Enovix Corp

NASDAQ:ENVX

Earnings Call Analysis

Enovix Achieves Strategic Objectives, Eyes 50% Growth

Enovix, during the recent quarter, has made significant progress by reorganizing its Fremont production facility, Fab1, for innovation and R&D. This shift led to substantial cost savings of $22 million annually. The acquisition of Routejade bolstered vertical integration in manufacturing and opened routes to new customers. Enovix's FDA-approved battery-powered health device is set to hit major retailers next year. With military contracts also boosting revenue this quarter, the company is on a growth trajectory with an expected acceleration to approximately 50% going into the next fiscal year.

Advancing to High-Volume Manufacturing

A significant milestone for the company this quarter is its progress towards high-volume production, with the commencement of factory acceptance testing for its Gen2 equipment. The successful testing keeps the company on track for production launch in April of the following year, using the equipment that's expected to land in Malaysia in November. This development is crucial in achieving their goal of accelerating battery production, which will play a pivotal role in capturing market demand and bolstering future revenue streams.

Operational Efficiencies and Cost Reduction

The company has made strategic operational improvements in Fremont's Fab1 facility, transitioning away from expensive round-the-clock manufacturing toward a more R&D and customer qualification-focused center, leading to a significant annual cost saving of $22 million. This highlights the management's commitment to creating a leaner, more innovative, and cost-effective operation that aligns with the company's broader strategy for sustainable growth.

Strategic Acquisition Enhancing Vertical Integration

This quarter saw the completion of the acquisition of Routejade, enabling vertical integration from electrode coating to battery pack manufacturing. This move is set to reduce capital expenditure, increase margins, and boost manufacturing capabilities, ultimately speeding up time-to-market for new products. Additionally, the acquisition opens up cross-selling opportunities and contributed to revenue growth this quarter with an FDA-approved portable multivital sign monitor set to be sold at major retailers and breakthrough-enabled batteries shipped under an Army contract.

Customer-Centric Approach and Market Positioning

The CEO emphasized a customer-first management philosophy that involves understanding customers' unique product requirements, which has led to deeper relationships with key decision-makers. The company’s battery architecture has received positive feedback from leading smartphone OEMs for its path towards high-energy density batteries, which strengthens its competitive position. This, combined with strong interest from the EV OEMs, presents an opportunity to deliver multiple billions of dollars of revenue with strong margins.

Market Demand for Energy Density in Smartphones

The company's focus on the smartphone market is based on the critical need for high-energy density batteries, with battery capacities in smartphones having increased substantially. However, instead of increasing energy density, manufacturers have been making batteries larger, registering only a 4% growth in energy density, while capacity grew at 11%. Enovix aims to capitalize on this demand by offering a solution that can further drive the growth curve in a stagnating battery capacity market.

Financial Highlights and Guidance

The company reported record product revenue for the quarter, centered on an Army contract, and maintained a strong cash position, ending the quarter with $370 million in cash and equivalents. The operational cash use for the year is projected at $210 million. Looking forward, revenue for the fourth quarter of 2023 is forecasted to be between $3 million to $4 million, influenced by Routejade's partial quarter revenues and the continuation of the Army contract.

Earnings Call Transcript 2023-Q3

[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, executive]

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, executive]

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 [ parallel ], 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, executive]

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, executive]

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?

[Raj Talluri, executive]

Yes. The question of meaningful revenue. I think as we mentioned, with the Routejade's acquisition, our revenue is already getting to grow nicely. We guided $3 million to $4 million in the fourth quarter, and we expect that to continue to grow next year. And as we start producing millions of batteries from our own Malaysia factory in '24, '25 is when you'll see the ramp and '26, it will continue to grow faster.

[Operator]

The second question is with Fab1 closing, how will Enovix satisfy the contracts with the Army and the medical device maker?

