ENVX - NASDAQ

Thank you for standing by and welcome to the Enovix Corporation's First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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.

Thank you. Hello, everyone, and welcome to Enovix Corporation's first 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 first quarter 2024 shareholder letter after the market closed today. It's available on our website at ir.enovix.com. A replay of this 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 a 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 our statements are made as of today, May 1, 2024, based on information currently available to us. We can give no assurance that these statements will prove to be correct and we do not intend and undertake no duty to update these statements except as required by law. During this call, we'll 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'll now turn the call over to Raj to begin. Raj?

Thank you, Charlie, and thank you to everyone joining us today. For our format today, I'm going to start with a recap of our recent results, how we are progressing against our strategy before I turn it over to Farhan for the financials and the outlook. I'll also have a few closing comments and then we'll take your questions. We're off to a great start in 2024. To recap our recent achievements, first, we delivered a Q1 revenue of $5.3 million, which was above our forecast due to strong performance from the IoT category. And thanks to the higher revenue and favorable product mix, we reported positive non-GAAP gross margins for the first time in the company's history. Second, we completed the Factory Acceptance Testing of our Gen2 Agility line and the vast majority of the machines are already in Malaysia and the SAT is well underway which is the Site Acceptance Test. As a result, we are on track to produce our first battery samples of the EX-1M technology this quarter. Now I'll also note that the FAT for the high volume, the Gen2 Autoline is nearly complete. And given that it's based on the exact same process kernels as Agility Line, for the unique and challenging portions of our battery manufacturing process, such as laser dicing and stacking, our yields are already at upwards of 95% in our Gen2 machines. Big picture, manufacturing is in a great place. We are confident we can scale the Gen2 process given the amount of rigor we put into getting these qualification steps right. Now, let's talk about the customer progress. Let's start with smartphones, the largest portion of the battery market and consumer electronics. We are deeply engaged with market leaders given the value they see in our architecture to enable silicon and increase the battery performance. As we talked about previously, our process has been to work with these OEMs to gather the specific requirements for the smartphone market, and then develop a product that's tailored to the needs of this market. This is exactly what we've done with EX-1M. And I'm thrilled to update you that we have now begun producing samples of EX-1M in Fremont for initial testing, which you can see on the cover of our shareholder letter. It's super exciting for us. Now the samples of EX-1M will go out shortly. And the customers are really eager to kick off the qualification products of these samples with product -- with their products in mind for 2025 launch. What does this mean and where are we with these customers? Now let's take a quick look with this slide. Now what I want to -- what I'm showing on this slide is basically the size of a smartphone business opportunity for us. The smartphone battery leadership opens a $12 billion opportunity for Enovix. If you look at the top bar on the slide, you can see all the OEMs that shipped around 1.2 billion smartphones in 2023. The top 8 of them represent 1 billion units which is 80% of the volume. Now of the $12 billion lithium-ion battery TAM in smartphones, $9.5 billion is among this top 8. Collectively, they produced 280 plus models of smartphones, which means an average smartphone unit volume of 3.5 million units per model. So 3 or 4 models of this will take a full line of ours. Now 6 of the top 8 of these OEMs are going to receive samples of EX-1M smartphone battery from us. So that $7.5 billion of smartphone battery TAM is actually represented here. So we're in great shape, as you can see with the market leaders, something that was a priority for me when I joined the company last year to focus on the largest part of the battery market. Now the customer interest has extended to conversations with OEMs about formalizing our relationship with them as we started making progress over the course of the last year. Some have expressed desire to be the first to market with products in 2025 and beyond. To that end, I am really pleased today to announce our first development agreement with a top 5 smartphone OEM by volume. What this agreement reflects is a progression of our technology relationship with this company and a mutual plan from both the company and us to bring out our technology into users' hands, very exciting development that has happened in the last quarter. And we see similar interest and collaboration from other customers who are also -- who are also sampling to -- who we are going to sample with our EX-1M technology in the coming months. Our goal is very straightforward. We begin with a handful of SKUs from this group of customers, ramp EX-1M to production in '25, then further differentiate with our EX-2M, a battery that samples later in this year for product launches in '26. As I have highlighted in the past, there is secular demand for increased battery capacity with every smartphone generation and Enovix may be the only company that can help these leading companies, leading smartphone OEMs, keep up with the demand for the higher and higher energy density