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spk01: Thank you for standing by and welcome to the Enovix Corporation fourth quarter 2022 earnings conference call. Currently, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. As a reminder, today's program will be recorded. And now, I'd like to introduce your host for today's program, Charles Anderson, Senior Vice President of Investor Relations. Please go ahead, sir.
spk12: Hello, everyone, and welcome to Inovix Corporation's fourth quarter 2022 financial results conference call. With us today are President and Chief Executive Officer Raj Tuluri and Chief Financial Officer Stefan Pitska. We'll also be joined today by our Chief Operating Officer Ajay Murathe and our Chief Commercial Officer Ralph Schmidt for the Q&A portion of our call. Raj and Stefan will review the operating and financial highlights, and then we'll take questions. After the Q&A session, we'll conclude our call. Before we continue, let me kindly remind you that we released our fourth quarter 2022 shareholder letter after the market closed today. It's available on our website at ir.inovix.com. A replay of this video call will be available later today on the investor relations page of our website. Please note that the shareholder letter press release in this call all contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are based on current expectations and may differ materially from actual future events or results due to a variety of factors. For discussion of factors that could affect our future financial results in business, please refer to the disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, February 22, 2023, based on information currently available to us. We can give no assurance that these statements will prove to be correct, and we do not intend and undertake no duty to update these statements except as required by law. During this call, we will also discuss non-GAAP financial measures which are not prepared in accordance with generally accepted accounting principles. You can find the reconciliation of the GAAP financial measures to non-GAAP financial measures in our shareholder letter, which is posted on the investor relations page of our website. I will now turn the call over to Raj to begin. Raj.
spk15: Thank you, Charlie, and thank you all for joining us today. I'm really pleased to report a very strong fourth quarter for Enamics Corporation. We accomplished a number of things in this quarter. We significantly improved our yield of the batteries that we are producing. We made record progress of our customers progressing through our funnel We explained last time the way we work with our customers is to get them samples of our batteries, which then they test, and then they, you know, put them in products that they're actually going to launch and move them along the productization cycle. And through that funnel, you know, we have got a lot of new customers and a lot of progress that we've made to date, and we'll talk more about that. And we just over a million dollars in revenue ahead of the consensus for this quarter. Now, we ended the year with over $322 million in cash. And more importantly, our FAB 1, which is our FAB in Fremont, is working, and we are focused on rapidly increasing its output now. The trajectory I see for NOX is incredibly promising in 23 and beyond. Now, before Stefan talks about financials, I wanted to spend a little bit of time talking to all of you about me and my background, why I joined Inovix, and what are the near-term actions that I'm taking to position the company for success. For nearly 30 years, I've been fortunate to have worked and led teams in some of the best semiconductor companies in the world, Texas Instruments, Qualcomm, Micron. And I worked on products that actually revolutionized the mobile device experience. And these mobile devices are devices from consumer electronic devices like digital cameras, MP3 players, DVD players, smartphones, tablets, and so on. The products I worked on included digital camera chipsets, MP3 player chipsets, the OMAP application processor, which is one of the very successful application processors in the industry at Texas Instruments, that actually transformed our phones from just calling devices to true multimedia devices. And from then on, I joined Qualcomm, where I was fortunate to lead the team that did the Snapdragon application processor, which actually powers majority of the Android cell phones today. And it really assured the era of the modern smartphone. More recently, for about the last five years or so, you know, before I joined InnoVEX, I was at Micron and I was leading the mobile division. It's a division that actually, one of the larger divisions at Micron and, you know, $7 billion of revenue in 2022 with over $2 billion of operating profit for that fiscal year. Now, having been in all these different companies, I understand what it takes to launch products at scale, to launch products at mobile devices, to launch them at very high volume. And it's given me a unique insight to both the customers, the care about the customers, the care about the end users when they use these products. Now, one important insight it gave me is actually the importance of battery technology in portable devices. Now, what became obvious to me, but may not be obvious to all the average person who actually buys these products, is the performance of these products. Whether you bought a digital camera or whether you bought a smartphone or a laptop, the performance is actually throttled because of the constraints of the battery. This is something that's not so obvious to everybody. You know, for example, if you take a smartphone and you run things like an Android bench and so on, you get great performance numbers. But when you get those performance numbers, the CPU, the GPU, the camera, the memory, they're all running full speed to give you that benchmark number. But when you actually use the phone, the process and the memories are not running at that speed because if they did, they would consume the battery really, really fast. So in other words, end users are not realizing the full potential of the devices that they bought because the battery is limiting the performance. So the number one problem I believe to be solved now in the consumer electronic devices is the portable battery. Now, when this opportunity arose for me to actually lead this team, I did a lot of due diligence and different battery companies out there that could actually help solve this problem so the users can get great end products that they paid for. And I felt InnoVIX is perfectly positioned to solve this problem. And that is the reason I'm here. Now, I've been here for about a month. I have been unbelievably impressed by the company and the talent and the resources here. It's really groundbreaking technology. It's highly differentiated across many, many metrics in the