. The reason is when you can meet those requirements, the rest of the markets have actually requirements that are a little bit less stringent.

Now, I saw this in my past life when I was at Qualcomm, we made apps processors that went into smartphones, but then that business quickly we were able to ramp it into the IoT markets and auto markets and so on, because the toughest one was the smartphone one. So in that sense, what you're seeing with the announcements we're making more recently is really the entitlement that the company deserves when we attack and try to make a battery for a smartphone market. So we are super excited by that, the branching out of it. Again, my goal and the company's goal is to go after large, high-volume verticals in these markets, but not go after many, many small ones, because that fractures the R&D and there's not as much return for a manufacturing company.

On the auto side, that was actually super exciting development. I know last time we announced one auto OEM. The fact that we now have another auto OEM also validating the fact that we have this ability to stop the batteries from swelling too much and the ability to charge very quickly is of interest is very exciting. We are now working jointly with them to figure out how to get that technology to the next level. So both of those are very positive, and I feel entitlements to the technology that we have here.

[Farhan Ahmad, executive]

And then, Ananda, on your second question related to the revenue bridge, it will depend on the pace of ramp and pace of qualifications. But the IoT growth can be another vector for the revenue opportunity for the company. And it just grows our opportunity and how fast we're going to be able to ramp the revenue.

[Ananda Baruah, analyst]

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

[Raj Talluri, executive]

Yes. We can't exactly comment on when the customers will be there, but there are a number of customers coming to visit us next week. And we can't obviously say who is what. But many customers want to come at the event, and some customers want to come a little bit ahead, some customers want to come a little bit later. And I do expect that as we build these factories, we will have many customers that will plan their visits. And we are super excited by the list of customers that want to visit us next week.

[Operator]

Our next question comes from Colin Rusch of Oppenheimer.

[Colin Rusch, analyst]

Can you speak to any potential collaborations with semiconductor chip companies that you're potentially working on to optimize device level performance?

[Raj Talluri, executive]

Yes, absolutely. As you know, when you put batteries in this markets, just maybe for the rest of the audience, the performance of the battery is -- and the way the battery performs inside, for example, a smartphone is quite a bit in close collaboration with the processor and the power management system. Because, for example, in a phone, when a 5G modem kicks on, it's going to draw power much harder. When it's on standby, it draws power less. So there's many, many aspects of making sure that the battery actually fits well, either in a smartphone or an IoT device, based on what processor and what power management system is in there. As you know, I've spent a lot of time at Qualcomm and TI and other chip companies, so I'm quite familiar with that.

One thing that is happening is that silicon batteries operate at a lower voltage, like, for example, 2.7 volts, because there's quite a bit of energy density you can get from the battery at a lower voltage. And a testament to the fact that the world is moving towards silicon batteries is the fact that now you see chip companies, Qualcomms, MediaTeks, other companies, Samsungs, and so on, making adjustments to the apps processor plus power management system to actually connect to batteries at 2.7 volts and so on. We are working with all of them thanks to our engagement with our customers and thanks to the deep connections we have in that ecosystem. So we are super excited by that, and I think it's a really good thing because our comprehension of how the battery should be built and how the battery should operate and how the battery should actually be optimized for an end device is getting stronger and stronger, and that really helps us in making the right kind of next-gen batteries.

[Colin Rusch, analyst]

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 in the first part of 2025?

[Raj Talluri, executive]

Ajay is actually online from Malaysia. He's there at Fab2, so I'll let Ajay talk about this.

[Ajay Marathe, executive]

Yes, the yields, as Raj alluded in his starting comments, we took time a little bit to buy off the equipment in SAT, which is Agility equipment, just because we wanted to make sure that there's no corners cut and those types of things. So yields, we will begin definitely where we left off in Fab1, and then they will climb from there to the world-class yields that we expect on both the lines.

[Colin Rusch, analyst]

And then in terms of the ramp and scrap expense for the balance of this year, how should we be thinking about that from a modeling perspective?

