Enovix Corp

NASDAQ:ENVX

Earnings Call Transcript 2021-Q4

[Operator]

Thank you for standing by and welcome to Enovix Corporation's Fourth Quarter and full-year 2021 Earnings Conference Call. Currently all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. As a reminder, today's program will be recorded. It is now my pleasure to introduce your host for today's program, Charles Anderson, Vice President of Investor Relations. Please go ahead, sir.

[Charles Anderson, Vice President of Investor Relations]

Thank you, everyone, and welcome to Enovix Corporation's fourth quarter and full-year 2021 results conference call with us today are President, Chief Executive Officer, and Co-Founder Harrold Rust, and Chief Financial Officer, Steffen Pietzke. Harrold and Steffen will review the operating and financial highlights, and then we will take questions. After the Q & A session, we'll conclude the call. Before we continue, let me remind you that we released our Q4 and full-year 2021 shareholder letter after the market closed today. It's available on our website @ ir.enovix.com. A replay of this conference call will be available later today on the investor relations page of our website. Please note that 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 disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, March 3rd, 2022, based on the 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 these non-GAAP financial measures to the 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 Harrold Rust to begin. Harrold.

[Harrold Rust]

Thank you, Charlie. Good afternoon to everyone. We're looking forward to updating you on our progress today. We do so with a heavy heart given the current situation in Ukraine. Our thoughts are with those affected by the ongoing conflict, including our employees from Ukraine, and those with friends and family from the area. While Enovix does not currently have direct business types of the region. Today, we are thinking of the people at Amphenol Airline, a Ukrainian airline who helped us deliver critical factory equipment from Asia to San Francisco in the spring of 2021 to mitigate supply chain disruptions. Without this hard working crew from Ukraine, we would not be where we are today. We remain grateful for their assistance and our thoughts are with them, their families, and their loved ones during this difficult time. 2021 was quite a year for Enovix. One that validated the technical and commercialization strategy, we have pursued since our founding. We entered 2022 with ever increasing demand for our batteries, which we believe offers the highest energy density for the mobile computing market. And most importantly, we are on track to begin commercializing in the coming months. Our shareholder letter, posted on our website details our accomplishments in 2021 and our focus for 2022. Let me call out some of the highlights here, then Steffen will do a review of the financials. After that, we'll take your questions. In January, we began shipping production qualification samples from our automated production line at Fab-1 in Fremont to customers. By doing so, we continue to expect recognizing first product revenue in the second quarter of 2022. Hitting this significant milestone will distinguish us from competitors who claim technology breakthroughs but are years away from commercialization. I want to thank our entire team and especially our operations group for bringing up our first line at Fab-1. It was by no means an easy task. Indications of demand for our battery remain well above what we can supply for several years. Our revenue funnel increased by roughly $200 million sequentially in Q4, 2021 to $1.5 billion. End markets and applications continued to be broad-based, but we would highlight the incremental contribution to the revenue funnel from new industrial applications and new engagements in Asia as a result of additional resources we devote -- we are devoting to the region. The speed by which we can capture this demand comes down to how fast we can qualify customers, improve our manufacturing process, and bring on capacity. We have generated a tremendous amount of learning for bringing up our initial production line and immediately fed this into designs for our next-generation equipment. These designs will enable lines that are faster, smaller, more energy efficient, and ultimately lower cost. First, in response to increased customer engagement and demand for custom cell designs, we will soon order a next-generation pilot line based on these learnings in order to speed customer qualification. Second, we also plan to order in the coming months, the first of our next-generation production lines based on these same learnings. This line will allow us to bring additional capacity online for revenue by the middle of 2023. It is long been our view that the proper time to scale up is when we have optimized our manufacturing process and believe our next-gen lines give us the best opportunity to do just that. Our shareholder letter, also details important third-party validation. Notably, we were in Innovation Award Honoree at the Consumer Electronics Show in January. Quite an achievement considering the 1800 products evaluated by an elite panel of judges. We further strengthened our balance sheet with the redemption of our outstanding public warrants, which has added another $130 million. Last, I'm pleased to announce 2 recent data points that demonstrate our progress in commercializing our battery for the electric vehicle or EV market. Today we are announcing the addition of Patrick Donnelly as Vice President of Strategic Business Development, focused on EVs. Pat joins us from Samsung SDI, where he led a commercial team that secured several multi-billion-dollar contracts for lithium ion batteries with both established auto OEMs and emerging EVOEMs. Also, today in our shareholder letter, we are showing updated progress on our Department of Energy program to demonstrate our 3D architecture and 100% active silicon anode with an EV class and MC cathode. As many of you know, low cycle life is one of the killer problems that has held back the adoption of 100% active silicon anodes. We believe the Enovix 3D architecture uniquely solve this problem and we are happy to report that these cells are approaching 800 cycles and only have lost 4% of their capacity. These are very encouraging and exciting results and we look forward to updating you as they progress. Please be sure to read our shareholder letter for more details on these significant achievements. Now, I will turn the call over to our CFO, Steffen, who will discuss our financials. Steffen?

