Enovix Corporation

Thank you for standing by and welcome to the Enovix Corporation fourth quarter and full year 2023 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, Charlie Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Thank you. Hello, everyone, and welcome to Inovix Corporation's fourth quarter and full year 2023 Financial Results Conference Call. With us today are President and Chief Executive Officer Dr. Raj Tuluri, Chief Financial Officer Farhan Ahmad, and Chief Operating Officer Ajay Marathe. Raj and Farhan will provide an overview, and then we'll take your 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 2023 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, and this conference 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 20, 2024, 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 a reconciliation of the gap financial measures to the non-gap 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?

Thank you, Charlie, and thanks to everyone for joining us today. I'm going to kick off with a few high-level remarks, and then we're actually going to show you some new video of our Fab 2 featuring Ajay. Ajay is actually now in Malaysia, and he's going to show you some update on manufacturing there. After that, Farhan will cover some financials and the outlook before closing, and then look forward to your questions. Okay, we had a strong finish to 2023, and now we've laid the groundwork on how to scale up in 2024. First, we reported record revenue of $7.4 million in Q4, well above our expectations. Secondly, we are in the process of completing our factory acceptance testing, and a good amount of our Gen 2 equipment is now in Fab 2 in Malaysia ready to produce the first batteries in April. It's very exciting to see that progress. Third, we made significant progress with our customers, both in smartphones and in EVs. Last quarter we hosted the executive management teams from two of the top smart smartphone OEMs from China at our Fremont headquarters and very good discussions on how to collaborate on making batteries for their phones. Additionally, we entered into a development agreement with a leading automaker to validate the advantages of the InnoXcel architecture for an EV battery. Now this significantly increases the addressable market for InnoX technology, and we have a strong pipeline of additional opportunities in this space. And last, we've gained significant confidence in reaching the thousand cycles on a smartphone class battery. And we look forward to sampling it next quarter. As I look back at our accomplishments last year, which were substantial, we began the year as a new management team in operating at an expensive, low yielding california factory with the product portfolio that frankly was not very well aligned to the key large customers and the end markets that we wanted to go after now in contrast to that we exited this year with a manufacturing base in malaysia ready to produce industry leading batteries a seasoned team in korea that has shipped batteries over 20 years that we acquired and close alignment with our customers that led us to gain a really in-depth knowledge and detailed product specifications that is helping us build category leading products targeted at the largest portion of the market, which is the smartphones. Now, we are engaged effectively with the world's largest smartphone OEMs at various levels. These companies are eager to harness our architecture to keep up with the demand for more and more power hungry applications by this AI megatrend. I'll show some data and touch upon this in a minute. But first, let's take a look at our goals. What we need to do this year is to position ourselves for the large influx in revenue with smartphone launches is very simple. First, we need to demonstrate high volume manufacturing on our Gen 2 equipment in our Fab 2 in Malaysia. Now, I know seeing is believing, so we're going to show you a video of the Fab2 featuring Ajay and that we just made in the last couple of days that speaks to our progress. And of course, Ajay will join us for Q&A from Malaysia. I think it's pretty early for him there, but he's online there standing by. So, operator, go ahead and let's roll the video.

I'm here in Fab2, as you can see, in Malaysia. We are standing in the Class 10K cleanroom. And right here, which I'm going to show you right now, is the Zone 1, one of the lasers in Zone 1, which is the anode laser. And now I'm going to give you a closer look. As you can see, there are four laser sources here, two for cleaning and two for the cutting. And then the web goes through. As you can see, the rollers, the ones which come from the toll quarters, get loaded on this machine, go through these lasers and here we can show you the little bit closer look in terms of the lasers firing. This machine is operating at 1350 UPH or close to it and we are producing actually cells for SAT. The cells, you can see the electrodes getting patterned, you know, as you can see from here. When it finishes all the process here. It goes through what is called an inline inspection system, which is really the camera which looks at the 27 different critical parameters, critical to quality parameters, which then get logged SPC and a closed loop correction system, which gets, you know, triggering the lasers for position and tolerating. And this is the anode, what we call the ALSR, which is anode laser. Next I will show you the other two, the cathode and separator lasers. Now I am standing in front of the SLSR which is a separator laser where I can show you the rolls that get loaded here as you can probably see on the film and two laser sources, two pico lasers. which are basically creating the pattern and cutting the separator. It goes through the same type of system and we can do a little bit more close up here in terms of how the patterning is being done. Again, this one is running at 1350 UPH in the middle of SAT and the inline inspection system again is very similar to one which I just showed you on the anode. It captures roughly 38 different parameters, out of which 25 are critical to quality and the others are more for productivity, OEE, speed, etc. That's all captured here in line again, feedback loop back to the lasers, adjustments for position and tolerating, and you get pattern separators at the end. Now I'm standing here in front of the stacker zone two. This is the zone two room. There's going to be 11 stackers here total or eight stackers for the HVM. And you can see the stacker in action here now. It is merging and then the four layers, as you can see. And it is stacking, creating six stacks at a time, punching, marking on the fly, vision systems right there, making sure that the stack is accurate and properly positioned in the skew. So this is the output of this stacker. We have six beautiful looking stacks which were created by this machine. Now we are standing in front of the final formation cabinets, which is also called Zone 4. And we're going to show you. Now you can see I've changed into a class 100K downing protocol, which is just a smock and not the bunny suit, which I wore in the class 10K. And you can see now the loader, automatic loader, which is loading the trays directly into the final formation cabinets. And you can see how that is working. Okay, as you can see, we are standing here in the zone 4 area. Again, I'm dressed down for class 100K. And this is the final step. After the cells go through the final formation, they go through an OCV test. And now the batteries are coming in these trays. being fed to the sorter fully done automatically this will be a nearly lights out operation where the trays are loaded from the all the way from final formation ocv into the sorter this is a sorter area which is the final step of sorting and and putting batteries in bins to be sold to the final customer so that's this operation as you can see thank you for watching Keep following our journey to scale at Enovix.com for updates as we post them.