[Raj Talluri, executive]

Yes, let me take a shot at it, and then, Ajay, you can add color to it. So if you talk about ramp, as I mentioned we are first focused very heavily on building cells out of our Agility Line, because that's the one that we need to sample to our customers. The HVM line is coming right behind it, and we will work to make sure that the HVM line is ready and fully capable by the end of the year, because the high-volume ramp, as I mentioned before, will happen in next year. So we just need to make sure that we are ready. But our lot of energy is now on getting the Agility Line to the right level, so we can actually make the samples of EX-1M, get it ready for EX-2M, and so on. And maybe there is a comment on scrap, is there?

[Farhan Ahmad, executive]

Yes, the comment was on the -- I guess, like he wanted to know the modeling and how they should be modeling the cost. Yes, should I take it?

[Raj Talluri, executive]

Sure.

[Farhan Ahmad, executive]

Yes, so look, there will be a lot of moving pieces on how you are thinking about the modeling. Our cost reductions that we have taken are going to be the predominant factor in terms of the overall cash burn and how that's going to be tracking in terms of the cash flow from operations. So Q3 should be better than Q2, and then Q4 should be better than Q3 overall. And that includes the expenses that are related to the scrap and the ramp of yield. Now, through the year, our COGS will go up and the OpEx may come down, but in aggregate, the overall cost comments that I have will start.

[Operator]

Our next question comes from Bill Peterson of JPMorgan.

[William Peterson, analyst]

Just on the smartphone market, and you've given a lot of color in the last few calls, but assuming that you're looking to maybe ramp in the back half of next year and more meaningfully into 2026, trying to get a sense of the milestones between now and let's say a year from now, which presumably when at least some of the customers will qualify. So first of all, can you remind us of the sampling cadence? I guess when will you be sampling EX-1 across all the smartphone makers this year, or the EX-2M later this year, and then more volume later this year into next year? You also mentioned earlier in the call that you may ink more formal agreements. How should we think about that? Basically, what we're trying to get to is, what should we be on the lookout for from a milestone perspective over the next year?

[Raj Talluri, executive]

Yes, sure. Absolutely. So let me just recap one more time. We made some samples before we shut down the Fremont factory, just to prove out that we can get the EX-1M into the right form factor. We talked about that last time. We sent those to some customers. But really, the sampling, what most customers want is actually samples from our Malaysia factory, which is where the production will be. And our target, as I mentioned last time, is to get those samples out in 3Q. And then once we get those out to the customers, after doing some amount of testing on our side, we'll get to them. And they will test them also and validate and make the right tradeoffs between energy density, cycle life, ability to fast charge, and so on. And then they will give us, during this period that we're working with them, the actual dimensions of the battery, what shape it should be, how many milliampere-hours, and so on. Because the phone models next year will have different shaped batteries than the phone models this year. And we will get that feedback in the later part of the year. And then we will need to adjust our tooling to actually make those batteries and get those to them next year. And they typically then put those in their phone models. And when they're making a phone that they're going to launch next year, and they're going to test one more time to make sure the batteries do what they're supposed to do in the phone, because initial testing this year will be in isolation, not in the phone.

And if everything goes well, and things look good, and the qualifications happen on time, they will place purchase orders, and we'll need to ramp up the manufacturing. As I mentioned, we are working with multiple customers, and many of them will get samples. And we just continue to work through one at a time. Meanwhile, as I mentioned, we are working on agreements that will actually talk about formalizing this process that I just mentioned. And we announced one of them last time, and we're working on others to do something similar.

And as for EX-2M, our first focus is on getting EX-1M. EX-2M, we made early samples, as I mentioned, in Fremont. The next step is to perfect that and make those again in Malaysia and get that ready to production for '26.

[William Peterson, analyst]

And on this newly announced IoT agreement with the Fortune 200, I guess, does this company make other form factors like smartphones? Is this something synergistic with what you're doing? Or is this for just small batteries, or maybe large batteries? I'm trying to get a sense for the financial ramifications of this, the go-to-market timing, the economics, milestone payments, just how to think about this agreement and how it should impact your financials.

[Raj Talluri, executive]

Yes, great question. As you can imagine, Bill, as an early-stage company that is working with big companies, we are a little limited in what the companies allow us to say and allow us not to say because they do have incumbent suppliers and so on. But I can tell you this much, though, there's tremendous amount of interest in what we're able to build. They're not able to get that kind of battery that we are talking about from their current base. That's why they're working with us.

