Enovix Corporation (ENVX) Q2 2024 Earnings Call Transcript

Enovix Corporation (NASDAQ:ENVX) Q2 2024 Earnings Conference Call July 31, 2024 5:00 PM ET

Company Participants

Charles Anderson – SVP of IR and Corporate Strategy
Raj Talluri – President and CEO
Farhan Ahmad – CFO
Ajay Marathe – COO

Conference Call Participants

Ananda Baruah – Loop Capital Markets
Colin Rusch – Oppenheimer
William Peterson – JPMorgan
Jed Dorsheimer – William Blair
Gabe Daoud – Cowen
Derek Soderberg – Cantor Fitzgerald
George Gianarikas – Canaccord Genuity

Operator

Thank you for standing by and welcome to the Enovix Corporation’s Second Quarter 2024 Earnings Conference Call. Currently, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question and answer session. As a reminder, today’s program will be recorded.

And now I’d like to introduce your host for today’s program, Charlie Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Charles Anderson

Thank you. Hello, everyone, and welcome to Enovix Corporation’s second quarter 2024 financial results conference call. With us today are President and Chief Executive Officer, Dr. Raj Talluri, Chief Financial Officer, Farhan Ahmad, and Chief Operating Officer, Ajay Marathe. Raj and Farhan will provide an overview and then we’ll take your questions. After the Q&A session, we’ll conclude our call. Before we continue, let me kindly remind you that we released our second quarter 2024 shareholder letter after the market closed today. It’s available on our website at ir.inovix.com.

A replay of this video call will be available later today on the Investor Relations page of our website. Please note that the shareholder letter, press release, and this conference call all contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are based on current expectations and may differ materially from actual future events or results due to a variety of factors. For discussion of factors that could affect our future financial results and business, please refer to the disclosure in today’s shareholder letter and our filings with the Securities and Exchange Commission. All of our statements are made as of today, July 31st, 2024, based on information currently available to us.

We can give no assurance that these statements will prove to be correct and we none attend and undertake no duty to update the statements as except as required by law. During this call, we will also discuss non-GAAP financial measures which are not prepared in accordance with generally accepted accounting principles. You can find a reconciliation of the GAAP financial measures to the non-GAAP financial measures in our shareholder letter, which is posted on the Investor Relations page of our website.

I will now turn the call over to Raj to begin. Raj?

Raj Talluri

Thank you, Charlie, and thanks to everyone for joining us today. For our format today, I’m going to start with a recap of our recent results and some of our recent milestones before I turn it over to Farhan for the financials and the outlook. I’ll have a few closing comments, and then we’ll take your questions.

Now, we had a very productive second quarter. To recap some of our recent achievements, first, we delivered a Q2 revenue of $3.8 million, which was above the midpoint of our forecast, and we expect significant revenue growth in the second half of the year from the first half. Second, we had some very important commercial successes, starting with an agreement we announced in June with a leading California-based technology company in the XR market.

Then today, we’re announcing a collaboration agreement with a Fortune 200 company, and also our second deal with an auto OEM. And lastly, we moved into operational mode in Malaysia as we began building batteries on the agility line while ramping down our high-cost manufacturing operation in the U.S. After this, we did it after completing the first batch of EX-1M samples, which we’ve now sent to some of our customers.

Now, Malaysia has come along very nicely. To the extent we’ve taken a little bit longer than we planned, this has been due to our previously stated desire not to cut any corners and make sure all the equipment we’re installing meets our rigorous specifications. We now have an agility line that has cleared the SAT, or the Site Acceptance Test, and is producing fast runs of our EX-1M batteries. Our high-volume line is right behind it, having cleared the FAT of all the key modules, and is in the process of arriving and being installed at our site.

We are super excited to show off this progress at our Malaysia Grand Opening next week. And many customers, including some big-name customers with lots of revenue, including smartphone customers and some cloud OEMs, have now begun scheduling visits to our facility, and we’ll be participating — we’ll be welcoming them next week to showcase our factory. We believe everyone who sees it will be amazed by the quality of the factory we have built and the quality of the team we have hired.

Now, speaking of customers, our engagement activity continues to strengthen. In the smartphone market, we work closely with the top five OEMs we identified in our last call to clear the first two key milestones in the development agreement that we signed. As noted in the last call, we broadly engage with the leaders in this market and continue to discuss more formal agreements and arrangements like this, similar to the one we announced in May.

