Enovix Corporation (ENVX) Q4 2025 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the Enovix Corporation Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's program will be recorded. And now I'd like to introduce your host for today's program, Robert Lahey, Head of Investor Relations. Please go ahead, sir.

Thank you. Hello, everyone, and welcome to the Enovix Corporation's Fourth Quarter and Full Year 2025 Financial Results Conference Call. With me today are President and Chief Executive Officer, Dr. Raj Talluri; and Chief Financial Officer, Ryan Benton. Raj and Ryan will provide remarks followed by Q&A. Before we begin, please note that today's call contains forward-looking statements that are subject to risks and uncertainties. These statements are based on current expectations and may differ materially from actual future results due to various factors. For a discussion of these risks, please refer to the disclosures in today's press release and our filings with the Securities and Exchange Commission. You can find these materials on our website at ir.enovix.com. All statements made on this call are as of today, February 25, 2026, and we undertake no obligation to update them, except as required by law. Additionally, during the call, we may reference non-GAAP financial measures. You can find a reconciliation to the most directly comparable GAAP measures in the materials posted on our Investor Relations website. With that, I'll turn the call over to Raj.

Good afternoon, everyone, and thank you for joining us. The fourth quarter represented continued progress as we transition from qualification into early commercialization across multiple end markets. First, we continued advancing smartphone qualification for the AI-1 platform with our lead mobile customer. Second, engagement expanded across smart eyewear and other AI-powered devices. We view smart eyewear as an earlier commercialization pathway for AI-1 due to lower qualification barriers and thresholds. We are currently preparing production to support initial high-volume demand from our lead smart eyewear customer. Third, defense and industrial programs continue to provide revenue, operational validation and manufacturing execution experience as we prepare for consumer scale production. Finally, we ended the year with a strong liquidity position, giving us flexibility to execute our commercialization road map while maintaining disciplined capital allocation, including recently authorized share repurchase program. Overall, we believe 2025 positions us well for the next phase, moving from qualification towards commercialization across smartphones, smart eyewear and additional defense applications, and we'll walk through that progress today. For the full year 2025, revenue grew 38% year-over-year to $31.8 million, with the defense shipments remaining our largest contributor and batteries for naval munitions specifically being our top product in Q4. Full year non-GAAP gross margin improved to 23%, reflecting higher production volumes and improved mix shift towards higher-margin defense batteries following our April 2025 asset acquisition. We ended the year with $621 million in cash, cash equivalents and marketable securities, supporting qualification completion, commercial scale-up and additional potential strategic transactions. To support this next phase, we strengthened our operational leadership. Kihong Park, or KH, as he prefers to be called, now leads our global manufacturing organization, bringing decades of battery production experience and deep operational knowledge from our South Korea platform to our Malaysia scale-up efforts. We also welcomed Ed Casey to lead advanced manufacturing engineering, adding significant expertise in scaling complex high-volume manufacturing environments across global networks. Together, this leadership alignment reinforces our focus on manufacturing execution as we prepare for high-volume production. We continue to improve yield and throughput across Fab2. As we discussed in our previous call, Zone 1 laser dicing remains the primary rate limiting factor, and we are methodically addressing that constraint through process optimization and alternative dicing approaches. We believe in our ability to unlock higher production rates as we transition towards commercialization. In 2026, we are capable of qualifying other new products and customers in the very production line they will use and meeting demand for smart eyewear customers. Our overall company focus remains on disciplined execution, advancing smartphone qualification while expanding into adjacent markets that support earlier revenue and manufacturing scale and leading in smart eyewear markets with our silicon battery shipment. You'll see how these pieces come together through today's presentation. Now let's talk about markets. Last quarter, we introduced this framework for outlining the end applications where our technology can create a durable moat. The smartphone market represents the fastest path, the large scale and is ideal for our technology. An independent study from Polaris Labs previously validated our energy density leadership in smartphone batteries. And this quarter, we extended the validation through a second apples-to-apples comparison against the leading competitor using identical methodologies. The results confirmed that AI-1 delivers a meaningful volumetric density advantage versus commercially available silicon-doped lithium-ion batteries. We expect AI-2 and AI-3 to further expand our technology lead with performance gains well beyond historically industry advancement rates. This quarter, we updated this slide by breaking out smart eyewear and drone applications as distinct growing addressable markets where our engagement has progressed. Smart eyewear adoption is presently accelerating as AI workloads migrate to compact always-on devices. We expect to ship our first smart eyewear batteries for use in AI/AR devices in the second half of 2026. Exceptional growth in this market is expected to continue throughout this decade with display-enabled architectures that significantly increase power demand and require higher energy density for constrained form factors. We believe smart eyewear battery TAM could exceed $400 million by 2030, and we are targeting meaningful participation based on early engagement with key partners and strong technical suitability. Drones represent another priority area of focus where we see an attractive TAM and a strong competitive advantage. Western drone platforms, both defense and commercial, are increasingly prioritizing higher energy density, extended flight time and supply chain diversification. This battery segment is projected to be approximately $1.5 billion this year. Breaking these markets out reflects growing conviction that we are well positioned across multiple high-growth platforms. With that context, let me walk you through our smartphone qualification progress and the defined pathways we see towards commercialization. Turning to our smartphone commercialization plan. We remain engaged with 7 of the top 8 global smartphone OEMs by market share and validation efforts have expanded this year with multiple leading OEMs, including those serving the U.S. market. Our near-term focus, though, remains on 2 Asia market leaders with Honor being our lead customer. We commenced their formal product qualification process in the third quarter of 2025. Most of the requirements have now been met, and cycle life testing remains the primary gating item to complete qualification and move into system integration and production planning. Because cycle life testing is often misunderstood, particularly for silicon anode batteries, let me spend a minute explaining what these tests actually measure and why they matter for real-world smartphone usage. The key point, and what we want to clarify next is that cycle life results are complex and depend heavily on test protocols, which is especially important when evaluating next-generation silicon anode technology. When we say cycle life testing, we are referring to multiple tests based on different charge and discharge rates, or C-rates. This is a standardized measure how quickly a battery is discharged relative to its total capacity, where a 1C rate means the battery can be fully discharged in 1 hour and a 0.2C rate means battery discharge in 5 hours. This slide illustrates relative C-rates across common smartphone applications. The highest power consuming activity is video recording, which requires approximately 0.17C discharge rate. We include a host of other popular consumer applications as well as scenarios for running multiple applications simultaneously to account for use cases such as using ChatGPT while also playing a Netflix movie. When we refer to our lead customers' primary qualification requirement of 1,000 cycles, that is based on a rate of 0.2C. As you can see that everything below this level, which is why smartphone as well as smartware OEMs rely on this test to ensure batteries