Enovix Corp

NASDAQ:ENVX

Earnings Call Transcript 2022-Q4

[Operator]

Thank you for standing by. And welcome to the Enovix Corporation Fourth Quarter 2022 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.

And now I'd like to introduce your host for today's program, Charles Anderson, Senior Vice President of Investor Relations. Please go ahead, sir.

[Charles Anderson, SVP, IR]

Hello, everyone. And welcome to Enovix Corporation's fourth quarter 2022 financial results conference call. With us today, are President and Chief Executive Officer, Raj Talluri and Chief Financial Officer, Steffen Pietzke. We will also be joined today by our Chief Operating Officer , Ajay Marathe and our Chief Commercial Officer, Ralph Schmitt for the Q&A portion of our call.

Raj and Steffen will review the operating and financial highlights and then we'll take questions. After the Q&A session we'll conclude our call.

Before we continue, let me kindly remind you that we released our fourth quarter 2022 shareholder letter after the market close today. It's available on our website at ir.enovix.com. A replay of this video call will be available later today on the investor relations page of our website.

Please note that the shareholder letter, press release and this call all contain forward-looking statement 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 discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's show letter in our filings with the Securities and Exchange Commission. All our statements are made as of today, February 22, 2023 based on information currently available to us. We can give no assurance that the statements will prove to be correct when you 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 prepared or not prepared in accordance with Generally Accepted Accounting Principles. You can find the reconciliation of the GAAP financial measures to 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, CEO]

Good afternoon. Thank you, Charlie. And thank you all for joining us today. I'm really pleased to report very strong fourth quarter for Enovix Corporation. We accomplished a number of things in this quarter. We significantly improved our yield of the batteries that we're producing. We made record progress for customers progressing through our funnel. We explained last time, the way we work with our customers is to get them samples of our batteries, which then the test and then they you know put them in products that they're actually going to launch and move them along the product creation cycle. And through that funnel, we have got a lot of new customers and a lot of progress that we've made to date. And we'll talk more about that.

And we just over $1 million in revenue ahead of the consensus for this quarter. Now we ended the year with over $322 million in cash. And more importantly, our Fab-1 y, which is our Fab in Fremont is working. And we are focused on rapidly increasing its output now. The trajectory I see for Enovix, is incredibly promising in '23 and beyond.

Now, before Steffen talks about financials, I wanted to spend a little bit of time talking to all of you about me and my background, why I joined Enovix? And what are the near term actions that I'm taking to position the company for success?

For nearly 30 years, I've been fortunate to have worked in and led teams in some of the best semiconductor companies in the world, Texas Instruments, Qualcomm, Micron. And I worked on products that actually revolutionize the mobile device experience and these mobile devices are devices from consumer electronic devices like digital cameras, MP3 players, DVD players, smartphones, tablets, and so on. The products I worked on included digital camera chipsets, MP3 player chipsets, the OMAP application processor, which is one of the very successful application processors in the industry, at Texas Instruments that actually transformed our phones from just calling devices to true multimedia devices.

And from then on, I joined Qualcomm, where I was fortunate to lead the team that did the Snapdragon application processor, which actually powers majority of the Android cell phones today. And it really ushered the era of the modern smartphone. More recently for about the last five years or so, before I joined Enovix I was in Micron and I was leading the mobile division. It's a division that actually one of the largest divisions at Micron and $7 billion of revenue in 2022, with over $2 billion of operating profit for that fiscal year.

Now, having been in all these different companies, I understand what it takes to launch products at scale, the launch products at mobile devices, to launch them at very high volume. And it's given me a unique insight to both the customers, they care about the customers, they care about the end users, when they use these products. Now, one important insight it gave me is actually the importance of battery technology in portable devices.

Now, what became obvious to me, but may not be obvious to all the average person who actually buy these products, is the performance of these products, whether you bought a digital camera, or whether you bought a smartphone or a laptop, the performance is actually throttled because of the constraints of the battery. This is something that's not so obvious to everybody.

For example, if you take a smartphone, and you run things like an Android bench and so on, you get great performance numbers. But when you get those performance numbers, the CPU, the GPU, the camera, the memory, they're all running full speed to give you that Benchmark Number. But when you actually use the phone, the process and the memories are not running at that speed, because if they did, they would consume the battery really, really fast. So in other words, end users are not realizing the full potential of the devices that they bought, because the battery is limiting the performance. So the number one problem I believe to be solved now in the consumer electronic devices, is the portable battery.

Now this happened -- when this opportunity arose for me to actually lead this team, I did a lot of due diligence and different battery companies out there that could actually help solve this problem so the users can get great and products that they paid for. And I felt Enovix is perfectly positioned to solve this problem. And that is the reason I'm here.

Now, I've been here for about a month, I've been unbelievably impressed by the company and the talent and the resources here. It's really groundbreaking technology. It's highly differentiated across many, many metrics in the battery. These are metrics like performance, energy density, capacity, thermal performance, longevity of the battery, how fast to charges, how safe is the battery.

Now, what I also found is technology in this company that have been done by tremendous number of people working for over 16 years in this space, we have significant technology in our laboratories here, that has a lot of headroom to even increase his performance metrics beyond way beyond what we are actually now able to sample. So I see here, the foundation for a high growth, highly profitable business with differentiated products that I can set spend the next part of my career scaling to new heights.