As we all saw over the course of the last quarter, leading OEMs are now starting to announce AI features which will become native and standard in the next generation smartphones. Clearly, we were early in pointing this out trend last year as we engaged with the customers and saw where these product roadmaps were heading. As I sit here and observe what’s happening, it’s my belief that the 4,000, 5,000 mAh battery in the smartphones in our pockets today will soon go to more than 6,000 mAh and beyond due to AI and other enhanced features.

Now, this is really good news for the battery industry broadly and especially for us at Enovix. That’s because we offer the customers in our target markets what we believe is the only path forward to fully replace graphite with silicon to boost energy density in order to keep up with this rapidly increasing power needs without unduly increasing the size of the battery. Now, notably, we’ve already made early prototypes of our EX-2M batteries here in Fremont, and we were able to validate the high energy density through the next generation chemistries that we’ve been working on. We are super excited by this result.

We also see incremental growth opportunities for the conventional battery business we acquired last year in Korea, the company called Routejade. Specifically, these batteries have very high rate capabilities. Now, these high rate capabilities have proven very useful for the Korean military and also a number of industrial IoT applications. We see this also being applicable to other allied military forces, including the U.S., and this high rate capability is also designed in other product categories, such as power tools.

It’s important also to realize that we are investing heavily to support lasting technical leadership to build out a roadmap. For example, our core R&D account at the end of second quarter was nearly double that of a level ago — double the level a year ago, and that’s excluding the R&D team we added through the Routejade acquisition. Now, if we include the Korea R&D team also, our R&D headcount is up nearly 170% year-on-year, and we intend to keep growing. For example, we now have a core R&D team in Malaysia that we now intend to double by the end of the year.

Now, we’ve done all this while in parallel taking actions to significantly reduce our fixed costs by exiting the expensive California manufacturing. We also topped up our strong balance sheet via the ATM. This gives us a strong runway and plenty of time to prove out our manufacturing along with our customer acceptance of our leading battery.

With that, I’m going to turn it over to Farhan for the financials. Farhan?

Farhan Ahmad

Thanks, Raj. All the relevant financials are in the quarterly report and the shareholder letter, so I’ll keep my comments relatively short. We delivered second quarter revenue of $3.8 million, which was in the upper half of the guidance range. Non-GAAP EBITDA was a net loss of $23.1 million, above our guidance of loss of $26 million to $32 million. And non-GAAP EPS came in at a loss of $0.14, also above our guidance of loss of $0.22 to $0.28.

We ended the quarter with roughly $250 million of cash and equivalents. And our balance sheet is very strong. And as Raj mentioned, provides us with strong liquidity.

Now for the guidance, turning to the third quarter of 2024, we forecast revenue in the range of $3.5 to $4.5 million, and adjusted EBITDA loss in the range of $23 million to $29 million and a non-GAAP EPS loss in the range of $0.17 to $0.23 per share. As Raj mentioned, we expect substantial revenue growth from the first half of 2024 to the second half of 2024.

With that, I’ll turn it back to Raj to provide the closing comments.

Raj Talluri

Yes, thank you, Farhan. As you can see, it’s been a great quarter. We made substantial progress in many things, particularly Fab2 went operational. We took very decisive actions to extend our runway. Now we are deeply engaged with leaders in the smartphone market. And as the industry hits the inflection point towards larger power requirements due to the AI features, this will really help us get our batteries into production in the smartphone space.

In IoT and auto, we stuck two important agreements with market leaders. We also were able to prove out that we can make the EX-2M batteries with high energy density here in Fremont. These are early samples. We’re excited by the results with the next generation chemistries.

With that, we can now go to questions. Operator?

Question-and-Answer Session

Operator

We will now begin the Q&A session. Please note that this call is being recorded. Before we go to live questions, we’re going to read the two most highly voted questions submitted by shareholders ahead of this call during the call registration.

The first question is, what are some of the measures you have taken to prevent Chinese companies from pirating your technology? And if a new U.S. administration significantly increases tariffs against China, how will this play out for Enovix?

Raj Talluri

Yes, thank you for this question. Firstly, you know, Enovix has been working on making high energy density silicon batteries for a long time, almost 16 years now, and we have a very, very strong patent portfolio on this technology that we’ve built, both in the way to make batteries and manufacturing and so on. More importantly, we have a tremendous amount of trade secrets of how to actually make these, and we’ve been perfecting these for some time now.

