Thank you for standing by, and welcome to the Enovix Corporation Third Quarter 2026 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. I would like to introduce your host for today's program, Monica Gould, Investor Relations for Enovix. Please go ahead.
Thank you, operator. I would like to welcome everyone to Enovix Corporation's Third Quarter 2026 Financial Results Conference Call. Joining me today are T.J. Rodgers, Executive Chairman; Ryan Benton, Interim Chief Executive Officer; Steve Bakos, Chief Revenue Officer and General Manager; and Michael Vyvoda, Chief Operating Officer.
Management will be speaking to the slide presentation displayed on today's webcast, which will also be posted along with our press release on our investor relations website at ir.enovix.com.
They will provide their remarks, and we will then open the call for questions. Before we begin, please note that today's call contains forward-looking statements that are subject to risks and uncertainties. These statements are based on current expectations and may differ materially from the actual future results due to a number of factors.
For discussion of these risks, please refer to the disclosures in today's press release and our filings with the Securities and Exchange Commission. You can also find these materials on our IR website. All statements made on this call are as of today, November 12th, 2026, and we undertake no obligation to update them except as required by law.
During the call, we may also reference non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in the materials posted on our IR website. With that, I will turn the call over to T.J.
Good morning. We are here to present the third quarter report. Given I am the ranking guy at the table, I only have two slides, the first one and the last one, and you will hear from the team. Let me get into it. We are talking about Q3 and 2027. First of all, revenue is up 38% year-on-year and quarter-on-quarter 22%, beat our estimates, and I will brag for a second, sixth straight quarter of year-on-year growth.
The revenue number is $11 million in the quarter. It is the second to last of what I will call our little league quarters. Our investors did not sign up for $40 million companies. They signed up for a bigger company and gave us that valuation and funded us to do that. We intend to do it, and you are going to hear about it today.
Nonetheless, I work with other companies, and I can tell you, having a team that at any size decides to make the quarter six quarters in a row, that's a culture thing that's very positive. I am bragging about that, and I am telling you we are going to do better, and I will not get off this page before I tell you that.
Our gross margin was 34.5%, which is a great number. It is higher due to a rich mix of smart eyewear, where they are paying for energy density that fits in glasses and still can run a substantial computer, and then drone and defense, which always have a premium relative to the commercial market. Here, I put in a vision.
This is not a forecast, but I am just saying consider when we have a $100 million year, and that is not infinitely far away, and that number has climbed because of accretion to 40%. That is $40 million to gross profit. That is ordinary math. What is the point? The point is, we are not that far away from the day when internally and externally,
I say we made $40 million of gross profit last quarter, and I expect you guys to keep your OpEx under $40 million and therefore break even. I am just giving a vision that the step toward a demand for break-even is not that far away. It is not in 2027, but it is shortly after that. Our drone orders that we have been bragging about are converting. First of all, let me talk about the pipeline. Let me define the pipeline.
The pipeline comes from an identified customer with an identified purpose with a socket. We know we fit into some purpose with a given customer, and the pipeline ends just before backlog. When they place an order and we put it in backlog, that is the beginning of the next step. I do not want to overhype the pipeline, but that is a big number for us, and we can lose a lot in yield. That has been the problem with our company.
We have a lot of hope, we have customers that love us, and then we lose a customer, and that changes our fortune for the future. We have a big pipeline, and the drone orders are starting to convert, meaning they are going from the pipeline into real orders. For example, we have a 100,000-unit battery order from a drone maker. Again, we are still obviously military stuff.
They do not want you telling them who is buying this battery for what purpose, so that is why we are using generics here. That order, by the way, 100,000 units, ships in January 2027. I have called that MX. MX is the name we give to the technologies from Routejade, our Korean subsidiary that we have owned for three years. That is their technology, and that is their base technology, so that is a conventional battery technology.
I do not want to hype it as being high energy. I will come to that relationship in a minute. But they got the order because they are military, because they have been shipping military for 20 years, because they have the military systems, paperwork, connections, and order. They are only for the kind of military we talk about, and we will talk about the various levels of military today.
There's only six countries in the world that can ship this kind of order, and they're one of them, and they're ours. This was a surprise for us, and we'll take it. Thank you very much. That's the first big order. It's military, and we're right on the cusp of shipping the first units. I then talk about a second technology called MX1. This is the souped-up, hypercharged technology from Korea.
It uses their machines, which are widely available, quick to get, and then it puts in our technology, and our technology is silicon anode. To my knowledge, there's nobody in the world shipping 60% silicon. The highest number I've ever heard is 20. But we do 100, and I'll talk about those technologies in a minute. This is not a stretch for us, and we're going to turbocharge.
We're going to make that company more valuable than the one we bought by transferring, have already transferred our technology there. That's their first product is B01, the first sample B01 battery. We've already sampled it. It's real. We've already passed the qual. We've already gotten an order, and that's going to start delivering in early 2027. So, we've got a pipeline.
It's military. It's heavily weighted toward drones. We're shipping something we can make today into it, and we've already got the next generation ready to go because it was on the shelf at our place, and that's the second one. Okay. Now I've got the status of our other technologies. These we call AI-1 and AI-2.
AI stands for artificial intelligence, and it simply means a battery that has high energy density and therefore can be a small battery in some sort of appliance, think smart eyewear, and still have enough energy to do real work, think AI. Our original technology that we've always shot at as a company is 900 Wh/L , and this is a generic title because the very same technology will have different watt-hours per liter depending upon what size the battery is.
It's just a curve that is far-ranging, but I'll generically denominate this 900 Wh/L . We're already working on AI-2, which is over 1,000 watt-hours per liter. For AI-1, which is in production, we have refocused on smart eyewear. Why?
We got a 50,000-unit order from them, and although we're qualified, and we'll talk later about cell phones, we don't have our first big order from cell phones. We got this order, it's a real customer whose name you would recognize in a second if I could tell you. Point one and point two, we've already got qual samples for AI-2. AI-2 is basically the next step on that technology,
Which we've been working on for years, and it takes us up over 1,000 Wh/L , and that's the one we're going to build the most of in the future, and we've already sampled that to 24 customers. We've learned about depending on too few customers and getting bad surprises. This one is broad, and it's a world-class technology.
