Enovix Corporation (ENVX) Q1 2026 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the Enovix Corporation First Quarter 2026 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. Welcome to Enovix Corporation's First Quarter 2026 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 conference 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 also find these materials on our website at ir.enovix.com. All statements made on this call are as of today, May 13, 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 of these 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. This quarter marked another meaningful step in Enovix's transition towards commercialization and scale. We advanced across the areas we believe are most important for long-term value creation. Customer engagement, commercial deployment of our silicon-anode batteries and manufacturing readiness. I'm very excited to share that in the smart eyewear market, we commenced commercial production of our A1 battery for our lead customer's reference platform and have multiple customers in the process of launching smart eyewear products. Initial shipments are underway with production expected to ramp through the second half of the year. We believe this validates our ability to manufacture our 100% silicon-anode architecture at commercial scale. On smartphones, we aligned with Honor on an updated qualification framework designed specifically for silicon-anode batteries. This framework, which includes revised specifications and testing protocols, better reflects real-world usage conditions. We are pleased to have also aligned with our second smartphone OEM on the view that they too will need to adapt a similar testing framework in order to get their products to market on a competitive timeline. Beyond these customer engagements, we're in active dialogue with several additional leading OEMs regarding silicon-anode battery qualification standards, and we are encouraged by the constructive cadence of our discussions with these OEMs as we work towards future qualifications and commercialization programs. Importantly, we believe we are doing the hard work now that will enable our future OEMs to roll out their silicon-anode solutions more rapidly. The principal structural mismatch and qualification has now been addressed to align with silicon-anode performance while maintaining and in some respects, increasing qualification rigor. Cycle life testing at our lead customer for batteries that we shipped at the beginning of the year is progressing under the updated protocols with the results approaching required thresholds. The deep partnership and technical engagement we are seeing with multiple customers in the smartphone market reinforces our belief in the industry's interest in high-performance silicon-anode battery solutions. We're encouraged to see growing demand across our drone, defense and industrial applications, securing new customer design wins during Q1 2026 in each of these markets with deployments expected in 2027. Our global pipeline for products manufactured in Korea now exceeds $130 million, with majority driven by rapidly expanding drone applications where demand for high-performance battery solutions continues to outpace the available supply. This creates an opportunity for an additional scaled high-performance supplier. We believe Enovix is positioned to emerge that differentiated supplier in this rapidly expanding market. We continue to improve manufacturing execution at Fab2. Yields in most production zones are now nearing or exceeding 90%. Zone 1 dicing, a key throughput driver, is delivering step level yields of approximately 80%, demonstrating continued progress with our laser-based equipment. We recently appointed Steve Bakos as Senior Vice President of Worldwide Sales to support Samira Naraghi, our Chief Business Officer. Steve brings more than 35 years of global semiconductor sales leadership from companies such as Infineon, where he served as a Vice President of Corporate Account Sales for large global accounts, including Apple. This quarter, revenue was $7.6 million, driven by Korean military contractors above the high end of our guidance range and up 49% year-over-year. Non-GAAP gross margin was 26.3%. Now I'll walk through each of these areas in more detail, starting with manufacturing. On that front, I want to give you an update on our Zone 1 dicing, which is our current throughput bottleneck. Since I joined to improve the throughput of Zone 1, we have been working on a faster, cheaper way to dice our coated rolls. We have been making great progress. Last week, I received a video from our equipment vendor showing this in action. Rather than trying to describe it with another chart, let me just show you the actual process. What you saw was our mechanical dicing system processing silicon-anode strips directly from coated roles. We're implementing a hybrid dicing configuration strategy that combines both laser and mechanical dicing approaches. I continue to be encouraged by the substantial progress our global operations and advanced manufacturing equipment teams are making in this novel area for silicon-anode batteries. As we mentioned on the last call, legacy smartphone qualification protocols were originally developed around the graphite-based batteries and relied on a 0.7C discharge requirement. That standard can artificially stress silicon-anode cells at discharge rates far above real-world smartphone usage, which typically remains well below 0.2C. The consequence was important. Silicon life testing under this framework systematically understated silicon-anode batteries longevity. We've aligned with Honor on a new silicon-anode specific qualification framework. The updated framework prioritizes a version of the 0.2C cycle test that commenced in Q1. This methodology better reflects real-world usage for silicon-anode batteries while enhancing the rigor and visibility into performance. We are seeing broader industry alignment around silicon-anode specific qualification standards. Our second smartphone OEM has joined our lead customer in removing the 0.7C test from their list of hard requirements as we're now progressing towards an updated framework similar to our lead customer. Discussions with several additional top OEMs are ongoing. We expect broad adoption of similar silicon-anode specific qualification approaches over time. With this framework now established, the plan with Honor is a targeted system-level deployment in the second half of the year to confirm infield performance ahead of the broader commercial launch in 2027. Importantly, we also recently received the battery form factor for their next-generation device to support readiness for the next major product launch. Our commercial strategy centers on 2 complementary technology platforms that address large and, in some cases, rapidly expanding market opportunities. AI, short for artificial intelligence class, is our flagship 100% silicon-anode platform, is targeted at smartphones and smart eyewear markets where volumetric energy density is a key requirement. Smartphones represent the largest battery market opportunity for Enovix. However, smart