As you get to know me better, you'll actually see that I always start with the customer first. When I talk about the customer, I talk about the customers who buy our products, and also our customers, customers who actually enjoy these products. And I think about the user experience those customers are having with these products and then that work backwards. What does that mean? I try to imagine how is a wearable device use?

How is the smartphone being used? What's the limiting the performance of smartphone? What's limiting the performance of a laptop? What's limiting in a car from charging to full battery capacity very quickly? Then it gives me clarity on what products we should be working on for those things to happen.

And then I work on with my team to build the right products to send it to our customers so the end users can benefit from all this technology innovations that we make.

Now, we are undergoing a transformation at analytics. We are an R&D focused company so far, you know, tremendous amount of R&D has gone in over the past many years to actually make these fantastic batteries that we are sampling. Now we need to transform this company into a customer-focused organization that focuses on morphing and tailoring this great technology that we have into high volume production very quickly and very profitably.

Now, thankfully, that is not the hard part of the job. A lot of us that have joined Enovix here know how to ramp products quickly to scale. The core technology development is behind us. And we really owe the founders of Enovix who actually worked tirelessly for a long time, a great debt of gratitude for getting us there.

Now, I do recognize that high volume production area that we have most improved. We have not ramped as fast as as much as we would have liked to buy now. But my commitment, my personal commitment to investors is, I will take you through the journey. And I'll be transparent about our progress on unit production, important milestones, things like yields, and also what we what we're doing to derisk, our Gen-2 line, which actually is going to produce high volume batteries.

Scaling is hard. I've done this many times in my career over the last 30 years in large companies with very, very complex products. It won't be perfect. It won't be like exactly how we want it, but we know how to do it. And we will be clear about where we are and how we are doing it and where we are going. I can tell you this, what I see today is unbelievably promising. And our newest Chief Operating Officer, Ajay Marathe has got 38 years in industry from some of the top companies and, and he was most recently the CEO of Lumileds, where their team has pulled off a tremendous job to make a huge amount of improvements in production. And here his team has already made solid progress just in the short time that he's been here. And we expect to make very strong gains quarter-on-quarter throughout this year.

Now, it's clear to me that we know how to make batteries. I see is we have factories right here I see the batteries coming off the line. We just need to do it faster. And with Gen-2 line, we will make them faster, and we will make them in high volume.

Now I want to close with a comment about funding and our capacity expansion. Now we've had like numerous conversations with our customers. The battery technology is so compelling the energy density we are able to provide and the quality we are able to provide is so compelling that we are now finding many of our customers and also strategics and the government entities where we're actually trying to -- that we are working with to build our Gen-2 line are interested in fusing capital into the company to help us build the capacity.

Now this is a common practice in the battery industry. And given the advanced stage of our technology, a lot of our partners see this as a fairly low risk for them to help us scale. So we plan to explore all these options and find out the most advantageous one to our shareholders.

Now, I want to turn the call over to Steffen who will give you some feel on the guidance. And then we'll take any questions you have.

[Steffen Pietzke, CFO]

Thank you, Raj. Our financials are available in our shareholder letter, which includes like a GAAP to non-GAAP reconciliation, so I will focus my commentaries on some high level guidance comments.

For '23 we are going to guide units produced as opposed to revenue guidance. Our annual revenue are highly influenced by the timing of our episodic service revenue. And we don't believe that it's necessarily a strong read on a progress on a scale up. As an example, for Q1, we don't expect to recognize service revenue. For '23 full year, we expect to produce 180,000 revenue quality units in Fab-1. And for Q1, we expect to produce 9,000 units. Our plan is to at least double that production each quarter sequentially for the full year.

For CapEx for 2023, we expect to spend $120 million and three components of CapEx are, first Gen-2, facitalization for Fab-2 in Southeast Asia, and we are going to bring in an agility line which is an automated R&D line to Fremont. That line will help us faster qualifying customers and focus on custom cell development.

Additionally, for '23, we expect to spend $120 million of cash operationally. While we keep the operational spend, OpEx flat, we will shift more cost into cost of revenue as we support the increased production volume in Fab-1 and the later part of the year, we will start Fab-2 in Asia. Now for everyone that runs financial models, I would like to give a couple of pointers for the models, one is we are anticipating here to increase cash and non-cash expenses that we are recognizing cost of goods Sold versus operating expenses, primarily as we shift the resources from R&D into manufacturing

The shift of higher cost of revenue will take shape in Q1, and you can see here and expect around $4 million of sequential increase in cost of revenue, whereas only $2 million decrease in operating expenses, both on a non-GAAP basis.

Closing out, we have made really good progress on the manufacturing side. We have a strong balance sheet and our experienced team is really committed to build shareholder value.

With that operator, we can start the Q&A session.

[Operator]

We will now begin the Q&A session. Please note that this call is being recorded. [Operator Instructions] Our first question comes from Ananda Baruah. Please unmute yourself and ask your question.