That's our two technologies, which in the future we will refer to as MX coming from Korea, MX1, the turbocharged Korean process. By the way, there's an MX2 in the books. I haven't mentioned it, but we already have defined it. Then we have the conventional Enovix technologies, which you've been hearing about for years, which we call AI-1 and AI-2.
These are the same thing, stainless steel cage, compressed battery with different levels of energy density based on some of the internal components. All right, restructuring. The company is too big for its revenue. One of the reasons I was never impressed with $10 million a quarter is that it wasn't paying the rent. We went in, and we decided to lean out the company a little bit. This is about what percent?
A little over 20%.
A 20% layoff, a RIF. 20% in most companies is traumatic. This company was, shall we say, porky, and that happened pretty much without incident. Everybody recognized it needed to get done, and I came in, and I was the new unofficial bad guy. That included cutting some R&D people. We have had 157 people in R&D in six different groups, and they're very good. 30% of them PhDs, they're very technical, but we had too many.
The cut included some R&D people and some R&D people in the U.S. So now they know they're a leaner group. We reciprocated by not saying, "Please do the same work with fewer people," by focusing on eight projects, which I have reviewed each project, and that was down from 19. So one of our problems with R&D in this company is smart but slow. Slow. Slow.
I'm saying it 3x so the R&D guys listening to this thing get it that I'm telling investors they're slow and they need to speed up. One way to speed up is work with more people on each of fewer projects. We're doing that. Just FYI, I'm an R&D guy, so these guys know that I know who they are, that is how they work and how they think.
This is chemistry. I was number one in my chemistry class at Dartmouth College. I have a PhD in electrical engineering from Stanford. They know they're talking to one of them, and when I bark at them about slow and too expensive, they realize it's important and they got to work on it. A little bit different from a manager talking about that. This is one of them. Okay.
Second point in restructuring is we're doubling the Korean capacity, $19 million. That's because we're getting run wild with drone orders. By the way, that may or may not be the end. The fact is, that will take us to the next level, and I'll show you the revenue that will come from that in a second. We made cuts in all the other divisions.
The Korean group had a slight increase, and then it got paid for by everybody else, and the net-net was, it was an $8.5 million savings. That's annualized, so that's step one. I don't claim it's the end. It was a sacrifice. Everybody knew it. We did it scientifically. In my prior life, I had a very sophisticated system for focal reviews.
When I started working in semiconductors, my second job was at Advanced Micro Devices, working in Jerry Sanders' company. My group, which was an R&D group at AMD, was the first to implement the focal review process. In a focal review, you divide your company down into groups, homogeneous groups that are comparable to each other. All vice presidents working for the president. All operators, direct labor operators working on day shift.
All engineers working in engineering in the American or the Sunnyvale engineering group. After you divided the kind and that's a process that takes some work, divided it down, then you go and compare them. This kind of comparison comes, it's used a lot in the food industry, where instead of trying to say, "Well, I got 20 people I'm trying to rank. Who's number one?" Then you argue for a while.
If you want to see the debate, what's the Billy Beane baseball movie?
Moneyball.
Moneyball." If you watch the movie "Moneyball," you can see exactly what goes wrong when a group of managers is trying to decide which players to keep. In this one, think about the food industry. I worked for Heinz, and they got five new ketchup recipes. Okay, I taste all five ketchups, and I go, "Well, number two tasted pretty good, but it was a little bit sour."
The fact is, it's confusing to rank even five things, let alone 10 or 15 or 20 things. But what I can do is I can take my little straw and I can dip it number one, I can dip it number two, I can taste one and two back to back, and I can tell you I like one better than two. So I can even make a mistake. I rank them like that. The realities are like that.
I can even make a mistake, but a compare-wise comparison is accurate and fast. If I compare one to two, one to three, one to four, one to five, two to three, two to four, two to five, three to four, three to five, and four to five, I've made 20 comparisons, 16 comparisons, and I've ranked, because it turns out you put those numbers, each of which is, who do I like better, into a computer and fractions of a second, you get a ranking.
Then you look at the ranking and you can start working on your company. We've done that. The company's now divided into focal groups. We've done the ranking. One of the reasons we've had not that much blowback is that we've scientifically, based on perception of everybody, not top-down, made our budget smaller, and the people went away.
Everybody knew, frankly, faster than management, what was going to get done. So that saved $8.5 million. At the end of this thing, I'm going to have the camera swirl around and show you this massive room we're in. It's the last time we'll ever be in the room. We're moving from Fremont to downtown Silicon Valley, Moffett, Sunnyvale?
Sunnyvale.
Sunnyvale.
Yeah.
Sunnyvale, just so you know, is where, it's a few hundred yards from where Shockley Semiconductor started up in Mountain View, and that was the true origin of Silicon Valley, the first transistor company. So we're moving downtown Silicon Valley, and that'll save, you can add another $1.5 million onto that number. We'll report that next quarter. Next thing, balance sheet. We got a lot of debt. People were worried.
We had two debts, the 2028 debt and the 2030 debt. The people could see we had plenty of cash to pay off the 2028 debt. Not so clear in 2030. So this debt had been heavily discounted in the market. The first thing we did is we went out and bought, retired $128 million of that debt. The bonus for shareholders is that we paid $81 million to retire $128 million in debt.
Built in there is a profit of approximately $40 million. That'll be a GAAP profit. We'll not report it in our non-GAAP numbers because it's a one-time event. That's action number one. Action number two is a warrant dividend. We'll talk more in detail several slides later on that. Ryan's running that.
We launched the warrant dividend to get in more cash to take out the 2028 Notes without depleting our internal cash. So, at the end of last quarter, we had $512 million in cash, and right now, that number's down to $415 million, and we're done spending money on this stuff. So we've now got a lot less debt, a little bit less cash, and if you look at the term, quote, "net debt," which is cash minus debt, we're way better off than we have been.
We're cleaning up the balance sheet, and that's behind us. The final one is guidance. We will have our last middling quarter, the quarter we're in now, because the orders I'm talking about, you see, they're hitting January 2027, early 2027. These orders are the next to go. If you add up those orders, we're looking at guidance of $65 million-$85 million. You look at this number, it's $36 million-$40 million.
