Hi, good morning. My name is Bill Peterson, U.S. Cleantech analyst, and we're really pleased to have Farhan Ahmad here from Enovix. He's going to give us a little intro to the company. He's been with the company how long now?
About 8 months.
8 months. I've been covering the stock for around 2 years. It's a really interesting play in advanced batteries, and we're looking forward to discussion. Farhan, thanks for supporting the conference. I'll let you do some intro comments. I'll take some questions after that, and then if anyone has any questions in the audience, we'll do that as well. Just make sure you use the microphone. Over to you.
Thanks, Bill. Thanks for having us at this conference, and thank you, everyone, for coming up so early for our presentation. So I'll start with some forward-looking statements. On the call today, we will be making some forward-looking statements. These statements carry risks and uncertainties with them. For a full disclosure of risks, factors associated with these statements that we make today, please refer to our Form 10-K that's available on our website and on SEC website. So I'll start with a brief introduction about who we are. Enovix is a disruptive battery company. We were founded in Silicon Valley about 17 years ago. What makes us unique is that we have a very unique architecture that allows us to use 100% active silicon. We are the only battery company today that can use 100% active silicon.
Now, this is extremely important because compared to graphite anode, a silicon anode uses much less space, so about 60% less space. And that basically allows us to increase the energy density in the battery. So we can get the highest energy density batteries available in the market today, and we can get about 20%-30% energy density improvement from what's out there in the market. And now, in terms of the battery architecture, we have a unique architecture. What we have done is we have used a lot of mechanical engineering. We have architected a battery which stacks anodes and cathodes in a stack and basically puts pressures on them. And we have a constraint system designed to keep the battery in pressure.
Not only is the battery architecture unique, and there's a lot of IP and patents associated with it that the company has, but also the manufacturing process itself is very unique. We have custom tools that we have designed that allow us to manufacture these batteries in high volume. The battery architecture, in addition to giving the highest energy density in the market today with our 100% active silicon anode, it also has some other unique properties which allow for faster heat dissipation. These thermal properties make the battery architecture very appealing to EV makers. The energy density part of it, that being the highest energy density battery, that's really very attractive to the consumer electronic market. Now, the company is in the journey of scaling the technology. I'll cover basically three aspects when I think about the company.
There are three vectors the company is making strong progress on. There's technology. There is manufacturing. And there are customers. So I'll start first with the technology. So the first product that the company first generation of product that the company developed is called EX-1. It is a very differentiated technology with the highest energy density available in the market today. It has been embraced by the Army for putting the batteries in the vest that the soldiers have because of the safety features associated with the battery and the high energy density that comes with it. And this generation of product, which was very exciting for the market, when our CEO Raj, he came into the company. He looked at the product. The technology was amazing. But the product management function did not exist. So he brought that function.
Raj is somebody who's been a veteran in the smartphone industry. He has been very well known. I've worked with him personally at Micron. He's pretty much a legend in the smartphone area. The guy basically developed a smartphone, a Snapdragon processor, and prior to that, the Texas Instruments OMAP processor, which really enabled the smartphones. Then at Micron, he led the mobile business, which was an $8 billion business. So he has really good understanding of product management and also has very strong relationships. He saw that the greatest need for the energy density was in the mobile phone market. So as soon as he got there, he engaged with customers. We started working on tweaking the product to make sure that it is really perfected for the smartphone market.
Internally, as soon as he got there, we started a program on EX-1M that basically was targeted towards smartphones and getting to the performance specifications of the smartphone market. So basically taking EX-1, tweaking it for the smartphone market. And that technology node, we are working hand in hand from day one with the customers. Customers love the technology. And several OEMs are engaged. But as you know, in this space, what we can say and cannot say is often determined by NDAs and things like that. So we can name some of them. We have named a few of them in the past. We have named a few prominent Chinese OEMs. But we are engaged with many more apart from that. And so the EX-1M, we are targeting to ship the samples in the second quarter of this year.