needs of the batteries because of all the AI applications that are coming into the smartphone, particularly for all the on-device AI applications. So let's recap what products we plan to bring to the market on the next slide. We've shown this slide to you before. EX-1 is our current technology that we were sampling last year. EX-1M is a new technology that we will be sampling second quarter this year. And this technology is comparable on energy density to EX-1M, which is quite a bit differentiated from all the cells shipping out there in the market. But we've made a few important advancements to this battery. We've increased our cycle life. We increased our capability to charge fast, both of which are very important in cellphone market. Now we plan to sample EX-2M, which is the generation after this, where we continue to make improvements on energy density and cycle life and fast charge capability. Our R&D teams have already started working on EX-3M, where we will further make improvements over EX-2M in all these 3 vectors, energy density, faster charge and so on. And we -- our plan is to sample them in 2025. Once we bring a leading smartphone battery to market, our view is that this gives us the entitlement to win in other large parts of the battery market, namely the IoT and computing. There is another $12 billion of TAM in those 2 markets. The reason for this is a smartphone battery has the highest bar of all consumer batteries. The demands of on-device AI are very high, so it needs higher energy density, higher cycle life, people like to keep the smartphone for a while, fast charge rate, they like to charge it quickly and move on. Highest levels of safety. It's a device you carry with you all the time. So when we produce a battery that meets these requirements, all the other markets are entitlements for us. This is actually same thing I saw at Qualcomm. When I was at Qualcomm, we built a significant mobile phone business, but very quickly, we were able to sell the Snapdragon into IoT businesses after that. Now it should also be not lost on anyone, the logos you saw in the previous slide of the smartphone OEMs are the same logos of some of these customers who are actually leading in some of the IoT markets like wearables and tablets and computers. So proof positive of our strategy is, once we qualify with a smartphone customer, it takes our EX-1M sample, they are not only qualifying us for smartphones but also for smart watches and so on. To this point, we are also -- we are continuing to make inroads into multiple other IoT customers. We are applying our vertical markets philosophy where we selectively engage with a few high-volume opportunities with leading OEMs that are products that take advantage of the higher energy density and higher battery -- better battery performance of EX-1M and EX-2M. Presently, our commercial team is focused on select IoT design opportunities for both 1M and 2M with product launches targeted in '25 and '26 for high energy density progress -- higher density and batteries. So some really meaningful progress here. Now as we look forward, we're approaching some key milestones this quarter as production begins in Fab2 and we get samples of our EX-1M going out to the customers. Now let's take a look at our scale-up strategy. We've shown this slide before. Q2 '24 is when we're going to be sampling our first EX-1M batteries from our Agility Line to some of the smartphone customers and also some IoT customers. Second half of '24 is when our Fab2 will get ready for production. And Q4 of '24, we expect to sample the EX-2M, the next generation of the battery. Now that takes more -- and the people take some more time to qualify that, and we expect that to launch to production in '26. In 2025, our goal is to launch multiple smartphones and also IoT customers with our EX-1M battery. Now what does scale look like when we get to launching multiple products with multiple customers in the coming years? These are slides that we haven't shown before. Our R&D -- this is a slide about the smartphone production line unit economics. Our manufacturing R&D team has been very busy at work to reduce the cost of our lines. Now we are targeting the CapEx per line to be in the $60 million range in the out years. And we're also targeting now with the experiments we have done to be able to get the throughput to be 1,650 units per hour. What that does is each line has the capability of producing revenue of $150 million. What we are finding is that as we produce higher and higher energy density batteries with better performance, there is the opportunity to increase the ASP because the customers want a higher energy density battery because that will help them differentiate the products much better. At that point, we expect our cash gross margin to be in the 50% plus, and we estimate the payback of each of these lines to be 1 year. So a very exciting future here as we get into scale of manufacturing. As you can see, we're making tremendous progress, and we have a very clear path and a very attractive long-term financials as we scale this business. Now none of this would be possible without the collective success of our global teams, from the operations team in Malaysia, readying our Fab2 to the team in India reducing our R&D cycle times to the team in Korea improving our coding capability. Based on this progress and our global -- taking advantage of our global footprint, we are now accelerating our plans to identify additional efficiencies as we scale to take advantage of this global footprint of our engineering teams and manufacturing teams. Our plan is now to reduce our fixed cost by more than 1/3 out or by more than $35 million annualized by this year-end. This significantly reduced our capital needs and accelerates our path to profitability. With that, I'm going to turn it over to Farhan.

