Enovix Corporation (ENVX) Q2 2021 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to the Enovix Corporation Second Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program may be recorded. And now, I'd like to introduce your host for today's program, Charles Anderson, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Hello everyone and welcome to Enovix Corporation's second quarter 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 kind of remind you that we released our shareholder letter after the market close today. It's available on our website at 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 our shareholder letter, press release and this conference call can all contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors. Enovix 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. We will also discuss certain forward-looking non-GAAP financial measures, which are not prepared in accordance with generally accounting accepted accounting principles. We urge you to review the discussion of our non-GAAP financial measures and the risks and uncertainties associated with our business that are described in the safe harbor provision for forward-looking statements and our shareholder letter and in our filings with the Securities and Exchange Commission. I will now turn the call over to Harrold to begin. Harrold?

Thank you, Charlie. I want to welcome everyone to our first results call as a public company. In mid-July, we completed our business combination with Rodgers Silicon Valley Acquisition Corp. This is a major development for us and for the whole lithium-ion battery industry. The net proceeds of $382 million from this transaction provides us with the capital to fund the scale up of two advanced lithium-ion battery cell production facilities and commercialize our breakthrough 3D silicon lithium-ion battery technology. I want to thank everyone involved for their intense effort over the past few months to get the deal done. I also want to highlight that on our first trading day, we hosted our advanced battery production showcase, over 60 investors and analysts attended in-person and more than 300 joined the live webcast. Since then, over 2,000 have watched a web press replay. We are humbled and excited by the interest in our story, which we think is one of the most compelling in our industry today. Now let's discuss our second quarter and touch on the highlights of our shareholder letter, which discusses in depth our results, strategy, progress around validation and production and supply chain. After I am finished, Steffen will cover our financial performance and outlook. A key highlight is our go-to market strategy. We remain committed to our strategy of initially focusing on the premium mobile computing battery market, which we forecast to be $13 billion by 2025. This market encompasses computing, mobile communications and wearables, including smartwatches, headsets and the emerging markets of augmented reality and virtual reality also known as AR/VR. In the second quarter, we began shipping technology qualification samples from our pilot line to our initial launch customers in these markets. Additionally, we have met key battery performance specifications for our initial customers. We anticipate shipping final customer qualification samples from our first production line by year-end with production following in the first quarter of 2022 and revenue in the second quarter of 2022. Customer demand today remains very high for our products. At the end of Q2, the potential annual revenue of all programs, either in the active design or design win phase reached $292 million. These represent programs that are through technology evaluation and design work has begun. In the case of design wins, the customer is funding a custom battery design or qualifying one of our standard batteries for a formerly approved product. We have also identified an incremental $881 million of engaged opportunities, which we define as a potential annualized value of projects, where a customer has deemed our battery a match for their product and is evaluating our technology. Altogether, our revenue funnel is $1.17 billion, to meet this growing demand. We are accelerating efforts throughout the company to scale. For example, we have accelerated hiring. In the first half of the year, we grew our headcount by 43% to 184 employees, which included several key additions to the leadership team. Now I'd like to discuss our progress on our first production line. As many of you saw during our showcase last month, we are on track to start production at that one in the first quarter of 2022, resulting in product revenue in the second quarter of 2022. Last quarter, we were able to navigate the global supply chain constraints and receive all key equipment for our first production line. This required heroic efforts, including a critical decision to charter an Antonov An-124, one of the world's largest cargo planes to fly over 60 times of manufacturing equipment from Asia to San Francisco. We managed industry-wide supply chain challenges and installed and started qualifying our equipment in the midst of a global pandemic. Now, let me turn the call over to Steffen, our CFO, who will discuss our financial results. Steffen?