That was awesome. As you can see, our confidence is very high around Fab 2. And we accomplished a great deal in a very short amount of time. And I'm really proud of everything the team has done. In addition to proving out manufacturing, this year we will need to deliver samples of batteries around tailored to the smartphone specification for fast charge and very high cycle life. i'm happy to report that our global r d teams have made significant progress in the recent months and we're looking forward to sending our first sample so what we call ex1m for mobile next quarter by the end of the year we'll have an enhanced version of this technology called ex2m which will also be ready to sample Now, these two will be truly revolutionary products, and they will be the first smartphone batteries in the world that we are aware of that will have 100% active silicon anode while also delivering 1,000 full charge and discharge cycles, along with the ability to really fast charge and increase energy density over the batteries that are shipping in the market today. The need for high energy density is critically important to smartphone industry. It's a huge $10 billion plus addressable market. Now, to give you a greater appreciation for why smartphones need a higher energy density battery, last quarter, we asked Tyrius Research, it's a team I'm familiar with from my days at Qualcomm, to analyze the impact of the looming AI applications on smartphones. The results of the study are actually staggering. I want to show this to you in a slide here. What you see here on the left side, the global gen AI output forecast of the amount of video and image frames in billions you can see in 23 15 24 59 to 28 we expect expected to be a staggering 2500 and you know billions of frames generated and these are uh going to be on mostly battery operated devices on phones pcs laptops and so on And what you see in the middle is actually very interesting data. What we did here is actually profile how much battery consumption um in terms of how much capacity is used per hour in milliamp hours for different applications on the left side you see non-ai based conventional applications and the right side you see the air based applications so things like 4k video when you go to 8k video a lot of up sampling is done using ai applications things like youtube that you're all familiar with on the left side but on the right side things like chat gpt are llama 2 chat bots It's staggering that ChatGPT actually consumes more battery than running YouTube on your phone. It's pretty amazing. And this is just the beginning. And this is very important because this is what we are hearing from all our customers that they just need a much higher energy density battery. In fact, I just saw a couple of new phones launched by some of the Chinese OEMs. And actually the flyers for the phone is actually all about the AI applications that run. You can also see something similar for Samsung Galaxy advertisements. the trends are clear with our product roadmap and our customer relations we are well positioned to enable the smartphone industry to really usher a new era of mobile computing in addition to that we are now thrilled to have our first deal done in evs and with that i'm going to turn over to farhan who will provide a recap of her financials and then the outlook thanks raj

So all the relevant financials are in our quarterly report, so I won't go into the details, but I'll just do a quick recap of the results and the outlook. For Q4, we delivered revenue of $7.4 million, well ahead of our expectation. We ended the quarter with about $307 million of cash and equivalents. Q4 CapEx was about $29 million. About $27 million was used in operation. And about $10 million of cash was used in acquisition of RouteJet, net of the cash that we acquired as part of RouteJet. As a reminder, we are accelerating the depreciation of Fab One equipment post our decision to stop manufacturing in Fab One. And as we decide to convert it for product development purposes. Our Q4 results included $18.5 million of accelerated depreciation, $6.2 million of this was in COGS, $12.2 million of this was in R&D, and $0.1 million was in SG&A. In Q1, we expect a similar amount of accelerated depreciation, but most of it will be in R&D expenses. Now turning to our guidance for the first quarter of 24, we are expecting revenue in the range of three and a half to four and a half million dollars. Now there is some impact, a meaningful impact to our Q1 guidance because of the water in Middle East, which is causing a longer time for the ships to go from Korea to Europe. We expect for Q1 an adjusted EBITDA loss of 24 million to 31 million and expect non-GAAP EPS between 29 cents loss and 35 cents loss. I would like to note that our non-GAAP EPS loss does include the impact of the accelerated depreciation that I talked, which is about 10 cents. And with that, I'll now turn to Raj.