Thanks, Raj. All the relevant financials are in the quarterly report in the shareholder letter. So I'll kind of keep my comments at a high level and then provide the outlook. For Q1, we delivered revenue of $5.3 million, which was ahead of our expectations. And we also had a first positive non-GAAP gross margin, as Raj mentioned. The EBITDA -- the non-GAAP EBITDA came in at a loss of $26.3 million, better than the midpoint of our guidance. Non-GAAP EPS came in at $0.31 loss, a penny better than the midpoint of our guidance. We ended the quarter with $262 million of cash and equivalents. For Q1, the CapEx was $15 million, and we used about $35 million in operation. Our balance sheet remains strong. And with the reductions that Raj mentioned, it provides us strong liquidity into 2026. As a reminder, we accelerated the depreciation of Fab1 equipment as we converted it to for usage for our product development. So in Q1, you see that the R&D expenses had about $18.5 million of accelerated depreciation. This won't occur in Q2, and we expect to return to a normalized level of depreciation expense and operating expenses in Q2. And then we should see a reduction in back half of the year and into 2025 as we reduce our spending in high-cost geographies as Raj had mentioned. And now for our guidance. For the second quarter of 2024, we forecast revenue between $3 million to $4 million and an adjusted EBITDA loss of $26 million to $32 million and a non-GAAP EPS loss of $0.22 to $0.28. As we have highlighted on the last call, Q2 tends to be the seasonally low quarter for the battery business that we acquired last year, and we expect strong revenue growth from Q2 level in the back half of the year. With that, I'll now turn to Raj.

Thank you, Farhan. As you can see, we have a very, very busy quarter ahead of us as we begin production in Malaysia and begin getting our EX-1M samples out of the door to our customers. Customer enthusiasm is very high, and our relationships continue to grow stronger. On that note, we have a number of customers. We're in the middle of scheduling visits to our Fab2 in Malaysia over the summer. And we are planning to have a grand opening of our factory with all the key constitutions, customers, investors in about August time frame. We'll plan to share more details later on; it should be a very exciting event. We are very excited to showcase this facility. I was there in Malaysia recently, and it's really phenomenal what the team there has done, and it will be awesome to showcase it to our customers and investors. With that, we can go to questions now. Operator?

Please note this call is being recorded. [Operator Instructions] Our first question will come from Mark Shooter of William Blair.

This is Mark on for Jed Dorsheimer. Congrats on the JDA, that's great news, a nice surprise for us. Speaking of them, I know that the target is for 2025 launch. But does that give you any indication on when you'll need to see a PO to achieve that time line?

Yes. The question is on PO for the launch in 2025. In consumer electronics, typically the POs -- I've been in this business for a long time, typically, the POs are placed a couple of months before production. And so from now, we're going to give them samples. They're going to qualify these samples and then give us some feedback. And then we're going to get from them the exact battery size that they actually need to go into a phone where once they decide the phone model, then we need to give them samples in that exact size, then they go through some more rounds of qualification within that phone. And then when the phone passes all the EVT, PVT, all the tests and it gets closer to production, that's when we actually get the PO. So I'd say it really depends upon the launch -- a couple of months before launch time. So I'd say second half of next year. Early -- I mean, like so much to the second half probably.

And for the follow-up, I'll ask another one here is -- so it seems as though you're using a land-and-expand model with these customers, right? Do they all have many different tiers of performance. So do you think that the customer is looking to get you into -- as a trial in the top-tier form or is there -- do you think you can be in multiple models by the end of 2026 with this customer?