battery. These are metrics like performance, you know, energy density, you know, capacity, you know, thermal performance, longevity of the battery, how fast it charges, how safe is the battery. Now, what I also found is the technology in this company that have been done by tremendous number of people working for over 16 years in this space, we have significant technology in our laboratories here that has a lot of headroom to even increase this performance metrics beyond, way beyond what we are actually now able to sample. So I see here the foundation for a high growth, highly profitable business with differentiated products that I can spend the next part of my career scaling to new heights. As you get to know me better, you'll actually see that I always start with the customer first. When I talk about the customer, I talk about the customers who buy our products and also our customers' customers who actually enjoy these products. And I think about the user experience those customers are having with these products. And then I work backwards. What does that mean? I try to imagine how is a wearable device used? How is a smartphone being used? What's limiting the performance of a smartphone? What's limiting the performance of a laptop? What's limiting, you know, a car from charging to full battery capacity very quickly? Then it gives me clarity on what products we should be working on for those things to happen. And then I work on with my team to build the right products to send it to our customers so the end users can benefit from all these technology innovations that we make. Now, we are undergoing a transformation of dynamics. We are an R&D focused company so far. Tremendous amount of R&D has gone in over the past many years to actually make these fantastic batteries that we are sampling. Now we need to transform this company into a customer-focused organization that focuses on morphing and tailoring this great technology that we have into high-volume production very quickly and very profitably. Now, thankfully, that is not the hard part of the job. A lot of us that have joined InnoVIX here know how to ramp products quickly to scale. The core technology development is behind this, and we really owe the founders of InnoVIX, who actually worked tirelessly for a long time, a great debt of gratitude for getting us there. Now, I do recognize that high-volume production area that we have most to prove. We have not ramped as fast as as much as we would have liked to by now. But my commitment, my personal commitment to investors is I will take you through the journey and I'll be transparent about our progress on unit production, important milestones, things like yields, and also what we're doing to de-risk our Gen 2 line, which actually is going to produce high-volume batteries. Scaling is hard. You know, I've done this many times in my career over the last 30 years in large companies with very, very complex products. It won't be perfect. It won't be like exactly how we want it, but we know how to do it and we'll be clear about where we are and how we are doing it and where we are going. I can tell you this, what I see today is unbelievably promising. Our new chief operating officer, Ajay Marathe, he's got 38 years in the industry from some of the top companies. And he was most recently the CEO of Lumileds, where their team has pulled off a tremendous job to make a huge amount of improvements in production. And here, his team has already made solid progress just in the short time that he's been here. And we expect to make very strong gains quarter on quarter throughout this year. Now, it's clear to me that we know how to make batteries. You know, I see we have factories right here. I see the batteries coming off the line. We just need to do it faster. And with Gen 2 line, we will make them faster, and we will make them in high volume. Now, I want to close with a comment about funding and our capacity expansion. Now, we've had numerous conversations with our customers. The battery technology is so compelling. The energy density we are able to provide and the quality we are able to provide is so compelling. that we are now finding many of our customers and also strategics and the government entities where we're actually trying to, that we are working with to build our Gen 2 line, are interested in infusing capital into the company to help us build the capacity. Now, this is a common practice in the battery industry. And given the advanced stage of our technology, a lot of our partners see this as a fairly low risk for them to help us scale. So we plan to explore all these options and find out the most advantageous one to our shareholders. Now, I want to turn the call over to Stefan, who will give you some feel on the guidance, and then we'll take any questions you have.
spk08: Thank you, Raj.
spk21: Our financials are available in our shareholder letter, which includes like a gap to non-gap reconciliation. So I will focus my commentaries on some high level guidance comments. 423, we are going to guide units produced as opposed to revenue guidance. Our annual revenue are highly influenced by the timing of our episodic service revenue. And we don't believe that it's necessarily a strong read on a progress on a scale up. As an example, for Q1, we don't expect to recognize service revenue. For 23 full year, we expect to produce 180,000 revenue quality units in Fab 1. And for Q1, we expect to produce 9,000 units. Our plan is to at least double that production each quarter sequentially for a full year. For CapEx for 2023, we expect to spend $120 million. And three components of CapEx are first gen two line, facilitization for FAB2 in Southeast Asia. And we are going to bring in an agility line, which is an automated R&D line to Fremont. That line will help us faster qualifying customers and focus on custom cell development. Additionally, for 23, we expect to spend $120 million of cash operationally. While we keep the operational spend OPEX flat, we will shift more cost into cost of revenue as we support the increased production volume in Fab 1. And in later part of the year, we will start Fab 2 in Asia. Now, for everyone that runs financial models, I would like to give a couple of pointers for the models. One is we are anticipating here to increase cash and non-cash expenses that we recognize in cost of goods sold versus operating expenses, primarily as we shift the resources from R&D into manufacturing. The shift in higher cost of revenue will take shape in Q1, and you can see here and expect around $4 million of sequential increase in cost of revenue, whereas only $2 million decrease in operating expenses, both on a non-GAAP basis. Closing out. We have made really good progress on the manufacturing side. We have a strong balance sheet and our experienced team is really committed to build shareholder value. With that, operator, we can start the Q&A session.