That should have about 18% higher energy density, call it, close to 18% higher. And then the next generation, EX-2M, should be about 30% higher energy density. So those products, the EX-2M is targeted towards the end of the year, the technology we should be starting to ship. But EX-1M, we should be shipping in 2 Q of this year. And the progress on both of them is good. And we are basically focused on making sure that we can deliver these samples to customers. Now, switching to manufacturing, we are also making good progress on the manufacturing front. The first generation of our Gen1 factory we put in Fremont, that allowed us to make sure that we demonstrate to customers that the technology is manufacturable and learn.
And then we are now in the process of ramping our second generation fab, which can produce millions of batteries. So our second generation line is targeted to produce 9-10 million batteries in a year. And that really is a high-volume production line. Each line could produce about 9-10. So once we demonstrate that, there would be more confidence that the customers will have to adopt the battery in their products. So we are in the process right now of scaling this technology, of ramping this in manufacturing, and are on track to begin to ship sample or to begin producing the samples for the batteries in Malaysia on our Gen2 line in 2Q. And I will talk a little bit about the FAT/SAT. So the factory acceptance test, we are going through that process. Most of the tools have completed that.
We have a detailed update that Ajay, in his podcast earlier this last month, he provided an update. That I would encourage you to listen to. We'll continue to provide updates on the website. Raj was in Malaysia last week. He was very excited by the progress in Malaysia. Really, the site is coming along really fast. A lot of tools are moving in. The clean room is in great shape. The team is top-notch. So really, he was very excited by the visit. It's really a momentous task when you talk about all these custom tools that are shipping on-site. We are bringing them fast. It's a fairly complicated task. But the team is really focused on making sure that we can get it ready so that we can produce samples for customers in 2Q.
And then, switching lastly to the customers, we have a very strong engagement—like I said—all major. I shouldn't say all, but pretty much who's who of the consumer electronics space, the customers we are engaged with. We have very good engagement, working really hand in hand on the EX-1M. There's a very strong interest on the technology. The customers feel that their traditional batteries are kind of running out of improvements. They can't get much improvement. You look at the batteries in recent years; there's 2%-3% improvement in energy density. They really are pressed for a need for higher energy density because applications like AI are going to demand a lot more energy. There isn't a lot of space in the phone. So for that reason, there is a lot of interest from customers.
With AI, actually, there is even more interest. Raj was at MWC two weeks ago, met pretty much with all leading OEMs in smartphones. His basic feedback was that the AI interest is higher than before. Customer interest in our battery solutions is very high. We have talked about two OEMs visiting our company in the fourth quarter of last year at the CEO level and the entire battery divisions coming with them, talking about the technology, evaluating our manufacturing. There is a lot of excitement around Malaysia and customers. They want to visit the site when it's ready to make sure that they get comfortable with the manufacturability of the process in high volume. So it remains a very important milestone for the company. The target for the company remains that with customers, we are engaged in different markets.
On IoT, we will be having the second half of this year revenue. Smartphone revenue is ramping in 2025. Then the PCs in 2026. Before I end, I just want to cover the EVs opportunity. So while I would say 90% plus of our R&D focus remains on really working on the consumer electronics space, we also have unique architectural advantages in the EV market. So because we vertically stack the electrodes, as I mentioned before, there are thermal properties that are attractive. And if you fast charge on our design batteries, the simulation shows that it'll be basically very limited temperature variability across the battery, something like 10x less variability. So our battery, the temperature profile, may be 3 degrees centigrade temperature increase on fast charge.
Whereas in some of the traditional batteries, there might be a 75-degree variation or 50-degree centigrade variation across the battery, which can be very harmful for the cycle life of the battery. So with our architecture, customers can go to a really fast charge. We have demonstrated on small cells about close to 5-minute 0%-80% charging, which can be a game changer in the EV market. So the OEMs are very interested. We are being very selective in who we are engaging with because of limited resources. And we are picking a couple of the customers that are most interested and have the potential to become large. So we announced on our last earnings call that we had an agreement with one of them. And we will be basically working with them closely to deliver them samples this year that will show the viability of our product.