This number is double that. It's $36 million-$40 million annualized. This number is double that. We had a long discussion last night, and actually the number they gave me was bigger, and I gave the lecture about it's great to give a good number and feel good for a few days, and then reality comes in. They dropped the number, this number they gave me.
Doubling up on 2026, and by the way, the reason we're confident of it is half the bookings required for 2027 are already booked. The military needs, for obvious reasons, non-Chinese equipment, and those rules are pretty stringent. We'll talk about them later. That's my one slide, and it kind of tells you what went on in the quarter.
I can tell you, I reported once when I first came in after the departure of our prior CEO, and I told you I found some pretty solid people. I've found that to be true again, or continuingly, and we've now got an executive staff that's ready to rock and roll. I don't feel obliged to micromanage anything here.
I do show up frequently, and I do show up for long meetings, particularly long R&D meetings, where the message, "You've got to move quickly, no matter how smart you are," is starting to come through. That's my introduction.
Good afternoon, everyone. Ryan Benton, interim CEO, and I just want to T.J., thanks for that. Thanks for that first slide. That's, I think, a great overview, and that's actually going to be a pretty tough act to follow, but I'm going to try to bridge on that. In this slide, we talk about the two product platforms, so MX and AI. The MX is the platform they have that's produced out of Korea. That's the graphite, traditional graphite, and blended silicon graphite products.
That's really the growth engine of the company in the near term. Over the last year, we've built products, we've built a team. Steve Bakos, who's the CRO, is going to talk several slides and talk about really the incredible demand that is in front of us and the incredible momentum that we've put together in terms of take advantage of that.
It's one of the most exciting things we have to report is the progress that we have and the proof points in terms of executing on that demand. What's one of the key things that's really driving that demand is the U.S. and allied countries are really in a frenzy for non-China-produced batteries. Looking for a battery company like us, and there's not many of those, that control the manufacturing process and have a supply chain that is essentially China-free.
As T.J. kind of discussed, we're starting to see a lot of proof points. We're seeing the pipeline that's growing quarter on quarter, heavily concentrated in drones, but we're going to talk about, during Steve's presentation, there's lots of different flavors of drones, lots of different vectors of driving that demand.
Really great proof point, this 100,000 order, drone order, battery order that we have that's going to start producing and shipping in January. It's a great order, and the team's gearing up for it and ready to execute on it. We've got a team in Korea, in Nonsan, Korea, that has been producing batteries for this type of customer for two decades.
As T.J. said, we have roughly half of what we're guiding for next year already in backlog, and Steve and his team, their goal is every day to book orders, and hopefully after this call, he'll book another order or two. Drone capacity, again, this is such a hot market. We're adding equipment to specifically double the capacity to make drone batteries in Nonsan, Korea. That's just the first step in our plan to add capacity.
We're doing that in what I think is a prudent, methodical way to bring that first automated high-volume line up, and then we'll add capacity as demand is put in front of us. As I talk to investors, I often get lots of questions in terms of what's really the capacity of that facility in Nonsan, because everyone knows we made the acquisition, we got a pretty good amount of land with quite a few buildings there.
With just that geographic footprint that we have, my estimation is that facility could support up to close to $200 million in revenue if we add the right equipment and build onto the facilities that we have. So it's really a gem of a company, the facilities that we have, the people that we have, and the technology from AI that we brought into that business.
On the other side of the house, the product platform, we have AI, the 100% active silicon. This is an area where this product really takes advantage of the high volumetric energy density that's really ideal for space-constrained devices like smart eyewear and smartphones. We're shipping to one fantastic premier large global company here, a 50,000-pack order, the first order, which is a reference design.
We're continuing to execute on that, and we've got dozens of other customers that are evaluating the product behind that. Next generation of that technology is, we expect to be roughly 20% higher in energy density. We've been sampling customers, and we expect that to be a leap forward in terms of our value proposition. Now I'll talk about smartphones. We've discussed for a couple quarters the testing that we've been performing with our lead customer.
We found out, just jump right to it, we found out on Monday that we are on track to pass that last hybrid qualification test, and we expect to hear from that customer on Monday giving us that information. Actually, the way the math pencils out, we actually think today or tomorrow would be the day that we would actually pass that test.
Certainly an important achievement, something that has been a long time coming. With that said, what we are doing is we are trying to spend prudently. We are trying to build the business the right way, and what we are doing is focusing our resources in Korea, where we have this tremendous near-term opportunity to build sustainable, profitable revenue.
Then we are also focusing our product development dollars on the AI side to the small cells that support smart eyewear. Eventually, we expect smartphone products will get the benefit of that.
In addition to the reduction in force, where we are saving dollars by doing this, by making this change, there will be millions of dollars a year in terms of savings as we are producing for those small cells. Then finally, again, to repeat, I think the team is very excited about what we have in front of us in terms of being a growth company, and we are guiding $65 million-$85 million.
Half of that is backlog. But the opportunities in front of us are enormous. So our hope and expectation is in 2027, we are going to be capacity constrained, and we are going to be adding capacity to take advantage of that beyond 2027. Now I am going to turn it over to Steve to talk in more detail.
Thank you, Ryan. Appreciate it. I just want to give you a little bit of background for myself. I have got 35 years in semiconductor manufacturing, equipment companies, semiconductor companies, high-performance analog companies like Linear Technology, Intersil, Conexant, and most recently Infineon. Sales and marketing leadership roles primarily. I have got an engineering degree from Cornell. So I want to talk a little bit about the pipeline.
We have had another really good strong quarter of pipeline growth, you can see. So up to $216 million, dominated by the drone space. The MX1-B01 cell you see there is the main reason for that, and I will talk about that shortly.
It is a very strong entrant to the marketplace, getting a lot of good interest from customers across multiple drone platforms. UAVs primarily, but also UUVs, UGVs, eVTOLs, and there is many other sub-segments that we are seeing interest in. So,
Let me,
Yeah.
Interrupt for one comment here. You have a drone. You use the word drone. You have limited words you can put in a page, but this is not something you see a Ukrainian soldier launching. These are unmanned aerial vehicles. That is what people think of as a drone. Unmanned underwater vehicle. These are drones that are submarines, in effect, and they sail around looking for ships.