spk10: We will now begin the Q&A session.
spk11: Please note that this call is being recorded. If you have joined via the Zoom application, please use the raise hand functionality to ask a question. If you have joined via the audio line, please press star nine. Questions will be answered in the order they are received. Please ask one question and one follow-up question at most.
spk10: We will now pause a moment to assemble the queue. Our first question comes from Ananda Bharath.
spk11: Please unmute yourself and ask your question.
spk05: Hey, thanks, guys. Good afternoon. Raj, good to hear from you, and thanks for the remarks. Yeah, I guess quick, too, if I could, just piggybacking off of your Gen 2 remarks, can you remind us when we can first expect Gen 2 revenue, Gen 2 volume, and what we might expect at least the first couple few quarters of that ramp to look like? And then I have a quick follow-up. Appreciate it.
spk15: Absolutely. The question is about Gen 2. Thank you for that question. We are now in the, you know, process of completing the design of the Gen 2. And as T.J. mentioned last time, and as you see in our shareholder letter, mid-March is when we will approve the design at the board meeting, and we'll start placing the POs, and pieces of equipment will start coming in. And we expect the build out to start happening by early next year. So in the mid-next year is probably when we'll start seeing revenue from some parts of Gen 2.
spk05: MR. Got it. Got it. Very helpful. And then didn't hear EV mentioned yet. Can you just give us a thought process on what some of the milestones are for EV for this year and where some of your EV investment might be pointed to? Appreciate it.
spk15: Thank you for the question, the question about EV. Yeah, EV is, as many of you know, a very exciting market for our technology. A few things about Inovix battery technology, particularly for the EV market, you know, in addition to the energy density, which we have much better than our competition, much higher than our competition, we also have some other advantage, such as how fast it charges and also the amount of heat the battery actually dissipates. You know, if you guys have Teslas or a car like that, when you start charging them, you'll see that the batteries get hot in these environments. Our battery, because of the way it's constructed mechanically, has the ability to dissipate that heat much faster than our competition. And we are also kind of material agnostic in the technology and EV will use slightly different materials. So, what we have been talking to different companies in the automotive space, there's a lot of interest, you know, for our technology in that space. And we are now figuring out the right strategy to partner to have a joint development agreement with multiple partners. And as we make those milestones, we'll absolutely communicate to you But we've given them some of our consumer batteries. And actually, all the EV companies, a lot of motor companies love what we can show.
spk08: Thanks so much.
spk10: Appreciate it. Our next question is from Bill Peterson.
spk06: Yeah, sorry about that. I think I was on mute. Thanks for the overview. I'm not sure this one's for Raj. But I wanted to talk about how you're going to be progressing to I guess a 180,000 units. I think in the special presentation you talked about trying or hoping to achieve around 60% yields. I guess in the early part of this year, how are those progressing and is that still the right way to think about yields as we I guess exit Q4 of 2023?
spk15: Yeah, absolutely. I'll take a shot at the question. And, you know, Ajay, if you feel like there's something else you want to add on top of it, please jump in. You know, as we mentioned, our yields are progressing nicely, steadily improving from where we presented last time. And we're on track to where we expect to be by end of the year. We're quite pleased with that. We are, as we said, more than doubling the number of batteries that come out, you know, every quarter. Again, A lot of these batteries, so we feel very confident we're going to hit this 180,000 number. No issues there. In fact, we produce more than that sometimes because, you know, we have to give batteries for qualification to our customers and so on. These are revenue-producing batteries that we're talking about. But, yeah, things look good there.
spk06: Okay. Thanks for that. I guess the second question I have is it was sort of I guess sort of briefly mentioned by TJ in the last call you didn't speak to hear that he alluded to. I guess one potential return to this following that I want to clarify is that truly an issue is it only one one. I was was returned or if not or maybe with something else entirely just trying to feel for that something we should be on the lookout for.
spk14: Yeah, there's only one. Yeah, go ahead. Yeah. Yeah, I can handle that question. Yeah, there was one particular cell which came back from a customer. In fact, we saw the pictures of it and concluded that the result was due to the, the swelling was due to the mechanical damage to the cell, which we are trying to understand where it could have happened, you know, post shipments from Enovix. So yeah, but that's the only cell that we have seen so far which is out there in the field which has been reported with the swelling. You're doing a lot of for the work. Reliability testing ourselves and you know trying to find you know different causes of what would be problems we haven't seen the architecture is very robust. We haven't seen anything like that.
spk10: Thanks. And our next question is from David Dowd.
spk17: Hey, afternoon, everybody. Thanks for all the prepared remarks. I was hoping to maybe just go back to the tech side. You mentioned the 1,000 watt hour per liter battery scale to a mobile phone and laptop size is kind of optimizing for cycle life. Could you just remind us maybe where you are today on that tech roadmap and where do you have to get to?