And then hopefully, we can translate that to a bigger engagement from next year. And we also may pick another supplier sometime, another customer sometime later this year. So the EV opportunity is also very exciting just because of the unique architecture that we have. So I'll stop there. And maybe we can jump into your questions.
Yeah. No. Look, you covered a lot of things that I'd like to dive a little bit deeper in. So let's first talk about factory and site acceptance testing. Yeah, these webcasts or blogs you do have been really kind of important to follow the milestones. So I guess when do you expect to complete, I guess, have 100% completion of the site acceptance in Malaysia? And then how does that inform your confidence level in terms of sampling off the Agility Line in April? Some of the timing was some things were pulled in. Some were shifted out. But how does your confidence to shift from the Agility Line, I guess, April?
Yeah. So look, the main focus for the company is to get samples produced in Malaysia in hands of our customers. Because for customers, it is very important that part of the qualification that they get samples from the same site that is eventually going to be producing. So the team remains on track to produce samples in Malaysia in 2Q. And that's what everyone's focused on. It is a very hard task. And that's why we do provide detailed breakdown of things time to time. And I let Ajay manage that narrative. But just for the benefit of everyone, I'll go over what FAT/SAT is and how we get from here to producing samples for everyone. So on the FAT, it is really to make sure that the tools that are designed to manufacture the batteries, they are working exactly to specification. And we have very tight specifications.
One of the things that we learned from Gen1 is that you really don't want to relax any of the specifications. You want to make sure that the equipment that is making the battery is perfect and doing everything that you want it to do. There are milestones associated. As soon as you complete FAT, you have to pay a certain amount of money to the supplier. So their incentive to meet that milestone is pretty high. The team is really focused on ensuring that the FAT process is done perfectly. We are very much engaged on that. Ajay has been providing updates on it. We will continue to provide updates. The Malaysia fab is filling up fast. If you go there, like I said, Raj was there. Most of the tools are there. Their team is ramping them.
Once all the tools are there on site, we have a plan to quickly start producing batteries. We expect that because we spend the time in FAT, that the ramp-up to SAT should be relatively quick. We can start producing batteries after that.
Okay. We're going to talk about qualification. And we could talk later about manufacturing ramp. But how should we think about product qualifications for your smartphone makers as well as maybe your wearable makers? So for example, you have EX-1. You have EX-1M. Then you're going to have EX-2, EX-2M. How should we think about the qualification times for the initial product, like EX-1? And then maybe a year from now or whenever you have EX-2 ready, how should we think about the qualification timeline of the second-generation products?
So typically, we expect once we have samples coming out of Malaysia, given the background of work that we have done with customers, we expect about 9-12-month qualification times with the OEMs that are fastest in qualification in the smartphone space. So some of the Chinese OEMs, they have really accelerated the timelines for qualification. And we expect that with the work that we have done with them already, we can get the qualification done in about 9-12 months. Now, one important thing to note is that they need samples from the site that will be used for producing the final product for starting some of the things in qualification. So once we start making the samples in Malaysia and ship them to customers after testing, from that time on, it is a 9-12-month process.
So we expect that in the EX-1M, we should have qualification with customers sometime in the first half to middle of next year. Then that should allow the customers to ramp EX-1 in some of their products, right? But really, people want to walk before they run, right? One of the things that I would think is that they are not going to put all their phones all at once in the beginning. It'll be a limited amount of SKUs, one or two, that a customer will pick that they will put us in, validate that, "Hey, you are basically taking the sample, that the phones are working. Everything's good. They're demonstrated in field. The performance is good." That's an important data point for them. Then on the EX-2, they can really have a much broader proliferation of the product.
So EX-1M is very important because it's a validation platform that allows them to ramp some products. And the key thing that I would say here is that what we hear from our customers is the design that we have is really unique. And that's why they're so interested in working with us. And they want a platform that not only can give them energy density improvement today, but that can deliver faster energy improvement and get to higher improvement over time, right? So in a year, they are getting 2%-3% energy improvement. They switch to our platform. It's like 10 years of improvement. And when you think about the iPhone this last year, in its review, the Wall Street Journal was like, "Hey, there's not much change. The battery life sucks." And that was basically their heading of the review.