Yes. Again, like I said, I think we are sampling multiple customers. We've just closed the JDA with one of what I understand is JDA with one of them, the development agreement is one of them. But there, we are working with multiple, multiple ones. Typically, my experience in what happens in smartphones from what I've done in other companies is that they put you in a model, they see how that is. And before they put you in the model, there is a battery evaluation team that makes sure that they're comfortable with the battery and where it goes. You now become one of the chosen battery vendors for a platform. So it starts with one model. But once you're in that -- once you are qualified by the customer, you make a model, you that quickly my experiences is moves into multiple models across different tiers. And again, people typically optimize the battery for energy density for fast charge, for cycle life based on the geography in which they're launching a model and the shape and size of the model. So my expectation is that once we get in, the next model should come much, much faster and much shorter qualification cycle.

Our next question will be from Colin Rusch of Oppenheimer.

As you've gone through the equipment testing and done everything installed and you've talked about kind of starting out at roughly a 65% yield sort of ratio. Can you talk about any surprises or positive incremental movement as you've gotten through the acceptance testing and everything installed?

Yes. I'll let Ajay handle that one. He's here.

Sure. Colin, good question. No, the FAT, as we have been saying, is pretty rigorous process, right? We go through several different not just critical to quality parameters, but also the marathon runs, the UPH, up times and yield, of course, right? So no surprises. We are expecting high yields, and that's what we are getting at FAT. There'll be more fine-tuning that we will continue to do through SAT, Site Acceptance Test. But generally speaking, I'm particularly quite excited about how the equipment has performed in the FAT cycles that we have run and pretty much most -- all the FAT for Agility is done, and the yields are exactly where we expected and then some. So no surprises. Only on the positive side.

And then with the customer engagement, obviously, you guys are getting deeper and more intimate with these customers and the performance specs, I'm sure, all these phones are changing very quickly. Raj, can you talk a little bit about the cadence of that performance and what they're demanding of the phones? And how quickly that's changing as we start to see generative AI become a much bigger part of some of the future growth for the phone functionality?

Yes. What we're noticing is that customers want higher and higher energy density for one. And secondly, they're asking for batteries with more -- higher and higher capacity in terms of 6,000 milliamp hours and higher. I think the reason for that is simply that the GenAI's just the battery consumption is like crazy. And when they start using these apps, I think last time I showed some data on YouTube versus ChatGPT versus now DALL-E and so on. Clear indication from all our customers that they want more energy density, larger batteries and the ability to charge it quickly and different shapes. But -- the unfortunate reality is the battery industry hasn't kept up for many, many years. And that's why when we come and offer a higher energy density battery, the timing is really good because now is when they actually really need it, and this is the time that we are showing up with a great battery.

Our next question will be from Bill Peterson of JPMorgan.

In the technology and products section of the shareholder letter, you mentioned you're working with 2 leading smartphone OEMs on launch for next year. Is one of these actually in this development agreement or is that a separate thing? That's the first part of the question. But really, the crux of that question is, what's the extent of the relation with the second question? And then you mentioned you have 4 others to receive samples presumably this year or next year. Is there a potential upside to the 2 smartphone customer launches in terms of revenue generation in 2025 or really the rest of the customers are sampling are more like '26?

Yes. I mean -- so I'll speak to it from my experience on how these things typically work. Typically, in smartphones, we mentioned one of the top OEMs that we're working with, then we're sampling another one and another one. So we will sample like 6 of the top 8 so far that we have planned. And again, these conversations are going. So people keep asking us for more and more as we get these samples out. And what happens then is it's -- some customers may decide their qualification may go faster because they may decide to put us in a particular phone, they can qualify faster. Some customers may be a little bit later. So it's hard to tell exactly how many will be in production next year. But you also got to realize we have limited capacity. So we have to modulate that a little bit with how many we can sell to. And so I think it's possible it could be more than 2. It just depends on how the qualifications go.