provide a positive experience for a wide range of consumer usage patterns. A test purely based on this rate would take a year to complete though. So most companies compress the test time to 4 months by using an accelerated 0.7C rate for a majority of the cycles where the battery is fully discharged in 1.4 hours. Smartphone OEMs also included in their qualification process, a secondary requirement of 800 cycles for just the 0.7C cycles, though this C-rate is well beyond any single app consumption we are aware of. For the parts shipped in December, customer qualification testing for cycle life began in January. This testing is progressing in parallel under customer control protocols. On this slide, you can see how batteries we send to our lead customer perform in our 0.2C cycle test. We made improvements over our initial version submitted in July, and our internal test indicates we are now likely to exceed the requirement of 1,000 cycles at 0.2C rate. This is a significant achievement that is indicative that our product is approaching readiness for integration into commercial products. However, these same batteries are not currently on track to exceed the accelerated 0.7C target. As it is the first time a 100% silicon anode smartphone battery has been brought to the market, we are working closely with our customer on alternative pathways for testing that is more suitable for silicon anode batteries. So while customer testing ultimately determines qualification, this internal data set gives us increasing confidence that the current batteries are tracking towards the required performance. Because there has been no 100% silicon battery qualified in a smartphone, there are no defined testing protocols for qualification. Based on current test results, we're discussing multiple pathways to qualification with our lead customer. The first scenario is approval based on our 0.2C results and acceptance of the 0.7C cycle life below their current requirement. A second scenario involves adoption of new accelerated testing protocol tailored for silicon anode batteries. Finally, we're also continuing to develop improved electrochemistry variation to hit the 0.7C target. While we believe our battery platform is ready for deployment, we also understand that we are entering the largest consumer electronic market in the world. Customers appropriately maintain a high qualification bar for new entrants. We look forward to meeting all the necessary standards in 2026 and transitioning into commercial production. Initial smartphone-related revenue in 2026 is expected to support system integration and launch preparation, positioning us for a larger scale commercialization in late '26 or beginning in 2027. Now let's turn to smart eyewear. We view smart eyewear as an earlier commercialization pathway for AI-1 due to shorter qualification cycles and lower durability thresholds. We believe this market represents a compelling near-term expansion opportunity for the platform, where our high energy density architecture is well aligned with product requirements. Our engagement in this category began early, and we're working with partners we believe are well positioned to lead in this market as it scales. Compared to smartphones, where an incumbent is deeply entrenched, this creates a more direct path to initial adoption. Our focus now is execution as we prepare for initial volume shipments to lead smartware platform later this year. Today, the eyewear market is dominated by products without displays, largely focused on audio, connectivity and basic AI assistance. However, over the balance of this decade, we expect more than 5x unit growth as display-enabled ecosystem emerge, which translates to even higher battery TAM expansion as ASPs increase over the same time frame. Display-enabled eyewear materially increases the power demand. Always-on AI processing, image capture and augmented reality overlays create sustained energy draw in highly constrained form factor. That combination, compact design and higher sustained power consumption is precisely where volumetric energy density matters most. Based on current engagement, which has accelerated rapidly, we expect smart eyewear to represent an earlier commercialization pathway for the AI-1 relative to smartphones. As this market matures, we estimate the smart eyewear battery TAM could exceed $400 million by 2030, and we believe AI-1 is well suited to participate meaningfully in this market. This slide illustrates how our platform aligns with smart eyewear cycle life requirements. Importantly, in this segment, customers typically require less than 1,000 cycles durability at 0.2C rates and do not have a pure 0.7C cycle test. Our energy density architecture is optimized for constrained space and sustained power draw. And because we architected AI-1 first for smartphones, the segment which has the highest technical qualification standards in consumer electronics, we believe extending the platform into smart eyewear is comparatively more straightforward from a performance standpoint. Once we designed for the most demanding use case, adjacent applications become natural extensions of the same core architecture. That allows us to prioritize energy density and power efficiency while comfortably meeting eyewear durability thresholds. In addition, we expect this market will have a mix of smaller customers who address a wide range of fashion preferences and use cases that are also enabled by the budding Android XR ecosystem. This means our future sales mix may include meaningful percentage of off-the-shelf products in addition to customized products for the market leaders. We are seeing this dynamic play out already with multiple wins we announced at CES earlier this year. Let me now turn to defense. Defense continues to provide both revenue and operational validation of our technology and manufacturing capabilities. We operate 2 differentiated defense-focused platforms across our global footprint. In Malaysia, we're advancing our 100% silicon anode architecture, our largest format AI-1 variation optimized for high energy density applications. These batteries are well suited for next-generation soldier systems, including augmented reality headsets and wearable power systems. We have supported U.S. Army programs since 2021 and recently provided deliveries under the conformal wearable battery program. In Korea, we have a conventional architecture platform utilizing graphite and silicon anodes. This facility has an extensive operating history in Korean defense markets and supports a wide range of battery sizes and configurations optimized for high discharge rate applications, including drones, subsea systems and munitions for several Korea's large defense contractors. Naval munitions specifically were the largest growth driver in 2025, and our pipeline is increasingly focused on expanding our presence in the aerial drones market. In 2024, we kicked off a campaign to introduce our technology to U.S. and European military contractors who are attracted by our diverse supply chain and internal manufacturing capacity. Establishing initial programs and building a pipeline has required time, but it is starting to pay off. We enter 2026 with a global pipeline of approximately $100 million, including opportunities with multiple Tier 1 defense contractors. Recent design win traction in Q4 has strengthened our confidence in pipeline conversion. As programs progress, we expect to provide greater visibility into customer engagements as we convert pipeline to backlog. Aerial drones represent a compelling battery growth opportunity with an estimated $1.5 billion TAM this year. Next-generation drone platforms require higher energy density to extend flight time and strong discharge capability to support power intensive missions. As autonomy and AI capabilities expand, power requirements will continue to increase. Our platform aligns well with these needs, enabling longer flight times, sustained high discharge performance and diversified supply chains through our manufacturing in Korea and Malaysia. We are building on deployed defense cells and existing customer relationship to expand into next-generation silicon anode drone applications. This segment demonstrates how our architecture scales beyond smartphones and supports a diversified growth strategy. This slide highlights our energy density progress in drone applications. Today, we have deployed defense cells supporting high discharge drone programs. We are now advancing a higher energy drone cell in development with internal testing achieving approximately 342 watt hours per kilogram. Looking ahead, our next-generation silicon anode road map targets energy density above the 400 watt hours per kilogram to support increasingly autonomous platforms. The road map shows clear progression, deployed cells today, higher-energy product launches next and next-generation silicon anode performance that expands mission capability. Now I'll turn it over to Ryan to talk about our financials. Ryan?