[Steffen Pietzke, Chief Financial Officer]

Thank you, Harrold. All our detailed financials can be found in our shareholder letter. So I will spend my time covering a few high level topics. We closed the first quarter of 2021 with net cash of $385.3 million, which does not include the incremental $52.8 million of cash we received in January from the remaining exercise of our public warrants. Turning to the fourth quarter results, we did not recognize product revenue in the quarter. Consistent with our expectations. As Harrold mentioned, we continue to expect to begin recognizing product revenue for the sale of our batteries, in the second quarter of 2022, consistent with our previously reported goal. Our operating expenses in the fourth quarter were $24.8 million, excluding stock-based comp, our non-GAAP operating expenses in the quarter were $20.8 million up from non-GAAP operating expenses of $16.2 million in the third quarter of 2021, which also excludes stock-based comp. The sequential increase was the result of our efforts to scale up the business for manufacturing and commercialization, to meet demand from our customers. Turning to the full-year 2021 results, we used $95.3 million of free cash flow, which included $43.6 million of capital expenditures. Cash use came in below our forecast of $110 million to $120 million. Due to timing of equipment payments, some of which slipped into early 2022. Now, let's discuss our expectations for 2022. As noted earlier, we expect to recognize our first product revenue in Q2, 2022. For full-year 2022, we expect to generate revenue between $6 million and $12 million. We expect that our revenue will consist of both product revenue and non-recurring engineering or NRE service revenue. Keep in mind that in addition to producing cells for product revenue, our alliance will also be heavily occupied this year, producing qualification samples to support future revenue ramps. For full-year 2022, we expect to use between $190 million and $210 millions of cash, of which we expect roughly 55% will be capex. As Harrold mentioned earlier, we are bringing on a next-gen pilot line in 2022 to respond to the need for increased customer qualifications. We are also continuing to build our Fab-1 and will order our next-generation production line. Not surprisingly, like the rest of the industry, we're not immune to the inflationary pressures impacting battery production equipment given the surge in demand for lithium ion batteries. To summarize, we entered 2022 with a very strong balance sheet, and are investing to commercialize our groundbreaking 3D battery architecture, which uses a 100% active silicon anode. We are focused on executing our plan, which we believe will drive shareholder value. I will now turn it back to Harrold for closing remarks. Harrold.

[Harrold Rust]

Thanks, Steffen, to recap, we made outstanding progress in 2021. We are now building and shipping batteries to tier-one customers. In 2022, our priorities will be responding to a growing customer base, driving transformative product enhancements, and improving our manufacturing process based on the learnings from Fab-1. With that, we are ready to take your questions. Operator.

[Operator]

Thank you. [Operator instructions]. Our first question comes from Colin Rusch with Oppenheimer. Your line is open.

[Colin Rusch, Oppenheimer]

Thanks so much, guys. Now, can you talk a little bit about the number of customers you've gone through the full qualification on for moving into the design and sales? And then I have a follow-up question around capacity expansion.

[Harrold Rust]

Yeah, Colin, thanks for that question. This is Harrold. We've shipped our qualification samples for our first customer, and we're working on qualification samples or others right now. As we mentioned in the comments earlier, we expect to start recognizing revenue from one of those customers in second quarter '22.

[Colin Rusch, Oppenheimer]

Okay. And then talk about the capacity expansion, but clearly demand is running at a pretty healthy clip. I'm curious about your thoughts on potentially doing slightly larger facility as you've decided on this next phase and how far along you are in terms of identifying that location and potentially entering into a [Indiscernible], could talk about.

[Harrold Rust]

Yeah, yeah. Thanks for that comment. As you mentioned, we're seeing an increasing and growing demand for our product, both across products and customers. And obviously want to translate that into revenues as fast as possible. As we actually think of this. One of the things we're actually starting to think about, is whether we need to establish an earlier global footprint for how we manufacturer. And so we're basically -- right now, we're evaluating both domestic and overseas locations to do that. The other thing I would say, is in addition, we've had such a valuable learning of our first production line. And that's really given us the opportunity to design next-generation line that is more efficient in terms of throughput and capital and floor space. And we're really looking at what's the best way to move the company forward, and how do we expand, and both of those have a factor on kind of what type of facility, and where we want to locate it. We remain actively engaged with one of the largest real estate firms that's out there. They specialize in manufacturing sites and we've been working for it quite a while and we actually have submitted a couple of LOIs on several candidate properties are ready. So I think stay tuned for that. We expect to move forward soon with this first next-gen line and then after that announce a location for it.