Okay, thank you Farhan. In closing, I'm super excited by all the work we've done in 23. And we set the framework for our business to scale in the years forward. And we have significant proof points to deliver in 24. And I'm super excited by all the stuff we have going on in our manufacturing fabs and executing to these key milestones. So with that, I'll open up for questions.

We will now begin the Q&A session. Please note that this call is being recorded. Before we go to live questions, we are going to read the two most highly voted questions submitted by shareholders ahead of this call during the call registration. The first question is, will management address the current and future status of government contracts for batteries? Is there still a near-term eight-digit revenue opportunity or has management totally abandoned this?

Yeah, so very good question. You know, as as we did last last quarter, we continue to deliver batteries to the army contract that we have, which these are brake flow enabled safe batteries that the army will use in vests and so on. And we expect to continue to do that through this year. As we do that, these batteries are put into different kind of tests by the by the army and a lot of qualification process and so on. Once that's done, We do expect that they will end up in higher volume production and we will have a good business opportunity there. Also with the acquisition of this company, RoutJet, they have very good batteries that are actually being sold to the Korean military. And we see opportunities to actually market those batteries to the US Army also. So yes, we do expect to continue to do that.

The second question is, what is happening with the former production space in Fab One now that the Gen One line has been shut down?

Yeah, thank you for that question. So FAB1, so we are not doing high volume manufacturing FAB1, but we are using it right now to make samples to give like EX1M and EX2M and so on to give it to our smartphone customers to sample, to validate the technology before our FAB2 is ready. And as I mentioned, we expect to produce cells from FAB2 in Malaysia in April timeframe. So we are actually using the current fab in Fremont for that. Also with this new EV opportunity, we have, you know, which we expected that we will need a clean room and a dry room and a facility to make those cells here, which we are going to do here in Fremont. So it continues to be a good R&D facility for us.

We will now go to the queue. Questions will be answered in the order they are received. Please ask one question and one follow-up question at most. We will now pause a moment to assemble the queue. Our next question comes from Colin Rush with Oppenheimer. Please unmute your audio and ask your question.

Thanks so much, guys. As you've gotten deeper into the customer conversations and testing on the smartphone side, can you talk about the number of SKUs you're expecting to have to make in the next 18 months to 24 months to serve those customers?

Yeah, thank you for that question, Colin. So what's happening right now, I'll give you a little bit of color taking that opportunity of that question. So what's happening right now is that we've got very detailed specifications from multiple customers. I mean, these are 20, 30 page documents on how the battery is tested, different temperatures, different size requirements, fast charge requirements, safety requirements, and so on. from multiple smartphone OEMs. So we are now building samples and sampling, and we will be sampling them soon to these customers with the requirements that they've given. And what we do is we test the batteries to those requirements so that when we give them the cells, we are pretty confident that they will pass. It's something that I've always done in my past is to make sure we understand the customer's testing requirements, test them, and then give it to them. and then what we expect to happen is after they pass the technology qualification we expect to get different uh dimensions and capacities so 5000 amperes or 6000 amperes based on what smartphone it's going into and each customer is a slightly different size like if it's going to flip phone it's one size it's got a candy bar phone it's going to be slightly different size and uh and then and then we will make those particular form factor batteries from our malaysia fab get them those samples, they go through the rest of the qualification and then get to high volume production next year. It's hard to tell exactly how many different shapes we'll need to do because we are sampling to multiple customers and based on how quickly those evaluations on their side go, it'll drive that. I'd say probably in the single digits is what I think. It shouldn't be too many because I do think that a lot of customers will try to use a similar kind of cell because the phone form factor is kind of very similar between customers.

That's super helpful. And then given the opportunity in mobility, there's certainly a lot going on in terms of vehicle design, pack design, and given the safety profile that you guys have and the potential for fast charge, can you talk a little bit about your expected pack size and how that might look for some of these vehicles as they look to optimize both space and the energy density in the vehicles. Are we talking about 60 kilowatt hours per vehicle, or are we talking something more like 80 or 90?

Yeah, good question, Colin. But so what, just to be clear, what we're doing now is working with, what we talked about is one OEM that's interested and there's others we're talking to on proving out the value proposition, right? Proving out that we can control swelling, proving out that we can charge fast. Exactly what kind of cells there would be, how many there would be, what kind of EVs there would be, it's too early to tell. We will continue to update you on milestones as we get there. At this point, we're just proving out the technology.

Yeah, the only thing I would add is that they will have our architecture, our unique architecture. What's common is that all of these cells that we are working with automakers are with our unique architecture and will have fast charge as the unique differentiator.

Thanks so much, guys.

Our next question comes from Bill Peterson with JP Morgan. Please unmute your audio and ask your question.

Yeah, thanks for taking the question. Maybe just to piggyback off that last question, it sounds like you said the key focus area will be fast charging, but can you just shed some light on some of the key milestones and timelines for this? What are the contribution and commitments from Inovix in terms of sampling testing? And I guess, is there further appetite for Inovix as well as resources as well to actually ink any additional agreements or should we just think of this single agreement for now?