Thanks, Raj. First, a few highlights on the fourth quarter results. Fourth quarter revenue was $11.3 million, a record for Enovix, up 16% year-over-year and above the top end of our guidance range of $10.5 million. This performance was driven by continued strength in defense and industrial shipments out of Korea. Non-GAAP gross profit was $2.9 million for a non-GAAP gross margin of approximately 26%. While margins can fluctuate quarter-to-quarter based upon product mix, Q4 benefited from higher volumes and operational improvements in Korea. Non-GAAP operating expenses were consistent with our planned investment levels, reflecting continued investment in smartphone and smart eyewear qualification programs as well as Fab2 readiness. Non-GAAP loss from operations was $28.9 million, modestly better than the guidance range of $30 million to $33 million. Non-GAAP net loss per share attributable to Enovix was a loss of $0.14, also better than the guidance range of a loss of between $0.16 and $0.20. With respect to the balance sheet, we ended the year with approximately $621 million in cash, cash equivalents and marketable securities, providing substantial liquidity to execute on our commercial plans as well as enabling us to evaluate strategic opportunities from a position of strength. Additionally, the Board authorized a share repurchase program, reflecting confidence in our long-term strategy and adding another tool to our capital allocation framework as we focus on long-term shareholder value. Turning to the full year results. For the full year 2025, revenue totaled $31.8 million, a record for the company, representing 38% year-over-year growth. This growth reflects sustained execution in defense and industrial markets, while new products in the smartphone and smart eyewear markets advance towards commercialization. Full year non-GAAP gross margin improved to 23%, benefiting from higher volumes and demonstrating substantial progress in manufacturing execution. Capital expenditures for the year were disciplined and aligned with our staged manufacturing expansion plans. Overall, we exited 2025 in a stronger financial and operational position than we entered it, with growing revenue, improving margins and substantial liquidity to execute upon our road map. Now turning to Q1 2026 guidance. For Q1, we expect revenue in the range of $6.5 million to $7.5 million, reflecting normal seasonality and program timing of defense shipments. We expect non-GAAP loss from operations between $29 million and $32 million, reflecting continued investment in product qualification and manufacturing readiness. We expect capital expenditures between $9 million and $11 million, primarily related to Fab2 equipment. Actual cash payments in Q4 were lower than previously guided due to the timing of equipment and vendor payments. The majority of those payments are expected to occur in the first half of 2026. This is primarily timing, though we also made a couple of intentional near-term adjustments. Coincident with the operations leadership transition, we made 2 adjustments to our capital plan. First, we deferred initiation of the NPI line in Korea to allow KH time to fully evaluate priorities and sequencing. Second, given the high demand for products from our Korea factory, we are accelerating adding incremental capacity there. This is a relatively modest investment supported by high customer demand and opportunities. On the M&A front, to provide a little bit more color there, we continue to actively evaluate a range of opportunities, both smaller and larger, that could accelerate commercialization or strengthen our manufacturing and technology position. We will only deploy capital with a focused and disciplined approach, especially with respect to strategic fit and price. And with that, I think we're ready to take questions. Operator?