spk15: Yeah, that's actually a great question. You know, as I came here in the last month or so, what I've kind of realized is that, you know, we are clearly making, you know, we are where we thought we would be in terms of our cycle. And we have a lot of innovations along the way on materials, on the way we, you know, develop the technology to continue to increase that and get ahead of it. And energy density, you know, continue to get ahead of the competition and also improve our cycle life. The main important thing here is that both in energy density and cycles, I somehow feel like people are characterizing batteries by just simple one number. And we are, as we get into more advanced stages where we actually have our batteries at our customers, and I talk to many of these customers, what I find is that how the battery is used in the device and the use cases that the battery goes through is actually just as important. For example, when you talk about a cycle, people talk about charging all the way to the peak and bringing it down. But nobody actually does that. I mean, if you have a mobile phone, you'll probably start charging it before it ever goes to fully zero. And also, if you think about energy density, when it's fully charged is one thing, but the use cases of how a watch is used, what's the phone is used, what's a laptop is used, has a lot of bearing. So we have kind of evolved a little bit more in how we actually measure the value of the battery to our customers. to more than just those two numbers. That's not to say we're not making progress on those. We are absolutely on track on that. But what you will find from us moving forward is actually talk more and more about the customer experience of using the battery than just one or two numbers, because I don't think those numbers fully capture all the aspects of the differentiation that's built into our technology.
spk17: Thanks for us that's super helpful and then maybe as a follow-up will pivot back to EVs. I guess could you maybe shed a little color around how those conversations are progressing whether with cell manufacturers or just traditional auto OEMs like is there any concern, I guess, with performance maybe not scaling to an EV size capacity battery. And then also form factor. What are the thoughts or latest thoughts around form factor, just given some of the headlines around potential OEMs or OEMs potentially going towards cylindrical? Thanks, guys.
spk15: Yeah, I mean, so first I want to make one general comment about form factor, not just specific to EVs. Something that I think if it's not clear to everyone here, what I've learned over the time here is that the form factor of the battery is different in watches versus, you know, digital cameras versus other IoT devices versus smartphones versus laptops, because they're kind of everyone needs a battery to be of a certain shape to fit in the cavity that's allocated to it after all the electronics and the displays have taken their space. Similarly, in EV, it's a different form factor. Our technology, now we are building manufacturing lines that actually have the ability, what we call agility lines, to customize the battery to different form factors very quickly. And our Gen 2 line will have the ability to do that and produce at different form factors. So that's something I just wanted to put it out there. It's a core technology and a core competency we are building and we will need to build to be successful. And our architecture is very amenable to that. Now, in terms of EVs, the conversations are going really well. The consumer batteries that we've given them to test, you know, they really like it. It's too early to tell how exactly the business model would be in terms of be manufacturer, they manufacture, we do a joint development, we license the technology. Quite a few of those options are open, and they're kind of early stage of development. And I'll continue to comment on that as the year goes by.
spk17: MR. Great. Thanks a lot, everyone.
spk10: Our next question comes from Colin Rush.
spk11: Please unmute yourself and ask your question.
spk18: Sorry about that, you guys. I think I'm good. I wanted to just get a little bit more color in terms of the design activity and the design wins in terms of the target customers, the process, and how that's cycling and how quickly you're moving through those cycle times with the design ends, because that may, you know, be very, very crucial for some of our estimates as we get into late 2024, 2025.
spk15: Yeah, absolutely. I'll add, I'll say a little bit on a general level, and I'll ask Ralph, who actually deals with this every day, to comment a little bit more on that. Our design inactivity has been tremendously has been so much better than what it was before. The last quarter was actually fantastic. What we are finding is that as we are able to produce more cells in our FabOne, we are able to give more samples to customers, and that is helping them test our battery versus their current batteries that they're using, and is really giving them the confidence that what we are talking about is real, and they're able to do it, you know, test it in their own way. And, of course, we understand how they test, and we put those tests back into our testing so the next time when we go to the battery, it already meets their requirements. You know, so in terms of samples we've given out, in terms of customer pipeline, I think there is some data in the shareholder letter that actually shows the progress. But they're super pleased with the progress so far. And many of them have actually progressed from initial testing where they have samples and said, yeah, this looks good, to actually putting it in their own form factor and then testing and saying this is much better. So now at this point, we actually know what products we will go into. But Ralph, you want to add more color to that?
spk16: Thanks, Raj. Yes. You know, everything Raj said is exactly on point. As we showed you last time in TJ's presentation in January, we're now tracking these to sell milestones. And those sell milestones are showing that we increased sort of our active designs and design wins by about $200 million in this year. last quarter, which is by far the biggest jump and really shows that these customers are now fully engaged because they've taken essentially the batteries off of our production line and have done their own full qualification. This is their tests in their products. So that's a very important milestone for us and just shows kind of the progression we're making. Now, you know, I'll state cautiously is I don't expect to see a 200 million dollar improvement every quarter. It was because we've you know, we've now shipped enough units, thousands of units to these customers to be able to make those progressions in the funnel. But we're right on track, and you'll see, you know, the 24 revenue will grow fairly substantially based off of, you know, these early qualifications from our customers on these existing cells out of Fab One.