So I feel good about our intellectual property and our strong technology leadership. But you know, this is a competitive space, and we have to keep innovating and keeping moving forward to make sure that we have a lead in technology ahead of all our competitors, not just from China.

As for the second comment on the tariffs, it’s very difficult to, you know, for me to comment on the geopolitical landscape and how that’s going to go. But I can tell you this, we are seeing a lot of interest from many customers now for a battery that’s made by a North American battery company. And as you know, we are one of the few ones that can actually make high energy consumer electronics batteries, and we are seeing a lot of interest for that nowadays. So we are very excited by the position we have there.

Operator

The second question is, what is the status of EX-2M and EX-3M in terms of timelines and their capacity in watt hours per liter and milliamp hours? What is the strategy with Elentec partnership? Is this only for battery pack, or are we looking beyond that?

Raj Talluri

Yes, on the first question on the roadmap, as I mentioned, we are super excited that we were able to create a few samples of the EX-2M to prove out that we can make the energy density increases that we talked about. But you know, as I mentioned before, most customers, based on the market segment we are in, whether it’s smartphones or IOTs or XR devices, optimize the batteries for not just energy density, but energy density, the ability to charge fast, the ability to go for number cycles, the size of the battery, the shape of the battery, and so on. So it’s hard to compare battery just on one metric like ED, but we are, you know, very confident with what we’ve been able to do so far.

And then with the next generation electro-chemistries and next generation material coming, we have a strong roadmap of continuing to increase beyond the EX-2M into next generation batteries.

As for the comment on Elentec, I mentioned, I think, when we first made the Routejade acquisition, that it was important for us to have the ability not only to own our own coating, but also the ability to make packs. Because in many markets, customers actually want not just cells, but batteries with the battery management system and so on in a pack. We have some capability to make packs because of the Routejade acquisition, but the market is big, and we need a lot of partners that have the capability to make packs to address various markets. And the Elentec one is one step in the direction of actually building out our channel so we can address multiple markets, not just in smartphones, but IOT and industrial IOT and XR and other markets.

Operator

[Operator Instructions] We’ll now pause a moment to assemble the queue. Our first question comes from Ananda Baruah of Loop Capital Markets.

Ananda Baruah

Hey, guys, can you hear me?

Raj Talluri

Yes, go ahead, Ananda.

Ananda Baruah

Okay, awesome. Yes, quick question, and then I have just a quick clarification as well. The question — and congrats on the announced progress here. The question is, it seems like based on the announcements, seemingly in the last 90 days, that you guys are kind of widening your aperture of engagement, or at least your aperture of progress. There’s, Raj, a couple IOT announcements. You had in the shareholder letter a power tool, something like a reference to power tools. Sort of moving forward the phone OEM engagements, and then now you’ve announced a second auto MOU this quarter.

So I guess, could you give us some context around what seems to be broadening engagement across verticals? And then also just with regards to kind of Farhan’s comments, is it appropriate to view there being some revenue bridge potential as a result of this between now and whenever you might start shipping to the smartphone OEMs? And I have just a quick clarification after that. Thanks.

Raj Talluri

Yes, sure. Thanks, Ananda. So, I’ve mentioned before, I think in the last call, one of the toughest batteries to make in the consumer electronic space is actually the battery for the smartphones. Because it is the largest market, the demands are very high, it’s got a big display, power-hungry application processors, memories, the AI requirements are coming in strong. There is things like long cycle life, there’s things like fast charge, there’s things like energy density, and there’s space constraint. So that is the toughest space.

And as we embark upon making batteries for that, and as you can see from our comments, we’re making steady progress there with the OEMs, that battery technology can now be parlayed into many other markets. For example, the XR market, for example, the other markets, other consumer electronic markets, as we announced here. And the reason is, when you can meet those requirements, the rest of the markets have actually requirements that are a little bit less stringent.

Now, I saw this in my past life when I was at Qualcomm, we made apps processors that went into smartphones, but then that business quickly, we were able to ramp it into the IoT markets and auto markets and so on, because the toughest one was the smartphone one. So in that sense, what you’re seeing with the announcements we’re making more recently is really the entitlement that the company deserves when we attack and try to make a battery for a smartphone market. So we are super excited by that, the branching out of it.