I would say this. I think the press really said it. It's a product that's got a large installed base already of products in the market, so we'll be replacing the batteries in some of them. So in that sense, it's not a new category of product. It's a product that's out there. So that's one aspect of it is that it's an established market. The second one is many of our engagements nowadays, we talk about milestone-based payments because we will need to make custom-sized batteries for these things, and we'll need to put a bunch of our R&D resources on that, and there's opportunity cost of all of that. And the exciting thing is the customers are willing to pay for that based on milestones, and that shows the value of the technology we bring and the differentiation we can offer to our customers. So I think that part is exciting. And absolutely, I understand where you're coming from, and we'll try to provide as much color and detail as we can as our customers allow us to do.

[Farhan Ahmad, executive]

And the only other thing I would add, and it was in the press release, that the customers, in this case, do care about energy density, and they are willing to pay a premium for the energy density as well over what's available more broadly in the market.

[Operator]

Our next question comes from Jed Dorsheimer, William Blair.

[Jonathan Dorsheimer, analyst]

Congrats on the fab. Looking forward to seeing things. I guess my first question is just around the commentary. I think Ajay mentioned that yields would be similar to Fremont, and I'm wondering, is that specific to Agility, or is that because my understanding was that the high volume was going to be more in the 95% type range, or is the 60% Fremont that the starting point, and you're going to ramp towards. And then I have a follow-up.

[Raj Talluri, executive]

Yes. I'll say a little bit about yields, and then I'll let Ajay add color. Look, essentially, this business makes sense when we get to very high 90-plus, 95-plus percentage yields when we're in high volume manufacturing, and that has always been our goal, and Ajay mentioned it before. That's where we will be, and we aspire to be, and we need to be when we get to high volume. The question is really about where we start and where we end up. Our goal has always been to looking at what we were able to do and where we ended in Fremont. We can start from there because we've learned what needs to be done, and then steadily increase them as we get to high volume. But Ajay, go ahead if there's more color you want to add.

[Ajay Marathe, executive]

Yes, sure, Raj. Yes, so first of all, differentiating between Agility and HVM is not necessarily the right thing to do or right thing to look at because both Agility and HVM kernels are identical. So when we do the learnings on Agility, we begin where Fremont left off, as I said, and we quickly ramp it to the mid-to-high 90s, as we have always said. That will be immediately applicable to the HVM lines. HVM line is just slightly behind Agility, as Raj mentioned. We have finished the FAT already for the HVM line. The equipment is already installed for the most part. There's some laggards coming in literally in the next couple of weeks, and we'll begin similar ramp as we are now doing on Agility. So the focus is on Agility now, get the yields up to where we need and where we desire, and then carry the learnings immediately on the HVM line behind it.

[Jonathan Dorsheimer, analyst]

And then, Farhan, just as my follow-up, it seems like you've got a few different moving parts here, and so as you ramp IoT on Agility, as you recognize those revenues, the costs are going to come. How are you thinking about the underutilization and allocating the costs as the high-volume line ramps around samples? Does that trigger that recognition, or would samples -- does that get put off until you're selling to the customers? Just the mechanics of that might be useful.

[Farhan Ahmad, executive]

So, the devil's in the detail, Jed, and it will depend on the contracts that we have and accounting policies are. There's a lot of technical accounting on it. And so, I would say that, look, ultimately, it's a noncash charge. It doesn't really matter on how you're thinking about the cash. The depreciation will start hitting once the tool is recognized as being in production, and there are different ways in which you can depreciate it, and that part still we have to finalize it in terms of how exactly we're going to be depreciating it. So I'll leave that question somewhat unanswered for you, Jed, right now, but it is a noncash item.

[Operator]

Our next question is from Gabe Daoud of Cowen.

[Gabriel Daoud, analyst]

Hey, guys. Sorry about that. I was on mute. I was hoping we can maybe go back to Bill's question just around cadence. So if you ship cells from Fremont in May and call it 9- to 12-month qualification period, puts you at next May, maybe next June. Is that maybe when we could expect a first PO from a potential customer, maybe for the second half of next year? Is that still the case?