[Ananda Baruah, Loop Capital]

Hey, thanks, guys. Good afternoon. Raj, good to hear from you. And thank thanks for the remarks. Yeah, I guess quick two if I could just piggybacking off of your Gen-2 remarks. Can you remind us when we can first expect Gen-2 revenue, Gen-2 volume? And what we might expect least the first couple few quarters of that ramp to look like? And then I have a quick follow up. Appreciate it.

[Raj Talluri, CEO]

Yeah, absolutely. The question is about Gen-2. Thank you for that question. We are now in the process of completing the design of the Gen-2. And as TJ mentioned last time, and as you see in your shareholder letter, mid-March is when we will approve the design at the board meeting and we will start collecting the POS. And pieces of equipment will start coming in and we expect the build out to start happening by early next year. So in the mid next year is probably when we will start seeing revenue from some parts of Gen-2.

[Ananda Baruah, Loop Capital]

Got it got it very helpful. And then didn't hear EV measure yet. Can you just give us, a thought process on what some of the milestones are for EV for this year? And where some of your EV investment might be pointing to, appreciate it.

[Raj Talluri, CEO]

Yeah, thanks for the question. The question about EV. Yeah, EV, as many of you know, are very exciting market for our technology. A few things about Enovix battery technology, particularly for the EV market. In addition to the energy density, which we have much better than our competition, much higher than our competition. We also have some other advantages, such as how faster charges and also the amount of heat, the battery actually dissipates.

If you guys have, Tesla or car like that, when you start charging them, you will see that the batteries get hot in these environments. Our battery because of the way it's constructed mechanically has the ability to dissipate that heat much faster than our competition. And we're also kind of material agnostic in the technology, EV will use slightly different materials.

So what we -- we've been talking to different companies in the automotive space. There's a lot of interest for our technology in that space. And we are now figuring out the right strategy to partner to have a joint development agreement with multiple partners. And as we make those milestones, we'll absolutely communicate to you. But we've given them some of our consumer batteries. And actually all the EV companies, a lot of automotive companies love what we can show.

[Ananda Baruah, Loop Capital]

Thanks so much. Appreciate it.

[Operator]

Our next question is from Bill Peterson.

[Bill Peterson, JPMorgan]

Yeah, sorry about that. I think I was on mute. Thanks for the overview. Maybe I'm not sure this one's for Raj. But I wanted to talk about how you're going to be progressing to I guess, 180,000 units? I think in this special presentation, you talked about trying or hoping to achieve around 60% yields. I guess, in the early part of this year, how are those progressing? And is that still the right way to think about yields as we I guess exit Q4, 2023.

[Raj Talluri, CEO]

Yeah, absolutely. I'll take a shot at the question. And if Ajay if you feel like there's something else you want to add on top of it, please jump in. As we mentioned, our yields are progressing nicely, steadily improving from where we presented last time. And we're on track to where we expect to be by the end of the year. We're quite pleased with that. We are, as we said, more than doubling the number of batteries that come out every quarter. Again, a lot of these batteries -- so we feel very confident, we're going to hit this 180,000 number, no issues there.

In fact, we produce more than that sometimes because, we have to do batteries for qualification to our customers and so on. These are revenue producing batteries that we are talking about. But yeah, things look good there.

[Bill Peterson, JPMorgan]

Okay, thanks for that. I guess, the second question I have is, it was sort of, I guess, sort of briefly mentioned by TJ in the last call. You didn't speak through here, but you alluded to, I guess, one potential return due to swelling. I wanted to clarify, is that truly an issue? Is it only one product that was returned? Or if not, or maybe was something else entirely? Just trying to get a feel for it, that's something we should be on the lookout for?

[Raj Talluri, CEO]

Yeah, there's only one. Ajay, go ahead. Yeah.

[Ajay Marathe, COO]

Yeah, I can handle that. Yeah, there was one particular cell which came back from a customer. In fact, we saw the pictures of it and concluded that the results was due to the -- swelling was due to the mechanical damage to the cell, which we're trying to understand where it would have happened post shipments from Enovix. So yeah, but that's the only cell that we have seen so far, which is out there in the field, which has been reported that with a swelling. We are doing a lot of quality work, reliably testing ourselves and trying to find different causes of what could be problems. But we haven't seen the -- architecture is very robust. So we haven't seen anything like that.

[Bill Peterson, JPMorgan]

Thanks.

[Operator]

And our next question is from Gabe Daoud.

[Gabe Daoud, Cowen]

Hey, afternoon, everybody. Thanks for all the prepared remarks. I was hoping to maybe just go back to the tech side. You mentioned that 1,000-watt hour per liter battery scale to a mobile phone and laptop size is kind of optimizing for cycle life. Could you just remind us maybe where you are today on that tech roadmap? And where do you have to get to?

[Raj Talluri, CEO]

Yeah, that's actually a good question. As I came here in the last month or so what I've come to realize is that, we are clearly making the -- we are where we thought we would be in terms of our cycle. And we have a lot of innovations along the way on materials on the way we develop the technology to continue to increase that and get ahead of -- and the energy density continue to get ahead of the competition and also improve our cycle life.

The main important thing here is that, both the energy density and cycles, I somehow feel like, people are characterizing batteries by just simple one number. And we are -- as we get into more advanced stages, where we are actually how our batteries and our customers, and I talk to many of these customers, what I find is that, how the battery is used in the device, and the use cases that the battery goes through, is actually just as important.