Yeah, you know, we hope to get samples out this year. That's our goal. We are working with, you know, other OEMs too, but I can't really comment much further than that. It's kind of early stage and we'll keep you updated as we make progress.

Okay, second question. So when we think about EX1 to EX1M and EX2, I guess what are the key changes you're making on the material side? I mean, are the formulations and manufacturing process fixed for EX1M and EX2? And I guess if not, I guess the formulations for EX2, if they haven't been fixed, what are the issues or performance gaps you're looking to address before locking in the materials choices and process? Just trying to get a sense for how mature these are at this stage.

Yeah, good question. So basically, if I look at the EX1M, it's built on top of what we have done in EX1, which is adapt the technology to meet the requirements of the smartphone market. And when I say the requirements for smartphone market, there is a few key requirements. One is clearly safety. People really, really care about safety in phones. As you know, we have spent a lot of time on that, and that's one area we address. The second area is cycle life. Our previous EX1 batteries ran up to 500 cycles. Our target in EX1M is 1,000 cycles, which is basically doubling that. and that's a significant uh increase and the third one is the ability to charge really really fast so if you if you think about a smartphone you know when you have a smartphone what a lot of customers do is um particularly with these ai applications a whole day battery life is getting harder and harder so when the battery life goes down people like to be able to charge and get to 15%, 20%, 30% charge so they can go through the rest of the day. So that is a very important care about. To do that safely and to do that in a way that it doesn't hurt the battery longer term is a very key care about. And that's one thing that we feel good about now. and and the third one is increasing energy density so we have now looked at all the different phones out shipping in the market and we believe that we can provide an advantage compared to that while keeping fast charge while keeping increasing the cycle life and and also different temperatures i mean that's the other thing you need to worry about in these markets is that what temperature you operate before i operate the battery at what top of the cycle charge looks like and so on So those are all the things that EX1M addresses. And again, these are slightly different based on each customer. Some customers want more cycle life and maybe a little less ED. Some customers want more ED and a little less cycle life. So we are now in the middle of basically a target specification, which we have finalized now on the EX1M. And those are the batteries that we expect to sample from our Malaysia factory in April. What EX2M does on top of that is actually continue to increase energy density. And you've seen us put out a slide before on where we expect to get there with that, while keeping the increases in cycle life, while keeping the increase in fast charge, while keeping all the safety parameters. Now, to be able to accomplish that, we have finalized a set of materials for EX1M, cathodes, anodes, electrolytes, separators, and so on. We have shortlisted what they will be for EX2M, and in short order, we'll decide which ones. Some very promising results, so we're pretty optimistic of being able to get there.

Thanks, Rosh.

Our next question comes from George Gianarchos with Canaccord. Please unmute your audio and ask your question.

Hey, everyone. Thanks so much for taking my question. I'd like to ask about your material supply chain. Earlier in the quarter, you announced an agreement with Group 14. And I'm curious, first of all, how diversified your silicon supply chain is. And how extensive are the choices by handset vendors or device vendors into making that decision? Or is that purely a decision that Inovix will make in terms of which silicon you put into your batteries? Thank you.

Yeah. So, you know, if you look at producing a battery that increases energy density, but also meets all these other requirements, and I can't emphasize enough of that, because ultimately a battery has to meet the requirements that are required by the end product, which our customers make, cycle life, fast charge, swelling, the end of life, and so on. it's a function of not just the anode but it's a function of the silicon anode a function of the cathode and more importantly the electrolyte because you know in a battery the electrolyte when it interfaces the cathode has a certain properties a certain way it needs to behave when interest faces the anode the other side it has to behave a certain way all at the same time being able to pass lithium ions And the separators make a big role as to how thick is the separator and how do they handle the stack pressure and so on. So the recipe of choosing the right cathodes, right anodes, right separators, and putting them together is really the intellectual property that we have at InnoVEX and experience we have here. So we like I said, there's multiple choices on anodes, multiple choices and cathodes, multiple choices and electrolytes. And that is the intellectual property that we have. We are constantly looking for new materials. We were very excited by the results we got from the group 14 material. And that team has been super supportive. We are also talking to other people. You know, supply diversity is also important. And ultimately what we're going to do is to find the right recipe for the right end applications based on the customer feedback. So that's kind of the best way to answer that question.

Thank you.

And just as a follow up, I'd like to ask about your timelines here on the FAT and SAT testing. Your confidence level in terms of getting out samples for the agility line in the second quarter. You know, I know that on a recent podcast, you discussed a little bit of a push out in some of the timelines here. Can you just kind of reiterate that and give us confidence that you can get those samples out in the second quarter? Thank you.

i'll answer a little bit high level and aj feel free to add i know he's in malaysia i'm not sure how good the line is but basically we feel very confident that we're going to get samples out you know in april time frame to our customers and you know we did we did announce some delays on fat of one of the zones and again you got to remember these are very very complicated things we are doing these are tens of machines all working in tandem together. One thing both Ajay and myself and the leadership team we've done is we're not going to cut corners. We're not going to cut corners in the requirements of FIT, in the requirements of SAT, how much material we need to run, what yield they need to come up with before we take acceptance of any of these machines for our customers, from our suppliers. So that has caused some amount of know back and forth with our suppliers but we feel good now that uh uh it's uh it's uh it's within reach and we feel good about the machines we've received um we do expect all of them to you know uh work together and some of them have been shipped they're in malaysia somewhere in the way of way of shipping but uh we're holding the date for um getting the samples to customers although some of the zones have pushed a little bit