[Raj Talluri, executive]

Yes, the question on Fab1. So as I mentioned, we've made quite a few batteries. We've doubled our production every quarter for the last few quarters. And we now have enough inventory of batteries to support the production needs of the current customer base. And we are still continuing to make batteries here for the Army contract. So we do have a line on which we can make those batteries, and we will continue to do that through next quarter. And that also gives us a very good way to make larger batteries because our previous line was mostly making small batteries, the army batteries are larger batteries that have also the breakthrough enabled in them. And we feel pretty confident that we can meet the requirements. And then when we transition to Malaysia, we'll make what's needed from there.

[Operator]

We will now go to the queue. Questions will be answered in the order that they are received. Please ask one question and one follow-up question at most. We will now pause a moment to assemble the queue. Our first question will be from Colin Rusch of Oppenheimer.

[Colin Rusch, analyst]

Congrats on the progress. As we've seen folks like CATL introduced 4C batteries with 1,000 [ cycle life and ] performance into the market. Can you talk a little bit about the competitive environment, and how important the breakthrough technology is and other attributes, obviously, the volume is import one from a competitive perspective. But what you're seeing from your customers in terms of what they want and what's continuing to keep them engaged with you guys?

[Raj Talluri, executive]

Thanks for the question. I think the main reason that our customers are super excited to work with us is the increased capacity and energy density we provide. If you look at the batteries in the market today, even if you take all the batteries out there that actually producing the 1,000 cycles that are fast charging, our energy density that we can provide is still much, much higher than anything on the market. Now, our current product doesn't hit the 1,000 cycles that they need and it doesn't hit the fast charge. As we add those two features to our products while maintaining energy density, that's where we see a clear differentiation from our products, from our customer products. That is the hardest thing to get is the amount of energy density, and we feel like we can accomplish all three of those. And of course, safety is very important, and we'll continue to work on the safety aspect also.

[Colin Rusch, analyst]

Okay. And then just with the factory exception testing, any surprises, either positive or negative in terms of what you're seeing in that first zone of testing?

[Ajay Marathe, executive]

No particular surprises. We are doing quite well. Actually, we have begun all the FAT work, as we said in the letter, and the video showed all the work going on. No particular surprises. There were a couple of changes, which is what is typically expected during this rigorous acceptance test that had to be made, which were already done on the Zone 2 equipment, which I ended up showing in the video. So no particular surprises. Things are on track.

[Operator]

Our next question will be from Derek Soderberg of Cantor.

[Derek Soderberg, analyst]

Ajay, I want to start with you. In the shareholder letter, it says you guys see a clear path to industry-leading yields as you move to high-volume manufacturing in Malaysia. Curious if we should be thinking about a specific number for yield with that commentary, be it 90%, 95% or what have you? And then just given what you're seeing in factory acceptance testing, what's the path look like for Gen 2 as it relates to overall equipment effectiveness?

[Ajay Marathe, executive]

Right. So good questions, and I'll answer them in two parts. So the first part is our yield learning that we did here in Fab 1. Eight more days and I'll be here for a year, and the yields have significantly climbed or did climb in Fab 1 and all the learnings of where the yield losses are happening and that type of thing was done very nicely. We are now Gen2, we will start where Gen1 ended. We chose to stop the Gen1 line, as Raj mentioned already. And Gen2 begins there and the ramp begins from there. FAT has very rigorous requirements of CPK, which means process capabilities and achieving the enough distance away from the spec so that the yields are very predictable and manageable. And yes, you can imagine in the high 90s is what we are targeting for the yield for the line to be. But it will take a little bit of time to climb, but the good news is that we are starting where Gen1 ended and climbing from there.

[Derek Soderberg, analyst]

And then as my follow-up, Raj. You've sort of said the plan is to optimize the deployment of Gen2 lines to sort of match the time lines with demand. You clearly have a sizable revenue funnel. It seems like Gen2 is on track. Have you determined exactly how many lines you feel is optimal to have during '24? And if not, what sort of are you waiting for? I know there's a lot of variables that kind of go into that decision. Just would love to be your thoughts.