Thank you, Harrold. Our detailed financial results can be found in our shareholder letter. I have a focus on a few high level topics. Before I do, I want to remind everyone that our business combination was Rodgers Silicon Valley Acquisition Corp closed on July 14. As a result, our second quarter financials presented today do not include the updated cash position or share count, reflecting the business combination. On cash, we raised net proceeds of $382 million from this transaction, which we received on July 14. The same day we repaid our $15 million bridge loan. Our balance sheet post business combination is very strong and we believe allows us to fund the scale up of two advanced lithium-ion battery production facilities. On share count, there were 145.2 million shares outstanding as of July 14. This does not include 17.5 million warrants with an exercise price of $11.50. Turning to the second quarter results. We did not recognize product revenue in the quarter, but we do expect to begin recognizing product revenue from the sale of our batteries in the second quarter of 2022. Our operating expenses in the second quarter were $14.2 million. Excluding stock-based comp, our non-GAAP operating expenses in the quarter were $12.1 million, up from non-GAAP operating expenses of $9.8 million in the first quarter of 2021, which also excludes stock-based comp. We’re accelerating our efforts throughout the company to scale given the tremendous demand we are experiencing for all our products. Through June 30, we have used $35.7 million of free cash flow, $20.6 million of which was used for CapEx. For full year 2021, we expect to use between $110 million and $120 million of free cash flow of which roughly half-yearly CapEx. Beyond hiring, we are also adding factory capacity, design capacity, investing in an intellectual property and creating a global footprint to support our customers. To summarize we entered the second half of 2021 with a strong balance sheet and we are investing to establish a leadership position in our industry. We are now focused on executing our plan, which we believe will drive shareholder value. I would turn it back to Harrold for closing remarks. Harrold?

Thanks Steffen, to recap, we made considerable progress in the first half of 2021 equipping our first advanced 3D silicon lithium-ion battery production facility. I wanted to thank our entire team for their dedication and effort. We are singularly focused and bringing our first of a kind manufacturing line to volume production. We entered the second half of 2021 with significant financial resources, strong customer demand, a world-class team and a breakthrough technology in a critical market that impacts all of our lives every day and a strategically important to the global economy. I want to close by welcoming all our new shareholders. We appreciate your support and your dedicated driving shareholder value. With that, we are ready to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Colin Rusch from Oppenheimer. Your question, please.

Thanks so much guys. I realized that you just finished installing all the equipment on FAB 1, but I'm curious about where you're at with FAB 2. If you can give us a sense of where you're at with site selection and any sort of deposits you’ve been able to put down on timelines?

Yeah. Colin, this is Harrold, thanks for that question. So as you know, we've gone through a down selection process over the last six months or so. And we're progressing in due diligence with some opportunities there that we think are good choices. I think those discussions are going quite well. And we believe that there's a deal to be had that will be good for the company, good for our shareholders. We need to be hoarding equipment for that factory in the first half of next year. And I would expect that sometime before then you'll see some public announcements about what that deal will look like.

Okay. That's helpful. And then in terms of the number of customers that are in that funnel that are testing itself at this point, can you give us a total number of customers and how many are testing at this point?

Yeah, I would say, there's roughly 20 customers or so maybe north of that we're actively engaged with right now. We're actively sampling to additional customers beyond that. The funnel's pretty broad. We're not short at all for people that want to test ourselves. And so we're actively trying to increase the diversity of that funnel in customers and products.

And then just the final one around the customers, getting reserving slots in the factory is actually the benchmark in our view, can you just give us a sense of how many other folks are looking at considering those sorts of commitments to you guys on the sales side?

Well, we made an announcement you probably saw today with a customer in the wearable space that's put down capacity reservation, that's worth up to about $20 million. I think, we're starting to have discussions with other customers as well. I don't think I can comment specifically about others that might be getting close or not close to that. I think certainly, our view is we've got a technology and an energy density advantage that you can't find anywhere else. And so I think over time, we may see people more motivated to try to lock up capacity, because I do think will be a scarce commodity.

Great. Thanks so much guys.

Thanks, Colin.

Thank you. Our next question comes from the line of Derek Soderberg from Colliers Securities. Your question, please.

Hi guys. Thanks for taking my questions. I wanted to start with the qualification and the commentary around that. It looks like, you guys have plans to shift production qualification samples in Q4. So it sounds like we should expect that entire assembly line to be operational by then is that correct? And are the production qualification samples you expect to ship? Are those going to be based on production that's fully automated or will you still sort of rely on quite a bit of manual labor there?