Just to add to that, I don't know if you guys can hear me okay or not, but I'm here calling in from TAP2. Feeling pretty confident about how the machines are behaving. And I think you shared some of the data as well, early data on FAT in the podcast. So yeah, feeling confident that Q2 will definitely get samples out from the Agility line here in Malaysia.

Our next question comes from Jed Dorsheimer with William Blair. Please unmute your audio and ask your question.

Hi. Thanks for taking my question here, guys. Raj, you've talked about some of the performance trade-offs between EX1, EX1M, and EX2. I was wondering, how should we think about the value creation in terms of some of those trade-offs? And what I'm really trying to get to is ASP differences between the different products and then I have a follow up.

Yeah. You know, I mean, Jed, it's really, really based on the end markets. You know, I think, you know, our view is that when you go into things like smartphones, where they're going to laptops, you've got to get to, you know, 800,000 cycles in that range. You know, you think about it, if you have a phone, you're going to charge it every day. So you're looking at 350 charges, discharge cycles a year. you know, let's say you keep the phone for two and a half to three years, you know, you're quickly at the thousand range, right? So you pretty much have to be able to do that. If you look at a variable or maybe some other IoT devices, you might keep it for less than number of years. Maybe you don't charge it every day. So you can go get away with less number of cycles, right? When we decided to go after smartphones as the big market and then laptops, a thousand cycles, 800 to thousand cycles became a must. And we aimed at thousand as a target. If some customers want to take 800 cycle device, that's good, we can do that, but we set the goal aggressively. Now, the ASP is going to depend upon what the value most, right? I mean, ultimately, there is must-meet requirements, which is fast charge, which is cycle life, which is not swell at high temperatures when you store the battery, safety, and so on. Once you meet those, the amount of ED you provide on top of that is what's going to change the ASP premium that we command. In some other markets, you know, maybe cycle life is not that important. We can index more on ED and then we can get a premium for that. So it really depends on the end market. Some are must-have requirements and some are requirements that once you do them, you know, you can get more premium for higher ED.

As a follow-up, I know on wearables, we've talked about, you know, Apple Watch in terms of value or the value... of the additional battery life is not as great as that of a phone. But I'm curious, when we look at Apple Vision or when we look at something that only has two hours of battery life and is certainly gating the adoption of that product, how do you think about the value in terms of the, and therefore the gating function of the battery to kind of help those markets open up to larger volumes. Thanks.

Yeah, absolutely. I mean, that is, you know, there are more and more applications like that coming out that absolutely need much higher energy density. And I am one of those proud owners of Apple Vision Pro. I love the device and I hate the two hour battery life. It's the single biggest problem with the device is the battery life. So, but it's a phenomenal device. And, you know, I mean, I think the reason the device is so great is because of the performance. That's in there, you know, with the memories and the process and the displays. And I mean, there's an IMAX app. I tried on it and it just feels like you're in a movie, you know, in IMAX theater. But, you know, the battery goes down pretty fast. So I think the ASP Premium is there in those markets because, you know, that's a... I think all told $4,000 product. And I mean, people will be willing to, I mean, what if you could double that battery life? That'd be awesome. So I think a lot, I mean, I actually think that is just the first of the many products that are coming. And this is what I mentioned when I first came to this job is that, the performance and the end user experience that great processors, great memory devices, great displays, great cameras can deliver is huge. I mean, we haven't seen how good that can be. And now we are seeing with the early products coming out, there'll be a lot more like that that'll come out. And you'll see that too, deliver the experience that this advances in chips and cameras and memories as really delivered, you can't really realize them until you have a better battery. And that's why I think that once we produce this battery, there'll be a lot of opportunity for a differentiated ASP.

Our next question comes from Derek Soderberg with Kantor. Please unmute your audio and ask your question.

Yeah, hey everyone, thanks for taking the questions. I wanted to start with, on the slide deck, it looks like you guys have the goal of multiple smartphone launches in 2025. I'm wondering what you're gonna need from a production capacity standpoint to achieve this. Can you do that with a single line? Do you need two lines? Any detail on that would be great, thanks.