[indiscernible] Q&A session. Please note that this call is being recorded. Before we go to live questions, we're going to read the 2 most highly voted questions submitted by shareholders ahead of this call during the call registration. The first question is, how does your current strategy differentiate Enovix from competitors?

Thank you for that question. So Enovix, we use 100% active silicon anode. Most of our competitors use graphite for the anode. Silicon anodes can store much more lithium. So we are able to provide much higher energy density because of that. One of the problems with replacing graphite with silicon is that the silicon tends to swell when using a battery when doing a charge and discharge. We've got an architectural advantage where we figured out how to enable the silicon anode from not swelling while maintaining the energy density advantage. That is our main advantage, and that is how we differ from most of our competition because we provide much higher energy density due to using 100% active silicon anodes.

Thanks. The second question is, at our current burn rate, how long is our cash runway? And under what conditions will we need to raise additional capital?

I'll take that one, of course. First, we ended the year with approximately $621 million in cash, cash equivalents and marketable securities. So we're operating from a position of strength, in my opinion. Second, I'd caution against thinking about runway purely in terms of static burn rate because our spending is tied to a very specific qualification and commercialization milestone set. As those programs progress, the working capital and capital expense profiles will evolve as well. As we said in the prepared remarks, we believe we have sustained liquidity -- substantial liquidity to execute on our commercialization strategy without needing to raise capital in the near term. That said, as we've discussed before, beyond that, we will always evaluate capital allocation options such as strategic M&A opportunistically but with process rigor.

[Operator Instructions] Our first question comes from Mark Shooter with William Blair.

Can you hear me?

Yes, go ahead.

Great. So I appreciate you getting into the details and geeking out with us a bit on the smartphone C-rates test requirements. The 0.7C rate life cycle test is definitely overkill for smartphones, but it's an incumbent standard, and they're notoriously sticky and difficult to change once established. So I'm wondering in your engagements with Honor, how receptive were they when you suggested the change? And given that cycle life and energy density are always paired to trade-offs, would Honor take a formulation that hits that 0.7 rate cycle life spec with a slightly lower energy density?

Yes. Thanks, Mark. Thanks for the question. Yes, I think the first thing is to -- the reason I showed some of the material in this talk is to actually show that most of the use cases in the smartphones, as the batteries get bigger and bigger and more and more capacity, are under 0.2C discharge, which basically means that we have a battery that now we believe under 0.2C average discharge rate, goes over 1,000 cycles. So we essentially -- we feel we have a battery that meets the requirements of the smartphone market. Now as I said, one of the challenges is if you want to test if the battery meets the requirements at the -- how the normally battery is used in the phone, it's going to take a year to at least to run that because if you run at 0.2C, it takes a long time. So customers typically use a higher rate of discharge, like 0.7C, to cut the amount of time it takes to test. This is very similar to people used to use a burn-in test, for example, for chips, high-temperature ovens, try to find the early failures. When you change technology from graphite batteries to silicon anode batteries, silicon anode batteries behave differently when you discharge them very fast, in this 0.7C. So Honor and our other smartphone customers, we've talked to them, they understand that. They realize that this test is a proxy and an accelerated test and not a true test. But, like you said, this is a test they have been using. So we are in discussions with them. We see 3 pathways forward. One is, we're able to convince them that this is not a real-life test and the real-life test is really 0.2C, and we can get a waiver on less cycle life for 0.7C, for example. By the way, this has got nothing to do with energy density. It's purely about cycle life testing. So it's not like they need to take a lower energy density. They just have to take a lower cycle life on 0.7C, which is not a real test, an accelerated test. The second one is we have to find together with them another accelerated test that is more representative, if you will, for silicon anodes. And we have some ideas on what that is, and we are discussing with them on that. The third one is we'll just have to modify our electrochemistry just to pass this test at 0.7C. So we are working on all 3 of those. Ultimately, there is a lot of interest from our customers in wanting to use our batteries because of the higher energy density we provide. And the road map, even higher energy densities because of 100% silicon anode. And those conversations are going well. But ultimately, we need to solve this passing of this test to a way where they and us both are comfortable, that in the real-life use case, when ultimately the battery is put in the phone, it's going to do really well and everyone is happy with the performance.