eyewear is emerging as one of the fastest-growing new device categories. We think that the smart eyewear battery market opportunity could exceed $1 billion by the end of the decade. More broadly, the AI platform is applicable to virtually any space constraint device requiring high energy density and long cycle life, including future applications in wearables, computing, industrial handhelds, EVs and humanoid robotics. Previously, we acquired an established business producing graphite-anode-based products. These products are in production today, generating revenue in defense, drone and industrial markets through our Korea facility. We've been able to leverage these capabilities in combination with our silicon-anode technology know-how to create high-performance MX silicon-enhanced platform. Our initial target market for MX represents more than $4 billion in opportunity, including approximately $2.4 billion in drones and $1.8 billion in defense technologies beyond drones. These applications prioritize performance and supply chain security with a greater focus on gravimetric energy density. Over the longer term, we believe the MX platform is also well positioned for adjacent markets, including robotics, eVTOL, healthcare devices, transportation, agriculture and broader industrial applications. The first product Enovix is launching on this platform is MX1, a ruggedized drone cell design requiring rapid discharge and high gravimetric energy density. I want to highlight something important here. These are not separate bets. They are mutually reinforcing platforms, sharing technology, supply chain capabilities and commercial infrastructure. We're increasingly seeing benefits flow in both directions with the AI platform leveraging Korea manufacturing strength and the MX platform benefiting from our silicon expertise and global commercial reach. Alongside qualification progress, our R&D efforts continue to advance the platform. This quarter, we produced the first engineering samples of AI2 for smart eyewear, delivering greater than 20% higher volumetric energy density compared to AI1. This represents a meaningful architectural-driven improvement, potentially enabling product categories that require significantly more power within highly constrained form factors. We've achieved this improvement through 2 primary drivers, reducing inactive material to improve packaging efficiency and increasing the cathode voltage. Together, these advances increase energy density within the same footprint and further demonstrate the advantages of our 100% active silicon-anode architecture. We believe this represents the first of many future advancements unlocking the full energy potential of 100% active silicon-anode architecture on the future AI product road map. Display equipped smart eyewear is expected to become a rapidly growing battery market. And we believe increasing power requirements create a strong fit for our technology. Smart eyewear also represents an attractive initial commercialization opportunity for our silicon-anode platform. Qualification cycles are generally shorter, more flexible and durability requirements are lower, and the market is in the early adoption stage. Customer sampling of AI2 is planned for later this quarter. We have already received initial sampling orders and engagement commitments from several leading smart eyewear companies. The 20% energy density improvement achieved with AI2 is important not only for smart eyewear, but also because similar gains for future smartphone batteries could materially extend our technology advantage. The current AI1 smartphone battery delivers 935 watt-hours per liter and has been independently validated against graphite and [ silicon-anode ] alternatives. We believe this positions Enovix with a meaningful competitive advantage in high energy density mobile applications. Competing approaches remain largely focused on conventional graphite-based designs with incremental silicon editions. These architectures continue to face swelling constraints that limit long-term performance and energy density improvements. In contrast, our architecture is designed at 100% active silicon-anodes, which we believe provides a substantially higher long-term scaling opportunity. Now let's talk about our second platform, MX. This week, at the Michigan Defence Expo, we formally launched MX1-B01, a drone battery cell, delivering energy density of 360-watt hours per kilogram positioning us competitively within the high-performance drone battery market. We achieved this performance through targeted silicon content enhancements, leveraging an already proven manufacturing platform. MX1 is designed for applications requiring excellent flight time, high discharge capability for power-intensive missions and a secure supply chain. We believe the product compares favorably with similar leading high-density solutions currently available in the market and offers a material cycle life advantage. We are manufacturing these cells from our South Korea factory, which has supported defense customers for years and our commercial focus is on drone manufacturers globally as well as their packaging partners. Following the Michigan Defence Expo, we plan to showcase MX1 at 11 additional conferences around the U.S. and Europe over the next 2 quarters as we continue building customer engagements and commercial pipeline activity. This slide shows how we see the MX platform evolving beyond the initial MX1 launch. Demand for high-performance drone battery supply continues to exceed currently available Western capacity, which we believe creates a meaningful opportunity for Enovix. These applications prioritize performance, reliability and supply chain security, supporting differentiated positioning relative to commoditized consumer battery markets. While drones are key near-term focus, we've also established product offerings for subsea, munitions and industrial applications expanding MX platform across multiple high-performance end markets. Our Korea and Malaysia manufacturing footprint directly addresses defense supply chain requirements backed by years of production history supporting major contractors and deployed programs. A key structural advantage for Enovix is vertical integration because we own our manufacturing operations, we're not sharing economics with third-party contract manufacturers, which we believe supports both competitive pricing and attractive long-term unit economics as volume scales. As product competitiveness becomes increasingly established, the gating factor becomes commercial conversion, which is why we recently appointed Steve Bakos as the Senior Vice President of Worldwide Sales. He brings more than 35 years of global semiconductor and industrial sales leadership experience and will help build the commercial infrastructure required to support growth. Looking ahead, MX2 is targeted for 2027 with the goal of reaching 400-watt hours per kilogram. Over time, we intend for MX to evolve a broader platform strategy, spanning multiple product formats and defense and industrial end markets. Now I'll turn it over to Ryan to walk through our financial results. Ryan?