Yeah, so I think it's important for me to explain how the process works. I know I get asked this question a lot. So if you think about where we are in our journey, we now have a recipe with the EX1M that we feel pretty good about that actually meets the requirements of the market. We have a factory coming up now and we feel pretty good that we'll be able to get some samples in April from that. And so what happens next, right? We're going to give these to our customers. They're going to test them and they're going to give us some feedback and they're going to give us feedback on maybe some optimization on dimensions of how big the battery should be and so on. We're going to make those changes because we have an agility line that can actually do different size batteries. We're going to give those back to them and they're going to test them again. And like I said, we are sampling multiple cell phone customers. And when you do that, typically it's nine to 12 months, as I mentioned, on how long it takes them to qualify the battery. Because you remember, we're talking about a thousand cycle battery, which means they got to charge discharge for a thousand cycles to make sure it's okay. That'll take the nine to 12 months. And then we get designed into, if things go really well, maybe multiple models, they'll start with one model. If things go really well, maybe you'll have multiple OEMs. So the amount of volume that we need is gonna depend upon how these qualification cycles go. And that's gonna get how much capacity we need to build. We do have one line now that can produce, as I mentioned, around 9 million batteries or so a year. And we're gonna be watching those customer qualifications closely and making decisions on how to make sure we have enough capacity based on how the design wins are going. And that's something that as this year go through, we'll continue to update you on that.

Got it. And as my follow up, Ajay, You spoke a bit about yield on the last podcast and you mentioned a bit about throughput just now on the video. You know, from your perspective, how's the equipment as a whole? I know you guys did a bunch of proof of concept tests and I'm just curious your thoughts and confidence level around, you know, everything together hitting sort of that 1350 UPH metric and share any incremental details on, you know, how throughput is tracking as well. Thanks.

Sure. Yeah, good question. The yields, I mean, as a part of the SAT, as Raj mentioned, we are doing some rigorous, you know, just take one example, laser, for example, there's about 25, 26 critical to quality parameters that we track. They're doing that in SAT, making sure the CP and the CPKs of that is, you know, at good, you know, more than 1.0 CPK levels. We'll further fine-tune that to 1.33. But yeah, fairly looking fairly good that when we clear the FAT, that the yield on certain critical processes throughout the line from our learnings in Fab 1 will not only hold, but will start at the right place. So yield kind of looking more and more confidence we're getting, actually, as we finish the FAT. The POCs helped us design the equipment right. Now the FATs are helping us ensuring that the yields are going to hold. And then the SAT, which is going to happen here, some of it is already started. In fact, the machines behind me are going through SAT right now, are going to assure that the fine-tuning will help us get the yield even at a better place. So that's yield. UPS-wise, zone 2 and 3 is really the battery line which will run at 1350 UPS. Loan 1 and 4, we are tuning it as a farm. And we'll do the 1350, but we can keep on adding to that to make sure it is the bottleneck. So 1 and 4 are farms. They will be adjusted to 1350. 2 and 3 are the ones which are kind of locked in. And we are feeling good about both these things.

Our next question comes from Anthony Stoss with Craig Helm. Please unmute your audio and ask your question.

Hey Raj, a lot of my questions were asked, but maybe now that you've had Route Jade under your belt for a while, can you update us what you've learned from Route Jade? And then also just to get Farhan in the action here, just your view on OPEX for March and where OPEX trends through the rest of the year.

Yeah, you know, I visited the factory, I think a few months ago. You know, we are super thrilled by the acquisition. It's really phenomenal. I mean, this company has been making production batteries shipping for over 20 years. And it's an expertise that really complements what we have in the company. They understand battery manufacturing, they understand safety, they understand different end markets. And more importantly, their coding expertise is phenomenal. So, you know, The thing I want to mention is that when you code a role properly to the right specifications, it makes it much easier to cut it on the laser and to stack it. So it's very important you own the incoming material quality and specification, which is one of the problems we had when we were running in Gen 1, that we were relying on third-party toll coders who weren't that motivated to really to code it like how we wanted it because you know you got to remember we don't just take rolls and make them jelly rolls like other people that they used to supply to we cut them with lasers so they're very different and we stack them so it's a you know i realized when i came in last year that it was a key piece of the manufacturing process we absolutely needed and uh now you know, we are using that capacity to even for Ajay to do his FAT and SAT and so on. So when the material comes out, we're able to quickly go back and forth between making sure its coating is right and the laser cutting is right and so on. So it's like an end-to-end optimization. The second thing we found is that, you know, the team at RoutJet has two things that they do really well in addition to the things I mentioned. They know how to make high current batteries. So these are batteries that can actually propel things like run electric motors, run drones, run military applications. That's a very unique value proposition that actually we are able to now looking at how to extend the customer breadth there. And the second one is they can make odd shape batteries, they can make donut batteries, they can make different shape batteries because of their ability to, the way they laminate and the way they stack batteries. So we have some customer base that actually overlaps that we're able to now go in and also present some of the silicon anode based batteries. But some customer base where you know we're able to sell uh route made you know graphite batteries and uh so we will continue to spend more time and grow the revenue of that company that we acquired i mean it's one team now so super exciting and uh it's a very fortunate us that we were able to get the recognition done quickly

So yeah, touching on the OPEC side, from Q4 to Q1, it should be similar level. From Q1 to Q2, there should be a decline because of the 18 and a half million of the depreciation that we talked about. And also because of the actions that we have taken in Fremont, some of those benefits will come through. So you should get additional low single digit kind of a benefit like that should also decline. And then for the year after that, we should be holding it steady, maybe go up slightly towards the end of the year. For the full year, like, you know, like if you look at the EBITDA of the company, you should kind of think of it for the full year, very similar to what we had in 23. And, you know, fairly steady through the year as well.