I appreciate all the color there. If I can switch over to the opportunity in smart glasses. In the presentation, you gave a lot of information there on the TAM as well. The performance advantage with Enovix's cell and technology goes up, but the battery application requirements get easier. So I can see this is your faster commercialization path. But you did mention an initial production demand in your -- in the release statement. So I mean, should we think about that as a purchase order? Or is that a next step? And can you frame what the revenue opportunity might be for '26? Or is this a '27 story?

Yes. Good question. So as you alluded, when the battery gets smaller but still the energy requirements or capacity requirements are high, we have a disproportionate advantage because the smaller it is, the efficiency we have is more -- better compared to our competition because the additional stuff we put in there for holding the cell from not expanding is not as much of a penalty, right? So that's why I think it's much -- we are much more competitive there. And also the cycle life requirements are much, much lesser. They don't need to do 1,000 cycles because people probably change their glasses much quickly. So those 2 are very good. And also, the battery in smart glasses is the limiting factor. I mean, if you guys actually buy some of the smart glasses in the market today and start using them, you'll find that almost none of them come all day. Smartphones come all day, but most of these things will die in multiple hours. So a better battery makes the product. That's why there's a lot of interest from our customers on using our battery. And also, there's lots of different kinds of applications, lots of different kinds of products. This is what I mean by -- there could be sport glasses, there could be utility glasses, there could be fashion glasses. And as I mentioned, when Android XR ecosystem comes, there will be even more products using that. So that's why the TAM is now suddenly much larger we expect it to be in the next few years than we ever thought before. So I think that's why we are very excited by this market and the fact that we can get there. Yes, you absolutely should think of the question you asked as a purchase order, and we are manufacturing them now to our lead customer. We are very excited by that. The whole team -- I was in Penang last week. The whole team is focused on executing that and building those products and setting it out. Initial volumes will be lower just because they're just starting. But I think that '27, '28, we expect the market to really grow and be meaningful for us. So we're excited by that.

Yes. If I can just jump in and chime in. Had an old boss, used to say, "All dollars are not equal." It's a very important order for us.

The next question comes from George Gianarikas with Canaccord Genuity.

Incredible level of detail in presentation. Appreciate it. So maybe first question, you pointed to sort of a little bit of an issue with the electrode dicing and the manufacturing process getting yields up there. How much have you been talking with your potential future customers around fixing that issue maybe together in anticipation of ramping production towards the end of this year?

Yes. I think, firstly, as I mentioned, the yields on almost -- on all steps are above 80%, as you saw in our -- 80% or above, as I mentioned. On the dicing side, they're close to 80% but not quite there in fourth quarter. But this quarter to date, we're at 80%. So we feel confident that as we make progress, it will sort itself out. But that's because we just started making 2 batteries, right? We just started making the smartphone battery and smart eyewear battery. We've been sampling a lot of batteries last year. We're now focused on 2 of them, one on Agility Line, one on H-volume line -- high-volume line, and we'll continue to work on each state to get it better. Our customers have visited our factories. They have seen it. We've got man through multiple customer audits. We have enough supply to meet all the requirements for 2026. And we're looking at various options to increase the throughput and get even more cost-effective than laser dicing methods to actually get the volumes up. So yes, a lot of focus on that, and we are working with our customers on that.

And maybe with regard to the drone opportunity, can you sort of talk about the different variations of chemistries that you have to work with them? I'm assuming these are silicon-doped cells, not 100% silicon that you're approaching the market with first. And so how many different chemistries do you need to approach that market? And do you need, like, any additional salespeople to sort of attack it?

Yes. Great question. This, we have been making. We haven't really talked about it too much in the past. We have been making very high performance, high rate of discharge cells because we were selling into -- a lot into the Korean military from our Nonsan facility. And some of the requests came from drone batteries, and we started making those. What we find now is, with the market expanding fast, because as you guys have seen in the more recent political situations, there's lots of drones being deployed, both in commercial and also in military, we have now combined -- used some of our knowledge on using 100% silicon anodes with our Nonsan team. And now we dope those batteries also with silicon anode -- with silicon -- the graphite with silicon and to increasing amounts. As I mentioned before, when we put more and more silicon, the cells, the batteries swell. So that problem hasn't gone away. But since they are inside things like drones, even if those cells swell 10%, 15% or more, there's space inside to accommodate that. So we have now found that we can make high gravimetric energy batteries that do swell a little bit, but still good within the application. Whereas in a smartphone, if you swell, it's not acceptable because it's very space constrained. So they are both -- so in that sense, I think it's been a really good thing for us. As I mentioned, we have a strong road map now, and you will see us sampling much higher watt hours per kilogram cells this year and just continuing to increase that through next year. And we have a lot of customers now helping us with that, too.

Our next question comes from Colin Rusch with Oppenheimer.

Can you guys hear me okay?

Yes, sir.

Yes, Colin, go ahead.