They will be the end in the future of the battleship. No battleship is going to survive 10 drones hunting for it. The drones, by the way, they find it, and then they run into it, and they are loaded with explosives, just like you see. This is unmanned ground vehicle. We have seen pictures of them, and this is vertical takeoff and landing vehicles.
This thing can be everything from a delivery service to drop stuff literally on your front doorstep, all the way to a taxi cab. Our biggest design win, by the way, is underwater. Not conventional, what you think of as drones. I just wanted to point out. This is a technology revolution in the military, and we are connected many places with a lot of different companies. Sorry, go ahead.
Okay. All right, let me jump to the next slide, give you a little more detail on why we are seeing this. This cell, as I said, is the reason for most of the activity, and it is a great drone cell. The B in the part number stands for balance. It has got a great combination of energy density, cycle life, discharge, and overall capacity.
What we are learning in the marketplace day by day is that as important, and sometimes even more important, is the fact that we have a great cell here. The fact that we can build it at scale outside of China is becoming almost as important, sometimes more important than the actual cell itself. We expect that window to continue for the next couple years.
We have seen multiple examples where customers have kind of changed course on what they are looking for, and have doubled down on this because we have got the TAA-compliant factory, because we have got NDAA roadmap, and because we can scale this thing at a TAA-compliant factory. Our factory, we will talk more about that, is really one of our best strategic assets. Of course, we do not expect to stand still with this.
We have got a next family, T.J. referred to our MX2, families of parts that improve on all these specifications, give the customers better performance across multiple specifications. You have got to remember that it is a balance of all these specifications. You can have one good, pick one spec and have it knock it out of the park, but the other specs get trade-offs. Sometimes that will limit your application and market acceptance.
I also want to point out that a company can put a part on the marketplace that's got great specifications, but if they can't deliver it, and they can't deliver it from a TAA factory, it's useless to the market. We intend to continue to drive excellent technology with our TAA-compliant factory and support customers for a long time.
I'd like to interrupt one more time and ask Ryan to explain. We heard the term TAA several times, and I don't see it defined. Frankly, two weeks ago, I had to ask what it was. Can you tell us what is TAA and what that means?
TAA is a requirement for many defense programs to source from factories that are physically located in a discrete list of countries, for example, South Korea.
The A in TAA is act. That means law. You're dealing with import/export kind of rigor. That's TAA. That says made in one of six It's an affirmative thing. You have to be made in a country that's considered an ally by the Defense Department, and TAA stands for? Steve.
Trade Agreements Act.
Yeah, there you go.
Say it again.
Trade Agreements Act.
Trade Agreements Act. You are authorized to trade with companies in this country. Act means law. What is the other one, so we can get them both out of the way now?
NDAA, National Defense Authorization Act.
NDAA, National Defense Authorization Act. What does that entail?
This requires the components and the build materials to be sourced from non-FEOC countries, so countries like China.
All right. So, now he explained the law with another acronym. So, we got company. FEOC, I think we all know, is a Foreign Entity of Concern. The NDAA simply says you can't have components in these machines we're building that come from the list of countries we don't want to do business with, or we don't want to have our defense depending on. So, 95% of the components have to be non-FEOC, not from. The FEOC is another act, it's another law.
Non-FEOC countries. So, these are the A and the N for both of these, act, law. I've been in that game before in the semiconductor industry. Our Cypress Semiconductor, my old company, we went from being a startup to being a real company because we got design wins in the now obsolete F-14, F-15, and F-16s, not obsolete, military products.
I've been through this cycle before. If you do what they ask you to do and do it with diligence, this wires in long-term, high-margin business. Sorry, go ahead.
That's all right. Okay. Oops, go back one. Okay. So, look, we've got a strong pipeline, and my job now is to convert that into more backlog. We're starting out with a really nice, healthy jump into 2027 with our backlog, $37 million, and obviously more to follow. We talked a lot about this 100,000 cell order that starts delivery in Q1.
Then, as I said, the MX1-B01, we're getting a lot of traction. We booked our first order. That's also going to be start shipping in Q1, and we sampled it to over 30 companies who are looking to continue to qualify it and get it into their systems and start looking at orders. So, very optimistic about 2027. Still have, obviously, work to do, but we see strong demand signals from the customers, and we don't expect that to slow down.
It's also given us an opportunity to hone our roadmap. We're getting requests to do variants of these devices because they know that they can trust our capacity, they can trust the specmanship. We've been around a long time, so we've got a lot of credibility in the marketplace. So, I'm very optimistic about 2027, and what lies beyond.
Talk about the backlog.
The $37 million of backlog, it is a very healthy number to start with into a year. I expect that number to grow, obviously, as we move into Q1. We have got some big engagements we are working with, and again, I am optimistic about how 2027 will shape up, and I look forward to providing some more good news for everybody in the coming weeks and months.
Yeah, and maybe if it is okay, I will chime in a little bit here. For all of us that have spent careers in semiconductor, they understand the concept of allocation and how important it is to be on the right side of that. A lot of the discussions that Steve and I and the production team have, as we look forward to planning for 2027, is which customers that we think make sense to allocate product to.
Again, we do think we will end up in a capacity-constrained environment, and we want to make sure that we are working with the right customers. I know that is something that really keeps Steve and his team up at night, because what we are trying to do is plant the seeds for a very big, important business.
Okay. Let us keep going. Back one. Okay, so we talked about the defense programs and their requirements for non-Chinese cell sources. We cannot emphasize that enough. It is basically eliminating China from the competitive pool, and it has provided us a really strong pull in the marketplace. These rules are going into effect in stages, but companies are acting now. The TAA is basically a requirement for most people, and now the NDAA requirements,
Now that we have got a roadmap for an NDAA-qualified device, that is becoming more and more of a requirement, even though that rule does not kick in till end of next year. So, we have got, I think, a very strong position in the marketplace, given the fact we have our own factory, TAA, and soon to be NDAA-compliant product on the marketplace.
As Ryan said, we continue to see the fact that this demand could exceed our supply through the end of the decade. As Ryan said, we're looking to partner with the right customers who understand the value we provide, and value our in-house factories, and also value the fact that we can build products for long program life cycles.
When you have your own factories, you control your own destiny, and we can go to the marketplace confidently and support these drone programs for three, five, seven, 10 years. That's something that we think is very unique and differentiates us from our competitors.