Thanks, Raj. Our first quarter results reflect disciplined financial execution alongside continued commercialization investment. First quarter revenue was $7.6 million, above the high end of our guidance range and up 49% year-over-year. These are largely batteries deployed in active programs with repeat demand. Non-GAAP gross margin was 26.3%, our sixth consecutive quarter of positive gross profit on both a GAAP and non-GAAP basis. Non-GAAP operating expenses were $30.8 million, reflecting continued investment in customer qualification completion, research and product development and smart eyewear production readiness. Non-GAAP loss from operations was $28.8 million, better than the guidance range of $29 million to $32 million. Non-GAAP net loss per share was $0.14 at the better end of the guidance range despite higher interest expense from the 2030 convertible notes issued last year in Q3. Adjusted EBITDA was negative $20.3 million, roughly flat year-over-year. We ended the quarter with approximately $582.7 million in cash, cash equivalents, restricted cash and marketable securities. We believe this provides substantial liquidity to execute on our operating plan to support commercial scale up and to pursue strategic opportunities from a position of strength. Free cash flow was an outflow of $36.3 million, increased from the same period a year ago, primarily driven by timing-related items, including the semiannual interest payment on the 2030 convertible notes and working capital movements primarily higher inventory levels in Korea to support planned shipments. Capital expenditure payments were $3.2 million in Q1, below guidance due to the timing delay of certain payments, the majority of which we expect to be paid in Q2. Turning to Q2 2026 guidance. Revenue is expected in the range of $8 million to $9 million, reflecting continued growth in defense and industrial shipments and initial smart eyewear revenue as deliveries to our lead customer begin. Non-GAAP loss from operations is expected between $29 million and $32 million. Non-GAAP net loss per share between $0.13 and $0.17, and capital expenditure payments are projected in the range of $9 million to $13 million, which includes the aforementioned deferred payments as well as initial payments for the investment to support capacity expansion in Korea. Last quarter, we approved a share repurchase authorization to provide additional capital allocation flexibility. We have not made any purchases under that program. Our capital deployment priorities remain unchanged: qualification, completion, scaling smart eyewear and defense production capabilities and selectively pursuing strategic opportunities with a high bar on strategic fit and return. And with that, I think we're ready to take questions. Operator?