spk18: And as a follow-up, I want to hear a little bit more about the tool set that you guys are looking at for the Gen 2 line. Obviously, you're coming close to being finalized on that design. But curious about how many vendors you're able to go to in terms of having backup vendors on some of these things and your ability to access what you need in terms of all the different pieces of equipment in a timely way, given the relatively compressed timeline you guys are looking at for this ramp on the next factory.
spk15: Yeah, great question. The question is about Gentoline. I'll make a quick high-level comment and I'll let Ajay talk to you about it. Ajay is actually in Asia right now as we speak, talking to all the vendors there, so that's why he's not here in person. But he can give you a live update on where he is. I think he's met just some vendors yesterday too. It's going actually very well. The designs look very good. We've done a lot of proof of concept experiments to make sure that whatever issues we saw on Gen 1 are actually resolved in Gen 2, so we know what we're going to get is going to be at the high throughput. And Ajay, you want to comment on vendors and specifics more, more specific as you do?
spk14: Sure, absolutely. Thanks, Raj. Yeah, good question. Yeah, we have several suppliers in the whole supply chain of this Gen 2, right? Now, what we have learned through this last Gen 1 experience and since then, designing specific tools which address the real problems that Gen 1 showed us in the early days, is that there's battery companies and then there's semiconductor companies. Semiconductor companies, our architecture, which mechanical tolerancing and placement tolerancing, et cetera, Imagine the, you know, ball grid arrays, you know, of thousands of balls in a PGA or, you know, array package. And doing something like that, we actually engaged with those guys very early on, about nine, ten months ago. And now we're seeing these groups of concepts which are coming through. But then we also need to complement that battery experience as well, right? Because there's very peculiar stuff. which is going on so they you know the senator vendors have been working with the battery counterparts which you brought together so this is a big ecosystem. And yeah we want to make it hard you know so that doesn't get replicated by just in this morning we all at the same time you know have a good good design. I saw a very crazy results actually out in Korea. A couple days here in in other parts of Southeast Asia, you know, going through that. In some cases, we triple drove, you know, certain areas which were higher risk. But we are coming down to now working with one set of suppliers who have given us tremendous confidence in the Gen 2, you know, both the schedule and the cost. So, looking . Thanks so much, guys.
spk10: And our next question comes from Alex Potter.
spk03: Perfect. That's actually a really good segue into what I wanted to ask. So you mentioned the cost. I know that Gen 2, some of the numbers that I was, that I seem to recall, was something in the neighborhood of $70 million of CapEx per line, and you were looking to put four lines or so In the first step there in Southeast Asia, I guess the second step of those numbers all still ballpark in the neighborhood or have your conversations led you to believe that those numbers should be revised anyway.
spk15: Yeah, good question. Actually, yeah, go ahead. Just give me a second. Maybe I'll make a comment and then you can head on top of that. So basically, the way this is working out is, you know, Ajay and team are looking at making sure that we have enough space so we can put four lines or even more as needed. And so we are going to make sure that we have enough capacity. And what we're going to do is we are going to start first with an ability to quickly make a custom cell using the pieces of the line that we're going to use in Gen 2, right? So this won't have full automation, but all the same machines that will be in the Gen 2 will come here, and that'll come earlier, what we call the agility line. That'll give us a lot of confidence that we can make different custom size cells. Then we'll scale up the line. And yeah, I mean, we still believe that with the demand and the customer pipeline that we have, we will need to get to at least four lines and maybe more in time. But we're going to do it in a staged manner. We're going to do it in a staged manner because, as Ralph mentioned, different customers are at different stages of qualification. As those products get qualified, we want to be able to scale quickly, but also in sync with the customer demand. Because what's going to happen is For example, a customer needs a smaller cell, may qualify faster than a customer needs a big cell, or maybe a customer needs a big cell and a smartphone qualifies sooner. So, we need to make sure that the equipment we're building is tightly in sync with that. So, we're kind of evolving to that stage of capacity planning, which is matching the actual customer demand with actual supply, and we're in track to do that. Ajay, anything else you want to add on that?
spk14: Yeah, just very quickly, actually, no change, no revisions to the original numbers. The cost per line question that you asked is roughly in line with what we're seeing now. As we do replicate second, third, fourth line, et cetera, those costs will obviously go down economies of scale and our ability to negotiate better with various supply chain members. So yeah, not much change from the numbers we already gave you.
spk03: Okay that's perfect and then maybe one more financial oriented question. Referencing to flat generally flat up X guide for 2023. I hear you on shifting some of the R and D cost and the cost of revenue as you move more toward production. But was also somewhat surprised presently you're going to need to be staffing up. In Asia and a lot of that would hit up X in the G and a line so maybe maybe none of that hits in 2023 but at some inflection in that line. And Les, correct me if I'm wrong.
