$ENVX Q3 REVIEW Intro - the capital raise I might have imagined that these reviews would be getting easier by now but hey, this is Enovix we're talking about. So let's get this one out of the way first. The capital raise a day after the earnings call went down really badly with a lot of retail investors. This includes serious people with serious numbers of followers on this platform (50K+). It's difficult to imagine that this has done anything other than damage Raj and Farhan's credibility with this community, at least for a while. I am pissed off about it as well but am not going to spend any more time on it here because I have a lot of other more important things to discuss. I see a hell of a lot to be excited about in Enovix and the rest of this review will focus on that. I would have finished this report earlier but thought it best to wait for the Oppenheimer call (a good move as it turned out) and so I will also include some stuff from that session in what follows. Q3 - prior expectations I had a few things on my watch list coming into Q3 reporting: - Yield progress. (re. the Agility Line Raj had said on the Blair call: 'by end of year we expect to have 90%+'). - Would there be another EX-1M JDA? (We had an announcement on 1 May and Raj had indicated on the Blair call that they were close to closing another JDA.) - EX-2M updates. (The expectation was for samples to go out in Q4 but given that EX-1M sampling had only taken place in Q3 and had been a pressured exercise, 2M could not be seen as a given). - IoT revenues: would these provide a bridge to smartphone revenues in H2 '25? (The background here of course was that Q2 reporting confirmed that smartphone revenues would be materially delayed due to Gen2 issues during H1, particularly in Zone 3A.) - EV sampling updates. (Earlier this year Raj had said it was possible samples would go out by the end of the year but there was no commitment to this). What follows will be structured in line with the above headings. I'll follow this up with a broader discussion on some strategic issues. Yield Progress The messaging on this in the Shareholder Letter and the Earnings Call, was muddled to say the least. The reality, happily, is much more positive. Both the Shareholder Letter and Raj's opening remarks gave the impression that Agility Line yields were (at the time of the call) ~60% with improvements 'on the horizon'. That made zero sense. As it happened the first 'Shareholder Question' was on yields which Ajay fielded. "Yeah, sure. So as we communicated with you all, the Agility Line completed the SAT during the quarter, last quarter. And we brought up the Agility Line on the EX-1M technology node at yields a little bit higher than where we left off here, closer to 80%." (Gotta love the understatement here, 'a little bit higher" as in, a third). "And the HVM line, which has identical kernels to the Agility Line is in SAT mode right now in Fab2, and there's no reason to expect anything lower than what the Agility Line was able to do. So we feel pretty good about the yields, how they're ramping." It's important to note here that the second question on the Oppenheimer call on 11 November (the first being ofc on the capital raise) was on yields. Raj's response runs from around the 9:40 mark to 11:18 and while Raj is a little bit more expansive here the essence of the message is identical to Ajay's above. I know there are some investors out there who are jittery about yields but I am not in that camp. Of course yields are mission critical but this is a capable team, led by an outstanding COO who has followed the right processes rigidly. They have, notwithstanding the delays, done an superb job in building a factory sceptics said would never work, and I strongly believe they will get yields to their target levels. ~90% yields on the Agility Line are forecast for fiscal year end. In other words, on track. As both Raj and Ajay have indicated, we should expect HVM to achieve similar levels and beyond through '25. EX-1M As a general point, I increasingly find with Enovix's comms that what is not said can be as significant as what you actually see or hear. Much of this is driven I think by the smartphone OEMs and the need for Enovix to be super careful around what it says for fear of busting their NDAs. If the Earnings Call messaging around yields was mixed, the messaging on EX-1M was even more confusing but this was by design rather than by accident. EX-1M samples were supplied by the end of the quarter as targeted and on 29 October we had the anticipated PR announcing another 'Development Agreement'. I thought: 'great, now we have two OEMs looking to put EX-1M into their phones in '25.' Raj's opening remarks however were quite clear in declaring otherwise: "I'm pleased to announce that we executed a new agreement with a leading global smartphone OEM for the qualification of our battery cells and the late '25 launch of one of their phone models, and this would mark our first official entry into the smartphone market." This begged the obvious question 'so what was the previous (1 May) smartphone OEM development agreement all about then?' The opportunity to ask the first question fell to Ananda Baruah (Loop Capital) who was on it straightaway: "I guess I'll just start with the -- is really a clarification around the announcements, Raj. So is the announced volume customer for December quarter 2025, is that the new customer? Is that the new relationship? Or is that the prior relationship?" (i.e. the OEM agreement announced on 1 May). Raj confirmed it was indeed the new announcement that would lead to Q4 '25 EX-1M shipments and then just waffled/dodged the wider question of what the 1 May agreement was all about: "The other customers we work with are also well along the way..." Towards the end of the call, Mark Shooter (William Blair) stepped up to the plate for another go at this: "Congrats