Again, my goal and the company’s goal is to go after large high volume verticals in these markets, but not go after many, many small ones, because that kind of fractures the R&D and there’s not as much return for a manufacturing company.

On the auto side, that was actually super exciting development. I know last time we announced one auto OEM, the fact that we now have another auto OEM also validating the fact that we have this ability to stop the batteries from swelling too much, and the ability to charge very quickly is of interest, is very exciting. We are now working jointly with them to figure out how to get that technology to the next level. So both of those are very positive, and I feel entitlements to the technology that we have here.

Farhan Ahmad

Ananda on your second question related to the revenue bridge, it will depend on the pace of ramp — pace of qualifications. But, you know, the IoT growth can be another vector for the revenue opportunity for the company. And it can be, it just grows our opportunity and how fast we’re going to be able to ramp the revenue.

Ananda Baruah

All right, great. Thanks, guys. And then the quick clarification is, Raj, there was mentioned in your prepared remarks of smartphone and cloud customers being in Malaysia next week. Will they actually be at the event next week?

Raj Talluri

Yes, I mean, we can’t exactly comment on when the customers will be there, but there are a number of customers coming to visit us next week. And we can’t, obviously say who is what. But many customers want to come at the event, and some customers want to come a little bit ahead, some customers want to come a little bit later. And I do expect that as we build these factories, we will have many customers that will plan their visits. And we are super excited by the list of customers that want to visit us next week.

Ananda Baruah

Okay, great. Thanks so much, guys.

Operator

Our next question comes from Colin Rusch of Oppenheimer.

Colin Rusch

Thanks so much, guys. Can you speak to any potential collaborations with semiconductor or chip companies that you’re potentially working on to optimize device level performance?

Raj Talluri

Yes, absolutely. As you know, when you put batteries in these markets, I’ll just maybe for the rest of the audience, the battery is — performance of the battery is, and the way the battery performs inside, for example, a smartphone is quite a bit in close collaboration with the processor and the power management system, because, for example, in a phone, when the 5G modem kicks on, it’s going to draw power much harder. When it’s on standby, it draws power less, so there’s many, many aspects of making sure that the battery actually fits well, either in a smartphone or an IoT device based on what processor and what power management system is in there. As you know, I’ve spent a lot of time at Qualcomm and TI and other chip companies, so I’m quite familiar with that.

One thing that is happening is that silicon batteries operate at a lower voltage, like, for example, 2.7 volts, because there’s quite a bit of energy density you can get from the battery at a lower voltage. And a testament to the fact that the world is moving towards silicon batteries is the fact that now you see chip companies, Qualcomm’s, you know, MediaTek’s, other companies, Samsung’s and so on, making adjustments to the app’s processor plus power management system to actually connect to silicon batteries at 2.7 volts and so on. We are working with all of them. Thanks to our engagement with our customers and thanks to the deep connections we have in that ecosystem.

So we are super excited by that, and I think it’s a really good thing because our comprehension of how the battery should be built and how the battery should operate and how the battery should actually be optimized for an end device is getting stronger and stronger, and that really helps us in making the right kind of next-gen batteries.

Colin Rusch

Thanks so much. And then as a follow-up, can you give us a sense of what you’re anticipating as initial yields on Fab2 and how we should be thinking about ramp and scrap expenses as we get to the balance of this year in the first part of 2025?

Raj Talluri

Ajay is actually online from Malaysia, he’s there at Fab2, so I’ll let Ajay talk about this.

Ajay Marathe

Sure, yes, the yields, we, as Raj alluded in his starting comments, we took time a little bit to buy off the equipment in SAT, which is agility equipment, just because we wanted to make sure that there’s no corners cut and those types of things. So yields, we will begin definitely where we left off in Fab1 and then they will climb from there to the world-class yields that we expect on both the lines.

Colin Rusch

And then in terms of the ramp and scrap expense for the balance of this year, how should we be thinking about that from a modeling perspective?

Raj Talluri

Yes, maybe let me take a shot at it and then Ajay, you can add color to it. So if you talk about ramp, as I mentioned, right, we are first focused very heavily on building cells out of agility line because that’s the one that we need to sample to our customers. The HVM line is coming right behind it and we will work to make sure that HVM line is ready and fully capable by the end of the year because the high volume ramp, as I mentioned before, will happen in next year.