Very good. Best of luck, guys. Thank you.

Our next question comes from Gabe Dowd with Cohen. Please unmute your audio and ask your question.

Thank you. Thanks everyone for all the prepared remarks and Ajay for the great video. Raj was hoping we can maybe just go back to EX1M and EX2M. There's already been a lot of discussion around it, but just curious if you can maybe quantify what the energy density targets are for each and just how that compares to leading edge mobile phones in the market today.

Yeah, we haven't put out exactly a precise target, mainly because we are making the right, I would say, trade-off between energy density, cycle life, fast charge, safety, and then also the... And that's very important. It'll definitely be higher than what is in the market today. I think we put in our investor deck what we expect to get to on EX2M. Where exactly EX1M will land is a decision we're gonna make together with our customers. As I mentioned, it's not just a one parameter that doesn't drive design wins. It's a sum total of all those five parameters that we need to be thinking about. And that's where we are focused on. It'll definitely improve over what's in the market for sure. We just want to make sure that we did it right with our customers because they also are involved now in the trade-off that they actually want to make to get the right battery in time.

Okay. Okay, guys, that makes sense. Certainly a lot of parameters you need to solve for depending on the customer. Okay, then just as a follow-up, very clear on when EX1M and EX2M are expected to be shipped for customers to sample, but When will the sales actually be coming off the high volume manufacturing line? I guess I'd imagine that some customers would want to see sales off of that line as part of the qualification process too. Is that within the nine to 12 month window that you talked about?

The short answer is yes. The good news is our agility line and the high-volume manufacturing line use the exact same modules. So in that sense, and also from the same place, they're both in Malaysia in the same factory that you see where Ajay is right now. So in that sense, there is a lot of similarity. So our expectation is that once they get samples from one moving to the other one, it should be a short cycle time call because they're really the same machines. It's just the scale is different, which is actually a very key part of our strategy to reduce that cycle time. But ultimately, look, we'll get them the samples, but the exact qualification time, like I said, is going to depend upon, you know, phone level of qualification. And when I talk to my customers, you know, they basically tell me, look, Raj, depending upon how good your first samples are and where we put it, it's anywhere between nine and 12. And that's kind of what we are looking, working towards.

Okay. Okay. Got it. Got it. Great. Thanks, Raj. Absolutely.

Our next question comes from... Our next question comes from Anada Baru with Loop Capital Markets. Please unmute your audio and ask your question.

Yeah, good afternoon, guys. Thanks for taking the questions. Really appreciate it. I guess the first one maybe is for Ajay, if you're still online, Ajay. Just to the earlier question about yields, is there a useful way to think about where you guys think yields in FAT2 will be? in April, May, when you start putting out legitimate samples, and then are there yield targets through the year as well? And I guess I have a quick follow-up, but what's the value of the yield targets that you guys have as well? And I have a quick follow-up after that. Thanks.

Good, good question, Ananda. So all the learnings and all the root cause analysis that we have done on the Gen 1 yield you know, yields that, you know, for the last whole year that we have been sort of ramping up, ratcheting it up slowly. Where we ended in Gen 1, that's where we will begin in Gen 2. All the learnings have been played in into the Gen 2 equipment and the design. And what Gen 1 did not provide, we have, you know, we have made sure the design accommodated that here in Gen 2. So we will start there. Pretty decent yields. mostly all cpk windows are the process driven more than 1.1 1.2 cpk kind of thing for every process step there are several viewpoints during the line so you can multiply those and you know you'll get a pretty decent yield but then immediately after that you know all the fine tuning and within the three quarters uh we are going to deliver you know upwards of 90 plus yields uh in the in the gen 2 line that's how we are thinking And that's how you're planning, actually, and the FAD, FADs are supporting that.

So that's super helpful. Thanks. Yeah, super helpful. And I guess the follow-up is maybe this is for Raj and Farhan as well. Like what – in terms of your margin model, right, so let's say you hit the 90% plus yield targets that Ajit just spoke to, you know, what – Is that at scale margins? Is that in the margin model? I guess, where are you in the margin model when you start shipping, you know, kind of volumes of those kinds of deals into initial customers at production?

Yeah, that's the right number. That's the right number to think about. I mean, look, this is consumer products, right? I mean, we've all done this with the processors and memories and Ajay and I have done it for, I don't know how many decades, but you gotta get to 90 plus percent yields. I mean, high 90s is where we really need to get to. but uh you know we have premiums that we believe we can command because of what we're able to provide and that will help us for a while but ultimately we got to get to those numbers uh and uh i think we we factored that in into how the fat is done and asset is done and that's kind of the important part here is that the acceptance criteria for the machines is to be running at that level of of cpks so that when we get them we string them all together you know it shouldn't take hopefully shouldn't take a lot of optimization to get to target yields so that's kind of what we're planning

Okay, awesome. Thanks a lot. Appreciate it.