Yes. And my follow-up is actually kind of related to that. So I guess for this year, which you assume you're going to have your high-volume line, is that line still more in the 1,350 UPH, I think, 9 million units support or can this existing line already do up to 1,650, which I guess would infer more like 11 million units? Just I'm trying to understand if that's just what we should assume for your volumes for the foreseeable future. And then kind of related, I mean, when at this point do you think that we should consider it, putting more lines into the system at the sort of $60 million per clip is I presume a '25 time frame? Or how to think about the CapEx cadence for this year and next year?

So I'll let Ajay handle the first part, and I'll talk about the second part of -- second line.

Sure. The first line, as just as a reminder is, as we said, it is a universal line, which can be adapted very quickly to the smaller cell size, to the larger cell size. So we have been talking about that. So you can expect 1,350 UPH. We have clocked it with marathon runs on this line at 1,350 FAT, which is what the HVM FAT is also underway, as you know, with -- so 1,350, 9.5 million roughly batteries a year for the first line is how we should model it. From second line onwards is both things are happening. We are speeding up the line. We are removing some of the bottlenecks. We are looking at exactly how the machine is behaving in terms of what can be condensed, what can be combined and that type of thing. And that's where we are getting 1,350 to go up to 1,650. And also cost reduce the line as Raj talked about earlier in his presentation.

Yes. So to add a little bit color to the second line and so on. I think the first thing I want to mention is that as we have gotten deeper and deeper into building these lines and manufacturing, a line is not really a monolithic thing, right? So there's -- the first part of the line where we do dicing is the zone one with the lasers, then there's a stacking and then there is actually the putting into the pouch and so on. Then there's a formation at the back end. Each of these parts has a different lead time and a different amount of capacity that we need to put in. So what we are looking at right now is what really exciting piece of work, which is -- which I have a lot of experience coming from a place like Micron is to figure out what is the customer qualification? How is that going? What's the demand? How is that shaping? Which models are we getting into? How many customers are coming in? And then figure out which parts of the line have to be order earlier, which can be ordered later to make sure that we balance the lead time of the procurement, but at the same time, we do it in such a way that the capacity ramps in sync with the customer qualifications. So stay tuned for that as we work through it this year.

Can Farhan speak to how to think about CapEx for this year and maybe high-level thoughts into next year?

So yes, like look for this year, no change from what we have said before, just CapEx for this first line. And then into next year, we will -- as it will be tied together with how the demand shapes up and just related to how the qualifications go. And based on that, we will order the lines. It's probably too early. We don't guide CapEx because it's flexible. We want to be flexible and maintain the flexibility.

Yes. The other thing is, as I mentioned, I think Ajay and his team have come up with a way to cost reduce the line. So we need to make sure we order the right things in the right way. And because the first one is a universal line, so we knew what we wanted to do there. We have the flexibility. But on the second line on as it is smartphones we're going after, we can narrow that window down of the shapes that need to change. That gives us higher throughput, that gives us lower cost and so on.

Yes. And I will just add one thing, Bill, to your question. In terms of thinking about the cost of the line, in the 2026 time frame, you should think of that as $60 million. And this year, obviously, first line was a lot more expensive than that. The 2025, if order, it will be closer to $60 million, but it won't quite be there because not all the cost reductions would be or projects will be completed by then.

Our next question comes from Derek Soderberg of Cantor.

Yes. So just -- I've got a question on the shareholder letter. You guys were talking about the 2 smartphone customers in April, you produced the first internal samples. I'm curious beyond sort of the FAT and SAT associated with the equipment. Do you still need to pass internal battery cell qualification before shipping samples this quarter or is it a scenario where once you get SAT for the Agility Line, you're ready to ship samples. I'm just wondering what else you have to do on the battery side to start shipping samples.