spk15: Les Jacobson- Yeah. So, I'll take a shot at it and then we'll see if Stefan maybe can add a little bit more color. What I found when I came here is that we are actually fairly well staffed on OPEX. And the company was at subscale in manufacturing in terms of output. So, that's one of the reasons why I feel like I can hold OPEX flat from last year to this year. There was a lot of expenses also with you know, coming from, you know, SPAC into the company and so on, which are really one time last year. And moving forward, the mix of investments is changing. From my perspective, I think we're investing a little bit more, bringing in a lot of good talent actually in the electrochemistry side and in the manufacturing discipline, the mechanical engineering and so on. But some of the other operating expenses that we had last year were really some kind of one time. So we were able to reduce that. Moving forward, I feel you know, we will add more in Malaysia, but at the same time, we have a lot of, you know, cost in Fremont, which will actually slowly come down also because of our current manufacturing. So, in that sense, you know, it might actually balance out. And, you know, or any other, you know, for example, it could be, you know, any other Asian country that we look at, costs are actually much lower that we have seen. So, our goal is to actually manage the transition so the OPEX actually doesn't become too high.
spk21: MR. Excellent. Let me Alex, a couple numbers, one for 23 and one for the older years. In 23, I mentioned we spent 120 million planned for cash on operational side. There's around 20 million of depreciation and amortization on cash. So keeping OPEX flat is around 80 million OPEX for 2023 and then on a cost of goods sold side is around 60, 40 cash and 20 million is non-cash. And then in other years, as Raj alluded to, right, the business model hasn't changed. We still expect to have around 20% on operating expenses, run rate beyond like 24, 25. Very good. Thanks a lot, guys.
spk10: Our next question comes from Gus Richard. Yes, thanks for taking. Thanks for taking the question.
spk07: You wrote off, you know, took an impairment charge for a piece of equipment. And I'm just wondering what was rationale and, you know, how is that related to the ultimate output of line one?
spk08: Yeah, maybe Stefan can take that.
spk21: Thanks, Gus. Yes, so that $4.8 million charge that we took is for a piece of the equipment that we ceased to develop. It has a higher UPH than the balanced line has. The line runs here in Fremont was 100 UPH, and that equipment was 600. So we don't develop that small portion. We don't expect anything to reoccur.
spk07: Got it. Thanks. Ross, you mentioned in your prepared remarks you had a number of customers that were interested in either doing JVs or building a factory together or what have you. And I was just wondering, as you evaluate those opportunities, what are your criterion? Is it who you get to bed with? Is it just purely economics, your percentage of output? How are you thinking about those opportunities?
spk15: Yeah, so that's a very good question. Actually, it's the strategic decision for the company that my team and I are focused a lot on. There is customers, there is different governments in Asia that we are actually, as we start thinking about putting lines there that are interested in supporting us, and that's a model that they're quite familiar with out there. So we are evaluating multiple countries and multiple customers. Ultimately, we have to make the decision of the partners based on what is in line with the strategic direction of the company. And the strategic direction of the company is, for me, the way we think about it is we have now two standard size cells, which are small cell and the big cell, that are going really into Internet of Things market. And I think that is something that you will hear us talk more and more. Because there in those markets, it's not as critical that we are optimal in size and shape and all that. Our next target is, you know, within that, wearables is a big part of the market, health monitoring and so on. Then there is smartphones, then there's laptops, then there's EV. And that's the direction and order in which we feel our technology will scale. So when we pick our partners, we want to pick them in that particular, in line with that strategy and not deviate from that, that will take us, you know, away from what's good to us. So, that's kind of how we are looking at it. And I think it's more about, you know, making sure our technology is a good fit based on where our current technology is, and it's a good fit for the markets where we're going into.
spk10: Robert Hopkinson Got it. Thank you.
spk11: Our next question is from . Hi, good afternoon.
spk02: Thanks for taking my question. You know, Roger, I'd like to just ask you, you've been now at the firm for a month or so, and curious as to if you can share any detail on the things that you've seen that you can improve upon or any processes and any methodologies that were implemented in the past that you're bringing fresh eyes to through your experience.
spk15: Yeah, absolutely. I think the number, you know, firstly, I'm actually unbelievably impressed with the technology and how differentiated the technology is. You know, it's not often you find a technology where you're that much better than the competition in terms of performance numbers and that much unique in the architecture that is hard to replicate. And it took us a long time to get here, almost 16 years. And then it took us a lot of effort to actually get these mechanical constraints done. So, we have sustainable differentiation, I feel. And there's a lot of stuff in the pipeline that will make the technology even better in terms of, you know, we talked about energy density, we talked about cycles and so on. So that part has been very pleasantly surprising. The parts that I bring is really the external and the customer focus. Because my whole career has been working with customers who make varying kinds of products, you know, cameras, you know, MP3 players, DVD players, smartphones, wearables, IoT devices, laptops, cars. So I bring that customer first mindset. And what I find is that when you're able to understand what the customer is trying to do with this technology, it gives you a view of what exactly our product should look like to fit in that product, right? You know, we're not making, you know, double A batteries, right? That's not what we're making. So we're not going to... So this business is not about making one size fits all batteries. but then we really have to you know have the structures and processes in place when there's so much interest from different customers which ones do we pick which markets do we go after first which ones we go after next how do we scale up how do we build manufacturing capability which is tightly you know match to the supply and the demand we are getting that's the areas that i'm really focused on and that's where i feel the company really um needs more strategic direction, particularly when the demand is so secular for batteries. It's important, just as important what we don't do first as what we do first, you know.