[Colin Rusch, Oppenheimer]

That's super helpful. Thanks so much, guys.

[Operator]

Thank you. Our next question comes from Anthony Stoss with Craig-Hallum. Your line is open.

[Anthony Stoss, Craig-Hallum]

Hey, guys. Harrold, I'm curious with the new process that you identified. You've talked about it being more efficient, faster, etc. Will that raise the potential revenue in plant 1 when it's up and operational and cranking? And then follow-up question, you have the 35 customers that you highlighted your sample to. How much is that up from the last quarter? And can you give us a sense of what markets, is there any new markets that you're sampling into?

[Harrold Rust]

Yeah. Thanks for the question. Do first question was -- sorry, repeat.

[Anthony Stoss, Craig-Hallum]

Plant 1 capacity.

[Harrold Rust]

Plant 1 capacity. Yeah. I think certainly to the extent these new lines are more efficient from a footprint utilization space, that gives an opportunity to increase the capacity here should we choose to. I think we're looking at where we put capacity a bit more broadly thinking about where our customers are. So we may decide to add more capacity here, we might decide to add more capacity somewhere else. I think that's an active discussion we'll go through. Ultimately, I would just think about how do we install enough aggregate capacity in our locations to satisfy the customer demand? And I think we're going to be flexible about that. And really look at what makes the most sense for the business and our customers. Your second question, if you -- was -- sorry, if you could repeat that, I'd appreciate it.

[Anthony Stoss, Craig-Hallum]

Yeah, the 35 customers that you've sampled to, how many you had last quarter and if there's any new markets?

[Harrold Rust]

Yes. So I would say the funnel continues to grow impressively, it grew roughly $200 million during the quarter. I think growth is both broad across all the markets we've been targeting are ready. But I think we've also seen some new interest in a couple segments. One is the industrial market where, in energy density has a pretty high value prop as well. And so that's one area which I think is new relative to what we've been seeing in prior quarters.

[Anthony Stoss, Craig-Hallum]

If I could just sneak in one other quick one just again on the new process. Is there a brand new equipment that you haven't dealt within the past, and is there any kind of material additional lead times? I'm curious when you think you can everything in and qualified for the new process.

[Steffen Pietzke, Chief Financial Officer]

Yeah, I think it's a combination, I think in some cases, these are improvements on equipment with existing vendors, where we've learned enough. We know we can make a much better -- piece of equipment. In some cases, we're looking at some new vendors as well. We're pretty far along in those discussions. So from a lead time standpoint, we have a good sense of what those are. And we believe that we'll have that first next-generation line on the ground and facility sometime in the first quarter next year. And have it producing revenue second quarter, which is consistent what we've been saying for the last several quarters.

[Anthony Stoss, Craig-Hallum]

Very good. Thanks Harrold.

[Steffen Pietzke, Chief Financial Officer]

Thank you.

[Operator]

Thank you, our next question comes from Derek Soderberg with Colliers Securities. Your line is open.

[Derek Soderberg, Colliers Securities]

Hey guys, thanks for taking my questions. So just on the second production line at Fab-1, you guys started putting that in, I think late in last quarter, you were talking about it. So late in the year, I guess what inning are we sort of out with that line and do you expect that second line to be fully up and running and ready to ship battery sales by the end of the year, or what, what sort of the timeline for that one. And will that one be using -- that second-line be using the new manufacturing equipment or not. And should that second line at Fab-1 be sort of the last-line using the prior-generation equipment? Sorry, that was a lot there.

[Harrold Rust]

We have two essential production lines here in the Fremont facility. One is has been here longer. It's the one that has produced the qualifications cells that we shipped in January, which will be in production in the second quarter. The second one is a bit behind time-wise, it landed later. And it's big role this year, if you think about through the summer is, doing qualification work for some of the larger cell products. And we do expect that towards the end of the year when that qualification work is done, that line will be available for doing production deliveries. But I would say that from a true revenue standpoint, most of the revenue work will be done on the first line because it's the one that's actually producing the product we're qualifying right now with our customers. And then your second question is, is line two kinds of the last of the current generation? I would say the answer to that is yes. There is some additional equipment coming in to support that, but overall, I would say [Indiscernible] is kind of what we have where there are a few more pieces showing up. We will -- we've done, is use all the learning on that, which has been super valuable. In fact, I would say we are more than pleased on all we've learned because it really helps us to design a next-generation line that is quite a bit better. And we're excited to turn that into these next lines that we can really grow the company with.