Yes, absolutely. So look, there is 2 aspects of qualification. One aspect of qualification is making sure the machines are working right, like FAT, SAT and so on. But then there is the testing of the battery to make sure that it is safe and it goes through all the consumer -- all the testing of safety and it meets the cycle life and it meets the performance requirements, it meets the fast charge and so on. So we are doing that now in parallel. And once we do that, that's when we will ship the batteries because what you don't want to do is ship the batteries without being fully tested to the customers because you don't want to see any surprise at the customer side when they test it. So you want to test it like how the customers test it, which is what's been really interesting for me is that we are now able to get all this test criteria of how they would actually test into Enovix. So now we are testing them exactly like how they would test after they got them. Once we've had all the tests and everything is good from the main manufacturing line, they can go without that, but we first need to make sure the early samples go through all of that test.

And then as my follow-up, I'm curious what the reasons were to sign a development agreement with you guys. What were the reasons that, that specific OEM had for signing today? Was it something they finally felt comfortable with on the production side or was it just a little bit more time working with your battery technology? Curious if you could talk about that. And then do you think there's some potential for this customer to provide funding for production someday if you guys were to sort of hit a certain criteria with the technology or production? Just curious if you could share some more info on that deal.

Yes, absolutely. So we gave many of these customers early samples from our Fremont line, which I mentioned before. We would give them small samples. They're testing them. They are at different stages of testing. They have gone through most of the testing now, and they see what they're able to get. They came and many of these customers came and visited us in Fremont and saw how we manufacture the batteries, convince themselves about the viability of the manufacturing and then they felt like they want to work closely with us to actually even further optimize the battery so that it works well in their phone models. Because you got to remember, every one of these customers use the battery slightly differently, right? And I think that is something that's not obvious from outside. People don't just take a battery and slap it in the phone. So they kind of figure out how do they fast charge, what algorithm do they use to fast charge, how much energy density did they use? And how does it work at different temperatures and what size do they keep and what different shape do they use? So there's a lot of proprietary know-how at these customers and how they use the battery. What this agreement does is it allows them to share with us all that information so that we can customize our battery to their actual specifications. And that's super exciting because now we're actually building something that when it's done and works, will fit in the particular phones that they are looking at. And I expect similar things to happen with other customers.

Our next question comes from Ananda Baruah of Loop Capital Markets.

Congratulations on the progress. It's really great to see. I guess, Raj, just I guess sticking with capital, can you walk through like how you're thinking about raising capital? And I guess, Farhan gave some context by year, how to think about CapEx per line in the coming years. But like how should we think about timing? And what are the various methods that you have to raise capital with? And I have a quick follow-up.

Yes, I think the previous question, I didn't answer the second part. As we discuss these agreements with the customers, we are clearly getting offers from them to see what can they do financially with us to actually get to the next level. So those conversations are also happening. And we're also talking to some governments about that. So I'll let Farhan add more color to it. But yes, those are happening now as we make more progress on our batteries.

Yes. So in terms of the funding for the lines, I don't think it's going to be a big challenge once we have the qualifications in the bag and the customers on the other side ready to buy the batteries. And as Raj mentioned, we have customers that have expressed even without asking a desire to pay if needed, to make us successful and make the factories, bring them up. So those conversations are happening. We are also talking to sovereign wealth funds and things like that to see if we can get more funding. Where the stock is right now, like it's not at a level where I can have support of the Board to consider any further capital. And we also don't feel like that it's anywhere close to the price that we would consider raising capital here. And with the actions that we have taken to reduce our cost, we have a fairly long runway. We have made very dramatic cuts to our cost structure. And so we can have long runway before we need to raise capital.

And the quick follow-up is, and maybe this is for Ajay, there is -- in the prepared remarks, guys, there is some mention of 90% yields at this point in time. I guess yes, Farhan, thought you could sneak that in. I mean, Ajay thought you could sneak it in. But yes, just clarification of that. And then are you still on sort of on track for 90% yields by the end of the year with high --

I knew somebody would catch up to that and ask that question because we're quite proud of where we are in terms of at FAT, like I mentioned earlier. Some of the tricky processes that we have, obviously, as some of you are closer to it, laser dicing and stacking process, which is in the front end. And that typically is where we -- in Gen1, at least we lost a good amount of yield. And that's where we feel very confident now that we have even in the first shot FAT, when we did the FAT, not only the 25 parameters of CTQs were looking very good, more than 1.1, 1.3 CPKs. So for people who are close to that, that's upwards of 95% yield in those processes alone, right? So we -- again, like I said, operations guy gets pretty excited actually when you see anything that is about 95%. So that's where we are right now. We will only get better. And we're very confident about what we talked about yields by the end of the year.