Yes. Thanks for the question. So you're right. Fourth quarter of this year is when we start delivering qualification samples. At that point, those products will be made in an entire automated fashion. So, there will not be humans actually doing any of the processing. The line that we put together here is essentially set up that way. So what we'll be delivering to customers will be the same thing they'll be receiving next year on volume production.

Got it. So it sounds like you guys haven't been able to do sort of a full dry run of production yet, but I guess you've probably been testing, the individual steps on the production line. I guess as you look at the latest capacity tests, how is your proprietary equipment sort of stacking up against your expectations on our capacity, better, worse any detail around that would be great.

I think, we are pleased overall in terms of the equipment and its ability to do, which intended function, we actually started working on the equipment probably two years ago in some ways. And so, there's been a lot of work that's gone into with this, a lot of proof-of-concept work, some pilot tools that we did. So we had pretty high confidence going in and I think in general, the tools that perform to specifications, we have a pretty rigorous set of both factory inside acceptance things we have to go through. And I would say there's no red flags there. We're pretty excited about the tools being able to deliver to the intended specs. And it's a real significant improvement from, as you mentioned, stuff in R&D is a bit more manual in nature. And I think that the level of quality of the parts we're going to make is going to be quite high out of this new line. So we're pretty excited about it.

Awesome. Thanks.

Thank you. Our next question comes from the line of Gus Richard from Northland. Your question, please.

Yes. Thanks for taking the questions. Just real quick on the sales funnel, you've got a $292 million of inactive designs and design wins. Can you give us a sense of how much is active and how much is design wins?

Yes, I don't have the breakout right in front of me. I think, there's significant amounts in both of those sections. And obviously what we're trying to do is push those down from design wins into actual purchase orders. And that's really the focus of the company. And I think, over the next six months, that's probably what you should look from us as we convert these things into for purchase orders. We'll make some announcements around that.

Got it. That makes sense. And the 292 is above the rated capacity of FAB 1, we need FAB 2 to realize that revenue or can you get that out of FAB 1?

Well, FAB 1 and FAB 2 both grow in size over time. I mean the nameplate capacity of FAB 1 when it's slowly ramp, I think is 228 million, something like that. So in principle, we have more demand than we can satisfy. I would expect that some of that demand in that part of the funnel will come out of FAB 2, and that's why that project is super important and we're spending a lot of resource on it, as well as FAB 1.

Got it. And then just in terms of FAB 2, we're seeing as people go to more regional supply chains because of pandemics and trade wars and natural disasters. I was wondering if you're giving any consideration to how you set up your capacity globally, do you need FAB 2. Is it more important for you to be in Asia or any – any color on that would be helpful?

Yes. I mean, it's a kind of a multi-dimensional problem, right? I mean, there's a bunch of considerations from costs of workforce to security of your intellectual property, to trade issues. One of the things that we've done for FAB 1, which might also help us in FAB 2 depending where you're located is we've built a company with a foreign trade zone. So essentially from a, kind of a tariff and duty standpoint where we're exempt from those to the extent those products, leave the U.S. and go back. And so that gives us a lot of flexibility in terms of where we locate FAB 2, but there's a matrix of parameters we're looking at in the final selection for FAB 2, and it's hard to handicap those cause each option has got different, different attributes. But I think we're pretty firm in picking what we think is the best choice for the shareholders.

Got it. And then the last one for me on the North, the work you're doing with the military, can you give a little bit more color to that is – is this just investigating higher capacity batteries for military applications and is there an expectation that that will ultimately lead to revenue down the road?

Yes. I think we're pretty excited about that program. I mean, I think we kind of view that as a new market for us outside of our initial markets. Soldiers themselves carry about 15 pounds of batteries each, there's kind of a standard building block battery. Obviously having a battery of higher energy density allows them to carry – probably they'll carry the same weight, but they're going to have more time so that so much of what they do is their sensors in there, everything about them as electrified. So that's super critical. We actually see this being a very important market for us going forward. And this is more than an evaluation. This is really delivering cells to them that, we hope will turn into and we spec will turn into a significant amount of revenue for the company as we get into the middle years.

Okay. And remind me, how long has that, that contract you signed?