[Raj Talluri, executive]

Yes. I mean, look, the demand is very strong. I mean I mentioned in the previous comments I've made that we are working with multiple smartphone OEMs. We're working with multiple laptop customers and variable customers, and each of them need a cell of slightly different form factor and shape, and our line is capable of producing them. What the variables we're looking at now are to get the first line up and watch how it goes. And at the same time, we're also giving samples to all these customers, and they're in various stages of validating them and putting into the phones and see how it works. And as we learn from them, what that ramp up their phone models and not the ramp of the laptops will be, we will be putting new lines in keeping in mind the lead time that it takes to do that. I can't comment exactly when I'm going to do that, but we are looking now at exactly that kind of situation. And for example, we may not have to order the whole line at once. We may order more lasers, for example, to get that bottleneck out. We may order more back-end capacity to make sure that goes out. So I don't want you guys to think of lines as holistic things we need to order like one at a time. So that's the kind of optimizations we are making. But we'll be ready for ramp in '25 with our customers.

[Ajay Marathe, executive]

And just to add to what Raj just said, the building the Fab 2, as we have been sharing with you, which is nearly ready now, ready to accept the Gen2 equipment, that building in itself right now, it's ready for four lines. right? So we have built infrastructure, power, a lot of details around how that facility has come up. It is ready for four lines, and the campus itself is expandable all the way to eight lines. That is consistent with what we have shown and shared with you all right now. That goes hand-in-hand with what Raj has said in terms of qualification cycles and adding the equipment.

[Operator]

Our next question comes from Bill Peterson of JPMorgan.

[William Peterson, analyst]

Kind of want to follow up on one of the prior questions about adding additional lines. Lines two through four, I guess, or even just adding to the first line. I guess the question is, are you going to be waiting for line 1 to be successful before you actually place orders? Or I mean, I assume there's pretty long lead times. So why would you actually have to place orders for the subsequent lines, let's say, two through four in order for them to be installed next year?

[Raj Talluri, executive]

Yes. So like I said, I think it's not a simple answer of this is a whole line lead time. There are pieces of the line that have shorter lead time, they are pieces that have a longer lead time. So we are looking at those and figuring and making sure that we have the long lead time ones covered. The short lead time comes, we can wait. Now we're also improving these lines. As we start making one, Ajay and his team have figured out how to even improve the performance of the lines the more, reduce the cost of the lines more. So we want to take all that into account and order them carefully, so that we don't spend too much money too soon, but at the same time, meet all the demand of the customers that are coming in '25.

[William Peterson, analyst]

And actually a follow-up on that. So is $50 million sort of the right way to think about a full line? Or is there opportunities to go lower from there? That's a follow-up to that last question, but I actually have a separate question related to EVs. You've been kind of talking about EVs for a while, at least in the context of fast charging and some of the other attributes. I believe at least in the past, the team has at least had an idea to maybe have at least one JDA by the end of this year. Now remind me if it was the prior management team. Just trying to get a sense for what is the optimal way you can work with OEMs? How many OEMs are you in discussions with? And when would you really want to, I guess, take this to another level with a partner?

[Raj Talluri, executive]

Yes. I'll take the new question and then I'll have Ajay talk about the line question. Look, I mean, our challenge honestly has been, the demand has been so strong. My challenge has been to prioritize which one we do first and which one do later, right? We just had one factory here, and we were learning on the yields. We are trying to make small-sized cells that we can get into the customers that had already early on signed up with us. We learned about how to improve the yields for the next-generation line. Then we are in the Army contract that we've been satisfying. Then we got a lot of this demand from smartphones, which we had to make bigger cells to give them samples to work on. Then the EV opportunity is also still there, and we had to make some cells for them. So it's just been a lot of things to do at the same time. And we've been prioritizing them and getting to them as quickly as we can. Honestly, now that we -- I think we've said in our press release now that we are not making high-volume manufacturing in Fremont, and now we are able to get our Manesar facility up quickly. We should be able to now start working on those EV type cells because they need clean room, they need a lot of different materials and so on. And that's where that is. The discussions are absolutely going well with the OEMs. We have been in the bottleneck of making them. And that's just on me because I prioritize making the smartphone cells and the largest cells for the Army first because we felt that's where the revenue opportunity in the short term is, and we will absolutely get to the EV cells in the first quarter next year.