[Raj Talluri, executive]

Yes. Again, it all depends upon when the customer finishes their qualification. And I explained the process of how the qualification goes in terms of when we give the first samples, when they give the exact size of it, when we get it from Malaysia. So typically, customer place orders when they feel the product is qualified in their phone, and they're ready for us to make high-volume products. So I would leave it as later half of next year is what we said before, and we'll continue to say the same thing, because once they get samples from Malaysia, they start testing them, that's when we'll know more.

[Gabriel Daoud, analyst]

Okay. And is it fair then to assume that you're still thinking about multiple lines in '26?

[Raj Talluri, executive]

Yes. When we put more lines will depend upon, again, how many customers are ramping, how fast, whether we are in a very high-volume product or whether we are in a lower-volume product first and then the next product. So that depends upon the timing of the volumes. What we are doing is we do have a facility that can hold up to 4 lines, and Ajay and his team have facilitized that, and we are looking at all the long-lead items and which ones we should get out more, get ahead of them. But clearly, that is our goal that we'll have multiple lines in '26.

[Gabriel Daoud, analyst]

And then just a follow-up. If we look at top-spec Chinese mobile phones with maybe 800 or so watt-hours per liter, could you maybe quantify then what EX-1M is relative to that figure and what EX-2M is relative to that figure? You noted some of the prototypes of EX-2M have encouragingly hit your energy density targets. So just curious if you could share those. Again, I recognize battery is all about tradeoffs, but just curious at least what the initial energy density number is.

[Raj Talluri, executive]

Yes. I think it's really not a fair representation. I've maintained this over the last many, many quarters. People like to describe batteries by one number, and it's really hard. It's like describing an apps processor by megahertz or gigahertz. These are not that kind of products. It depends upon cycle life, it depends upon fast charge. If you actually take the batteries in all the smartphones out there and start looking at them, you will get a varied set of numbers. What's most important is the battery be competitive in energy density while satisfying all the other requirements to be in the phone.

Customers are working with us because they see the energy density we provide, and they see the road map that we have. And ultimately, the tradeoffs they'll make and exactly where the ED will be, you will be able to once we are in production, once the phones are out, you'll be able to take out and measure them to see what exactly the tradeoffs the customers have made because we don't control all of that. The customers will decide to use them differently based on what phone they put in and which markets they're selling in and what features they tend to highlight.

[Operator]

Our next question is from Derek Soderberg of Cantor.

[Derek Soderberg, analyst]

And I'm also looking forward to seeing the facility next week. Raj, you mentioned a smartphone OEM that's cleared 2 key milestones. How should we think about those milestones in terms of that 9 to 12-month qualification schedule? Does it speed up that schedule at all? Just wondering if you can frame how we should interpret that commentary with milestones achieved as it relates to commercialization. And then I've got a follow-up.

[Raj Talluri, executive]

Yes. You should interpret it as things are on track, is like how we expected that we would do it. The contract specified we need to do this by this time, we need to do this by this time, we need to do this by this time. As I mentioned, the process is we give samples, they test them, they do the safety testing, then they test the ED and so on, then they give us the exact shape of the battery, then we make them. And there's a whole bunch of stuff that's laid out in these contracts. And we're on track to do those. And I hope everything goes smoothly, and we'll get them to production as quickly as we can.

[Derek Soderberg, analyst]

Got it. And then as my follow-up. In the shareholder letter, there was some wording around trends in diversity of suppliers in the industry. Raj, can you elaborate on that bit? I'm curious, first, which end markets that applies to. Is it more smartphones? Is it broad-based? And just generally, how does this diversification trend fit into the scale strategy?

[Raj Talluri, executive]

Yes. The comment is based on the fact, I think there was a question at the beginning of the call, we are seeing a lot of, I would say, customers preferring to go with North American battery manufacturers with all the geopolitical uncertainties and the tariffs and so on. And they're looking for different suppliers. And we are one of the few, if not the only, who can make batteries into consumer electronic devices in this market. So, I think, we're getting good, I would say, tailwinds in that front. And that's what that comment is meant to highlight.