So guys, exciting that you're moving into the drones. Can you talk a little bit about the form factors that you're working on there as well as the diversity of electrolyte and binder materials and binder processes that you can -- you feel comfortable talking about at this point? Just want to get a sense of the full ecosystem here and potential product diversification that you might see within that opportunity.

Yes, sure. Again, like I said, it's a pretty big market and all of them are not same, right? There are subsea drones. There are aerial drones. There are big aerial drones that carry a lot of weight. There are smaller ones that carry some munitions and maybe onetime use and just used for a few times. So we have different chemistries and different electrolytes to address that market. Here, this is one of those areas where we can trade off cycle life for energy density, for weight and so on because you don't need to charge them 1,000 cycles, right? So that's really not a requirement here. 300 is plenty. So suddenly, a lot more opportunities open up for us in terms of the electrochemistries we use. And our team in Korea has been doing this for a long time. So we have multiple chemistries going after that, some purely graphite, some graphite doped with silicon, a different kind of cathodes. So multiple form factors, multiple products. But we understand this market pretty well. And the other important thing is, in this market, having your own factory is really a big deal because manufacturing -- that's something that our customers tell us that the fact that we own our factories and we can make them in Korea or Malaysia is a big advantage compared to some of our competition who actually have to use contract manufacturing in China and other places. So these are sensitive areas where having our own captive manufacturing helps us quite a bit.

And I'll add to it. I think I was going to say part of the question, I do expect that we'll add to the sales and business development organization to support that. So it's kind of the time to build that group out.

That's right, yes.

Great. And given what's going on in the U.S. in terms of trying to migrate manufacturing and secure supply chains back into the U.S. over the next few years, even from Korea, can you talk about some of your capital planning on a multiyear basis as you enter that market in terms of having to have some localized or regionalized supply in the Western Hemisphere to serve some of the [ U.S. military ]?

Yes. I mean, at this point, as Ryan mentioned, we were fortunate to acquire this facility in Korea last year from SolarEdge that added 300,000 square foot of total capacity we have -- factory we have in Korea now, with a very capable team that's been building batteries for defense for like 20 years and industrial applications. So we have a large footprint there, and we are now going to invest more into that this year to get more capacity there. And again, so far, I think manufacturing in Korea, our manufacturing in Malaysia seems perfectly acceptable. We'll continue to see if it makes sense to bring something into the U.S., but we are quite -- our customers are quite comfortable right now with those 2 facilities.

The next question is from Jeff Osborne with TD Cowen.

I appreciate all the detail on the call so far. I wanted to know, Raj, relative to the last earnings call, 3 months ago or so, the 0.7C metric that you mentioned, is that new? Because you referenced sort of a 4-month testing period. I'm just curious like when the parameters changed? And then when that -- I think you referenced a 4-month sort of shot clock to proceed through the testing process and procedures. Did the 4 months start 3 months ago and you'll know next month? Or did you get that new homework assignment, so to speak, in the past few weeks?

No, that's always been there as a requirement. And our thinking was that we will figure out a way to -- I mean, we will pass that requirement also. But I think what we find now is with 100% silicon anode batteries, 0.2C requirement is something we can pass because that's -- we have data now that shows that. When you discharge a battery like 100% silicon anode battery at 0.7C rapidly, which is not a real use case, as I mentioned, you just do it for convenience. It doesn't behave like the graphite batteries do. It behaves differently. So in that sense, it's one of those cases where the accelerated test itself has to be adapted a little bit for the kind of battery we are using. And we showed this to our customers, and they understand it. So we're not discussing what the right way to resolve this is, right? So it's not a new homework assignment. The results is what we have now, is we've solved the 0.2C problem, which I believe is a real problem in terms of how a battery is used in the phone. Now we are working on how to resolve the 0.7C accelerated test in a way that both us and our customers are comfortable.

And do you think that can still be done in a 4-month window that started at some point this quarter? I'm just trying to understand like when do you expect, knowing what you know now, to pass the Honor test, so to speak?

Yes. Like I said, I think there are 3 pathways for us. One is, we have results now on 0.7C that don't go all the way to the cycle life that they want. But we are talking to them about how real is this, like it's a proxy test, can we get comfortable? And for example, get a waiver that you pass these many cycles, it's okay as long as the 0.2C is holding 1,000 cycles. That's one pathway. That may be the shortest one. The second one, maybe we come up with a different accelerator test, which we believe is more representative or better -- makes them comfortable that silicon anodes, if we accelerate test like this, they behave like how they would in real-world use case. We are working on that, which is a different testing protocol. And the third one is they say, "No, you just got to pass this." In which case, we'll have to change the electrochemistry and find a way to pass this, which we have some ideas on how to do. The team is working on that. That might take longer. So depending upon which one we are able to convince them, we'll gate how much the time is. So we do believe that one of these things we'll be able to convince them before the end of the year and get some volume.

Got it. And then maybe for Ryan, just given Raj's answer on the 3 different outcomes there, as it relates to sort of modeling the business over the next few quarters, I know you only give formal guidance 1 quarter out, but I assume we should think about eyewear as the main driver outside of the Routejade facility for the next 6 months or so? That is part A of the question. And part B, can you just remind us of what you expect seasonality to be for defense? You've got a pretty precipitous decline in Q1. How should we think about that rebounding in Q2 to through the rest of the year?