So we just need to make sure that we are ready, but a lot of energy is now on getting the agility line to the right level so we can actually make the samples of EX-1M, get it ready for EX-2M and so on. And maybe there is a comment on scrap, isn’t it?

Farhan Ahmad

Yes, the comment was on the, I guess like he wanted to know the modeling and how they should be modeling the cost. Yes. Should I take it?

Raj Talluri

Sure.

Farhan Ahmad

Yes. So it looked like there will be, there are a lot of moving pieces on how you are thinking about the modeling. Our cost reductions that we have taken are going to be the predominant factor in terms of the overall cash burn and how that’s going to be tracking in terms of the cash flow from operations. So Q3 should be better than Q2 and then Q4 should be better than Q3 overall. And that includes the expenses that are related to the scrap and the ramp of yield. Now through the year, like our COGS will go up and the OpEx may come down, but in aggregate, like the overall cost comments that I have will start.

Colin Rusch

Thanks so much guys.

Operator

Our next question comes from Bill Peterson of J.P. Morgan.

William Peterson

Yes. Hi, thanks for taking the questions. Just on the smartphone market, and you’ve given a lot of color in the last few calls, but assuming that you’re looking to maybe ramp in the back half of next year and then more meaningfully into 2026, trying to get a sense of the milestones between now and let’s say a year from now, which presumably when at least some of the customers will qualify.

So first of all, can you remind us of the sampling cadence? I guess, you know, when, you know, will you be sampling EX1 across all the smartphone makers this year, already EX-2M later this year, and then more volume later this year and the next year? I mean, you also mentioned earlier in the call that you may ink more formal agreements. How should we think about that? Basically, what we’re trying to get to is what should we be on the lookout for from a milestone perspective over the next year?

Raj Talluri

Yes, sure. Absolutely. So let me just recap one more time. We made some samples before we shut down the Fremont factory and just to prove out that, we can get the EX-1M into the right form factor. We talked about that last time. We send those to some customers, but really the sampling, what most customers want is actually samples from our Malaysia factory, which is where the production will be.

And our target, as I mentioned last time, is to get those samples out in 3Q. And then once we get those out to the customers, after doing some amount of testing on our side, we’ll get to them and they will test them also and validate and make the right trade-offs between energy density, cycle life, ability to fast charge, and so on. And then they will give us during this period that we’re working with them, the actual dimensions of the battery, what shape it should be, how many milliamp hours, and so on.

Because the phone models next year will have different shape batteries than the phone models this year. And we will get that feedback in the later part of the year. And then we will need to adjust our tooling to actually make those kind of batteries and get those to them next year.

And they typically then put those in their phone models and when they’re making a phone that they’re going to launch next year, and they’re going to test one more time to make sure the batteries do what they’re supposed to do in the phone, not because initial testing this year will be in isolation, not in the phone. And if everything goes well, and things look good, and the qualifications happen on time, they will place purchase orders, and we’ll need to ramp that to manufacturing. As I mentioned, we are working with multiple customers, and many of them will get samples. And we just continue to work through one at a time.

Meanwhile, as I mentioned, we are working on agreements that will actually talk about formalizing this process that I just mentioned. And we announced one of them last time, and we’re working on others to do something similar.

And as for EX-2M, our first focus is on getting EX-1M. EX-2M, we made early samples, as I mentioned, in Fremont. The next step is to perfect that and make those again in Malaysia and get that ready to production for ‘26.

William Peterson

Yes, thanks, Raj. And on this newly announced IoT agreement with the Fortune 200, I guess, does this company make other form factors like smartphones? Is this something synergistic with what you’re doing? Or is this for just small — is this for small batteries or maybe large batteries? And trying to get a sense for the financial ramifications of this, you know, the go-to-market timing, the economics, I mean, how milestone payments, just how to think about this agreement and how it should impact your financials.

Raj Talluri

Yes, great question. As you can imagine, Bill, we are a little, as an early stage company that is working with big companies, we are a little limited in what companies will allow us to say and allow us not to say, because they do have incumbent suppliers and so on. But I can tell you this much, though, there’s tremendous amount of interest in what we are able to build, and they’re not able to get that kind of battery that we are talking about from their current base. That’s why they’re working with us.

I would say this, I think the press really said it, it’s a product that’s got a large install base already of products in the market, so we’ll be replacing the batteries in some of them. So in that sense, it’s not a new category of product, it’s a product that’s out there. So that’s one aspect of it, is that it’s an established market.