[Derek Soderberg, Colliers Securities]

Got it. And then as my follow-up, you guys spoke to sort of prioritizing customer qualifications and improving your manufacturing equipment ahead of scaling capacity, it doesn't sound like that priority is changing the timeline to Fab-2, timeline to revenue there, just curious if that relates to that commentary is related to your JV licensing strategy and just trying to sort of bulk up the throughput of the equipment. Is that a good way to think about some of that commentary?

[Harrold Rust]

Yeah, I would think a little bit about the partnership stuff as being on a parallel track, right I mean, we're squarely focused on getting the production lines that we've built ourselves on known to hit -- hit their goals, and then working on the second-generation line. At the same time, obviously we're, we're talking -- we do talk on a somewhat regular basis with customers and potential partners for how we can grow faster. A key piece of that is our Fab-3 strategy, which is what we've talked about which is further out in time and geared maybe more towards of the EV space because we feel that approach to JV or licenses the right way to enter that market. And so with the addition of Patrick Donnelly, we talked about he'll be someone who is actually going to be helping have some of those conversations with the players and ad space to try to push those discussions forward.

[Derek Soderberg, Colliers Securities]

Perfect. Thanks, guys.

[Operator]

Thank you. And our next question comes from Gabe Daoud with Cowen, your line is open.

[Gabe Daoud, Cowen]

Hey, guys. Thanks for taking the questions. Maybe just back to the manufacturing capacity and capabilities, I think Harrold, initially Fab-1 was expected at scale to deliver 45 million cells a year. Just curious, how many lines of that -- how many lines would that assume? And then -- just because I'm just trying to get a sense of how much products you could actually deliver today from the lives that you have today.

[Harrold Rust]

Yes. So thanks for the question, Gabe. Certainly, we've talked about our ability to significantly ramp that capacity here. That's beyond the two lines that are in place and that would be something we would do in the future. Certainly consistent with our strategy for these next-generation lines, maybe the generation beyond the ones we have right now. I would say that our decision to increase the capacity here will judge over time as we look at how our Fab-2 strategy rolls out and whether it makes sense to do more here, less here, and more at some of these other locations. I think we want to be flexible on that with respect to where our customers are and what the opportunities are for these other locations. I think we'll adapt dynamically, and I'm sure whatever we would say today is probably slightly different than we'll end up executing on. Ultimately, we just want to make sure we can deliver the overall capacity to meet our customers ' needs.

[Gabe Daoud, Cowen]

Understood. Thanks Harrold. And then maybe shifting gears a bit and just looking at some of the cycle life data you showed on the EV battery. Could you just talk about -- I know there's a target as part of the deal we programmed to get to a lot hours per liter. I figured 700. Could you just talk about what the energy densities on those cells on one hour per kilogram. And if EV partners are more interested in the gravimetric or the volumetric energy density?

[Harrold Rust]

Yes, I would say there is interest in both from a customer standpoint, it turns out that in cars today and in some ways the space is as valuable as the weight. The specific cells that we've built now we're not super aggressive from an energy density standpoint that somewhat on purpose, because the objective was to establish the long-term cycling capability of our unique 100% active silicon add-on architecture. And I think thus far the data on that is pretty exciting. And I would say, that people would struggle to show active silicon stuff in the past. It looks as good, so we're excited about that. We do believe that if we were designing to a high energy cells for that market, we could have a compelling product either from a volume metric or specific gravity standpoint. And we've had some data out on our website that talks about what that might look like.

[Gabe Daoud, Cowen]

Thanks, Charlie. And then I'm just curious, as those cells have cycled now and hit close to 800 cycles, how much did they swell, well was it sold like less than 5%? Thanks.

[Harrold Rust]

Yeah, I would say in general where the architecture and our unique and strength system, we see very little actual swelling of the batteries.

[Gabe Daoud, Cowen]

Got it. Thanks. Harrold.

[Operator]

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

[Sean Milligan, Williams Trading]

Hey guys, thanks for taking my question. As you look to build out the EV sales process and I know you're bringing on Patrick. Just curious if he's brought any with him, how that team is going to build out over the next year or two?

[Harrold Rust]

I would say it's -- I don't know the answer to those questions yet. Patrick is just coming on board and I'm sure you have some thoughts how to build that stuff out. I would like for us to make some comments that kind of have that organs going to shapes up over the next several quarters. But to be honest I don't have the actual answers to all those in front of me right now.