[Operator Instructions] Please note that this call is being recorded. Before we go to live questions, we're going to read the two most highly voted questions submitted by shareholders ahead of this call during the call registration. The first question is, "previously, management has discussed multiple pathways to achieve final smartphone qualification targets. Could you elaborate on which of these pathways currently appears most promising?"

Yes. Thank you for the question, and thank you all for listening. Of the pathways we discussed, as I mentioned in the prepared remarks, we have now aligned with Honor at a combination of different pathways that we could use. The 0.7C legacy test requirement, that's been mainly for -- based on graphite batteries, we've aligned with our customers that is not -- must have a requirement, and it's been removed as a gating item. We're now working on a slightly different 0.2C test, which more than -- better reflects the real-world usage of the smartphone, and that's been prioritized now. And not just with Honor, but many of our other lead customers also agreed to the same thing. In general, I feel like the smartphone market, now people are realizing that as silicon batteries become more and more popular, we should really -- they should really change the requirements that are in the market that have been used mostly for graphite. So it's a really nice, really great result. I'm really pleased with my team being able to convince them. Now the 0.2C test is more than halfway done at our customer, and it's continuing to go and we're tracking it.

The second question is for your AI2 platform. When will the samples be submitted to customers so that testing can begin?

Yes. As I mentioned in the remarks, we have engineering samples now inside, and they look really good in terms of the 20% energy density increase that from AI1, great achievement by the R&D team, harnessing the full potential of silicon. And these will continue to get better over time. But these samples, we expect to sample this quarter to our customers and quite a few people have actually expressed interest in that and we got to have a few sample [ batches out now ].

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

My first question is just focusing in on Honor a bit. I saw in the press release that you have some field testing looking at second half, right, is when you're targeting. So I'm wondering if you could give us an updated understanding of what unit volumes may be for that field testing with Honor. And if successful, do you have a better view on what a ramp would look like in '27?

Yes. So, again, as I mentioned, now we have a test methodology that aligned with Honor, so we're in the middle of doing that. And the next big step is to actually put the battery inside an existing phone for which we made this custom size cell. It's hard to predict the number of units, and they'll be small because it will be initial test just to make sure that everything is smooth and limited launch maybe. But the real volume will be in '27. But more importantly, we got the size for that particular battery that's going to be launched in '27, and we're now working on how to make that battery after the field testing is complete.

Okay. Great. Switching gears into drones, which is a very interesting opportunity. And congrats on the silicon carbon composite and that mixed graphite cell. A 360-watt hours per kilogram, that's going to put you well in the running against the current peer set. So I'm wondering if you could speak to maybe some of the customers that you're engaged with in sampling and say you win all that business today everyone you're engaged with. Do you have an idea of what those qual times look like and your current unit volume and revenue capacity?

Yes. Firstly, thank you for that comment on the drone cell. We are also super proud of the engineering team that came up with it in a very short order, particularly because we have a well-established manufacturing facility that beyond we were able to quickly make that. The product actually is extremely competitive with what's in the market today and it's made totally within our factories. It's not contract manufactured. Actually, I have the phone battery here with me, we have a bunch on these cells now. So we -- there is a lot of interest. I just got a call from our sales team who's at the Detroit Drone Show (sic) [ DroneArt Show ] right now about the tremendous interest they're seeing. Because this is also an NDAA-compliant cell, which is actually a big deal for many of our customers. The go-to-market of this works this way. Typically, there are people who take this and put them in packs and put the BMS around it, and the system around it. And that goes into multiple drone makers. So it's hard to call the volumes right now, but the market is so fast and growing really fast that we think that the cycle times, the qualification time will be shorter than things like smartphones because there's such a demand. And also a cycle life doesn't have to be that long in these. Our cell goes to 300 cycles, but even shorter cycles are okay in some of these markets.

And maybe I'll chime in. Mark, you asked about volumes. Again, we talked about in the CapEx forecast in prepared remarks, we're already spending dollars to add equipment to one of the existing buildings in the non-sim facility. And one of the great strength advantages that we have sitting on our balance sheet is we have multiple empty buildings in that facility as well. So we have numerous stages of additional expansion capacity there, and we're just going to do that in a methodical way as demand presents itself.