For example, when you talk about a cycle, people talk about charging all the way to the peak and bringing it down. But nobody actually does that. I mean, if you have a mobile phone, you will probably start charging it before ever goes to fully zero. And also, if you think about energy density, when it's fully charged is one thing, but the use case is of how watch is used, what's the phone is used, what's a laptop is used, has a lot of bearing.

So we kind of evolved a little bit more in how we actually measure the value of the battery to our customers to more than just those two numbers. That's not to say we're not making progress on those, we're absolutely on track on that. But what you will find from us moving forward is actually talk more and more about the customer experience of using the battery than just one or two numbers. Because I don't think those numbers fully capture all the aspects of the differentiation that's built into our technology.

[Gabe Daoud, Cowen]

Thanks, Raj. That's super helpful and then maybe as a follow up or pivot back to EVs. I guess, could you maybe shed a little color around how those conversations are progressing? Whether with cell manufacturers or just traditional auto OEMs? Like is there any concern I guess, with performance maybe not scaling to an EV size, capacity battery? And then also form factor, what are the thoughts or latest thoughts on around form factor just given some of the headlines around potential OEMs or OEMs potentially going towards cylindrical? Thanks, guys.

[Raj Talluri, CEO]

Yeah, I mean, so first, I want to make one general comment about form factor, not just specific EVs. Something that I think it's not clear to everyone here. What I've learned our time here, is that the form factor product the battery is different in watches versus in a digital cameras versus other IoT devices versus smartphones versus laptops. Because they're kind of -- everyone needs a battery to be of a certain shape to fit in the cavity that's allocated to it after all the electronics and the displays have taken their space.

Similarly, EV it's a different form factor. Our technology now we are building manufacturing lines that actually have the ability, what we call agility lines, to customize the battery to different form factors very quickly. And our Gen-2 line will have the ability to do that and produce a different form factors.

So that's something I just wanted to put it out there. It's a core technology and a core competency we are building and we will need to build to be successful. And our architecture is very amenable to that.

Now in terms of EVs, the conversations are going really well. The consumer batteries that we've given them to test, they really like it. It's too early to tell how exactly the business model would be in terms of manufacture, they manufacture, we do a joint development, we license the technology. Quite a few of those options are open, and they are kind of early stage of development. And I'll continue to come in than that as the year goes by.

[Gabe Daoud, Cowen]

Great, thanks a lot, everyone.

[Operator]

Our next question comes from Colin Rusch. Please, unmute yourself and ask your question.

[Colin Rusch, Oppenheimer]

Sorry about that, you guys, I think I'm good. I wanted to just get a little bit more color in terms of the design activity and the design wins in terms of the target customer, the process and how that cycling and how quickly we're moving through those cycle times with the design ends, because that may be very, very crucial for some of our estimates as we get into late '24-'25?

[Raj Talluri, CEO]

Yeah, absolutely. I'll add -- I'll say a little bit at a general level. And I'll ask Ralph, who actually deals with this every day to comment a little bit more on that. Our designing activity has been tremendously -- has been so much better than what it was before. The last quarter was actually fantastic. What we're finding is that as we are able to produce more cells in our Fab-1, we are able to give more samples to customers. And that is helping them test our battery versus their current batteries that they're using.

And is really giving them the confidence that what we're talking about is real. And they're able to do it use tested in their own way. And of course, we understand how the test and we put those tests back into our testing, so the next time when we get the battery, it already meets the requirements.

So in terms of samples we've given out in terms of a customer pipeline, I think there is some data in the shareholder letter that actually shows the progress. But super pleased with the progress so far. And many of them have actually progress from initial testing, where they have samples and said, yeah, this looks good to actually putting it in their own form factor and then testing and saying is much better. So now at this point, we actually know what products we will go into. But Ralph, if you want to add more color to that?

[Ralph Schmitt, Chief Commercial Officer]

Thanks, Raj. Yes, everything was said is exactly on point. As we've showed you last time in TJ's presentation in January, we're now tracking these cell milestones. And those cell milestones are showing that we increased sort of our active designs and design ones by about $200 million in this last quarter, which is by far the biggest jump and really shows that these customers are now fully engaged, because they've taken essentially the batteries off of our production line, and have done their own full qualification. This is their tests in their products. So that's a very important milestone for us and just shows kind of the progression we're making.

Now, I'll say cautiously is I don't expect to see a $200 million improvement every quarter it was because we've now shipped enough units thousands of units to these customers to be able to make those progressions in the funnel. But we're right on track. And you'll see the '24 revenue will grow fairly substantially based off of these early qualifications from our customers on these existing cells out of Fab-1.

[Colin Rusch, Oppenheimer]

And as a follow up, I want to hear a little bit more about the tool set that you guys are looking at for the Gen-2 line. Obviously you're coming close to being finalized on that design, but curious about how many vendors you're able to go to in terms of having backup vendors on some of these things and your ability to access to -- what you need in terms of all the different pieces of equipment in a timely way, given the relatively compressed timeline you guys are looking at for this ramp on the next factory.