Yes. Thanks, Jeff. The first part of your question, the answer is yes. So for the first -- the near term, that's -- you heard it right. So smart eyewear is the more near-term opportunity. And then the second part of your question in terms of seasonality, exactly right. So if you look at the same pattern in terms of revenue that we had last year, Q1 tends to be soft based on the order pattern of these long-term defense contracts and then the back half of the year tends to be much stronger. Kind of evidenced by our Q4 that we just printed, which was record quarterly revenue.

Got it. And then maybe last one quickly for you. Just CapEx for the year, should we think about $50-plus million? Or what's the expectation?

We don't give -- apologies, we don't give guidance beyond the quarter. I think we gave guidance for just Q1 and just speak broadly about Q1 in general, we talked about the HVM-2 line. We've already started placing some orders for some of the long lead, but we'll reevaluate all of our plans now with KH, who's in this new role of Head of Operations, who's wonderful to work with, and we'll just be smart and prudent how we phase those orders out over the year.

The next question comes from Will Peterson with JPMorgan.

I wanted to come back to the question about your Korean operations. Can you give us a sense for what the combined, the 2, Routejade and the other one, can support in terms of megawatt hours or revenue? Just trying to get a sense of the run rate you could support at sort of max capacity? And then how much capacity do you plan to add? And what -- can you give us any sort of sense on what investment you're considering?

Do you want to take that or me?

Go ahead.

I'll go. Again, with that, we haven't given out specific numbers in terms of megawatts, but we -- I think we've talked publicly about how this is a facility that will support significantly higher revenue streams, maybe 2x, and we're investing -- we're making decisions in terms of deploying capital right now, which would incrementally add to that. Again, I don't want to quote an exact number, but it's -- we recognize what a great opportunity we have here in some of these markets that we've talked to, and we've got a great team to support. So we're starting to invest dollars. But again, the -- I think you can see the type of numbers that we've invested in Korea over the last couple of years compared to the dollars that we're investing in PEP-2, they're relatively small, but they're really important in terms of the ROI that they can return both in terms of dollars and strategic return.

Yes. One other color I'd add is, we have a much larger facility now. Like I said, we have a fairly large facility that we acquired with a lot of machines. So we will be adding incrementally and in a scalable manner. So some of it that we acquired is usable. For example, we have a huge coater that we acquired from there that the coating -- we don't have to add new capacity, and coater is very expensive. But then we can add more to the dicing and stacking in a scalable manner. So we don't have to do it all at once. The facility is there, so we can prudently add it as and when we see the demand and the qualifications materialize. So it's been very fortuitous that we got this facility and now the demand is coming to us.

I appreciate that. And then coming to the key, I guess, your first smartphone customer, trying to get a sense for the key learnings from the chemistry reformulation process. And how many more, I guess, options do you have with this customer? And you gave, I guess, a pretty clear example of cycle life. I guess is there differences in requirements between the various customers? Anything you can kind of give us to better understand what, I guess, opportunities you have ahead?

Yes. I mean, look, the learning here is this for me, right? I think the learning is we wanted to give a lot more color on this call and our report on exactly what it is. And what we have learned over this is the smartphone requirements are very, very difficult because this is the largest market for portable batteries and consumer electronics, great margins because they provide clear value, huge TAM. But when you make a battery for that, the rest of the markets are much easier because this is the toughest one. And to replace an existing graphite battery and existing graphite battery ecosystem with 100% silicon anode battery, one is, meeting all the requirements. Second is, helping and learning with the customers on accelerated tests or other tests that they have put together, have to be updated a little bit for this particular kind of technology. It was kind of like thinking about when you started to add -- I don't know, I remember in my past, we added fingerprint sensors to phones. So now you've got to face ID. It's completely different, right? So it's still a biometric authenticating system, but the test cases are different and the way you use is different. So whenever you introduce a new technology, you have to work with the customer in enabling that. The reason that the customers are interested in, although it's different, is because we can provide an energy density road map that's not possible to do by just graphite batteries. And that is an absolute requirement. As I mentioned when I first took this job, the AI use case is only getting more and more and the demands are getting higher and higher. And now as I mentioned, I think a few calls ago that I expect these batteries to go to 10,000 milliamp hours, and now you see that. And they can't keep getting bigger because the phones can't get any bigger. So the customers are highly motivated to help us get this technology to market. But when you totally change the graphite anode to silicon anode, here, we have to work with them to make that to qualify. So if you look at the progress we've made, it's tremendous. I mean, I think we showed -- we have specs of like 75 different specs, and we passed most of them. So we are converging, and it's been a fantastic learning. But at the same time, other markets like eyewear are much easier to do because of this. And there are so many other markets like that, that are much easier, like if you think about wearable cameras and so many other markets where AI at the edge is really creating, there are great opportunities for us once we get this smartphone battery done or even before as we've gained a lot of technology advancements in the last few years working with our smartphone customers.