Your next question will come from Colin Rusch with Oppenheimer.

Could you talk a little bit about the mix of silicon material that you have in the new drone batteries? And the pathway from the 360 watt-hour per kilogram to 400 watt-hour per kilogram, how much of that is being driven by increased thickness or a different form factor or increased concentration of silicon in the anode?

Yes. Great question, Colin. So when we did this one, the way we did it was to -- there's an existing requirement for a cell that's in the market today that many of the customers wanted us to provide something that is with the full NDAA-compliant made within our factories. So we made that one and we quickly got it to that performance. Actually, it performs really well. The cycle life is really good and the capacity holds. We have about 60% SIC in that cell, but we now believe that we can get that to a much higher percentage because in this market, some amount of swelling is okay because it's inside a drone and you could put pressure and put it in there. It's not a space constraint situation like smartphone. And also, the discharge rate and the pulse discharge and the number of cycles are variables we can keep tuning. We mentioned 400-watt hours per liter is something that we could produce. I believe we can go much higher than that by just making the right trade-offs between cycle life and discharge rate and the amount of swelling that allow. So I think the good news is we've been working on silicon for a long time. So we know exactly what electrolytes work well with silicon. We're working with graphite for a long time in Nonsan. We have that know-how and we have a factory that's been supplying for defense for a long time. So our quality of the products that we actually supply to defense is very, very high bar, and that factory is actually qualified for that. So that's why I think that you will see a pretty competitive road map from us for this market very quickly.

Great. And then looking at the laser cutting, I just want to understand kind of the cadence of learning cycle on yield improvement and how we should think about kind of the engineering work that you're doing and how quickly you can implement that to start getting a little bit better output on the overall facility?

Yes. So as I mentioned, from last quarter to this quarter, we've improved our yield across multiple zones, well into the 90% range now in most of the zones. The laser light is kind of in the 80% range, but that's improved quite a bit from last time. But as you guys saw in the video, we've been working on this for a while. And today, I thought it was a good time to show you a combination of laser and mechanical dicing that actually cuts much, much, much faster and much cleaner. When you laser dice, there are also some challenges that we've been working on for a while, which is how to get to the yield and the throughput and so on. It's an expensive way to do things. So we've always -- right when I started, we've been working on a different way to actually do this and you saw the mechanical dice now. So we have enough lasers, we have enough throughput to meet the demand for this year. And we will get the mechanical dicer, our plan is to get it online this year. So for the next year's demand, we can use a mechanical dicer with some combination of laser finishing it up. So really exciting results. So I hope you guys saw that video -- the throughput that we can produce with that.

Your next question will come from Jeff Osborne with TD Cowen.

Maybe just a quick two questions, but one quick follow-up on Colin's. Can you get to 90% yields without that machinery intact? Or do you need to add the lasers to get there? And that's more of like a 2027 event getting to 90%?

Maybe I'll take...

Yes, please, Ryan.

Yes, I think we can -- we're capable of getting to 90% yield. But again, it goes hand in hand with throughput. I mean, again, you saw the video, really the mechanical dicer is just able to operate so much faster. And so ultimately all this -- I'm the finance guy, ultimately, it's about cost. We just think it's the most economical way eventually in some of the sub-process steps to operate.

Okay. And cost of the machines, right? These are much -- it's a less expensive way to get throughput.

Yes. Perfect. And my two questions is, one, Ryan, I was just wondering if you can update us on the M&A pipeline. I think you've been out there searching for a couple of quarters now. And then just, Raj, a clarification, you mentioned providing packs to Honor to put in a phone, small quantities in the second half of the year, but then you mentioned something about getting a second design. It was unclear. Is there a second SKU that they've given you? Or is the SKU that they gave you what they intended to produce in '27? I'm just trying to get a sense of your relationship is deepening with them, and they're giving you a glimpse of what they intend to commercialize after the first product launch?

It's exactly the latter. So we actually have a SKU that will launch in '27. So which is actually a fairly large deal and shows the relationships we have with them.

And in terms of the packs to Honor or the quantities, any comments on that?