The second one is, many of our engagements nowadays, we talk about milestone-based payments, because we will need to make custom-sized batteries for these things, and we need to put a bunch of our R&D resources on that. And there’s opportunity cost of all of that. And the exciting thing is that customers are willing to pay for that, based on milestones, and that shows the value of the technology we bring, and the differentiation we can offer to our customers. So I think that part is exciting. And we’ll be, absolutely, I understand where you’re coming from, and we’ll try to provide as much color and detail as we can, as our customers allow us to do.

Farhan Ahmad

And the only other thing I would add, and it was in the press release that the customers, in this case, do care about energy density, and they are willing to pay a premium for the energy density as well, over what’s available more broadly in the market.

William Peterson

Thanks, Raj and Farhan.

Operator

Our next question comes from Jed Dorsheimer, William Blair.

Jed Dorsheimer

Hi, thanks for taking my question, and congrats on the Fab, looking forward to seeing things. I guess, my first question is just around the commentary, I think Ajay mentioned that yields would be similar to Fremont. And I’m wondering, is that specific to agility? Or is that because my understanding was that the high volume was going to be more in the 95% type range? Or is sort of the 60% Fremont, kind of that, the starting point, and you’re going to ramp towards, and then I have a follow up.

Raj Talluri

Yes, I mean, just I’ll say a little bit about yields, and then I’ll let Ajay add colors. Essentially, this business makes sense when we get to very high 90 plus 95 plus percentage yields when we’re in high volume manufacturing. And that has always been our goal. And I mentioned that before, that’s where we will and we aspire to be and we need to be when we get to high volume. The question is really about where we start and where we end up. Our goal has always been to looking at what we were able to do and where we ended in Fremont, we can start from there, because we’ve learned what needs to be done, and then steadily increase them as we get to high volume.

I think that’s, but Ajay, go ahead, if there’s more color you want to add.

Ajay Marathe

Yes, sure, Raj. Yes, so first of all, differentiating between agility and HVM is not necessarily the right thing to do or the right thing to look at, because both agility and HVM kernels are identical. So when we do the learnings on agility, we begin where Fremont left off, as I said, and we quickly ramp it to the mid to high 90s. As we’ve always said, that will be immediately applicable to the HVM lines. HVM line is just slightly behind agility. As Raj mentioned, we have finished the FAT already for the HVM line.

The equipment is already installed for most part. There’s some laggards coming in literally in the next couple of weeks, and we’ll begin similar ramp as we are now doing on agility. So the focus is on agility now, get deals up to where we need and where we desire, and then carry the learnings immediately on the HVM line behind it.

Jed Dorsheimer

Got it. That’s helpful. Thanks. And then Farhan, just as my follow-up, it seems like it’s going to, you’ve got a few different moving parts here. And so as you ramp IoT on agility you recognize those revenues, the costs are going to come. How are you thinking about the underutilization and allocating the costs as the high volume line ramps around samples? Does that trigger that recognition or would samples, does that get put off until you’re selling to the customers? Just the mechanics of that might be useful.

Farhan Ahmad

So the devil’s in the detail, Jed, and it’ll depend on the contracts that we have and accounting policies are like very technical — there’s a lot of technical accounting on it. And so I would say that, look, ultimately it’s a non-cash charge. It doesn’t really matter on how you’re thinking about the cash. The depreciation will start hitting as once the tool is recognized as being in production. And there are different ways in which you can depreciate it. And that part, still, we have to finalize it in terms of how exactly we’re going to be depreciating it. So I’ll leave that question somewhat unanswered for you, Jed, right now, but it is a non-cash item.

Jed Dorsheimer

Thanks. I’ll jump back in the queue and look forward to next week. Thanks.

Operator

Our next question is from Gabe Daoud of Cowen.

Gabe Daoud

Hey, guys. Sorry about that. I was on mute. Thanks for taking my questions. Hoping we can maybe go back to Bill’s question just around cadence. So if you ship sales from Fremont in May and call it a nine to 12-month qualification period, switch it next May, maybe next June, is that maybe like when we could expect a first PO from a potential customer, maybe for the second half of next year? Is that still the case?

Raj Talluri

Yes. I mean, again, it all depends upon when the customer finishes their qualification. And I explained the process of how the qualification goes in terms of when we give the first samples, when they give the exact size of it, when we get it from Malaysia.