again on the second customer. We got more details in that engagement. So should we read this as more concrete? Or is this customer more eager than the other? Is there an opportunity here to try to pick these two against each other in a race for qualification? Our plucky batter struck out, falling to an epic dodge from Raj: "I mean every customer is a little bit different, Mark. And I think, as you know, I have relationships with all of them. Every estimate is a little bit different, every customer is in a little bit different stage. I think that's the way you should read it." You have to say, Raj is getting pretty good at this, but those NDAs are a bitch. Since the call I have gone back and compared the 1 May and 29 October announcements and the only meaningful thing they have in common is that they both involve a smartphone OEM. The content of each press release is quite different with, as Mark Shooter pointed out, much more specificity around the 29 October one. This is what the 1 May PR said: ['a development agreement with one of the top five smartphone OEMs in the world by unit volume.' "We are thrilled to announce we have advanced our engagement further with one of our top customers by reaching a formal development agreement, underscoring the value and competitive advantage our silicon batteries can provide to the next generation of smartphones, beginning with EX-1M"] While the 1 May PR mentions EX-1M it doesn't actually say it's specifically targeted at designing EX-1M into a smartphone, whereas the 29 October announcement says exactly that. The obvious conclusion is that the 1 May agreement has a broader (but entirely opaque) scope. Who might be the partner here? 'Top 5 in the world by unit volume' means it's one of Samsung, Apple, Xiaomi, Oppo, Vivo. During the earnings call Farhan said that both the 1 May and 29 October announcements are with OEMs who are "very prominent in the premier tier smartphones in China." Let's assume here that 'prominent' means top 5. Samsung has minimal share in China generally and is not in the top 5 even in the premium segment, while the other four are. OK , just four left to choose from... At this point I feel like I'm stumbling around trying to pin the tail on the donkey, which I imagine is the effect Enovix and its partners were aiming for... After the earnings call I therefore noted with considerable interest this outlier comment from Cantor: 'The big catalyst, in our view, is Enovix receiving platform qualification with Samsung sometime in 2025E (we are hoping this happens in 2Q25). After that Enovix would have the ability and the desire to strike a licensing deal with Samsung.' (Cantor Fitzgerald, 29 October '24) Huge. Just monstrously fucking huge. Transformational, if true. It also makes a lot of sense but the evidence is circumstantial. Also, it being Samsung doesn't stack up with the comments in the earnings call. Mind you, who says every commercial agreement has to be accompanied by a press release? As a case in point, see the EV section below. With the benefit of hindsight, I now look back at the 1 May announcement and wonder if it was maybe just too early for a specific EX-1M agreement at that point. After all, FAT had only been completed two weeks earlier. And maybe that is the key point here. The major hurdle of FAT completion had only just been completed. I said at the time that this was a huge deal, not just for Enovix but for the wider battery industry. After all the drama and pain of Fab1, and the failed efforts over many years prior, Enovix was finally able to announce (in effect), 'we can make this at scale.' Wouldn't that be a great moment for a large player to (finally) decide they wanted to work with Enovix towards a licensing deal? Last thing on this. Three months after the 1 May PR, on 31 July, Raj said during his opening remarks on the Q2 Earnings Call: "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." Any of the analysts out there fancy pitching a question on the Q4 call around what these milestones actually are and their progress :) ? You never know, you might get lucky. EX-2M EX-2M was previously signalled as being sampled by the end of Q4 and management confirmed this is on track, which is really excellent news. Last quarter I said I thought the majority of OEMs would wait for EX-2M rather than go with EX-1M (given the delay in EX-1M sampling meant there was only a small time gap between that and EX-2M sampling) and that does seem increasingly likely now. My guess is that we will see several EX-2M development agreement announcements in Q1/early Q2. For me this is a huge marker. In his opening remarks Raj underlined that EX-2M is a top priority: "we're also launching EX-2M as fast as possible." It's also worth noting Raj's response to Ananda Baruah's second question: "EX-2M is our next technology, which we will be sampling this year, and we expect that to go to production and we are working hard to get that accelerated also." All this reads to me very much like a tacit admission that EX-2M is where the real customer pull lies. Customers are telling Raj, 'hurry up with EX-2M'. One or two analysts tried to tease out the possibility of EX-2M revenues in '25 and top marks go to George Gianarikas (Canaccord) who in a sneaky, oblique kind of way asked if EX-2M samples supplied by the end of '24 could lead to it being in phones in '25: Q: "is there still potential if customers come to you that are testing your samples to fill the 2025 revenue pipeline between now and the end of the year?" (GG) A: "I do believe that we do a lot of the testing in-house to make sure that what we're giving is what people really want and are safe. So if things go well, it could be much faster. But we are planning that will be late next year." (Raj Talluri) Farhan reminded Colin Rusch (Oppenheimer) that EX-2M was not just about giving the market the higher ED they're craving: "This