Our next question comes from Gus Richard of Northland Capital Markets.

Just curious on when you'll start sending samples to customers from Fab2 and how quickly that can ramp? Will you start to send samples out of Fab2 in Q3 or will that have to wait until Q4?

No, it will definitely be Q3 from Fab2. We are gearing up to finishing up the FATs like I said, done. We are going to finish up SAT here in Q3. But the samples definitely going to the same customers that we Raj and Farhan have talked about in Q3.

Yes. So just to add a little bit more color. We are making samples now of this EX-1M here. So those will go out to the customers first. And so they'll start doing some testing and so on. Meanwhile, we'll also start building on our side. And as they start testing, they give us some more feedback and hey, we'd like this tested, that tested. And we're going to do all those tests also of the samples that come out from Penang, and then we'll send them those in Q3.

Just a quick clarification. Farhan reminded me. So first, batteries out of Fab2 still happening here in Q2, right, which is what we have been talking about, and we are confirming that that's going to happen. But fully tested batteries, as Raj pointed out, to go to the customers after all the safety testing, after everything that is relevant to the customer going out will be in Q3, early Q3.

And then you're still sampling customers out of Fremont and sort of what's the volume that you're able to ship to customers at this point? Was that a significant portion of Q1 revenue?

No, no. These are not big volumes. These are hundreds of samples. Like as you guys know, we don't have a manufacturing -- high volume manufacturing line here. We mainly have an R&D line with which we can make some samples. But we don't have to ship a lot because it's mainly for testing and make sure they're okay. But ultimately, customers want samples from our Agility Line, which, as I mentioned, we're super excited. The FAT is all done and the machines are almost there in Penang. So in a short order, we'll be getting samples from there.

Our next question comes from George Gianarikas from Canaccord.

Wondering if you can update us on what's happening with your materials-related conversations, companies like Group14. Specifically, if you can help us understand more -- better quantify the performance improvement you bring to cells using -- relative to those using conventional cell construction with their material. There seems to be still an active debate in the marketplace.

Yes. I mean look, we are a material agnostic company, and we are using different kind of materials. Luckily, we now also have a graphite battery that Routejade makes. So we can -- we are also able to figure out how to improve those batteries with some amount of this newer silicon that we can put on top of that. Everything we have seen between 5% and 8%, if you put any more than that, the battery swells up. So the only architecture that I know of that can actually allow people to use more of silicon in a battery is Enovix architecture. And we are at any reasonable amount that actually meaningfully increases the energy density. And that's what we are focused on. And we use 100% active silicon. So as different kinds of silicon materials come out, we are happy to use them, test them, and they all have properties like longer cycle life, different kinds of fade, different kind of fast charge and so on. But to get the high energy density, we absolutely feel we need the Enovix architecture to constrain the swelling of silicon.

Our next question comes from Ben Johnson of Piper Sandler.

I don't have a question at this moment.

Our next question comes from Chris Souther of B. Riley.

It seems like we're getting more confident on the economics where we're learning about the manufacturing process and pricing strategy here. We've talked about customers potentially financing future lines. Does the less than 1-year payback change that approach where it makes more sense for you to finance yourselves or just make it more attractive to customers to potentially finance? Can you kind of walk through how that decision-making process is evolving here?

Yes. Look, that's definitely a big consideration on whether to take customer financing or not. We've also talked to Asian banks in terms of project financing options. So I think if we have signed agreements with demand confirmed and economics that are attractive, I don't think it will be a very difficult choice for us to get financing on a -- for project financing. And so whether we take customer financing or we go project financing, it will really depend on the economics. And I think the important thing really is to understand fundamentally what's driving the model, right? And when you look at it, we give really unmatched energy density. If you look at EX-2M, it's far superior to anything that's on the road map that's out there from any of our competitors and customers see that. And we already know what the pricing is for the sort of the high-end batteries. And with that pricing and with some premium, which we think will be justified for our differentiated performance and given that we are only game in town, I think we can get to the financial performance that I described along assuming that all the cost reductions that Ajay is targeting, we are also able to execute on it. So I think like it's we have all the pieces to get to that model, and we just have to execute towards getting that.