You know, I'll be honest. I don't recall the – I don't recall the length of the contract, but there's some near-term deliverables over the next year. We're going to be building cells for them to try out. One other point, I'll just mention, obviously if you're a soldier in the field and you're getting shot at the robustness of the batteries is also important and one of the things you probably recall is our batteries in case in stainless steel. And so there's some advantages from a robustness standpoint as well. That is very interesting to the Army and in addition to obviously just the energy density.

Great. Thanks so much for taking the questions.

You're welcome.

Thank you. [Operator Instructions] Our next question comes from the line of Sean Milligan from Williams Trading. Your question please.

Hey, thanks for taking the questions this afternoon. I think in the shareholder letter, you mentioned some advancements you've made on the EV front, and I was wondering if you could expand on that in terms of maybe discussion about the types of partners that you're working with, are they automakers or pack and module players and how you see that progressing over the next several years?

Yes. Thanks for that question. I think we've got a multi-pronged approach there. We are engaged with actual auto companies as well. We're also talking with components, suppliers, specs suppliers, like you said, into that space. There's multiple ways to enter that market. And we want to basically engage with all of those. So we're sampling cells into various parties along those spaces to have them evaluate our technology. We're also in parallel executing a three-year program with the Department of Energy, which revolves around essentially building ourselves with the more standard EV chemistry's materials that are in their batteries to demonstrate the performance with the actual, material set you do. So we're pretty bullish and optimistic about that. Our view is that, we'll push both these efforts, over the next year. And our goal is that by, sometime next year, we'll announce, development agreements with specific companies in those spaces. And that leads to, so obviously more serious engagements and supporting us, becoming a supplier into that space by 2025.

Okay, great. And also if we spend a second talking about AR/VR, you have the customer that's trying to reserve or has reserved capacity in the plant and just curious within the $13 billion TAM, what percentage of that is AR/VR and just based on discussions you're having with, people in that space is there upside to that figure and like when do we start to realize the upside to that figure over the next couple of years?

Yes. I would say the AR/VR space is interesting, right? It's a early stage technology now, but one that kind of the, the Mavens and consumer electronics believe could be a huge, and actually, essentially almost be as ubiquitous as cell phones down the road. The timing of that I think is not completely certain even from those Mavens. And so, what they're doing now is essentially the groundwork to build those development products and platforms. Batteries are super challenged in that area. And a number of players has said the only battery that they see that gets them to where they need to be is ours. And so, we're super excited to be working with people on that space. In terms of the $13 billion the AR is ARV is probably is a pretty small portion of that. My guess is probably going to being a lot higher. The question is, how soon before 2025 does it happen? And I think that's maybe anybody's call, I would say that these customers in these spaces are making some pretty big bets in investing lots and lots of money to make that happen. And so it's quite possible that could pull in and be a significant portion of the market and also significant business for us in the years ahead.

Great. And just one more earlier you answered questions about the timing of equipment for fab too, and when that needs to be ordered in terms of the ramp that you're projecting on the raw material side, have you signed takeaway agreements with suppliers of raw materials, or how should we think about that in terms of the supply chain?

Yes, So we've been pretty active executing supply agreements this year. Our general philosophy is a multiple supply agreements, so that we've got some redundance of supply in our critical materials. And so we've been pretty successful at that. And these are staggered over time in terms of how much material we need, we're not a huge consumer in 2021, and we get to be more significant – sorry, in 2022, we're a bigger consumer in 2023. I don't foresee any issues getting access to those materials over that timeframe. And certainly, we continue to negotiate those into bigger supply agreements as step two comes online. I think we're pretty happy with that, and we’ve picked, I think had industry leaders and we pick materials, which are very high raw volume runners. So we're trying to some extent kind of ride coattails what the industry is using and not try to be trailblazing in that respect.

Great. Thank you for taking the questions.

My pleasure.

Thank you. [Operator Instructions] And I'm not showing any further questions in the queue at this time. I'd like to hand the program back to Harrold Rust for any further remarks.

Well, thank you for everyone attending our earnings call today. We appreciate your attendance. We're super excited about the company, the direction we're heading and the progress we're making. We are singularly focused on bringing up this first of a kind battery line to satisfy our customer needs. And we're excited to share with you all the progress towards that end as the year progresses and create shareholder value for everyone. So thanks again for your attendance.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program, you may now disconnect. Good day.