[Ajay Marathe, executive]

And just to answer your other question, which is how many batteries were lined. You should keep thinking 9 million to 10 million batteries on line 1, which is a universal line. And as Raj said, we are continuously improving or increasing the UPH, I should say, and reducing and taking cost out. So line 2 will be copy exact for most part, but then a little bit higher UPH, removing the bottlenecks and cost reducing the line. That's how we are thinking line 2 onwards.

[Raj Talluri, executive]

And we would like to get to that $50 million range that you talked about. Of course, I'm pushing the team to make it even less cost, but...

[Operator]

Our next question comes from George Gianarikas, Canaccord.

[George Gianarikas, analyst]

Just very quickly, I watched the video with Ajay. And I'm curious, looked very automated, high parallelism. So when I'm assuming that you weren't operating at the full tilt in terms of UPH. So when that happens, what's your confidence level that you can continue with that level of automation with all the metrology happening? What's the risk that those things start to break down as you speed up the process?

[Ajay Marathe, executive]

Yes, good observation. And yes, we were not operating anywhere near full tilt. I just wanted to make sure that we are capturing videos of exactly what's going on per station. So we had slowed the line down quite a bit. FAT will require it to run in what we call marathon run for a certain number of hours at the 1,350 UPH. So that's part of the buying criteria or qualification criteria for the line. We will continue doing that. And only after that, then we'll give a green light to ship that line. So that's what we were doing. And my confidence in making sure that the line runs without having to stop the MTBA meantime between assist and mean time between failures is exactly meeting the specs that we wrote, which means the OEE has to climb up to that 85%, which is equipment effectiveness, the equal equipment effectiveness. So yes, so definitely not running at full tilt in the video.

[George Gianarikas, analyst]

And maybe as a follow-up question, there have recently been discussions from China around export restrictions around graphite. I'm curious what you think that does to your long-term business and also actually to RouteJade. How confident are you that you can continue to get graphite supplied to your existing business there?

[Raj Talluri, executive]

Yes. ourselves don't use any graphite. So I mean the silicon cells that we are making. We haven't seen any effect to the RouteJade cells on the graphite section so far. So as and when we know about it, we'll comment. I just read as much as you have. I haven't seen the restrictions.

[Operator]

Our next question will be from Gabe Daoud of Cowen.

[Gabriel Daoud, analyst]

I was hoping we can maybe just start with Fab 2. Hoping, Raj, you can maybe just give us a bit more color around the smartphone launch. The cells coming off of those lines, would that be EX2? And then with the second half '24 launch, I guess the quality period would only be a few months if you're anticipating commercialization in '25 with multiple OEMs. Is that right?

[Raj Talluri, executive]

Yes. So I showed EX2 as a road map to what we can get to. We will be doing something in between the EX1 and EX2 to start where we will improve the cycle life and we'll improve the fast charge, but maybe not push the energy density all the way to it, we need to because as you saw in the slides, our EX1 energy density itself is much higher than what is shipping in the market. So we're actually pretty confident on the technology we have. So we'll probably get that to production first. That's what we are in the discussion with our OEMs on how quickly they want it, which one do they want. We have programs running on that. We have programs running on EX2. So clearly, our goal is to get cells into the hands of the smartphone OEMs next year as soon as we are able to from our Malaysia line and then get ready for production by end of the year, so that will be in phones early '25.

[Gabriel Daoud, analyst]

And then I guess just as a follow-up, noted the new vertical strategy, as you mentioned. Could you maybe just talk about if some of those customers that you're focused on now? Would that include the Canaccord strategic accounts that was mentioned by the previous team. Those are the companies agreed that $200 billion of market cap, I guess. Just trying to get a sense of the MOU with Samsung, like is that moving? Are you pushing the ball down the field there with Samsung? Is there maybe anything that you could speak to there? Just curious, again, if there's an update on specifically those six strategics that you guys have previously mentioned?