Our next question comes from Sean Milligan of Janney.

I hopped on a little late, so sorry if you already addressed this. But I think on the last call, you talked about kind of a 9- to 12-month qualification time line for the smartphone customers. And I saw in the press release, you're starting to deliver samples to 6 of 8 in 2Q. Just curious if you could comment on that 9- to 12-month qual time and is that from delivery of first sample, like final sample? Like how do we think about the qualification time and sort of the, I guess, the iterations of samples that may go to them if that's happening concurrently in that whole time line or not?

Yes. I mean, look, we are able to deliver some samples now from Fremont. And those -- we will be sending them soon. As I said, we're producing them. You saw in our shareholder letter some of the pictures of our EX-1M batteries. The customers will do some testing with them, so they'll get a feel for what it does and so on. But ultimately, they want samples from our high-volume manufacturing -- I mean, from our agility line from Malaysia to really start the call process. So that we mentioned is when we start shipping in 2Q, we produce the first one, so in 3Q, we produce next one. So you can think of 9 to 12 months from this summer when we start shipping samples, right? That's why I was saying latter half of next year is when we expect to see those productions happen. Now will a few customers do them sooner? I hope so, but that's not what my experience has been with batteries. It typically takes that time because they're very careful. Battery is something that people want to be -- make sure it's 100% safe and so on. So -- but that's for the first launch. Like I mentioned, once we get there, it's qualified by their technology teams, it's qualified by their sourcing teams, and we are in the system. The next products, next products can come much faster. So the first one is the one that takes 10 to 12 months.

So would the idea be that -- sorry, so just trying to understand with the smartphone customers, maybe like with their main sales season, like would you hope that you would have volumes in commercial phones like the second half of next year or is it more like the first half of '26 and you would be building inventory kind of the in second half of next year to serve that 2026 launch?

Our target is to have them in phones in second half of next year. That's what we're working towards, yes.

Our next question comes from Tim Moore of EF Hutton.

And my first question is now that you inked the development agreement with the top 5 volume smartphone OEM, I'm wondering if you maybe could share a little bit more color in detail on how you evaluate and what hurdles you might be applying for allocating future capacity to customers in 2026 and beyond. In other words, really how do you go about prioritizing your capacity that's going to be coming on based on proposals that come across your desk from other customers?

This is early stages, right? I mean I think this is not -- this happens all the time. So it'll really depend upon which phone models and which customers and how much we get prioritized. And are we on multiple models at one customer or one model at each customer and so on. It really will depend upon how the rest of this year goes and how early part of next year goes. It's a little too early to talk about prioritizing customers.

And all my other strategic and operational questions were already addressed. I was just wondering, just one financial question for the income statement for the rest of the year. How should we think about accelerated depreciation in R&D showing up in the next few quarters? Is that probably going to occur until you maybe lap the acquisition late October?

No. So the accelerated depreciation, just as a reminder, was associated with the restructuring that we did in Fremont, where we announced that we are going to stop the manufacturing activities in Fremont for the small cell and plans to move high-volume production to Malaysia. So at that time, we had really taken accelerated depreciation in Fremont. And so we had said that it would be over a 2-quarter period, so Q4 and Q1. So -- and we disclosed that in Q1, $18.5 million were included in the R&D expenses. And that will not repeat in the Q2. So basically, you take like your Q1 R&D run rate, subtract $18.5 million, that gives you a baseline. And from that level, that's kind of where you should start. And we will -- we should probably be around a similar level and then decline -- for operating expenses, we should decline after that because of the further actions that we announced today. Does that answer your question?

Yes, it does. I thought it would last 2 quarters, but I just want to double check and try to factor in the extra cost savings. So that clarifies everything.

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