[Operator]

Our next question comes from George Gianarikas of Canaccord.

[George Gianarikas, analyst]

Maybe just to focus on the margin potential. As you continue to round out customers looking into '25 and '26, how do the recent discussions that you've had, particularly with the announcement you made today, how do they inform your cash gross margin and overall margin targets over the next couple of years?

[Farhan Ahmad, executive]

Yes. The IoT customers that we have disclosed in our earlier arrangements, they have price points which, when the technology is at scale, will give us good margins when we are in scale with multiple lines. So the price point itself, there is a sufficient premium. And it can support very healthy level of margins. And actually, it validates our assumptions that we had in our long-term model.

[George Gianarikas, analyst]

And maybe as a follow-up, I'm curious about the discussions that you've had with EV OEMs and as you continue to work through those, maybe 2 parts. First, to the extent you have visibility on this stuff, given that it's very early stage, what model years would we expect any batteries to show up in EVs? And second, as you continue to contemplate which business model you'll deploy to enable EV batteries, where are you leaning towards in your thinking?

[Raj Talluri, executive]

Yes. I'll take a stab at it and Farhan can add some more on the model. I think, EVs take much longer to go to production, as you guys know. I think what is exciting about this announcement is that we had always talked about the fact that our battery has a couple of key advantages in EV market: one is the ability to charge fast without heating up; and the second one is any kind of material that's trying to put high energy density is still swelling, and we can control that. And those 2 we've presented to the auto OEMs, and they like it. And they have signed agreements with us to jointly develop this technology to the point where it can be deployed in their cars. That's where that is. It will take a couple more years for us to get to that stage.

In terms of production, if you ask me today, I'd say, we'd pursue a less capital-intensive licensing model because we are busy building factories for the consumer stuff. But I don't know, Farhan, if you want to add anything more to it.

[Farhan Ahmad, executive]

No, I think, yes, like that covers it, Raj. I think, overall, when I think about the EV market, the value proposition that we are bringing there is, hey, we have IP that has got value to this market. We don't want to commit a lot of capital. We are very limited in how much R&D we are spending. So the idea there is that we will have a limited amount of investment. We'll take our IP, and then we'll have our customers pay for a lot of the development expenses. And then as this technology ramps, we will try to keep it such that we also don't have to invest a lot of money in this market because we have other areas that we are investing, like consumer electronics.

So, we will, of course, remain flexible. And if other business models make sense, we'll look at them. But right now the focus would be to use some sort of licensing royalty model and let our customers make the investment. But as I said, like the exact model, we will remain flexible. But as I sit here today, most likely it seems like licensing royalty is like the way that we want to go.

[Raj Talluri, executive]

Yes. Just one other thing I'll add is the fact that we have now 2 EV OEMs doing it clearly validates the value proposition that we are talking about. And that's really exciting. And, of course, we're continuing to figure out other people who'll want to do that, too.

[Operator]

Our next question comes from Bill Peterson of JPMorgan.

[William Peterson, analyst]

In the press release, you guided to a meaningful revenue growth in the second half relative to the first half. Can you speak to the various drivers between your conventional business acquired from Routejade versus early IoT revenue and maybe any revenue from sampling the customers? And then how should we assume the corresponding margin profile looks with this ramp again, presuming this is mix dependent?

[Farhan Ahmad, executive]

Yes. So in terms of the revenue ramp, from Q3 to Q4, there's going to be a significant ramp. And it'll be driven by both Routejade and our batteries coming out of Malaysia and whatever we are getting from sampling some of those batteries and some service-related item that are related to the milestones that we have. The growth, though, I would say more driven by Routejade than the new stuff, but both will be contributors.

In terms of the margins, there are a lot of moving pieces. It comes back to, hey, how the depreciation stuff hits in the Q4. But on the gross margin front, probably Q3, Q4, you will have a lower gross margin because you have some of the increased depreciation related costs probably hitting. But I won't be able to give you a lot of specifics around it because of the technical accounting related questions, some of which are still open.

[Operator]

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

[Raj Talluri, executive]

Yes. Thank you all for listening into the call. Been a really nice quarter and looking forward to talking to you guys next quarter. Thank you.