So typically, customer place orders when they feel the product is qualified in their phone and they’re ready for us to make high-volume products. So I would leave it as later half of next year is what we said before. And we’ll continue to say the same thing because once they get samples from Malaysia, they start testing them, that’s when we’ll know more.

Gabe Daoud

Okay. And that’s still, is it fair then to assume that you’re still thinking about multiple lines in ‘26?

Raj Talluri

Yes. When we put more lines, we’ll depend upon, again, how many customers are ramping, how fast, whether we are in a very high-volume product or whether we are in a lower-volume product first and then the next product. So that depends upon the timing of the volumes.

What we are doing is we do have a facility that can hold up to four lines, and Ajay and his team have facilitated that. And we are looking at all the long-lead items and which ones we should get out more, get ahead of them. But clearly, that is our goal that we’ll have multiple lines in ‘26.

Gabe Daoud

Got it. Okay. Great. Thanks, Raj. And then just a follow-up, if we look at top-spec Chinese mobile phones with maybe 800 or so watt-hours per liter, could you maybe quantify then what EX-1M is relative to that figure and what EX-2M is relative to that figure? You noted some of the prototypes of EX-2M have encouragingly hit your energy density targets. I’m just curious if you could share those. Again, I recognize battery is all about tradeoffs, but just curious at least what the initial energy density number is? Thanks, guys.

Raj Talluri

Yes. I think it’s really not a fair representation. I’ve maintained this over the last many, many quarters. People like to describe batteries by one number, and it’s really hard. It’s like describing an apps processor by megahertz or gigahertz. These are not that kind of products. It depends upon cycle life. It depends upon fast charge. If you actually take the batteries in all the smartphones out there and start looking at them, you will get a varied set of numbers.

What’s most important is the battery be competitive in energy density while satisfying all the other requirements to be in the phone. Customers are working with us because they see the energy density we provide, and they see the roadmap that we have. And ultimately, the tradeoffs they’ll make exactly where the ED will be.

Once we are in production, once the phones are out, you’ll be able to take out and measure them to see what exactly the tradeoffs the customers have made, because we don’t control all of that. The customers will decide to use them differently based on what phone they put in and which markets they’re selling in and what features they tend to highlight.

Gabe Daoud

That’s very helpful. Thanks, Raj.

Operator

Our next question is from Derek Soderberg of Cantor.

Derek Soderberg

Yes. Hey, guys. Thanks for taking my questions. And I’m also looking forward to seeing the facility next week. Raj, you mentioned smartphone OEM. That’s cleared two key milestones. How should we think about those milestones in terms of that sort of nine to 12-month qualification schedule? Does it speed up that schedule at all? Just wondering if you can kind of frame how we should interpret that commentary with milestones achieved as it relates to commercialization.

Then I’ve got a follow-up.

Raj Talluri

Yes. You should interpret it as things are on track. It’s like how we expected that we would do it. I mean, the contract specified, we need to do this by this time, we need to do this by this time, we need to do this by this time. As I mentioned, the process is we give samples, they test them, they do the safety testing, then they test the ED and so on. Then they give us the exact shape of the battery, then we make them. I mean, there’s a whole bunch of stuff that’s laid out in these contracts, and we’re on track to do those. I hope everything goes smoothly and we’ll get them to production as quickly as we can.

Derek Soderberg

Got it. Then as my follow-up, in the shareholder letter, there was some wording around trends in diversity of suppliers in the industry. Raj, can you elaborate on that a bit? I’m curious, first, which end markets that applies to? Is it more smartphones? Is it broad-based? Just generally, how does this diversification trend fit into the scale strategy? Thanks.

Raj Talluri

Yes. The comment is based on the fact, I think there was a question at the beginning of the conference of the call. We are seeing a lot of, I would say, customers preferring to go with North American battery manufacturers with all the geopolitical uncertainties and the tariffs and so on, and they’re looking for different suppliers.

We are one of the few, if not the only, who can make batteries into consumer electronic devices in this market. I think we’re getting good, I would say, tailwinds in that front, and that’s what that comment is meant to highlight.

Derek Soderberg

Got it. Thanks, guys.

Operator

Our next question comes from George Gianarikas of Canaccord.

