ENVX - Enovix: Executing Well To Exceed Key Milestones

2023-05-03 13:44:50 ET

Summary

• The new Enovix Corporation management managed to exceed all milestones as the company produced 12,500 batteries in the quarter, got the design approval for Gen2 Autoline and chose Fab-2 site in Malaysia.
• The main focus by market was the communication by the CEO that the four lines in Fab-2 will be rolled out based on demand.
• As a result, the timeline for high-volume production in all four lines in Fab-2 seems to have shifted from "end 2024" to "end 2024 to 2025" to match demand.
• Funding for all four lines in Fab-2 is within reach, and the financing from YBS could lower 2023 capital expenditures forecast.
• In terms of outlook, Enovix Corporation management continues to expect 180,000 cells to be products from Fab-1 in 2023, with 18,000 cells to be produced in the second quarter of 2023.

Enovix Corporation ( ENVX ) announced Q1 2023 earnings on 26 April, and I looked deeper into the earnings report and management call in order to put together this summary of my views on Enovix's 1Q23 print.

Enovix Exceeding expectations and meeting milestones

As highlighted in my earlier article, Enovix managed to produce 12,500 batteries in 1Q23 in Fab-1, 39% more than its own forecast of 9,000 batteries.

In addition, Enovix also completed ahead of schedule a design approval for its Gen2 Autoline and completed the purchase orders for both its Gen2 Autoline and agility line.

Enovix has made strong progress in Fab-2, as it chose a site in Malaysia which was ahead of schedule, and a leadership team and team of engineers have been hired there. On top of that, there were several leadership additions to get Enovix ready for scaling up.

Lastly, management has managed to secure financing for all four planned Gen2 Autolines in Fab-2. YBS, Enovix's manufacturing partner in Malaysia, is currently working with a syndicate of local banks to make an investment into its first Gen2 autoline, with an expectation of at least $70 million in non-dilutive financing. The recent $173 million convertible debenture will fund its second to fourth Gen2 Autolines, providing financing at a very minimum dilution to shareholders.

Confidence in scaling up Gen2 Autolines

CEO Raj Talluri tried to address the market's concerns whether its Gen2line will be successful at high-volume manufacturing. Both Raj and Ajay have strong experience in the semiconductor industry. Raj was quick to point out that after looking at Enovix's manufacturing process, he saw that it can definitely scale. He likens Enovix's manufacturing process to the backend process of semiconductor manufacturing, just that in the backend process of semiconductor manufacturing, the tolerances are in the 5-microns range while Enovix's manufacturing process has tolerances in the 50-microns range. Enovix does not need to do the difficult part of making the batteries, as it does not manufacture the anodes, cathodes and electrolytes that make up the materials of its batteries. Instead, Enovix buys them from the suppliers that can produce these efficiently.

As a result, Raj states that what he and Ajay are used to in the semiconductor industry is much harder, and thus, they both believe that they can manufacture Enovix batteries at scale.

The key about Gen2 will be to add more speed, automation, and parallelism to ensure that the line is able to handle more tasks at one once.

At the same time, Enovix batteries do not require a change in manufacturing process even when the team improves the battery's density or cycle life. There is no need for Enovix to spend a huge amount of money to change the equipment when the technology is improved for Enovix batteries. As a result, there is a huge advantage in the way Enovix produces batteries, and it will ultimately be very profitable in the long term as the manufacturing footprint scales well.

Capacity buildout

As mentioned in an earlier article, Enovix has a non-binding letter of intent from YBS International, its manufacturing partner in Malaysia. Along with this letter of intent, YBS is expected to provide Enovix with an existing building space in Penang Science Park for its high-volume manufacturing lines. It is expected that the space can cater to four lines and YBS is expected to provide dedicated staff for the lines.

While the funding has not yet been secured by YBS, the expected $70 million in non-dilutive financing from YBS could reduce Enovix's own internal full-year capital expenditure forecast. Initially, the forecast for 2023 capital expenditure spend is $120 million, which could go down as a result of the $70 million in non-dilutive financing from YBS.

Management has managed to secure the funding required to build its four Gen2 autolines in Malaysia, and thus, the capital expenditure needed has been covered.

Timeline

In terms of the timeline, management said that the agility line will come sometime in November to December 2023, and the samples from its high-volume manufacturing line should come in April 2024.

As a result, customers can then go through the process of qualification then and management expects to go into production and manufacture those products in late 2024 to 2025.