[Raj Talluri, executive]

Yes. I mean, it is very consistent. If you think of strategics as having large market cap and shipping millions of units, that is what the vertical first strategy is. We are actually focused on people who can buy millions of cells from us for each product, not aggregate. So that's very important because each product needs a custom cell of a certain shape and certain characteristics. So it's very important that every product we make ships in the millions of units, that way we get the right ROI on that. And they're all the top customers that we talked about. And by the way, these are the same customers that were in the funnel that we used, and it's just that we are focusing more strongly on those and not on all the hundreds and hundreds because the opportunities have been so much that we need to pick the ones that can ship the highest volume.

[Operator]

Our next question will be from Gus Richard, Northland Capital Markets.

[Auguste Richard, analyst]

Could you guys give us a split of Army revenue and RouteJade in the fourth quarter and sort of a little bit of color on how you see RouteJade's business in 2024?

[Farhan Ahmad, executive]

Sure. I can take that. So in terms of the fourth quarter revenue, Army should be similar to third quarter plus minus some. And then the remaining should be RouteJade. So RouteJade, we have talked about $18 million annualized run rate in the first half of the year. So think of it like $1.5 million per month. And the fourth quarter tends to be a little bit stronger than that, so just a little higher maybe. So that gets it to maybe $3 million to $4 million of guidance. So that should give you color. That should give you a fourth quarter revenue and the breakup. Talking about '24, we should expect some growth from 2023. So we talked about an $18 million annualized run rate in the first half of the year. And so from that '24, we should expect more growth. We should expect some growth in revenue from that number. As we have talked about it, this is a company with a very good cost structure. It's in a remote part of Korea. So the cost structure, what they're paying per employee is actually very good. And even at that level of revenue, the profitability is comparable to what you see with the large companies in the graphite space. And so very competitive cost structure there.

[Auguste Richard, analyst]

And then in terms of production and shipments out of Fab 1, can you give us just the numbers for what you produced in the quarter and what you shipped?

[Raj Talluri, executive]

The number we produced in the quarter [indiscernible]. I think we talked about what we produced. And I don't know exactly how much we shipped and how much we need. But we kept quite a bit in inventory because, as I mentioned, we have to make sure that we're not making any more of those in third quarter. So we need to make sure we have enough to satisfy the needs of the people that have already designed us in. So some of it is we are holding to satisfy that market. And some also we are using for our experiments quite a bit. For our EX1.5, EX2, we need a lot of cells to do that. So that's where majority of that sales went.

[Operator]

Our next question will be from Ananda Baruah, Loop Capital Markets.

[Ananda Baruah, analyst]

So on PCs rise, I think you had mentioned PC kind of is a volume revenue in '26. And so is it '25 when you start volume sampling on the PC side? And then how does AI PCs kind of play in as well, like folks like HP has talked about? I think in three years, they expect 40% of their PCs to be AI-enabled. And so does that play into the demand backdrop as well for PC10 demand backdrop? And then I have a quick follow-up.

[Raj Talluri, executive]

Yes. Good question on this. So the key thing about the PC market is the time it takes to qualify the customer is actually much longer, even longer than smartphones, just in terms of the qualification process that they go through in that market. So we will be sampling them in '24 actually, and also more in '25. But by the time they get to production, volume production, meaningful billions of units of production, it will be '26. But some of the PC makers may actually go to production sooner, I'm hoping in '25 using our smartphone like cells. So that's kind of how I see that. But your point on AI PCs is actually clearly what has been tremendously exciting for us because as you saw in the slide that I showed, when you run AJI, it just hogs the battery like there's no tomorrow. And that's why we are seeing a lot of interest from the PC OEMs actually wanting a higher capacity battery. The use cases are a little bit different. For example, how long they keep it, how many cycles it needs to charge. Fast charge is not a big requirement like in the phone. So we are optimizing our recipes to actually target those more precisely. So we can give them more energy density, maybe give them less fast charge and so on. But that's another super exciting market for us because of this push of AI into the edge.