Okay. Now we'll talk a little bit more about silicon anode, and again, I think the message here is that our focus of our resources is going to be on small cells first. Again, taking a step back, though, incredible achievement that we have in terms of what we expect to hear back from our lead smartphone customer passing that hybrid protocol. I think it's a pretty important technical achievement.
We're also recognizing here today that right now we have smart eyewear, big demand from smart eyewear, small cells. We're in production with an important customer, and Michael here can talk a little bit about the manufacturing that's continuing to improve and go well. And we're seeing also a tremendous pull for our next generation AI-2 smart eyewear cell.
We're going to focus, again, we're going to focus our resources on continuing to push the envelope on that product, and we just think that makes so much sense, and all the end markets are going to get the benefit of that development, and there's going to be tremendous cost savings by taking that prudent approach. Steve, maybe you want to talk about smart eyewear specifically?
Yes. So this is another market space that I'm very excited about. In the drone space, we talk a lot about gravimetric energy density, so it's how much energy you have per unit weight. In this space, it's really about space. It's about energy density per unit volume. And our solutions that we have and the roadmaps we're building have industry-leading performance in terms of volumetric energy density,
This application in particular is extremely interested in that attribute. We've got, again, 24 customers that we've been talking to. They're interested in the technology and where we're going with it. We have the orders, as we said, 50,000 unit orders that we're shipping, so customers know it's real.
I think this is going to be a very exciting area, and I am happy the company is focusing the resources in this space, because I think there is definitely some low-hanging fruit for us. I think this is one of those applications that is going to find new niches, and not just in the consumer side. I think it is going to become a very mainstream tool for folks in the B2B space as well.
Our roadmap is strong. Our technology with 100% silicon anode is industry-leading. The fact it is built in our own factories is also, again, a plus. I am excited about the space. I think there is a lot of good things to come. The other thing I want to throw in here is that we do have another angle on the marketplace with our Korea technology, which is a nice way to address the market.
We have got two solutions. This AI solution is world's leading volumetric energy densities, but it is fixed form factor. Our Korea technology allows us to make unique shapes and curve shapes that fit the space in the customer's application more completely. So even though the energy density is a little lower, the actual capacity of those cells is higher,
Which gives you very comparables, maybe even more runtime. So it is a really compelling story to go into these customers with two solutions that are world-leading in their own right. So, again, that is why I am excited about the space and looking forward to some good news coming up in the next quarter or two.
Come in here. The second generation of smart glasses doesn't have the Aristotle Onassis dorky look. It is pretty stylish. You notice that is not a rectangular solid in the temple. So, our super high energy batteries are smaller, and you can mount them at an angle in there, but sometimes you want to wrap the battery even beginning over the ear. So our two technologies,
One allows for odd shapes, and one gives much higher energy density in a rectangular solid shape. I have had these glasses on my head, and while I was looking and the glasses circled, I could see it on the screen lens. I could see an outline go around the person, and the internet started identifying that person. Then down in the corner of my vision, I could see they had some spreadsheet or something up that basically demonstrating data.
These things are getting really close to being not like those old glasses with that little outboard mirror on them. These are getting real close to being real and high volume.
Okay, great. Now, I'll take a couple minutes here on the restructuring. As T.J. Said, we did reduce about 23% of the open positions. T.J. talked about the method, but I'll talk about the task. It's a difficult task to do, but the right thing to do. We're a few days removed from it, and I'd share T.J.'s sentiment that although I miss some of the folks that are gone and there's a human element to it, I think we're a better, more efficient company now for doing this.
We're able to focus the company, the people, on a more narrower set of tasks. The mission is very clear how we support all parts of the organization, support what the near-term revenue engine is, and the focus on getting to profitable, sustainable growth, I think it's on everyone's minds.
This number, $8.5 million savings, it's a easily calculable number in a spreadsheet. Some people listening may think that's a big number, some people may think it's a small number. The reality is it's an important step,
Taking an action like this and some of the tactical shifts that we've been discussing today results in these ripple effects of significantly reducing additional cost, layers of additional costs that will come out, and changing the culture and the dynamic of the company and be focused on the prize.
This is, again, something that we're really only about a week behind us, and I've been in semiconductors a long time and seen these type of actions, and I couldn't be more proud of my team that helped execute on this and make what's the right decision for the company and the shareholders.
Now we'll talk about the warrant dividend. We've announced, we've declared on October 28th that we intend to issue a one warrant for every four shares for shareholders of record, that the shareholders on record at the end of the day tomorrow, November 13th. Beyond that, those warrants will be distributed on or about November 18th, and they will essentially come for early expiration,
Similar to the last time we did a warrant dividend, once we hit a certain price target, in this case, $3.30. The earlier of that date or April 28th, 2028, they'll expire. But let's talk about really what the intent, and we mentioned that earlier in the presentation. The intent is we've designed this transaction to help fortify the balance sheet.
In addition to being able to exercise those warrants for cash, holders of the 2028 convertible notes were able to turn in their notes to provide the consideration for the exercise of that warrant. It's been constructed in a way that we think this will be a tremendous win-win for the shareholders and for the note holders, both two really important constituencies.
Again, for everyone that's on record, a shareholder of record, end of the day tomorrow, the warrants will be distributed, and those shareholders, once they receive those warrants, they can make their own decisions of whether they want to sell those warrants, they want to hold onto those warrants, or they want to exercise those warrants. The note repurchase we talked about, we just think this made a ton of sense.
We understand the dynamic of the marketplace of why these bonds were trading at a discount. We just think it made too much sense to essentially fortify the balance sheet in this way as well, capturing $46.6 million worth of discount and eliminating that interest coupon going forward. I am pleased with the results here.
Finally, we will talk about the guidance that we have. As T.J. talked about, this is, we hope, the last quarter where we are looking at numbers like this in terms of the top line. 2027, the implied guidance is right here in the midpoint, $75 million . What we have guided is $65 million-$85 million number, and we feel great.
We are already just shy of half of that in backlog, but there are still six weeks left in the year, so we are expecting good things out of Steve to finish the year strong, getting us off to a good start. Now I will turn it over to T.J. to kind of wrap things up, and then we will take questions.