So it's something that affects replacement times for phones. Your innovation in the phone can speed up a lot if you can get a better battery. So really, that's a need from customers. So now switching to IoT market, we expect to have revenue in the back half of this year. And like I said, in the PCs, the qualification times are longer. And so that will take till 2026 to get qualification and ramp.
Yeah. All right. Thanks for that. So in terms of manufacturing, you guys have spoken a little bit on your yield sort of ramp. How long should we think about, I guess, achieving sort of high yields into the 90s%? And I guess maybe equally important, I think there's a lot of questions on how fast you can add new lines, lines 2 through 4. Questions we get is, how many lines could Enovix have next year in 2025 and then in 2026 and 2027?
Sure. So in terms of their yield ramp, we expect to start the yield at a higher level than what we achieved in Fremont. So what Ajay has said, that we expect to start at 60% plus in Malaysia from the get-go. And then by end of the year, to get north of 90% through the year, improve the yields there. And now in terms of the ramp of lines, we are working closely with customers. And as we have the qualifications and based on the timing of the qualifications, we will order more lines. And so really looking for a very steep ramp in revenues in 2026 and 2025. So we will bring up the lines depending on the pace of the customer qualifications and how many phones we get designed in and things like that and the demand for those phones.
How fast from the time you ordered to?
Yeah. So that's a good question. So it's typically 6-9 months. And the way the ordering of the line works is that you will order the longer lead time parts first. And so if, for example, you're making a laser tool and you were like, "Hey, it takes the longest," you will order the lasers first and everything else later. And you would put something like 10% as a down payment. So it takes about 6-9 months. And basically, it's not an uncommon practice in industry that the long lead time items, you will keep it ordered so that you can turn around in 6 months. So we will target something like 6-month cycle time or lead time from the decision to actually having the tools.
Maybe speaking about the competitive landscape, I mean, you have EX-1, EX-2. You have a roadmap. But I mean, everybody knows you're going to need better batteries. So one could presume it's going to be competitive. How do you see the competitive landscape today? And how do you see that evolving over the next few years?
That's a good question. So one of the things that is unique to us is that we are a battery agnostic company with a unique architecture.
Material agnostic.
Sorry, material agnostic company with a unique architecture. So we take advantages of the material innovation. So the traditional battery industry, the way they have been improving the energy density is that there is innovation in material. You put the more advanced materials, and you get higher energy density. And we can benefit from that. And we can take the cathodes that are more advanced. Right now, the cathodes that we have taken on our EX-1, they are about 4 years old, right? So we are missing on 4 years of improvement. So that's where EX-2M can come in and really give us a boost in energy density. Architecturally, there's nothing that we have seen which gets you anywhere close, nothing which has got 100% active silicon that we have seen in the consumer electronics market.
The most we have seen is some people have started to use 5%-10% of active silicon material in the graphite batteries. But that has very limited advantages. You don't get the full benefit of what is possible with silicon using that approach.
I guess you talked earlier about broad customer interest from names that everybody would recognize. Based off how you're feeling about the manufacturing ramp, cost structure, and pricing, are these supportive of sort of the long-term target, sort of 50% or approaching 50% gross margins that you've spoken about in the past?
Yeah. I think we will be able to get good gross margins, 40%-50%. We have brought up that, "Hey, these batteries will require premium pricing." And I mean, one of the things that you should think about is that compared to the EV batteries, the smartphone batteries are really 4x per kWh, right? And that's because of the energy density, right? There's about a 30% higher energy density that you get from the materials that are used in EVs to the materials that are used in smartphones. So the customers in the smartphones, for the performance attributes that are needed in the phone, are willing to pay a premium. And we are not asking for a 4x higher price. We will need a premium. But we will give a 30% boost to energy density. And with that, we think we can get to good margins.
There is no other game in town. We are the only game in town for giving this level of energy density. So we think we can get to good gross margins once at scale. We obviously have to ramp manufacturing. One of the things that is important is that because we have a lot of unique materials in our battery, scale is important because manufacturing things like constraints that requires you to get to volume. So sometime in the 2026 timeframe, we should be at scale. We need about four lines to be ramped, to be at scale. And at that time, I think we can get to very good gross margins.