George Gianarikas

Hey, everyone. Thank you for taking my questions. Maybe just to focus on the margin potential, as you continue to round out customers looking into 2025 and 2026, how do the recent discussions that you’ve had, particularly with the announcement you made today, how do they inform your cash gross margin and overall margin targets over the next couple of years? Thank you.

Farhan Ahmad

Yes, the IoT customers that we have disclosed in our earlier arrangements, they have price points which, when the technology is at scale, will give us good margins when we are in scale with multiple lines. So the price point itself, there is a sufficient premium, and it can support very healthy level of margins. And actually, it validates our assumptions that we had in our long-term model.

George Gianarikas

Thank you. And maybe as a follow-up, I’m curious about the discussions that you’ve had with EV OEMs, and as you continue to work through those, maybe two parts. First, to the extent you have visibility on this kind of stuff, given that it’s very early stage, what sort of model years would we expect any sort of batteries to show up in EVs? And second, as you continue to contemplate which business model you’ll deploy to enable EV batteries, where are you leaning towards in your thinking? Thank you.

Raj Talluri

Yes, I’ll take a stab at it, and Farhan can add some more on the model. I think — EVs take much longer to go to production, as you guys know. I think what is exciting about this announcement is that, we had always talked about the fact that our battery has a couple of key advantages in EV market.

One is the ability to charge fast without heating up, and the second one is any kind of material that’s trying to put high energy density is still swelling, and we can control that. And those two, we’ve presented to the EVMs and the EV, auto EVMs, OEMs, and they like it, and they have signed agreements with us to jointly develop this technology to the point where it can be deployed in their cars. That’s where that is. It’ll take a couple more years for us to get to that stage.

In terms of production, if you ask me today, I’d say we’d pursue a less capital-intensive licensing kind of model, because we are busy building factories for the consumer stuff. But I don’t know, Farhan, if you want anything more to add.

Farhan Ahmad

No, I think, yes, like that covers it, Raj. I think overall, when I think about the EV market, the value proposition that we are bringing there is, hey, we have IP that has got value to this market. We don’t want to commit a lot of capital. We are very limited in how much R&D we are spending. So the idea there is that we will have a limited amount of investment. We’ll take our IP, and then we’ll have our customers pay for a lot of the development expenses.

And then as this technology ramps, we will try to keep it such that we also don’t have to invest a lot of money in this market, because we have other areas that we are investing, like consumer electronics. So, we will, of course, remain flexible. And if other business models make sense, we’ll look at them. But right now, the focus would be to use some sort of a licensing royalty model and let our customers make the investment. But as I said, like, you know, the exact model will remain flexible. But as I sit here today, most likely, it seems like licensing royalty is kind of like the way that we want to go.

Raj Talluri

This is one other thing I’ll add is the fact that we have now two EV OEMs doing it clearly validates the value proposition that we’re talking about. And that’s really exciting. And of course, we’re continuing to figure out other people who want to do that, too.

George Gianarikas

Thank you.

Operator

Our next question comes from Bill Peterson of J.P. Morgan.

William Peterson

Yes, hi, thanks for taking the follow on question. In the press release, you guided to a meaningful revenue growth in the second half relative to the first half. Can you speak to the various drivers between your conventional business acquired from Routejade versus early IoT revenue, and maybe any sort of revenue from sampling the customers? And then, how should we assume the corresponding margin profile looks with this ramp again, presuming this is mixed dependent?

Farhan Ahmad

Yes, so in terms of the revenue ramp, like from Q3 to Q4, there’s going to be a significant ramp. And it’ll be driven by both Routejade and our batteries coming out of Malaysia and whatever we are getting from sampling some of those batteries and some service related item that are related to the milestones that we have. The growth, though, I would say more driven by Routejade than the new stuff. But both will be contributors.

In terms of the margins, there are a lot of moving pieces, it comes back to, hey, how the depreciation stuff hits in the Q4. But on the gross margin front, probably Q2 to Q4, you will have a lower gross margin because you have some of the increased depreciation related costs probably hitting.

But, like exact, I won’t be able to give you a lot of specifics around it because of the technical accounting related questions that are some of the just a little bit. Thanks for taking the follow up.

Operator

There are no further questions at this time. With that, I’d like to turn it over to Dr. Raj Talluri for closing remarks.

Raj Talluri

Yes, thank you all for listening into the call. Been a really nice quarter and looking forward to talking to you guys next quarter. Thank you.