market is sensitive to energy density. And for us to achieve our long-term (gross margin) target, we have to get the EX-2M types energy density and beyond" While there are a bunch of product/market priorities for Enovix right now EX-2M looks like numero uno. I expect we'll see an announcement on sample shipments to 'select customers' before the end of December/early January. IoT When Raj Talluri decided to make smartphones Enovix's key target market he took a huge gamble. If he had focused on IoT, where Enovix was inundated with sample demand, (note Ralph Schmitt's comments mid '23 and the way the Sales Funnel was growing) they would already have a decent number of customer orders. Remember, 75% of the prospects in the old 'Sales Funnel' were IoT related. In fairness to Raj, the 'pivot' of mid last year was as much about targeting very large customers who could offer huge volumes as anything else, 'market agnostic', you might say: "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." (Raj Talluri replying to Ananda Baruah on the Q2 earnings call, 31 July '24) Enovix is now much more picky about the IoT customers it works with. Only sizeable volume opportunities are directly supported. In Q2 we had the mixed reality headset PR (25 June) and the Fortune 200 OEM PR (31 July), which ofc actually came in Q3 but was just in time for Q2 reporting. The Q3 Shareholder Letter gave us some idea of progress here: 'In parallel, we have aligned on a production schedule with a leading IoT customer, which includes a mass production purchase order also slated for 2025.' The language here fits pretty well with the Fortune 200 OEM PR which included this: 'Under the terms of the agreement, Enovix will receive milestone payments associated with building and testing prototype batteries for this IoT device along a path toward mass production.' Only one analyst, Derek Soderberg (Cantor) asked about IoT and tried to tease some more customer/application details out of Raj. You'll be unsurprised to learn he got nowhere, seen off by another NDA. For me the timing of IoT '25 revenue is still somewhat open, even though Raj's opening remarks bundled both IoT and smartphone revenues into 'late '25': "consistent with our time line and start of mass production for smartphones, IoT customers in late '25" My own hunch here is that this piece of IoT business may come in a bit sooner, Q3 perhaps. Final thing on IoT. One thing that is much clearer here is pricing. Terms seem to have already been agreed, and at a premium Farhan is happy with. "We've also closed pricing with some of the other customers (nb plural) in the IoT space. We are continuing to be able to command a premium for our batteries because we provide much higher energy density" (Raj Talluri, replying to Colin Rusch (Oppenheimer), Q3 Earnings Call, 29 October '24) EV The Shareholder Letter offered a very positive EV update declaring: 'In the EV space, we are advancing our targeted strategy of developing customised products with two of the world’s largest automotive OEMs.' In Q4, we expect to complete our first milestone pursuant to the agreement with one of the major automakers in the EV market, which is a major milestone in our efforts to enter and grow within the EV market.' None of the analysts ventured into this area in the Q&A. When we had the Q4 '23 Earnings Call on 24 Feb earlier this year they were all over it. The announcement of Enovix's first EV OEM agreement had been included in the Shareholder Letter, but wasn't, strangely, the subject of a separate press release. I am left to conclude this was at the request of the OEM. Curious. It's kind of funny when you think about it. Pretty much every 'next gen' battery maker is focused mainly if not exclusively on EV and here we have Enovix for whom EV is very much a secondary objective, now with a couple of big players really interested in its unique battery architecture. James Wilcox might well be the longest serving guy in the company now (since 2008) and is head of Enovix's 'Mobility' business, so it could hardly be in better hands. Given all the other fronts the business is pushing on I am mighty impressed by the fact they're now declaring that they're going to hit that first milestone, which would appear to be samples: 'We hope to get samples out this year. That's our goal. We are working with other OEMs, too. But I can't really comment much further than that. It's kind of early stage, and we'll keep you updated as we make progress.' (Raj Talluri, Q4 '23 Earnings Call, 24 February 2024) How much of this is factored into the SP? Somewhere between zilch and fuck all. Beyond EX-2M and the real Journey to Scale Panning out a bit here, we had some interesting comments in the Earnings Call where Raj and Farhan talked about the need to have that breakthrough moment with one smartphone OEM which would then lead to others following suit. I found that sightly jarring when I first saw it. Since Enovix went public a consistent theme has been that of 'insatiable demand'. Pull, rather than push. So how do we make sense of this? By deciding to focus on smartphone business mid last year Raj was not only aligning product development/ management with the needs of smartphone OEMs, he was also setting Enovix up for an absolutely essential massive and rapid expansion of production capacity. The challenge with breaking into the smartphone battery market is that having great technology is not enough. You also need very large scale to be seriously competitive, to be really relevant. Finance guys talk about scale as being when unit production costs flatten out and that will start to happen for Enovix between 4 and 8 lines, but we're talking about competitive scale here. 8 lines wouldn't be enough to satisfy 10% of the total smartphone market (never mind IoT). Longer term Enovix has to get way beyond 10 lines if it's going to be a major supplier to smartphone OEMs. In