[Raj Talluri, CEO]

Yeah, great question. The question is about Gen-2 line. I'll make a quick, high level comment, and I'll let Ajay to talk about it. Ajay is actually in Asia right now as we speak, talking to all the vendors there, so that's why he's not here in person. But he can give you that live update on where he is. I think he's met some members yesterday, too.

It's going actually very well. The designs look very good. We've done a lot of proof of concept, experiments to make sure that whatever issues we saw on Gen-1 are actually resolved in Gen-2 so we know what we're going to get is going to be at the high throughput. And Ajay, you want to comment on vendors and specifics and more specific?

[Ajay Marathe, COO]

Sure, absolutely. Thanks, Raj. Yeah, good question. Yeah, we have several suppliers in the whole supply chain of these Gen-2. Now what we've learned through this last Gen-1 experience, since then, designing specific tools, which address the real problems that Gen-1 showed us in the early days, is that there's battery companies and then there's semiconductor companies. Semiconductor companies, with our architecture which mechanical problem seeing, and placement problem seeing et cetera, is lot more lending itself going to semiconductor suppliers out there, who are very, very familiar with plus or minus 5-microns, 10-micron placements. Imagine the ball grid arrays of thousands of balls in a PGA or array package.

And doing something like that, we actually engage with those guys, very early on, about 9, 10 months ago, and now we're seeing these proofs of concepts, which are coming through. But then you also need to complement that battery experience as well. Because there's very peculiar stuff, which is going on.

So the semiconductor vendors have been working with the battery counterparts, which we brought together. So this is a big ecosystem. And yeah, we want to make it hard, so that doesn't get replicated by just about anybody else. But at the same time, have a good design.

I saw very encouraging results actually, I was in Korea, a couple of days, I'm here and in other parts of Southeast Asia, going through that. In some cases, we tripled row in certain areas which are higher risk. But we are coming down to now working with one set of suppliers who have given us tremendous confidence in Gen-2 both the schedule and the cost. So looking pretty good [multiple speakers].

[Colin Rusch, Oppenheimer]

Thanks so much, guys.

[Operator]

And our next question comes from Alex Potter.

[Alex Potter, Piper Sandler]

Perfect, that's actually a really good segue into what I wanted to ask. So you mentioned the cost. I know that Gen-2, some of the numbers that I was -- that I seem to recall, were something in the neighborhood of $70 million of CapEx per line, and you were looking to put four lines or so in the first fab there in Southeast Asia, I guess the second fab? Are those numbers all still ballpark, in the neighborhood? Or have your conversations led you to believe that those numbers should be revised in any way?

[Raj Talluri, CEO]

Yeah, good question.

[Ajay Marathe, COO]

Yeah, go ahead.

[Raj Talluri, CEO]

Give me a second, maybe I'll make a comment. And then you can add on top of that. So basically, the way this is working out is, Ajay and team are looking at making sure that we have enough space so we can put four lines or even more as needed. And so we're going to make sure that we have enough capacity.

And what we're going to do is, we're going to start first with an ability to quickly make a custom cell using the pieces of the line that we're going to use in Gen-2. So this one full automation, but all the same machines that will be in the Gen-2 will come here that will come earlier, what we call the agility line, that will give us a lot of confidence that we can make different custom size cells. Then we will scale up the line.

And yeah, I mean, we still believe that with the demand and the customer pipeline that we have, we will need to get to at least four lines and maybe more in time. But we're going to do it in a staged manner. We're going to do in a stage manner because, as Ralph mentioned, different customers are at different stages of qualification.

As those products get qualified, we want to be able to scale quickly, but also in sync with the customer demand. Because what's going to happen is, for example, a customer needs a smaller cell may qualify faster than a customer needs a big cell, or maybe a customer needs a big cell and a smartphone qualifies sooner. So we need to make sure that the equipment we're building is tightly in sync with that.

So we're kind of evolving to that stage of capacity planning, which is matching the actual customer demand with actual supply. And we're on track to do that. Ajay, anything else you want to add on that?

[Ajay Marathe, COO]

Yeah, just very quickly, actually, no change, no revisions to the original numbers. The cost per line question that you asked is roughly in line with what you're seeing now. As we do replicate second, third, fourth line, et cetera, you know, those costs will obviously go down economies of scale. And our ability to negotiate better with various supply chain members. So yeah, not much changed from the numbers we already gave you.

[Alex Potter, Piper Sandler]

Okay, that's perfect. And then maybe one more financial oriented question, referencing flat-- generally flat OpEx guide for 2023. I hear you on shifting some of the R&D costs and the cost of revenue as you move more toward production. But was also somewhat surprised, presumably, you're going to need to be staffing up in Asia, and a lot of that would hit OpEx in the G&A line. So maybe kind of that hits in 2023, but at some point that would presumably be in an upward inflection in that line unless correct me if I'm wrong.

[Raj Talluri, CEO]

Yeah, so I'll take a shot at it. And then we'll see if Steffen maybe we can add a little bit more color. What I found when I came here is that we are actually fairly well staffed on OpEx. And the company was at subscale and manufacturing in terms of output. So that's one of the reasons why I feel like I can hold OpEx flat from last year to this year. And there was a lot of expenses also with coming from SPAC into the company, and so on, which are really onetime last year. And moving forward, the mix of investments is changing from my perspective. I think we're investing a little bit more bringing in a lot of good talent, actually, in the electrochemistry side, and in the manufacturing discipline, the mechanical engineering and so on. But some of the other operating expenses that we had last year, were really some kind of onetime, so we were able to reduce that.