spk02: Thanks. And as a follow, speaking of those customers, as you engage with them further, as you had conversations, I'm sure, with them before you got to Novix, what are the competitive products, if any, that you're bumping up against? I mean, is there anyone out there that offers anything close to what you do in terms of performance characteristics and potential parameters?
spk15: Yeah, I mean, what I've learned is pretty much we are competing with the traditional battery technologies that exist today, standard lithium ion batteries. There is no one that I've bumped into that our customers have talked about that would use something like a silicon anode, for example, that we are doing, or the energy density that we are providing. So it's very, very unique. in its capability. So most of the places we are actually trying to replace an incumbent that's the standard lithium ion battery that exists today, which was invented some time back. So it's a truly revolutionary in that sense. But we have to adapt our technology to that particular customer form factor to get it to production.
spk10: Thanks. Our next question comes from Tony Stoss. Please unmute by pressing star six. Thank you. Tony Stoss, when you're ready, please unmute by pressing star six. We will move on to Derek Soderbergh.
spk11: Please unmute and ask your question.
spk19: Yeah. Hey guys. Thanks for taking my questions. Raj I want to touch on yield. I think that number exiting year was 42.9. Can you give us a yield number today. And you know in the January presentation you talked about yields are following the S curve and just looking at the yield today is it still on that curve is a tracking better or worse. Any detail on you know how you'll this tracking since January would that would be helpful.
spk15: Yeah. So, as we mentioned, the yields are tracking down that curve. And absolutely, they are in line with where we expected it to be. And we are steadily making progress in that front. So, I'm pretty confident that, you know, at the rate at which we're making progress, we will get to our 180,000 batteries number. Clearly, again, I'm not going to break down yields at this factory this month and so on because a lot of factors involved in that. But really what I'm super excited by is we will be able to hit the number of cells we want. And the learning from that will actually make sure that the Gen 2 we build will be at much, much higher yield right off the bat, which is really the number that matters because that's where we're really going to ramp the majority of our production. But so far, I'm pretty happy with what I see. Ajay and his team have done a very nice job.
spk19: Got it and then as my follow-up on the shareholder letter there was some commentary around enhancing cycle life. I think you guys are at 500 cycles for the consumer applications batteries. You know you talk about working with new electrolytes and things like that. I'm wondering how we should interpret that commentary is this something that your customers are asking for how should we think about that thanks.
spk15: Yeah, you know, I think different products need different cycle lives. Like, for example, battery in a wearable needs certain cycle life. Batteries in, you know, phones need a different cycle life. And batteries in laptops, different cycle life. But I also think that so we have to continue to improve that, and we are working on improving that. We have a lot of ideas, a lot of techniques, a lot of experiments going on to do that. But I do also want to say the important thing is, you know, as I come into this business, To me, cycle life and also energy density is kind of like asking, what is the clock speed of your Snapdragon processor? It's just one number. That doesn't really translate to how good is your camera, for example. Because the way we measure cycle life is to charge it fully to the top and take it all the way down and fully to the top. And nobody actually does that. So if you actually only charge it halfway, because most of us, when you use a phone or a watch or whatever, when you see it running low out of charge, you start charging it. And sometimes you may not charge it all the way. So we do have to continue to improve the cycle life and we are. But more importantly, to me, the exciting part is as we work with the customers, they're actually telling us how they use the battery and the test they're performing to make sure the battery fits that application. And we are customizing to meet that requirement. I think that is kind of the key.
spk10: We will now come back to Tony Stoss. Please unmute by pressing star six. Sorry, all my questions have been answered. Thank you. We will then move on to Mark Kerhord.
spk11: Please unmute yourself. Thank you.
spk13: Thanks for taking my question. He doesn't have any questions. I guess I'll add a few. First of all, Raj, congratulations. you're going to become a very, very, very wealthy man over the next decade. But my real question, since it was such a big issue on TJ's call about having to raise money, can you elaborate on interest from your partners in helping you build facilities and governments? I assume AJ's over in Asia speaking with governments as well as customers in building the facility. Can you get into a little more detail, Raj, about the interest of helping you fund this?
spk15: Raj Nadella- Yeah, thank you. Thank you for your question, and thank you for your comments. I, you know, it's a little early to precisely comment on that because, you know, we are in the middle of these negotiations and multiple ones, and I really don't want to, you know, get in the middle of that negotiation that IJ is doing. But I'll give you a couple of comments on how these things usually work with my past experience in building these kind of factories in Asia and so on. Many governments actually like to help companies build out manufacturing facilities there, either by helping with the facility, facilitation, or paying for a line or two. And because, you know, it provides employment and they also get, you know, great return on their investment later on. So there's multiple opportunities for that. And for the customer side, typically what customers want is they like our technology and they feel it's very exciting, but they worry whether they'll have enough volume for production when they go to high volume, because some of these are high volume lines, and they'd like to reserve some capacity, for example. And that's where they'd like to help us build, but they want some, you know, reserve capacity. So, those are the kind of the variables that we are looking at. And that's why it's very important that we make this decision carefully, because there's a lot of interest in the technology, and we want to pick the right partner. So, hopefully, I'll be able to comment on that more in time.