the short term there is the fundamental hurdle of needing to thoroughly qualify the technology. However, from the OEM's perspective there is little point in doing this and investing significant technical resources from your side unless you also have a longer term plan that addresses not only the technical roadmap but also the production roadmap i.e. how Enovix can grow to meet your demand. After all, if the tech is as good as you think it is you're going to want to buy a lot more, aren't you? So, going back to the 29 October 'Development Agreement' announcement the unspoken part of this is that Enovix and the OEM have a growth plan in place. According to Cantor, Samsung also has a growth plan. They're going to move to licensing, and do it early. Whether it's Samsung or Apple that makes a ton of sense to me. There is a glaring flaw in an argument that says: 1) Current battery tech can't meet ED demands and the problem is worsening. 2) 'Our battery technology roadmap offers a generational leap in energy density' (from the Q3 Shareholder Letter). 3) 'But you're all going to have to wait quite a long time while we grow from one line to many.' If the need for more ED is a major issue that is constraining the end user experience and undermining potential demand, then a slow steady build up of production capacity isn't going to be good enough for the smartphone OEMs. Why did Enovix, even in its White Paper in early '21 declare that EV business would be done via licensing? Because it's just too big to be done expeditiously by themselves (huge capital requirements, takes too long). The same can surely be said of meeting Samsung's (and Apple's) needs in the CE space. Will the Chinese OEMs license Enovix's technology? I think they'd love to but I'm sure Enovix won't offer them the opportunity. Enovix's IP, for the battery itself and the manufacturing know how are the crown jewels and Enovix will not allow Chinese customers to get too close to those. I expect Enovix to rapidly expand the number of lines in Penang and possibly elsewhere to meet Chinese OEM demand from late '25 onwards. From the interview with Raj published in Digitimes in September: "Shipping directly from Malaysia is especially strategically advantageous for our Chinese customers." "Moving forward, I aim to continuously boost our factory's production capacity and build greater trust with our customers to secure more orders. For now, our focus remains on Fab2, with ongoing monitoring and investment for future overseas facilities." Competition During Q3 there were a number of smartphone launches and the sceptics were hailing the energy densities of these phones and proclaiming that Enovix's future looked bleak. It was notable then that page 1 of the Q3 Shareholder Letter gave this withering assessment: 'Our analysis of recent smartphone launches highlights a critical shortfall in conventional batteries. Energy density improvements in flagship devices released in 2024 have stagnated, with a mere 1% year-over-year increase. We believe this trajectory is insufficient to meet escalating demands of modern devices, especially those powered by AI.' Ouch. Enovix previously described EX-1M's performance as being 'competitive' and some longs were concerned about this, expecting it to be way better than the competition straight off the bat. I've said it before and I'm probably going to have to continue saying this for a while yet, but the smartphone OEMs are not talking to Enovix because of EX-1M, or even EX-2M. The OEMs are taking a longer term view here. It's the ROADMAP. The smartphone OEMs seem to have concluded that Enovix's architecture does indeed offer the best medium to long term option for meeting their growing ED needs. The Oppenheimer call gave us another sign of Enovix's more combative tone. As far as I can remember (and I also checked back over earnings calls from the last couple of years, this was the first time a senior officer of the company has mentioned ATL by name). For over three years Enovix has talked of 'the incumbents' or 'the competition'. On the Oppenheimer call Farhan mentioned ATL directly. Where I come from calling out a rival by name always meant you were up for a fight. Note here Farhan on the Oppenheimer call, from the 33:17 mark onwards: "there are a lot of companies that would want to diversify away from China" "we are already seeing some interest from customers that want to move their supply chain...and are currently finding that they can't have their future plans reliant on China" Raj knows very well he is taking on a big beast in ATL. He played it down on the Blair call in September but let's just look at what he is doing. Look at R&D spend. YOY at the end of Q3 it was up 90% to just over $102M. Raj knows ATL will come after Enovix hard so he has to invest to stay ahead. No-one asked about this on the Q3 Earnings Call but it did come up on the Q2 one. From Raj's opening remarks: "It's important also to realise that we are investing heavily to support lasting technical leadership to build out a roadmap...and we intend to keep growing...we now have a core R&D team in Malaysia that we now intend to double by the end of the year." (Raj Talluri, Q2 Earnings Call, 31 July '24) It's going to be fascinating next 12 months and beyond. Rounding up Q3 reporting was overshadowed by the capital raise but the longer term thesis for Enovix has not changed. If anything, it has become stronger. This team is running at full pelt across multiple market segments and geographies and progress has been outstanding. What they are doing is pretty amazing. I haven't even discussed the ongoing technical collaboration with Qualcomm or Ajay's major cost reduction of Gen2. And what about the development of Hyderabad? Show me another battery maker that's trying to break into smartphones, IoT (consumer + industrial) and EV and making damn good headway in all of them. DYODD