Yes, it will be small volume. Again, it will be just to test and make sure that the system level stuff works okay, and we get a small initial launch. And I think that's again, that's fine with us just to make sure everything is good before we get into high volume.

Does that like thousands, friends and stuff?

That's probably what -- that's probably what you should think of.

And then on the first question in terms of M&A pipeline. So I'm really pleased with the pipeline that we have multiple opportunities that we're pursuing. Again, as we said and repeated time and time again, we're going to be disciplined. So it has to meet a strategic fit. And we're going to be disciplined on price. So it's fair to say that we've looked at quite a few opportunities that we just didn't like the price tag, and we've moved on from that we're -- I think we're excited about some of the opportunities we're pursuing. But again, there are -- we're not going to waver. We think we're going to be disciplined stewards of the capital and make sure it makes sense, and it's something that Raj really sees the strategic fit and benefit. And it's something that I can be here on an earnings call and be proud of the price we paid for it.

Your next question will come from Ruplu Bhattacharya with Bank of America.

Raj, I wanted to ask the first question on smart eyewear batteries. I think the press release says that you expect 50,000 units in 2026. How should we think that, that scales as we head into next year? And how should we think about the revenue progression from smart eyewear over the next few years?

Yes. So the 50,000 is this year. Firstly, I wanted to say that with the way where the yields are and the throughput is and the way it's working, we're not able to manufacture the cell in our lines and the customer -- deliver to the customer, they're testing them, it looks good. So firstly, that's, I think, a great result. We -- as I mentioned, it is a huge market growing rapidly. It should be in the millions next year. It's hard to tell exactly how much. We have sample to many different customers now because what we have is a battery that really makes the product because energy density right now, as you know, many glasses out there, they don't last the whole day. So this 1 actually continues to improve on that. And now that's why we decided to launch the next product using our AI2 in that space first, because the market was really asking for even more because they're -- it is very difficult to have the product last holiday without that. So we do think that, that will -- the first product will launch this year. The next product, AI2, we're going to sample this summer, and that will go into production next year. So we expect it to be in the millions next year.

Okay. For a follow-up, can I ask Ryan, as you ramp the smartphones later this year and next year, the smartphone batteries, how does that impact gross margin? I think some OpEx might move into COGS. So can you just help us understand how we should think about gross margin progression as smartphones become a bigger part of the mix?

Yes, certainly. So certainly, as we ramp the smart eyewear and the smartphones, you're going to see some change. And you will see some of the costs right now that we have an operating expense will move up above the line into the cost of goods sold line. But really, whenever you think about our cost structure, the majority of our cost of sales is materials. So it's really about continuing to drive the bill materials cost down, and those will be materials that we purchase for those orders as we prepare to ship them. So that's the vast majority of our COGS. So when you talk about direct labor, variable overhead and even fixed overhead to some extent, although we have some material cost as it relates to the cost of the [ factory overhead ], as we get to a decent amount of volume, it ends up being a very small percentage of our costs.

Your next question will come from Derek Soderberg with Cantor Fitzgerald.

I was wondering if there's any way you can segment that $130 million Korea pipeline drones and defense opportunities, how much of that is sort of legacy Routejade and how much of that is drones?

Well, firstly, this is future-looking revenue, not -- right? So it's actually -- a lot of it is new designs that we are working with customers to get. And so in some sense, some of it is continuation of the defense business that Routejade had, but the majority of it is actually new stuff that we are winning and drones is like over 60% of that.

Got it. That's helpful. And then just curious on the NDAA-compliance piece. I was wondering how unique that is. I know there's a couple of others that have that, but not too many at this point. Might it be difficult for others to sort of achieve that over the next couple of years. And then within drones, what kind of drones are you getting interested in? There's a wide variety of sea drones, air drones, heavy and light. Where do you guys think you can build a nice business in drones?