Okay. Eight points, what we delivered. We talked about the quarter. I will not repeat it. The most important thing to me is the team is in a cadence to know and make quarters. In a place like Silicon Valley, that is a hard thing to do because you got the creative types that grinding out quarters is not always what they think about when they get up in the morning.
We have excellent gross margin that had grown a lot based on our business. Our defense pipeline is huge, and I want to remind you again, it is a pipeline, not backlog. It is weighted toward drones, but there are a lot of other things. There are many kinds of drones, and the rest of it has got other important stuff in it. We have got the MX1 technology, which is a turbocharged version of the Korean technology right now.
Smartphones, we have given them AI-1 samples. We have heard about our qual worked. We have heard that today their qual will work, so we are going to agree on the hard part, that we have reliable devices. Meanwhile, I got a 50,000 unit order coming over the transom, and the thing I like about the order is it is an order for samples.
Okay, I will be glad to ship 50,000 samples for you. What happens after that? What we changed, we did a cost reduction, and will not go through it again. Retired the notes, and both a fraction of the 2030 Notes and a plan to retire all of the 2028 Notes.
We put a modest amount of money in our Korean subsidiary, and the fact that their technology is the standard technology means you can make a significant capacity addition without a lot of money,
Which is not true in the very high-level battery, high-energy density batteries. We've got what I'm very happy to say is a good projection for next year. We're feeling good about next year, and it's got some backing to it. I'd like to open it to questions now, please.
We will now begin the Q&A session. Please note that this call is being recorded. If you would like to ask a question, please use the raise hand feature on your screen. Questions will be answered in the order they are received.
Given the time constraints, please ask one question and one follow-up question at most. We will now pause a moment to assemble the queue. Your first question will come from the line of George Gianarikas with Canaccord Genuity. Please unmute your line and go ahead with your question.
Hi, everyone. Thank you for taking my questions. I'd like to just maybe start with a decision around smartphones, and given that you're potentially on the precipice of passing the customer verification tests at your customer, why the decision to pause and not move forward with at least some shipments of AI-1 before the next few years when you plan to ship them, hopefully AI-2? Thank you.
Okay. Let me do that one because I've been here continuously. The problem is the rel qual and the cycle life qual at the cellphone customers is arduous, and it takes damn near six months to get it. What you do, obviously, is you rush in your samples as quickly as you can get into the place to get qualled.
We did get qualled, and we have met those reliability standards. We started a long time ago because of the time constraint I talked about. Therefore, we've only qualified the 900 Wh/L AI-1 battery for reliability. The AI-2 will be equally reliable, has the same construction, has a little bit of different materials in it.
The deal is, do I want to make a bunch of cellphones that have a very limited lifetime in a large number of samples when those same units, the first ones we can make in our capacity at this time.
Do I want to ship them for money, or do I want to ship them for a qual that has a very limited lifetime? We did not punt. We are going to resubmit the AI-2, which does meet the energy targets, and continue on. But right now, I got a choice, revenue, no revenue. It is a real simple choice for me to make.
Thank you. Maybe focusing a little bit on 2027 with the revenue guidance that you have given. Can you maybe just help give form and shape to what the OpEx and CapEx trajectory might look like next year so we can sort of try to base what the cash burn might look like? Thank you.
Yeah. On the OpEx, as you know, we posted materials. We have not provided specific guidance. With that said, we have given a couple clues, right? We talked about the headcount reduction, so that is a specific number we have given that would come off. I have talked about there is probably an additional ripple of a material amount of cost that comes out because of that change.
T.J. mentioned this facility that we are downsizing to a much smaller building across town, which is another $1.5 million, probably $2 million a year, whenever all is said and done. Then as we are ramping up into production here as we enter this ramp, some of the operating expenses will disappear and migrate above the line into COGS. Without providing a specific number, it is going to be a materially lower number on OpEx.
CapEx, we gave one quarter of guidance, and I think that is just maybe a good reference point to take a look at in terms of what our quarterly spend will be going forward. The $19 million number we have quoted is the specific improvements, capacity expansion that we are doing in Korea, but part of that is already paid, going to be paid this year, and part of it will bleed into 2027. But again, smaller numbers than we have had in recent years.
Short form is, the world we live in is uncertain enough that it is pretty damn near impossible to give detailed quantitative information for a whole year. The whole technology industry is that way. We are going to keep the flow of technology updates quarterly, but we wanted to give you a view because of backlog that we can count now, and we wanted to give you that view today.
We are in the annual planning process, one of the reasons he is being vague is, although he has got a large spreadsheet right in front of him there with all that stuff on it is our current view of all of that, and we are still in the middle of planning. Pardon the big answer. That is where we are.
Your next question will come from the line of Mark Shooter with William Blair. Please unmute your line and go ahead with your question.
Thank you, gentlemen. Just want to dig in a little bit more on the smartphone decision. The Malaysia fab right now is underutilized, so I am just trying to understand, is producing more cells for the AI-2 cost prohibitive and we just do not want to spend the money? Or has the level of engagement or interest changed with the lead customer that has also helped form this decision?
I think it is two elements. The continued development is more expensive on the larger cells, so this is like reducing our spend level and going after customers that we know have demand right here and there. What we think the smartphone customers want is going to be AI-2, and we will continue that development on smart cells and come back to the smartphones in the future.
Thanks, Ryan. Looking at 2027, you have 50% of your revenue guidance booked, and it's a big jump, right? Almost double year-over-year. Where do you see the other 50% coming? Or how do you have line of sight on those customers and markets? Is it a mix of new customers or just converting larger orders from existing customers?
Steve, you want to take that?
Yeah, I'll take that, Mark. 2027, we're optimistic because I said, this Magpie platform that we have has got just a tremendous amount of pull from the marketplace. We're ramping our capacity there. You heard about that in Korea, and we expect to fill it. Most of our pipeline is drone. A good chunk of that is this Magpie and soon to be some derivatives, and NDAA derivatives of that.
We expect the growth to come from that corridor. And it's multiple customers. This is a global, Western-friendly countries, and we're seeing it across multiple end markets in terms of the drone space. You got from the interceptor types to the ISR types, to some of the loitering, public safety. Really, as I said, it's a balanced sell. It touches a lot of different application segments, and it's available. We can ship it.