Our next question comes from Chris Sutter with eRiley. Please unmute your audio and ask your question.

Hey guys, thanks for taking my question. I just wanted to follow up on, you talked about a nine to 12 month to qualify for some of these wins. Is that after the X1M is already in customer's hands or are we already in that like nine to 12 months with some of the samples of prior sales you've supplied to some of these customers? And then should we think about, is there kind of a lead time out between design in and kind of a launch that's a good kind of rough, timeframe we should expect. I just wanted to kind of get a little bit more on the cadence there.

Yeah, that is what after we delivered the samples in April from our factory, right? I mean, what we have done previously has really helped them understand our technology and how it works and so on. But the product that's actually, you know, targeted to go into the cell phone is a thousand cycles fast charging product, which is one we want to sample in April. And that's when, you know, you can think of the clock starting. Now, you know, typically my experience in these kind of things is that we will get to a model that we're going to be in, you know, there'll be technology evaluation where they're just evaluating the battery in isolation in terms of the tests and so on. Then they'll actually, you know, pass that. Then they'll actually put it in an actual phone model and that'll go on for some time. And then the precise phone it will go into is the one that happens next. So that's the total period of nine to 12 months. The actual design of what model we are on will come just a few months before high volume typically doesn't, They don't decide way ahead. But the good news is once you pass the technology qualification, once you're in their vendor list, subsequent models can come much faster because you're now inside, right? And that's what my experience has been previously with memories and process. The first one takes a little longer. Once we get in, follow-on models can come faster.

Understood. And then maybe just on the route shade contribution in the fourth quarter, can you update us on what the run rate is for that legacy business? It seemed a little bit stronger than I had been expecting, at least.

yeah no i can i can talk about that so in the fourth quarter route j business tends to be stronger there is normally a seasonality associated with it so the for the year the seasonality is that the second quarter is kind of the low point the fourth quarter is the strong point generally speaking This year in 23, what we saw was that there was a bunch of business that was at the end of the year and beginning of 24, so end of 23, beginning of 24, and a lot of that got shipped in 23. So that was a factor why the revenue came in stronger. And also like quarter on quarter decline, also it contributed to it. So generally speaking, for the first three quarters, you should think of it as about 18 million annualized run rate, and then fourth quarter stronger. And with the fourth quarter of 23 being somewhat exceptionally stronger.

Our next question comes from Tim Moore with EF Hutton. Please unmute your audio and ask your question.

Thanks. Most of my questions were already answered, but regarding, you know, you mentioned the 90% yield goal commentary two questions ago. Can you maybe give us, you know, a rough better sense, and we won't hold you to it, of the timing roadmap maybe for potential revenues run rate, you know, when you look out to maybe the December quarter or the March quarter next year from, you know, the FAB to sample production, if that goes pretty well. Any rough thoughts on maybe what the revenue tied to that could be, you know, a year from now, quarterly? Yeah. Go ahead.

No, I was just saying that, you know, we are guiding one quarter at a time. And so, you know, we'll get to it when we get to it. But, you know, we kind of talked about the timing of the production ramp. And we talked about, we gave you some good color on that. And we have given like, you know, 25 that we will be in smartphones. And, you know, so you will have a revenue ramp associated with that. I don't know.

Yeah, I mean, absolutely. I mean, look, we're going to sample products from our fab two in April. And, you know, we hopefully there'll be some IoT type customers that can go to production earlier in 24, but the smartphone ones will really be in 25. So I think that's just the way you guys should be thinking about this, you know, and again, super excited by the technology and the acceptance of the customer base. You know, once we qualify, you know, it's just, it's just going to be a lot more fun. So.

That's good. Yeah. I think you were pretty clear on the 2025 timing for the smartphones, but the IOT, you know, that could be pretty promising maybe towards the end of the year. And the other question I had just on smartphones, I mean, I mentioned it was a sum total of parameters and there's trade-offs. You know, if you get asked during qualifications and maybe pilot's, Do you think you could get asked to do an exclusive contract for a major OEM customer? I mean, do you do a unique specification exclusively for them? Or is that something you wouldn't consider?

yeah i mean you know look uh it's just a business case right i mean so if there's guaranteed volumes and good asp we're totally open to it um but by the way the nature of this business you know is that um what i expect to happen is that uh you know we'll probably you know sign some joint development agreements or something like that and then they'll talk about you know um what size battery they want what size battery we make what time is the yield and and that's how these things go typically from my experience but um

um i i in some way it will become a little bit exclusive because of the shape of the battery not the technology itself right okay that makes sense well thanks and uh good luck with the april sampling and that's it for my question thank you there are no there are no further questions at this time with that i'd like to turn it over to dr raj hillary for closing remarks

Yeah, thank you all. Been a really great year in 23 recap. Super excited by where we are in 24. So look forward to talking to you guys next quarter. Thank you for all your interest.