We're focused on consumer electronics, but you did announce the auto arrangement. Maybe there's some more on the come. Maybe just at a high level, how do you think about auto? What are the key milestones we should look for? How could this evolve over the coming years?
Yeah, sure. So let me just take a step back and talk about the auto strategy relative to smartphones. So the company is focused on getting to profitability sooner. One of the company's largest shareholders is our chairman, T.J. Rogers, who has been a veteran, brought many companies to market, and really a legend in the Bay Area. And one of his philosophies is that you want to minimize the cash burn that you have before you become profitable. And on EVs, because of the scale needed, it's a very long journey, right? It's not something where things can become profitable. So we were very clear that we want to go and focus on the smartphone market and the consumer electronic market more broadly because that was the fastest path to get to profitability. So we have been focused on that area.
But as I mentioned, there is interest in EVs. So on the EV side, our strategy is to use the architecture that we have and bring it to market, but do it in a fashion where we don't have to put a lot of capital to work. So we are looking for close customer collaboration for customers to fund the R&D largely and minimize our R&D contribution and demonstrate to them that, "Hey, our architecture is great for you. And we will put a little bit of R&D dollars to demonstrate that. But then we will get the R&D dollars and then probably license it to them." Like Raj has said, it makes sense. In that way, we can minimize our investments there but still bring the benefits of this technology to the market. And so on that front, we are working with two sort of leading OEMs.
One of them we announced as a customer and a customer that we have signed an agreement with. This year, we will show the viability of the product. The next couple of years, depending on the viability, we will do prototyping, closely working with the customers, and R&D dollars largely coming from customer. Then after that, scaling in manufacturing.
Okay. I want to stop and see if there's any questions in the audience. If there is, we got a microphone over here. Anyone?
Thanks for that. Just a couple of questions just around costs, perhaps. Just interested in what the sort of cost is compared to a traditional battery in manufacturing, if you've got an estimate of that, and also in terms of sourcing raw materials, if you've got arrangements for that or where the inputs would come from.
Yeah. So the materials that we are using, like we said, are commodity materials largely, like the electrode, cathodes, electrolyte. They are not something that is unique to us. Those are available across suppliers. We have commitments for what we need for next 1 year, 2-year kind of framework. We will continue to get those arrangements for what makes sense. But we don't think it's a big challenge for us. Now, in terms of the cost structure, we think that once at scale, we can get to a cost structure where, and I'll separate the EV side from the consumer electronics side because the batteries are very different. I'll talk about that. On the consumer electronics side, we think we will have about 20%; we are targeting about 20% incremental cost per capacity. That's what the team is driving to. We are not there yet.
In order for us to get there, we need high volumes. We need to bring down the cost of manufacturing, the line itself, the capital cost for the line itself. Those projects are going on. But there is a line of sight for that. With that, we think we can have a good business. Now, on the EV side, it's a little different because EV side, we don't need to have silicon material. It's mostly the stacking of the architecture. So once you do that, you don't have the process complexity of prelithiation. You also don't have the need for a constraint that puts pressure on the battery in some cases, depending on the material that you use. And so in that case, the cost delta would be much lower. It may be 5% or something close to that.
But then with that, the EV customers are very price sensitive because it's a big portion of the BOM cost, unlike smartphones. In a smartphone, you have a battery which is $5-$10, call it. And the BOM cost of a phone on a high end is $500-$700. So it's a very tiny piece of the cost. But it matters a lot to what the battery performance is. So they are less sensitive. But in the EV, they are very sensitive. But in addition to the battery, they have to spend thousands of dollars on integrating the battery in the car. And a lot of it is cooling systems. So if you use our battery, you can simplify the cooling system. And if you can fast charge, you don't need as big a battery. So the value proposition is there. And it's very clear.
The cost delta in EVs is probably not going to be as much.
Well, Farhan, unfortunately, we're out of time. A lot more questions we could get to. But thanks a lot for your time this morning. We'll look keenly on how the companies.