Moving forward, I feel we will add more in Malaysia, but at the same time, we have a lot of cost in Fremont, which will actually slowly come down also because of our current manufacturing. So in that sense it might actually balance out. And at any other -- for example, it could be any other Asian country that we look at costs are actually much lower that we have seen. So our goal is to actually manage the transition so the OpEx actually doesn't become too high.

[Steffen Pietzke, CFO]

Excellent. Let me add couple of numbers, one for '23, and one other years. In '23, I mentioned be spent $120 million planned for cash on operationally site, there's around $20 million of depreciation and amortization on cash. So keeping OpEx flat is around $80 million OpEx for 2023 and then on a cost of goods sold side is around 60-40 cash and $20 million is non-cash.

And then in other years, as Raj alluded to, the business model hasn't changed. We still expect to have around 20% on operating expenses runway beyond like '24-'25.

[Alex Potter, Piper Sandler]

Very good. Thanks a lot, guys.

[Operator]

Our next question comes from Gus Richard.

[Gus Richard, Northland Capital Markets]

Yeah, thanks for taking the question. Just you brought off, took an impairment charge for a piece of equipment. And I'm just wondering, what was the rationale? How is that related to the ultimate output of line one?

[Raj Talluri, CEO]

Yeah, maybe Steffen can take that.

[Steffen Pietzke, CFO]

Thanks, Gus. Yes, so that $4.8 million charge that we took is for a piece of the equipment that we seize to develop. It has a higher UPH, and the balanced line has the line runs here in Fremont is 100 UPH and that equipment was 600. So we don't develop that small portion. We don't expect that anything to reoccur.

[Gus Richard, Northland Capital Markets]

Got it. Thanks. And then, Raj, you mentioned in your prepared remarks, you had a number of customers that were interested in either doing JVs or building a factory together or what have you. And I was just wondering, as you evaluate those opportunities what are your criteria and is it who you get that with, is it just purely economics, your percentage of output? How are you thinking about those opportunities?

[Raj Talluri, CEO]

Yeah, so that's a very good question, actually. It's the strategic decision for the company that my team and I are focused a lot on. There is customers, there is different governments in Asia that we are actually, as we start thinking about putting lines there that are interested in supporting us. And that's a model that they're quite familiar with out there. So we are evaluating multiple countries and multiple customers.

Ultimately, we have to make the decision of the partners based on what is in line with the strategic direction of the company. And the strategic direction of the company is, for me -- the way we think about it is, we have now two standard sized cells, which are small cell and a big cell that are going really into Internet of Things market. And I think that is something that you will hear us talk more and more. Because they are in those markets, it's not as critical that we are the optimal in size and shape and all that.

Our next target is, we think that wearables is a big part of that market, health monitoring, and so on. Then there is smartphones, then there is laptops, then there's EV. And that's the direction and order in which we feel our technology will scale. So when we pick our partners, we want to pick them in that particular -- in line with their strategy and not deviate from that that will take us away from what's core to us. So that's kind of how we are looking at it. And I think it's more about making sure our technology is a good fit based on where our current technologies, and it's a good fit for the markets where we're going into.

[Gus Richard, Northland Capital Markets]

Got it. Thank you.

[Operator]

Our next question is from George Gianarikas.

[George Gianarikas, Canaccord Genuity]

Hi, afternoon. Thanks for taking my question. Raj, I'd like to just ask you, if you've been now at the firm for a month or so. And curious as to you showed any detailing the things that you've seen that you can improve upon or any processes, any methodologies that went over in the past that you bring fresh eyes to through your experience? Thanks.

[Raj Talluri, CEO]

Yeah, absolutely. I think the number, firstly, I'm actually unbelievably impressed with the technology and how differentiated the technology is. It's not often you find the technology where you're that much better than the competition in terms of performance numbers. And that much unique in architecture that is hard to replicate. And it took us a long time to get here almost 16 years.

And then it's taken us took us a lot of effort to actually get this mechanical constraints done. So we have sustainable differentiation, I feel. And there's a lot of stuff in the pipeline that will make the technology even better in terms of we talked about energy density, we talked about cycles, and so on. So that part has been very pleasantly surprising.

The parts that I bring is really the external and the customer focus, because my whole career has been working with customers who make varying kinds of products, cameras MP3 players, DVD player, smartphones, wearables, IoT devices, laptops, cars. So I bring that customer first mindset. And what I find is that when you're able to understand what the customer is trying to do with this technology, it gives you a view of what exactly our product should look like to fit in that product.

We're not making AA batteries, that's not what we're making. So we're not going to -- so this business is not about making one size fits all batteries. But then we really have to -- have the structures and processes in place. When there's so much interest from different customers, which ones do we pick? Which markets do we go after first? Which ones we go after next? How do we scale up? How do we build manufacturing capability, which is tightly match to the supply and the demand we are getting? That's the areas that I'm really focused on. And that's where I feel the company really needs more strategic direction.

Particularly when the demand is so secular for batteries. It's important, just as important what we don't do first as what we do first.