Yes. So NDAA-compliance is actually not that easy to achieve because there's multiple elements to that under way, the cost of the things that are sourced, what percentage of them have to be from this FEOC and non-FEOC countries and then where the cells are actually manufactured. So for us, we manufacture them in Nonsan, South Korea, which is a non-FEOC country so which is very good there. And then most of the material we have in there, majority of it is actually not sourced there either from FEOC country either. So in that sense, it's a big advantage for us and that we own our factories and we have the material. In terms of drones, we are seeing it in like training, public surveillance, inspection, public safety, multiple markets like that. What varies between these drones is kind of like a discharge rate, then it also depends upon how many cycles. The first product we made is, as I showed, 300 cycles, high discharge rates, this one that I talked about. But we have the technology and we have the know-how and we have the factory now to make different products optimized for slightly different -- lesser cycles, but more energy density and so on. So we will have a road map of products addressing various parts of the market as we start building out that road map. It's an opportunity that really grew very fast and came quickly.

And I'll touch and I apologize if you already mentioned it. But obviously, we've got a lot of -- a long history of subsea drones, and so that's out of Korea. And so that's something that I think will continue to be a strength for us as well.

Your next question will come from Alek Valero with Loop Capital.

Yes, just on smartphones, what impact is memory cost inflation having on your lower-end phone volumes?

We're not shipping much volume right now, right? So I think not so much impact right now. But we do see that the number of units shipped this year will probably be much lesser in terms of the total number of smartphone units shipped. Hopefully, that will normalize over the next couple of years, by the time we get into higher volume, maybe less -- hopefully it be less of an impact. But right now not too much impact.

Okay. And another clarification question. Did you say that the 0.7C testing requirement was removed or you're hoping to remove it? And if so, what impact does that have on your smartphone qualification time line?

Yes. It's -- our customers agreed to remove that as a must do. They have agreed to actually have a variation of the 0.2C and 0.1C, so on, which is actually how the phone is actually used as a gating requirement. So that does help. In terms of time lines, it will probably take a little bit longer because the 0.1C, 0.2C take longer to run, the 0.7C is a faster discharge. It's an accelerated test, but it hurts the battery. So they realized it's hurting the battery, it's not really helping. So in that sense, it may take a little bit longer to do 0.1C, 0.2C discharge because the time it takes to qualify is a little longer, at least on the first launches. But once we get to it, we understand what it is. We understand the trend, it should become normalized.

Your next question will come from Bill Peterson with JPMorgan.

For AI2, the 20% increase in energy density using this sort of the next-generation platform, can you speak about the trade-offs of this, including Cycle life that we can consider? I realize this at least in the first stages for eyewear, but assuming -- I'm assuming that AI1 will be your focus for your initial and second smartphone customer, but do you have a plan to sample AI2 for smartphones next year? Or is this longer dated? I'm basically trying to get a sense for what needs to be solved for the next gen to be used in smartphones. And basically, it's a question we've asked in the past, but how should we think about your road map for smartphones beyond AI1?

Yes, absolutely. I mean, look, I think the advantages we showed with a 20% increase on the smart glasses, that's why we showed a little bit of color on how we got to that. We increased the cathode voltage, we reduced the amount of inactive materials in there. We will put those -- we'll absolutely put those things into our smartphone battery, and you will see us improve it similarly. There's a few other things that we will -- we are continuing to improve. Packaging efficiency is 1 of them, how we actually package this, they are slightly different electrolyte. So we have a strong road map that will keep increasing energy density. I mean the thing I've mentioned to you, Bill, is that, as I mentioned before, we use 100% silicon but we're not getting the full potential of the energy density increase 100% silicon could and should provide because we've been trying to solve these other problems, like cycle life, 0.7C, accelerated testing, fast charge and so on. But once we know work with customers to get those things understood and how exactly to do the qualification, we'll continue to improve our energy density. And the first [indiscernible] of our improvement in energy density we showed in the AI2, in the smart glass, but we'll quickly roll that into smartphones for next year.

I'm chime in as well here, the finance guy is happy to report that some of these key things on the road map not only improve the energy density but also reduce cost out of bill materials and reduce the cost to manufacture. So it's really kind of magic time when that happens.

And one other thing, Bill, maybe since you asked about the energy density road map, I know -- it's a question that's come up. Our batteries swell very little. So the existing batteries, even with the ones with silicon, still swell. So most of the smartphone OEMs actually leave a space in the phone for the -- allow the battery to swell at end of life. So we actually don't need that space. So when -- if we get that space also, that's what we're working with our customers, they allow us to use that. Our energy density even higher. So we will be -- once we get to qualification, we will be able to take advantage of that piece also.