Yeah, one thing I'll add is, I think it's easy to say that we don't have to add anything to the pipeline to hit that number. We've got everything in front of us in terms of opportunities to meet and potentially beat that number.
Your next question will come from the line of Colin Rusch with Oppenheimer . Please unmute your line and go ahead.
Thanks so much, guys. Looking at the guidance for next year, it still looks like you need about 4x growth from there to hit break-even, plus or minus. Just want to get a sense of the rate of growth and conversion on this pipeline that you're looking at to start approaching that as you think about reducing the cash burn here.
Go first, and then I'll add to it, Steve.
Yeah. As I said before, we expect the pipeline to continue to grow. Yes, it's plenty big for 2027. We're still getting out there and scaling our sales force. We're still getting out there and meeting new customers every day, every week. So we expect the funnel to continue to scale. As we get better market knowledge information, I think you'll see some of these numbers shore up and even improve.
Looking at the market data that we have and other companies have access to, there's no shortage of demand for TAA-compliant cells, non-China cells. It's maybe an order of magnitude bigger than all of us can produce. We don't worry about the market. We just worry about executing and growing and building the capacity to serve it.
Yeah. I'll comment on that a lot, because that last point's the key point. The capacity we're adding is just one manufacturing line, so it's hopefully the first of many. We just think it's the right decision to get that line up first, get the dozens and dozens of customers qualified on that product, and then start to really add scale. At that point, it's going to really be about copy exact.
Excellent. Then just from a capitalization perspective, appreciate the work on the balance sheet that you guys are doing here. Just want to think about total cash needed to get to a breakeven level. How are you guys sort of thinking about that number as you go through capital planning?
My hope is the warrant, we're able to harvest that transaction, and that takes care of the 2028 Notes. Assuming that to be the case, I think we have an ample balance sheet right now.
Your next question will come from the line of Ruplu Bhattacharya with Bank of America. Please unmute your line and go ahead with your question.
Hi. Thanks for taking my questions. I just wanted to clarify, does the guidance for fiscal 2027, $65 million-$85 million, have any revenue associated with the smartphones? From a process standpoint, does customer one and customer two now start from a new formulation, and do you think it's a six-month or a year qualification timeline? I have a follow-up.
We're not giving a specific mix in terms of that guidance. But no, there's the assumption that there'd be nominal smartphone, if any, in next year. You don't start over with those customers. I think it's a tremendous amount of work that's gone in terms of establishing the testing protocols that validate our battery with that lead smartphone customer.
We had customer number two that is essentially waiting in the wings, ready to adopt essentially that same protocol. We think we, again, we can restart that process whenever it makes sense after we've executed on fulfilling the demand that we have in smart eyewear, and then we'll fall behind. Again, as T.J. said, that is typically a six-to-eight-month process once you start it.
Ryan, also on the gross margins, you had thought that when the smartphone was a key focus, that gross margins would go negative, and then after some time, get back to positive territory. How do you think about gross margin progression now?
Yeah. I think I have a better near-term outlook in the sense that the ramp that we're about to undertake in Malaysia, the cost structure there is more frugal, and the pricing that we expect is, we think we're able to command a value price in what is a very tight market for supply.
Your next question will come from the line of Derek Soderberg with Cantor Fitzgerald. Please unmute and go ahead with your question.
Yeah. Hi, everyone. This is Drew Nordquist on the line for Derek Soderberg. Thank you for taking our questions. Just on the drone pipeline, how much of that $150 million is for the conventional cells versus the silicon-blended one? Then can you provide any guidance on the margin profile of those two cells?
Drew. The pipeline that you see is dominated by this MX, and it's the MX1-B01, which is the flagship. That's a 60% silicon blend device. Then we do have a lot of opportunities for the conventional Korea technology, which is 100% graphite. But I would say that it's dominated by the blends right now.
I'll add to the blend. We see higher margins there in terms of that product than the traditional graphite. Though, I will have to say, we expect and demand healthy margins out of that product as well. We have a lot of overhead that is fixed, and so the flow-through on the large order that we take is really healthy.
All right. Thank you, guys.
Your next question will come from the line of Bill Peterson with JPMorgan. Please unmute your line and go ahead with your question.
Yeah. Thanks for taking the questions and for all the details here this afternoon. I guess in Malaysia, as we think about the near-term opportunity with smart eyewear, I realize there may be some shared costs, but I'm trying to get a sense of what type of revenue and margin structure, just specific to eyewear, you would need to break even on Malaysia.
It would be material volumes. I think we have significant cost structure there. We've taken a step to reduce that, but it would need to grow to a pretty substantial amount to cover all the costs.
When you plan for a big machine. This machine is the length of a football field. You run it automatically, and it runs at high speed. You then can talk about the output when it is fully running, and that is about 7 million units a year. Unless that machine gets loaded to 5+ million units a year, it is not going to generate gross margin.
Second point is, a cellphone battery, think about a package of cigarettes, that thick. The eyewear battery, think about the little finger. That is how big it is. We can make five of these for one of these on the same machine. Also, the materials are expensive. I am looking for gross margin, and I am looking for gross profit to feed the company to put us in a position where profitability is in sight.
One of the choices we didn't articulate today is the eyewear batteries are a much better candidate for getting us going. If I again go back to my own life, when I started Cypress Semiconductor, I didn't pick the biggest, fanciest random access memory in the world and flex my muscles and say, "We're going to do it." I picked a 1,000-bit memory made by Fairchild Semiconductor for five bucks a pop,
I made one in CMOS that burned a quarter of the power and had yield that was several times higher. We sold that into a limited market, the mini computers really, and that is what got our company going. So these doable, small, executable orders with good ASPs, that is what I am focusing on. Then if you talk about cellphones, you are talking about making money when your fourth machine is up and running.
We have got one. So right now, we are doing what is required to fill orders we have got and start to make some gross profit.
I appreciate that. My second question, I realize it seems like right now in the area of drones and defense, you probably have unconstrained demand, but how should we think about your long-term differentiation in this market? I realize that you're adding significant amounts of silicon, but I mean, I suppose other people could as well.
I guess, how important is it that you have the know-how from, I guess, what you built up from Malaysia that can give you long-term competitive moats in this defense arena, which presumably will attract a lot of competition?