[George Gianarikas, Canaccord Genuity]

Thanks. So as a follow speaking of those customers, as you engage with them further, as you're having conversations, I'm sure with them before got to Enovix. What are the competitive products, if any that you're bumping up against? I mean, is there anyone out there that offers anything close to what you do in performance characteristics and potential brands?

[Raj Talluri, CEO]

Yeah, I mean, what I've learned is pretty much we're competing with the traditional battery technologies that exist today, standard lithium-ion batteries. There is no one that I've bumped into, that our customers have talked about, that would use something like a silicon anode, for example that we're doing, or the energy density that we are providing. So it's very, very unique in its capability. So most of the places we are actually trying to replace an incumbent that's the standard lithium-ion battery that exists today, which was invented sometime back. So it's a truly revolutionary in that sense. But we have to adapt our technology to that particular customer form factor to get it to production.

[George Gianarikas, Canaccord Genuity]

Thanks.

[Operator]

Our next question comes from Tony Stoss. [Operator Instructions]. We will move on to Derek Soderberg. Please unmute and ask your question.

[Derek Soderberg, Cantor]

Yeah. Hey, guys, thanks for taking my questions. Raj, I wanted to touch on yield. I think that number exiting the year was 42.9. Can you give us a yield number today? And in the January presentation, you talked about yield sort of following the S-curve? And just looking at the yield today? Is it still on that curve as attracting better or worse? Any detail on how yield is tracking since January would be helpful?

[Raj Talluri, CEO]

Yeah, so as we mentioned, the yields are tracking down S-curve. Absolutely, they are in line with where we expected it to be. And we are steadily making progress in that front. So I'm pretty confident that, the rate at which we're making progress, we will get to our 180,000 batteries number. Clearly, again, I'm not going to break down the yields at this factory this month, and so on, because a lot of factors involved in that.

But really, what I'm super excited by is we will be able to hit the number of cells we want. And the learning from that will actually make sure that the Gen-2 we build will be at much, much higher yield right off the back, which is really the number that matters because that's where we really going to ramp majority of our production. But so far, I'm pretty happy with what I see Ajay and his team done a very nice job.

[Derek Soderberg, Cantor]

Got it. And then as my follow up on the shareholder letter, there was some commentary around enhancing cycle life. I think you guys were at 500 cycles for the consumer applications batteries. You talked about working with new electrolytes and things like that. I'm wondering how we should interpret that commentary. Is this something that your customers are asking for? How should we think about that? Thanks.

[Raj Talluri, CEO]

Yeah, I think different products need different cycle lives. Like for example, battery in a wearable needs certain cycle life batteries in phones need a different cycle life in batteries in laptops, different cycle life. But I also think that -- so we have to continue to improve that and we are working on improving that.

We have a lot of ideas, a lot of techniques, a lot of experiments going on to do that. But I do also want to say the important thing is, as I come into this business, to me cycle life, and also like energy density is kind of like asking, what is the clock speed of your Snapdragon processor? It's just one number, that doesn't really translate to how good is your camera, for example.

Because nobody -- the way we mentioned cycle life is to charge it fully to the top and take it all the way down and fully to the top. And nobody actually does that. So if you actually only charge it halfway, because most of us when you use a phone or a watch or whatever, when it's when you see it running low out of charge, you start charging it.

And sometimes you may not charge it all the way. So we do have to continue to improve the cycle life and we are, but more importantly to me the exciting part is as we work with the customers, they're actually telling us how they use the battery and the tests they're performing to make sure the battery fits that application. And we are customizing to meet that model requirement. I think that is kind of the key.

[Operator]

We will now come back to Tony Stoss. [Operator Instructions].

[Tony Stoss, Craig-Hallum]

Sorry, all my questions have been answered. Thank you.

[Operator]

We will then move on to Marc Cohodes. Please unmute yourself. Thank you.

[Marc Cohodes, Alder Lane]

Thanks for taking my question. If he doesn't have any questions, I guess I'll add a few. First of all, Raj, congratulations. You're going to become a very very, very wealthy man over the next decade. But my real question since it was such a big issue on TJ's call about having to raise money. Can you elaborate on interest from your partners and helping you build facilities and governments? I assume, Ajay is over in Asia speaking with governments as well as customers and building the facility. Can you get into a little more detail Raj, about the interest of helping you fund this?

[Raj Talluri, CEO]

Yeah, thank you. Thank you for your question. And thank you for your comments. It's a little early to precisely comment on that, because we're in the middle of these negotiations and multiple ones. And I really don't want to get in the middle of that negotiation that Ajay is doing. But I'll give you a couple of comments on how these things usually work with my past experience in building these kinds of factories in Asia and so on.

Many governments actually like to help companies build out manufacturing facilities there either by helping with the facility facilitatization, or paying for a line or two. And because it provides employment, and they also get a great return on their investment later on. So there's multiple opportunities for that.

And for the customer side, typically what customers want is they like our technology, and they feel is very exciting. But they worry whether they'll have enough volume for production when they go to high volume, because some of these are high volume lines. And they'd like to reserve some capacity, for example. And that's where they'd like to help us build, but they want some in reserve capacity.