[Sean Milligan, Williams Trading]

Okay. And then on the EV side with the dairy program, I think you're testing NMC technology, if I'm correct. Have you sampled any cells with EV players with other technologies to this point?

[Harrold Rust]

Yes. So what we've done in the past, we have four standard sizes of batteries today, which are targeted more for the consumer electronics space. And so we've sampled cells from those fleet of batteries into the space are ready. Those tend to have a look in Cobalt oxide cathode as opposed to NMC. But it gives the customer in that space a good sense of what our technology is capable of and how it performs. And so that's something we've been doing over the last half year, if not longer.

[Sean Milligan, Williams Trading]

Right. And then one last question, I guess around the -- you mentioned 35 customers that you've sampled cells to, just kind of curious if you're able to talk to a win rate that's in that product pipeline. And then maybe how long you're seeing it take from sampling to first revenue?

[Harrold Rust]

I don't have the figures off the top of my head and I don't think we've commented specifically on how many as each part of the funnel, I would say that our ability to move people into the bar to the part of the funnel is really more driven by our ability to engage with the kind of demand we're seeing. One of the things that we're actually doing this year, which I think is a pretty big initiative, is we're spending some capital to put in place a whole next-generation pilot line, which is roughly 10 times the throughput of the line we have right now. So obviously the raw horsepower to deliver samples to customers is much better. It's also going to be highly flexible, so our ability to deal with lots of custom designs is significantly better. And then one thing that's also super exciting about that is that it's really designed around the same production kernels as the new-gen -- the next-gen manufacturing line. And the hope there is that we can cut some of the qualification timeout with our customers by having something that really reflects what manufacturing looks like and not have to go through multi-step qualifications for products. So we think all of those things will increase our ability to drive stuff to the bottom part of the funnel and also increase our -- reduce our time-to-market with some of these customers. So that's a pretty big initiative and we think it's a real critical thing the company is doing, which will give us an advantage going forward.

[Sean Milligan, Williams Trading]

And the pilot line is mid year or?

[Harrold Rust]

It will be coming in the end of this year, right. So I would look at towards the end of this year that starting to have a significant effect on how fast we can engage with customers and move people down. And also give us a promise to be quicker in terms of converting opportunities into actual revenue.

[Sean Milligan, Williams Trading]

Okay, great. And then just one more Harrold. In terms of the early customers that you've had in sort of the land and expand strategy or you starting to see customers sample cells across different product lines. I know it, maybe you would have sampled with 1 product initially and now they're starting to bringing into other products.

[Harrold Rust]

I would say in general; we've had increase in terms of customer traction across multiple customers. But even within specific customers, we're starting to talk with customers about follow-on products. The initial products are ready. Those discussions are happening, which is I think a very encouraging sign for their view of our relationship. And obviously, 1 of our decision factors around customers since we can't necessarily service everyone, is to pick customers where there is at extending life and we can ride with these customers through multiple revolutions of products. And we're starting to see that stuff materializing.

[Sean Milligan, Williams Trading]

Okay, great. And the cycle life on the EV, what's the target that -- what's the target that we should look for if you're approaching 800 now. What's the number of cycle lives that you need to get to?

[Harrold Rust]

The stated goal that the DOE set out in this program was 1,000 cycles. Right now we're just short of a 1000 cycles to 20% fade or 80% initial capacity. Right now we're sitting just short of 800 and we've got only about 4% capacity side. So we're pretty encouraged of those results and we think we'll have additional good news to report on that later.

[Sean Milligan, Williams Trading]

Great. Thank you for the time.

[Harrold Rust]

Thank you.

[Operator]

Thank you. I'm currently showing no further questions at this time. I would like to hand the conference back over to Mr. Rust for closing comments.

[Harrold Rust]

Thank you, everybody for your time today and listening to our earnings call. We're super excited of where we're going, and the progress we made this past year. This has been a long journey for this company to really fundamentally changed, our batteries are made and we think we've proven a lot of that. Shipping qualification samples out of our first production line as a huge milestone for us that we think differentiates us from many others in the battery space that talk about technologies, but have yet to commercialize. We realized that reducing things to practice in making a product is ultimately what it's all about. We've got a product that works. We've proven we can make it, we have customers that are lined up to take, and we think that's a great position to be in. We're very excited. We look forward to forming a better progress going forward. We have -- every employee in the company runs around with their badge, with a list of our core values, but also the vision for this company. That vision is that every person is positively impacted by Enovix Innovation every day. We're dead set to make that happen and we're excited about the journey run, and the progress we're making. We look forward to having you along for the ride.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.