spk13: Male Speaker 1 What do you think is behind the dynamic of your design wins and your backlog going up? with production being below where initially it was stated. It seems like people are more excited than less excited, even as these push outs have occurred. Can you square that a little bit on what you see?
spk15: Absolutely. It's actually very simple. We've had, this company has had great technology and a few batteries that we were able to give. And what everybody saw was super exciting. And we gave like a couple of cells here, half a dozen cells to somebody, and they're all super happy. But for them to really consider designing, they needed hundreds and thousands of cells, which we've never been able to do. As Ajay and his team and as all our investments in Fab One are starting to materialize, we're able to produce thousands of batteries. So now as we produce thousands of batteries, the customer is able to put them in their products and test them, and that is increasing the design. It's really a question of just satisfying that early sample requirement that's helping us.
spk13: And you're able to satisfy everyone now?
spk15: Well, I wouldn't say everyone, but as many, Ralph wouldn't be too happy if I said everyone, but there's still a lot of demand, but definitely much better than we were. Ralph's got more happy customers than he's done in a long time.
spk13: Okay, thank you very much.
spk08: Yeah, my pleasure.
spk09: Next up, we have a question from Chris Southup.
spk20: Yes, thanks for taking my question here. I'm just curious for the 180,000 batteries for revenue this year can you give a split between you know they're going into kind of end products versus you know testing with different customers just want to get a sense of what the full year demand is for you know the testing if you have any sense of that.
spk15: Yeah, I mean, we're not really breaking them exactly that way because all of them, I can say this much, all of them are actually products that customers are paying for. Sometimes they'll be in high-volume production, sometimes maybe in the early stage of production, pre-production lines, and so on. But those are basically production cells. Ralph, you want to comment on that? Is that accurate?
spk16: Yeah, I think that's that's fairly accurate is, you know, we've got some products we believe will launch this this year and they're fairly lower volumes, you know, in the grand scheme of things. But we've worked closely with customers to try to, you know, say, prime the pumps effectively so that we go into 24 and start really ramping into much higher volumes. you know if i were to put a i'll put a swag on it is is you know probably about half the cells are going to at least going to be in some sort of product that you're you know hopefully going to be able to to get in the market of course you know it's always relied on when a customer can can actually release those products yeah thank you i understand that's helpful and then maybe this last one you know in the letter you talk about you know proof of concept demonstrations
spk20: Can you talk through confidence of the 13 head changes you highlighted on the January call? I'm just curious if, you know, there were any changes since that call to those, you know, different pieces that seem to be the higher risk areas and, you know, what, if anything, do we really need to do to validate the plans between now and mid-March? Thanks.
spk15: Dr. Yeah, absolutely. Maybe, Ajay, you should take this one. You're living and breathing these every day.
spk14: Yeah, absolutely. Good question again. Yes, we are currently absolutely right on track for that UPH that you just talked about, 1350 UPH, and all the equipment. There were some high-risk areas, which we had pointed out earlier. We double drove them in some cases. But yeah, most all of the proofs of concepts now are leading to believe that we are going to get that UPH.
spk10: That's great. Thanks. Our next question comes from Sean Milligan.
spk04: Hey, guys. Thanks for taking my question. I guess Mark asked earlier about outside funding or funding from customers and governments. Trying to understand here, obviously, you have a lot of confidence in the Gen 2 design. with the idea that you're going to add additional lines next year. So, you know, how do you, what do customers or funding, you know, parties need to see in terms of Gen 2 design to be willing to fund that? Do they need to see the production coming off the line first or are they willing to do that ahead of time?
spk15: Yeah, so good question. I think different funding partners are in different stages of that. So like I said, in some cases, if it is kind of like governments, then they just want to know that, you know, we do have the demand and, you know, we will be successful with this. So they want to invest ahead. They're okay. If it's more like customers, then they'd like to see some piece of equipment running or get some samples from it and so on. So different people in different stages of that. And I really hope that I'll be able to communicate better next time. And I'm kind of cautiously trying not to say much about it because we are in the middle of these negotiations and it's never good to talk about it now.
spk10: Okay, great. Thank you.
spk11: are no further questions at this time with that i'd like to turn it over to raj for closing remarks
spk15: Yeah, I mean, absolutely. Thank you all for this time. And thank you for listening to us and your support of Inovix. Fantastic company. Super excited to be here. I want to, you know, take a few minutes to a few seconds to thank all the employees at Inovix. I mean, it's a fantastic place to work. People come in real early and work really hard and long hours. And a big shout out to the founders who built this company. But you'll hear more and more from me in every quarter. And as I get to see you guys more as I travel. Thank you.
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