So those are the kind of the variables that we are looking at. And that's why it's very important that we make this decision carefully, because there's a lot of interest in the technology. And we want to pick the right partner. So hopefully, I'll be able to comment on that more in time.

[Marc Cohodes, Alder Lane]

What do you think is behind the dynamic of your design wins, and your backlog going up, with production being below where initially it was stated? It seems like people are more excited than less excited, even as these push outs have occurred? Can you square that a little bit on what you see?

[Raj Talluri, CEO]

Absolutely, it's actually very simple. We've had -- this company has had great technology and a few batteries that we were able to give. And what everybody saw was super exciting. And we gave like a couple of cells here, half a dozen cell to somebody, and they're all super happy. But for them to really consider designing, they needed hundreds and thousands of cells, which we've never been able to do.

As Ajay and his team and as all our investments in Fab-1 are starting to you know materialize, we're able to produce thousands of batteries. So now as we produce thousands of batteries, a customer able to put them in their products and test them. And that is increasing the design. And it's really a question of just satisfying that early sample requirement, that's helping us.

[Marc Cohodes, Alder Lane]

And you're able to satisfy everyone now?

[Raj Talluri, CEO]

Well, I wouldn't say everyone, but as many, Ralph wouldn't be too happy if I said everyone, but there's still a lot of demand, but definitely much better than we were. Ralph's got more happy customers than he's done in a long time.

[Marc Cohodes, Alder Lane]

Okay, thank you very much.

[Raj Talluri, CEO]

Yeah, my pleasure.

[Operator]

Next up, we have a question from Chris Souther.

[Chris Souther, B. Riley FBR]

Hey, guys, thanks for taking my question here. I'm just curious with 180,000 batteries for revenue this year. Can you give a split between, they're going into kind of end products versus, you know, testing with different customers? Just want to get a sense of what the full year demand is for the testing? If you have any sense of that?

[Raj Talluri, CEO]

Yeah, I mean, I mean, not really breaking them exactly that way. Because all of them -- I can say this much, all of them are actually products that customers are paying for. Sometimes there'll be high volume production, sometime maybe in the early stage of production, pre-production lines, and so on. But those are basically production cells. Ralph, if you want to comment on that.

[Ralph Schmitt, Chief Commercial Officer]

Yeah, I think that's fairly accurate. We've got some products, we believe we'll launch this year. And they're fairly lower volumes, you know, in the grand scheme of things, but we've worked closely with customers to try to say prime the pumps effectively, so that we go into '24, and start really ramping into much higher volumes.

If I were to put a put us a swag on it is, probably about half the cells are going to at least going to be in some sort of product that you're hopefully going to be able to get in the market. Of course, it's always relied on when a customer can actually release those products.

[Chris Souther, B. Riley FBR]

Yeah, thank you. That's helpful. And then maybe just last one. In the letter, you talk about proof of concept demonstrations. Can you talk through competence of the 13 changes you highlighted on the January column? I'm just curious if there were any changes since that call to those different pieces that seemed to be the higher risk areas? And what if anything, do we really need to do to validate the plans between now and mid-March? Thanks.

[Raj Talluri, CEO]

Yeah, absolutely. Maybe Ajay you should take this one. You're living and breathing this every day?

[Ajay Marathe, COO]

Yeah, absolutely. Good question again. Yes, we are currently absolutely right on track for that. UPH that you just talked about, I think 350 UPH. And all the equipment. Yeah, there were some high risk areas, which we had pointed out earlier. We double drove them in some cases. But yeah, most all of the proofs of concepts now are leading to believe that we are going to get that up UPH.

[Chris Souther, B. Riley FBR]

That's great. Thanks.

[Operator]

Our next question comes from Sean Milligan.

[Sean Milligan, Janney Montgomery Scott]

Hey, guys, thanks for for taking my question. I guess Mark asked earlier about outside funding or funding from customers and governments. Trying to understand here, obviously, you have a lot of confidence in the Gen-2 design, with the idea that you're going to add additional lines next year. So how do you -- what are your customers or funding parties need to see in terms of Gen-2 designs to be willing to fund that? Like, do they need to see the production coming off the line first, or are they willing to do that ahead of time?

[Raj Talluri, CEO]

Yeah, so good question. I think different funding partners are in different stages of that. So like I said, in some cases, if it is kind of like government, then they just want to know that we do have the demand. And we will be successful with this. So they want to invest ahead, there. Okay. If it's more like customers, then they'd like to see some piece of equipment running or get some, get some samples from it, and so on. So different people at different stages of that. And I really hope that I'll be able to communicate better next time. And I am kind of cautiously trying not to say much about it, because we're in the middle of these negotiations, and it's never good to talk about it now.

[Sean Milligan, Janney Montgomery Scott]

Okay, great. Thank you.

[Operator]

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

[Raj Talluri, CEO]

Yeah, I mean, absolutely. Thank you all for this time. And thank you for listening to us, your support of Enovix. Fantastic company, super excited to be here. I want to take a few minutes to a few seconds to thank all the employees at Enovix, and it's a fantastic place to work. People come in real early and work really hard and long hours. And a big shout out to the founders who built this company. But you'll hear more and more from me in every quarter. And as I get to see you guys more as I travel. Thank you.