All right. On the time line for shifting or the general trend to move towards mechanical dicing, are there any new challenges that we need to be mindful of? I'm wondering about particles or mechanical stress or other technical issues you need to overcome? Or maybe even said another way, why wasn't mechanical dicing the primary path for this relative to laser dicing?

Well, I mean, again, as you saw in the video, I wanted to show you guys a little bit of the machine. This is a complex machine that we've been working on building for a while. It's not like you just take a roller and put a role in it, right? So we have to build roll-to-roll roller, we have to ablate, we have to dice it, we have to find the right kind of binders and materials to actually make the right kind of coating and electrolyte so that as you said, when you do it mechanically, it still holds. So there's a lot of R&D, a lot of know-how has gone into it. We've been working on it since I joined. So in that sense, it's very excited, but it's a great technology that our teams have advanced. And -- they're still -- again, there's still issues to be solved, right? So we have to finish the dicing of it. We have to finish the anode, finish the cathode and put it in a full cell. So we're going to take this year to actually do that because we have enough lasers to meet all the demand we have for this year. And absolutely next year is when we'd like to roll it out.

Great. And if I could sneak one more in. On the part of that [ test report ], so 70 to 75 tests, 2 life cycle and 1 below freezing power tests. I think the power -- I'm not sure about the freezing power test, but is there any insight as to how your expectations? I think you feel more confident about the cycle life, but what about this freezing power test, something that I don't think I've heard much about in the past.

Yes. It's one of those corner use cases because what happens is silicon behaves differently than graphite at very low temperatures. So if you have a phone with a silicon battery at extremely cold when you start using the phone and you suddenly have a use case where you pull a lot of energy out it very quickly, there are some challenges to how much energy can battery can put out. So these are the kind of situations where we're working very closely with our customers to see at what use cases does it happen, how much does it pull in and which parts of the world and so on. So it's again, like the 0.7C test, silicon is different from graphite. So the tests you had before don't quite work exactly the same. But -- so that's one of those things that we are working with them. And I do believe that we will surely get past that also as we continue with this journey.

Your next question will come from Gus Richard with Northland Capital.

You mentioned the $130 million of pipeline for military projects. Is that an annual number? Or is that a lifetime opportunity and how much currently -- how much capacity in Korea do you have to support that?

Yes. So it's a total we keep in terms of what are the new designs that we are talking to customers and they're coming. So we can update that every quarter, it's not like annual, it's lifetime of those designs we have. They may take 1 year, they may take 2 years, time to launch. We have enough capacity right now, but we are adding capacity now. As Ryan mentioned, we are building out that factory more. Fortunately, in the last acquisition we've made, we got almost 300,000 square feet of factory with lots of buildings and power and dry rooms and so on. Very good acquisition we are fortunate to get from SolarEdge. We are now feeding it to keep increasing the capacity in line with the demand. Because the qualifications take a little time. So we're going to work on the capacity increase in line with that demand.

On a relative basis, of course, this is relatively standard equipment. So it's just blocking and tackling.

Got it. And then when you mentioned the eyewear customer, I believe you said it was a reference design. I was wondering if that's an OEM or chip companies reference design?

Yes. Well, again, because of confidentiality, I can't really exactly comment more than who that is. But 1 thing I'll say is, eyewear, maybe I add a little color to it. If you actually think of things like eyewear, there are things people wear on their personality. So it's a very style-based thing. So most of the eyewear things we buy, as you know, comes from fashion brands, right? So like you can think of Gucci and Prada and Ray-Ban and so on that you buy from Sunglass, so most of the tech companies are even chip companies and so on will actually make a reference platform. So the ultimate product is actually branded as a fashion product, right? So that's why it's very key to get a reference design with one of those leading technology providers so that then the channel to market can be through the fashion brands.

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. I mean, thank you, everyone, and thank you for your all the questions. Over the past year, much of the discussion has been on validation of the technology and its commercial readiness. We believe this quarter we provided additional evidence and the conversation can increasingly shift towards disciplined execution against commercialized milestones. The markets to watch over the coming quarters are clear, right? The continued progress and qualification, targeted system-level deployments, initial smartphone production ramp and conversion of this drone pipeline into revenue. Now we view these as tangible operational milestones, and we expect to demonstrate progress methodically over time. And thank you all for your support.