@quakes99 Hi John, really sorry to hear you're leaving X. Your knowledge has been invaluable to me and I'm sure many others feel the same way. Very best wishes for the future.

@RJRCapital Best of luck 👍

Hi Lien, Raj also covered this during the Q&A on the last earnings call, replying to Derek Soderberg (Cantor). Whenever Raj gets a question related to technology trends he is clearly in his element and can talk about this for ages :) "it's a market that's very ideally suited for our kind of batteries, which deliver high energy density even in small form factor. So that's a market where we're excited by. I've seen some industry reports, these will be multiple tens of millions in the next few years, like 20 million, 30 million units is what I saw in out years. I think this market is still being built out. I've seen demonstrations of the products we announced a customer, I think last quarter or the quarter before, I forget, that was interested in our product, and then they are making custom cells for them, they look amazing. I think there's a lot of progress has been made in waveguide optics. So the experience you get is really, really good. And I expect a lot more customers to start making those products. Particularly with Gen AI, you can use speech to navigate now, and that's looking really, really good. And that also demands a lot of battery life. So in that sense, I think there'll be smaller batteries when they look like glasses, there could be bigger batteries when they look like AR, VR headset. If there are form factors where the battery's on the side and you plug it in like a Vision Pro, those could be bigger batteries, if the battery's inside the head, they may be slightly different batteries. So I expect there to be multiple form factors of batteries in those kind of devices. But all of them have this need for high energy density in a small form factor, so something that suits well for us. So it's a market I'm quite excited by. It may take a little bit longer to become a really large market, but I think it's a good market for us. And the ASP is a market where we can get a very nice ASP premium. And I think we are seeing that in our first batteries that we got it."

@market_tomcat Thanks, good question and I would be guessing so best I pass on this :)

@eenLien Exactly so 👍

@TimAnde07550182 Fyi

This came up on the last earnings call. This is part of Raj's reply to the Cantor guy's question, which was specifically about 'smart glass': 'And the ASP is a market where we can get a very nice ASP premium. And I think we are seeing that in our first batteries that we got it.'

@RichRayPoorRay Yep, good spot :)

@Ryan61968319 @adamElkkkk I think he's referring to additional lines being installed in '26/'27 i.e. lines 3 and 4.

@doh_in Agreed, which is why I've been saying more OEMs will start with EX-2M.

@eenLien Agreed. Line 1 was always intended to be a universal line. I expect line 2 to be smartphone batteries only.

Need to be careful we don't put the cart before the horse here. I think the main thing to watch for is smartphone OEM agreements. If we get one or preferably two of these then that will support the view that the strategy is working. The additional lines will flow from that. I think we'll see a second line in place by end '25.

@JoseyWalesPace It was fantastic, thanks Rich.

@michael94521 @bleacherbum23 Hi Michael, I'm pretty sure that one is way out of date. Spencer left a while back and James Wilcox has been heading up 'Mobility' for a while now - just checked the website and he's still there.

@RocketPenguin75 Good news Doug.

I think the nub of the short case is valuation. Over three years after going public we're still 'pre-revenue'. But valuation is still c. $2B. A pretty rich valuation. However if the company executes the upside is huge. A lot of the short stuff is just garbage (no product etc), based imo on desperation. At one time there was a short argument that the battery couldn't be made - now comprehensively disproved.

@ladiesonfilm @Richard_X_Roe @EnovixBatteries Roe is a full time troll, best blocked/muted. Note the language, invariably negative.

@eenLien Have just dm'd you the image, have fun :)