Our next question comes from Derek Soderberg with Cantor Fitzgerald.

I was curious if switching out the dicing technology sort of resets any part of the battery qualification process. Obviously, your customers want to make sure you guys can scale and putting aside any of the cycle life testing, might the change to the dicing technology push back that qualification process at all?

Look, any time you have a customer qualify one particular product, if you change some steps within it, we will need to communicate what those steps are and what it changes, and we will need to run some form of qualification again. That's just the way it is. Even when you move from one fab to the other, you got to do that. But the way we would do it is, these are all by different zones. For example, dicing is Zone 0 and then Zone 1 and then stacking is Zone 2. So there's many ways in my experience, we've done this. We established equivalents. We show similar performance. We can do a subset of the qual. So there's many different ways to do it, but it's still a little bit early. Right now, we are doing laser dicing on all of them. When we do some other form of dicing, we'll work with the customers to gradually phase it in.

Got it. And then just a quick follow-up. Are there any remaining technical milestones to shipping commercial volumes in the back half of the year for the augmented reality market?

Any technical milestones was your question?

For smart eyewear.

Yes. So I mean, look, we now have seen the products from our customers with our battery in them. Very exciting. We saw a few at CES. We saw a lot more in private demos. The performance is fantastic. They really like it. They really like what it's able to do and what the AI is able to do. We don't see any big technical obstacles. But this is a new market. It's a new application. So the applications are evolving. So they are doing testing of different applications. And as and when they find them, we'll figure out how to adjust it. We did learn about one thing after we first sampled in terms of how to -- different rates and different pulses and so on, and we quickly adapted that, and now we have a new battery that meets that. So my team is very capable of quickly reacting to those now. But right now, the battery we have, we feel meets all the requirements. That's why we got a production PO, yes.

The next question is from Alek Valero with Loop Capital.

This is Alek on for Ananda. So my first question is, what is a good way to think about the cadence of testing and production over the next few years for smartphone, eyewear, PCs and drones? Additionally, what do the capacity needs look like over that time frame? I have a quick follow-up.

Cadence of testing, how do you mean by that? Maybe you can ask a little bit better. In terms of timing you mean, how long it takes or...

Yes. I guess what's the timing of the phases of the testing?

Yes. So my experience in the last 3 years has been that typically, we provide a standard size cell to the customers that one we have. And they give us a set of requirements in terms of cycle life, energy density, rate of charge, discharge, swelling requirements and so on. And they'll do a bench level test of that. That takes a few months. When they're comfortable with that, they come back to us and ask us, hey, we want a particular -- if they are happy with that particular size and then they put it in a product and then there's a product level testing that takes a few more months. But if they want us to change the size, it will take us multiple months to come up with a different size, like when I say size dimensions, X, Y, Z and so on, to fit in that. That becomes a long pole, maybe 3 to 4 months to build that. And then they will put in the product and do the testing again. And then when all of them have passed, they place the PO. And they do system-level testing now. They put it inside a product, test to make sure the product is performing like it's always supposed to perform, and then they go to production. So if you -- and that whole cycle can take anywhere between 1 year to 1.5 years for a brand-new customer starting from scratch. Now if the requirements are not as stringent and we already have a technology that meets those requirements, for example, it can be much shorter because we don't really have to change anodes and cathodes and electrolytes and so on. Like, for example, when we have a product that meets the smartphone requirements, we were able to quickly react and make small adjustments and meet the smart glass market -- smart eyewear market. So that -- so now it's much shorter. Now if your cycle life is 1,000 cycle requirement, well, that testing takes like 4 months. But if your cycle life is only 300 cycles, it takes much shorter time. So it depends based on the end application, whether you need a custom cell or not, whether you can use a standard technology or not. So it's -- the question -- maybe a little long-winded answer, but that's just the nature of these lithium-ion batteries in custom applications.

And drones?

And drones I think can be much shorter. Yes, sorry, go ahead.

No, sorry, go ahead. Apologies.

No, I was just saying drones, very similar. But like I said, the cycle life requirements are much shorter. And the space requirement is not as bad in the sense that there's more room there, so you don't need to exactly make this exact dimension of the cell. Sometimes they stack multiple cells to get the performance. So they may be able to use the cells that we have and stack multiple of them to meet the power. So that time of making a custom cell will come down.

I appreciate the detail. Super helpful. And actually, just a quick follow-up and on that same note. So you mentioned the drones, and I believe you said that's one of the products that could handle a little bit more swelling. Can you speak to other markets besides drones that are maybe similar like this where you could get a little bit more swelling? Is there any markets there that seem attractive that you may want to penetrate in the future?

Yes. I mean I would say industrial markets that have large space, for example, I don't know, think about forklifts, stuff like that, where there's a lot more room to put the batteries in and you put it inside a big pack and you can design the pack to enable some amount of room inside that, right? That -- those are the kind of markets. But if it's a small form factor like earphones or smart glasses or cameras or consumer, they're a lot less forgiving. I would say industrial and defense are probably a little bit more forgiving.

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

Yes. Thank you. Thank you all for your attention today to listen to the call. I really appreciate all the support, and we look forward to talking to you guys next quarter. Thank you.