Steve, you want to go first?
Yeah. Great question. So, differentiation is what we're focused on, right? We've got great products. As I said, we've got a factory that's very unique in terms of servicing this marketplace, highly differentiating. Now, of course, that'll change over time, but we're not standing still. We're looking at how we can provide more value to the customer.
We're looking at servicing customers with a broad portfolio of products that we can provide to multiple customers for long life cycle applications, right? If you look at, say, again, back to the cellphone market, it's good and bad, right? You win, you're in for a couple years, and you got to fight yourself back into the next generation. In the defense market, industrial market, medical market, you get in, and you're in for 7-10 years.
You build those building blocks as a revenue profile for years to come with healthy gross margins. There's a lot of moats, how we test the parts, how we characterize them, how we bin them. There's a lot of ways to differentiate besides the raw GED, volumetric energy density, cycle life, et cetera.
Those things are important, but it's the whole picture that gives us the advantage right now to go leverage that complete set of capabilities for the company into a wide variety of customers and applications. So, that's the model that I'm trying to build here.
We're going to ride the wave for the drone market, and we'll ride it as long as we can. But when the dust settles, we're going to be into multiple customers and multiple geographies and multiple applications with multiple products. That's how you build a successful business.
I'll chime in as well. I think from the Korean manufacturing perspective, 20 years of hard-fought experience shipping into military customers is difficult to replicate. As you look at what we see the future of demand, drones are going to be a big market for the next decade, no doubt. We see other markets that have similar requirements and attributes, like robotics, that will be also huge markets that will be the next big thing.
Living in Silicon Valley for a couple decades, it's always about what's the next big thing, and we think robotics. The capabilities that we have in terms of different product types, the R&D team that the U.S. and India and Malaysia team brings to be able to support the Korean manufacturing know-how is formidable. I think that's something, this rebalancing of resources, it's not just about a spreadsheet.
It's about the really important, smart, hardworking people that have PhDs, for example, that are starting to spend a lot of their time in Korea helping deliver on some of these really important opportunities that we have that could be tens of millions of dollars of opportunity at really high gross margins. We just think the table's set for us.
I'd like to make a comment on the competition jumping in. No, you don't get to jump in on a submarine. It's what's called a sticky order for a reason. It takes several years to qualify, and if you're not in the right country, one of six, there's one law that says you can't qualify. In our case, we've got the defense companies coming to us. I've tried to illustrate the drone change, the complexity.
Tesla is right there. I can jog to Tesla in 20 minutes, 15 minutes. They're not making cars anymore. They're making autonomous vehicles. That change is going to go across the world. This isn't a military niche that somebody gets in. The fact is, the lithium-ion battery commercial business is dominated by China. That's because their government subsidized it, nurtured it, and built it up.
Congratulations to them, and every time I buy a $10 battery, I'm happy for them. The world needs other batteries, and they're a multiple. Steve said an order of magnitude is about right, a multiple of what our small company can produce.
I'm a guy who likes double-digit pricing, and I certainly can sign up for it intellectually and morally to, in effect, prevent us from becoming a second-tier power by virtue of our technology. No, you don't make one of these and jump into the market. It just doesn't work that way.
Your final question will come from Alek Valero with Loop Capital Markets . Please unmute your line and go ahead with your question.
Hey, guys. Thank you for taking my question, and thank you for all the detail today. Quick question. It sounds like you guys are currently qualifying the AI-2 batteries for smartphones. I just wanted to confirm if this is the six-month test, the six-month 0.7C test with the 800 lifecycle requirement. Are you confident that you can pass this, and is this still with Honor?
Yeah, that is not what we said. The AI-2 battery right now, we're sampling for smart eyewear customers, and we think ultimately this is the technology that can win in smartphones. We haven't said specifically which customers we plan to ultimately sample in smartphones, but that'll be done after we take care of the demand that we have in front of us on smart eyewear.
Let me answer it directly. The cell phone company we've been working with is Honor. They're as good as any customer gets in the world. They're what I call a teaching customer, and they've helped us a lot. The qualification that was killer for a brand-new technology was the lifecycle test. There, you simply charge a battery and discharge it 1,000 x. Then there's a rate specification, so it's 0.2C.
That's a normal cell phone operating rate. You charge and discharge a battery twice in one day on an automatic machine. So, 1,000 is 500 days. That was the tough test, and we have passed it internally, our own testing. They did a parallel test with us, and we expect, as of one week before the end of the test, we see data and we see they're going to pass.
We're extrapolating they're going to pass today. The hard test in Honor is behind. Now, what happened if Honor gave me a 15 million unit order at cell phone pricing? We're not ready for that right now, point one. Point two, Honor has raised the bar.
They want 1,000 Wh/L , not 900. We've got that. We call it AI-2, and we expect to start qualifying that. It's just the urgency of the markets we can serve for revenue now that is pushing in the direction. It's got nothing to do with our good customer that's helped us a lot.
Got it. It sounds like the underlying technology works. It's just going to be a matter of time. Just a quick follow-up. Any context around the mix of the 24 AI-2 customers that you mentioned earlier that you are currently sampling? I'm assuming it's going to be a mix of smart eyewear and military, but I wanted to know if there's any smartphone customers in there as well.
That was a smart eyewear number.
Are we sampling the AI-2, the cell phone people yet?
Yeah.
AI-2, we have thousands of samples that are good enough that we say, "Shake, rattle, and roll. You can't break them. Go ahead and qualify them." That's what we're doing, and we don't have enough samples yet. You take a company like Honor, they want 20,000 units to sample. Right now, our high-end battery can sample thousands of units and promise production in 2027 of tens of thousands of units.
That's where we're at, and we're matching up our capability with the market that needs us. Eyewears need us. It's a real hard problem. Of course, I don't have temples on my glasses here. It's a real hard problem to put enough energy in the temple of your glasses to run an AI computer, which is a power hog. We've got that technology. The batteries don't want to be big.
They're not allowed to be big. Therefore, we've got a sweet spot where what we can do and what they want match up. The prices are right, and the gross margin is right in that market.
There are no further questions at this time. With that, I'd like to turn it over to Ryan Benton for closing remarks.
Thank you for joining us today. We look forward to updating you on our progress next quarter.