[Ananda Baruah, analyst]

And then just a quick follow-up. Ajay, you mentioned -- I forgot the exact language on yields, but it'll take a little bit, I think you said to get to the 90s. Do you think you would be at the 90% yields when you're going to volume in '25 on smartphones?

[Ajay Marathe, executive]

Yes, absolutely, Ananda. The plan right now to which we are tracking, we will get to the 90-plus percent closer to the high 90s before the actual good, nice ramp begins on line 1, so yes. FY '25? Yes, absolutely in the high 90s.

[Operator]

Our next question will be from Chris Souther, B. Riley.

[Christopher Souther, analyst]

I just wanted to kind of get a little bit more color around focusing more on specific kind of higher-volume customers. Does that mean there are specific subsectors here that are very small today but might become kind of volume that you might miss? Like, how do you evaluate potential where some of the stuff is pretty kind of cutting edge, I guess you could say as far as the customer base?

[Raj Talluri, executive]

Yes. So what I've seen in my history of the 30 years I've been doing this kind of consumer electronics chip business is that at this stage of the company, it's very important that we focus on a few customers that can drive very high volume and satisfy the requirements of those customers. Fast charge, cycle life, energy density, form factor, how they're used, how the PMIC interacts with that, how they charge, how they discharged. Once we get that nailed and we are able to have a few of those customers drive meaningful volume, we now will have scale. And then those exact same cells, we'll have the ability to sell them into all the other markets, which may not take as many of them, but they are more willing to compromise on the form factor of the battery and so on. And those will be some new cutting-edge markets that could come up, ABR and a few other ones like that. But then we can then optimize to those as they get bigger. So the idea is to get your product ready for the vertical markets, get to volume, get to scale, get to the right deals, pay for our manufacturing lines, then use them to see this broad market and then grow into those markets. So I expect in time, 80%, 85% of our business will probably be in large verticals, and 20%, 25% will probably be in a broad market. So it's a vertical first, horizontal second strategy.

[Operator]

Our next question will be from Tim Moore of EF Hutton.

[Timothy Moore, analyst]

The question I had was just about the purchase closing of your recent transaction for the acquisition. When do you expect it to be fully integrated to achieve your forecast cost savings? And separately, how many months maybe until you can beat up the battery development cycle there?

[Farhan Ahmad, executive]

Yes. So I want to be clear, the cost savings that we have talked about is they are dependent on the quoting capacity and how we are utilizing that. So the shift to the coating capacity and the cost savings from that are related to how the manufacturing lines ramp up. So most of those cost savings, you will see it in 2025 and beyond that. And we are keeping RouteJade pretty much as a separate entity for their existing business. Where we are focused on is primarily on using their coating and making sure that all the innovation in coating that we wanted to drive for cost reductions and also for yield improvement in our manufacturing processes that we are really executing towards that plan. And so yes, like the things there are going well, and we are on track to execute towards ramping with RouteJade in our manufacturing in 2025.

[Timothy Moore, analyst]

Just out of curiosity for the accurate Meditech Mini, how many months in advance would you maybe start to recognize revenue before it starts selling in CVS, Walgreens and Walmart?

[Farhan Ahmad, executive]

So look, what I can tell you is that our revenue recognition is not contingent on their shipments. But when we ship the batteries to them and we get paid for it, we will recognize revenue after fulfilling all our obligations. We do expect those to start selling sometime in next year. I don't want to be too specific on that, but yes, like that's what we know.

[Timothy Moore, analyst]

My last question is a comment you had on the last earnings call was that capital expenditure next year will be higher than this year, which makes sense, given all the great strategic expansions and moves you're making. Is there any way maybe to give us a sneak peek maybe by how much higher the CapEx might be next year, now that we're about seven weeks away from the year-end?

[Farhan Ahmad, executive]

So look, we are not guiding next year CapEx at this point, but we will control CapEx and are spending very tightly and spending as needed. Right now, we are not expecting CapEx to be up year-on-year next year, and we will continue to manage it tightly.

[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 to our earnings call, and thank you for all the great questions and looking forward to talking to you next quarter. Thank you.