Ramping of production

With Fab-2, management seems to be committing to building one line through 2024 despite having the necessary capital expenditures sorted out and having the ability to produce the other three lines. However, the reason given for focusing on one line through 2024 is the match customer demand and supply, as Raj mentioned that the most important thing when running a company like Enovix is to match the demand and supply. As customer qualifications progress, management expects to have better visibility into when they want to build the other three lines. The key thing is that the team has ensured that the facility for Fab-2 in Malaysia has the ability to have all four lines and that its suppliers are ready for more than one line.

At the end of the day, management seems to be taking a more prudent approach in managing the rollout of supply to ensure that they spend the necessary resources at the right time to match the demand when it arrives.

As a result, I think that what management is trying to convey in this earnings call is that the raise of capital for all four lines for Fab-2 enables Enovix to have the flexibility to pull the trigger when demand arrives, but at the same time, the recent capital raise should not be seen as a reason to accelerate the ramping up of production, as the key consideration for management is to match supply and demand.

Mobile phone and laptop markets

At the end of 2023, management expects to get samples from its agility line that will be in the right form factor for the laptop and phone markets. The current ones that are produced in Fab-1 only fit the IoT and wearables space.

As Enovix produces more batteries that are specific to laptops and mobile phones at the end of 2023, management expects that this sampling activity for the laptops and mobile phone market will help these customers validate its technology for their own product lines.

The rough guide management gave is that by 2025, we should see revenue from the high volume production of batteries for the phones and laptop markets as it takes time for the batteries to be made in the right form, to be sampled and validated and qualified by customers.

And in their own phones and laptops, and so on, that will take us through - that will be the end of next year. And '25 is when we expect to see revenue from those kinds of high-volume applications, because that's the time it takes to actually make these batteries in the right form and get the validation and get the qualification from our customers.

Now we will continue to improve energy density, we will continue to improve our cycle life and that will naturally intersect with the latest technology we have in '25, when they get to production.

Commercialization

Enovix continues to make progress in customer qualification. As of the end of 1Q23, Enovix had expanded the number of customers sampling to 106. The bottom of the funnel has grown as its "Active Designs and Design Wins" segment has grown 7% quarter on quarter to $718 million, compared to $669 million in 4Q22.

Based on management commentary on the earnings call , there has been an acceleration of the number of customers evaluating Enovix's technology. It will take a few quarters for the cells shipped over the past few quarters to be qualified, and the company expects that it is still on schedule and expects that we will see customers put products into the market with Enovix batteries by the end of 2023.

Capital expenditures and supply chain risk

COO Ajay has multiple second sources lined up for qualification. Even in the Malaysia Fab-2 factory, Enovix has second and third sources lined up that are going through its own qualification process. At the same time, management is localizing the supply chain and equipment in Malaysia as the high-volume production will be done there to minimize supply chain risks.

Positive on long-term margins

When thinking about Fab-2 and the four lines currently planned for Fab-2, along with the agreement made with its manufacturing partner, Enovix's management continues to remain positive on Enovix's margin profile and expects it to be a profitable business.

The long-term gross margin continues to be 50%, which is the same as what was earlier communicated.

However, Raj further elaborated that about 60% to 70% of the cost of the batteries comes from materials, and as Enovix gets multiple sourcing in place and as the company gets to scale, the cost will likely come down. On top of that the local manufacturing capability and sourcing in Malaysia will help to bring costs down as well. Lastly, the factories that are being built are expected to last for a long period of time, and as Enovix makes millions of batteries, they can then be amortized over these millions of batteries. At the end of the day, it is a matter of getting to scale and the profitability will come.

Outlook

In terms of outlook, Enovix Corporation management continues to expect 180,000 cells to be products from Fab-1 in 2023, with 18,000 cells to be produced in the second quarter of 2023.

While the full-year cash guidance is still $240 million, which is half from capital expenditures and half from operational needs, this could be revised down in the next earnings call as management gets more visibility into the YBS transaction as well as its internal efforts to run its business more efficiently.

Final thoughts

While the Enovix Corporation share price plunged after the earnings report, I think that those with a long-term view will appreciate that the plunge was a timely opportunity to be adding to Enovix. The fact that Raj could be transparent about his thought process regarding the rollout of all four lines in Fab-2 to match supply and demand is a positive one and the right move in my opinion. At the same time, with the right management team leading Enovix Corporation, the strong demand from all the customers qualifying its technology, and strong visibility for financing for all four lines in Fab-2, I am increasingly confident about Enovix's ability to scale and successfully reach high-volume production of its batteries.

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