Enovix - Q3 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Enovix Corporation third quarter 2023 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. 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.

Charlie Anderson (SVP of Investor Relations and Corporate Strategy)

Thank you. Hello, everyone, and welcome to Enovix Corporation's third quarter 2023 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 third quarter 2023 shareholder letter after the market closed today. It's available on our website at ir.enovix.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 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, November 7, 2023, 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 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 (President and CEO)

Thank you, Charlie, and thank you all for joining us today. I'm gonna kick it off with a few high-level remarks, and then I'll pass it to Farhan to cover some of our financials and the outlook. After that, I'm gonna make some closing remarks, and then we'll take your questions. Now, as you can see from the recent announcements that we've been making, we've been super busy in this quarter. We started the factory acceptance testing, or the FAT, as we call it, of our Gen2 equipment on time, and we have the first equipment landing in Malaysia in November, and we remain on track to go into production in April next year with first batteries from that line.

Now, a little bit earlier today, we posted a video of Ajay on site at one of our Gen2 vendors. Please go check out that video. It's very exciting to see the new machines coming online and how everything is, everything is going on. Now, in parallel, we achieved our strategic objectives in Fab-1 here in Fremont during this quarter, which allowed us to transition from this expensive 24/7 manufacturing in Fab-1 to converting it into more of a center of innovation focused on R&D and customer qualifications. This allowed us to shave off $22 million of our annual burn. Now, this quarter, we also completed the acquisition of Routejade, a company in Korea, which vertically integrates our manufacturing process from electrode coating all the way to making battery packs.

Now, owning our own coating, as I mentioned before, is a highly strategic thing for us. It reduces our CapEx, increase our margins, enhances our manufacturing capability, speeds up access to the new materials so that we can bring new products to the market much faster. Now, we also gain complementary business from Routejade who are shipping products into leading IoT and military customers. This gives us cross-selling opportunities to be able to sell Enovix current Enovix silicon batteries also into those customer base. We announced that Enovix enabled a product in the market an FDA approved portable multi-vital sign monitor. This will be sold in CVS, Walgreens, and Walmart next year.

And last but not least, we shipped BrakeFlow-enabled batteries, which is our proprietary technology for keeping batteries safe, to, to the U.S. Army under contract, which drove, this quarter's revenue. Now, before I pass it to Farhan, I'd like to take a few minutes to make some, big-picture comments on, how we are positioning the company to seize this tremendous opportunity in batteries that's in front of us. As I mentioned, in my first call as Enovix CEO, it's almost 10 months ago now, that my management philosophy is to really start with the customers, their products, how our products enable their products, and move backwards to making great products on our side. This is exactly what has happened, during the last many months.

We have rebuilt our management team, we have driven much deeper relationships with the key decision-makers and customers, and now we understand their unique product requirements. Now, we received consistent feedback from some of the leading smartphone OEMs that the Enovix architecture offers industry's best path to high density, high energy density, batteries, matched with cycle life and fast charge. All three careabouts are very important to our customers. If anything, what I noticed over the time I've been the CEO here, is our competitive position in energy density and consumer electronics is actually even better than when I joined the company. I'll talk a little bit more about it in a few minutes. Our relationship with our smartphone OEMs is strengthening, and I've managed to now understand exactly where our competition is and what kind of batteries our customers are currently using.

Based on this belief, I believe that Enovix is capable of delivering multiple billions of dollars of revenue with strong margins, similar to the businesses I've been associated with, Qualcomm and Micron. With a superior product that we are going to make here in the portable electronics market, which the market size exceeds over $20 billion. Now, we're also seeing strong interest from the EV OEMs, where the market is much larger than the consumer electronics market. But the question to us: how do we get there most efficiently, and how do we live up to that promise? Now, I first want to today show you a reason why we are so focused on the smartphone market. I want to show on this slide, what has happened in the smartphone market from 2025 to 2023.

Now, I've been involved in this market very intimately from my time at Texas Instruments and Qualcomm and Micron. If you look at 2025, the smartphones had a 2-inch TFT display, close to a couple of hundred megahertz CPU, 3G modem, 1-megapixel camera, maybe had like a 900 milliamp hours of battery, which was about 8 mL, if you would say. Now, as you transition to the right, what has happened is the CPUs got much more powerful, and there's multiple CPUs now. Now, today in 2023, there's octacore processors in multiple gigahertz, shipping in these phones. The displays have gone from the 2-6.8 inches, HDR10. I'll talk a little bit more about the displays in a minute. Multiple cameras, 5G cellular, and you can see the transition along the way.

Now, the phones themselves have got increasing capability. You can now take great pictures, you can watch 4K videos, you can do, you know, your GPS-based navigation with maps, you can make, you know, purchases and so many other things, which has really helped the smartphone market grow because of these innovations that have been launched with the processing power and the displays and cameras from to almost 1,200 million units. Now, the battery, what has happened to the battery? During the same period of time, you can see the battery capacity, if you talk about the capacity of battery in milliamp hours, has gone from 900 milliamp hours to almost 5,450 milliamp hours in a few of the very, very, very high-end devices.

However, an interesting thing to note is that as the battery milliamp hours grew, the size of the battery also grew, which means this increase in energy has been achieved by making the battery bigger and bigger. So the battery grew 7% CAGR, the battery capacity grew 11%. But if you actually think of the energy density of the battery, which is how much has the capacity grown per liter, it's only grown 4%. This is clear if you look at the most recent batteries, how little increase they got. Now, why is this a problem? This is a problem because now the increase in energy, in energy capacity in smartphones has been achieved by making the batteries bigger and bigger, with a little bit increase, modest increase in energy density.

The problem is now you can't make the phones any bigger, 'cause if we make the phones any bigger, they don't quite fit in your pocket anymore. Now we have a problem: How do we continue to increase and supply the demands of these increasing smartphone applications without increasing the size of the battery? Now, if you look at the next slide here, it's gonna show you that the emerging use cases haven't stopped. I talked a little bit about the AI and machine learning use cases that are happening at the edge. Talked about multiple displays, larger displays, foldable phones, and if you look at the mixed reality headsets, if you look at all these new applications that are coming, and recently you've seen announcement from other chip makers and even much higher performance processors and much higher performance memories and better displays.

But the battery is not keeping up, and the phone cannot get any bigger. So there is a problem. That's why customers are very interested in working with us at Enovix, because our technology is one of the few ones that can actually enable smartphones to continue that growth curve of this insatiable demand by increasing the energy density. This slide shows you our battery technology. On the leftmost side, I show the average capacity of conventional batteries, which are the graphite batteries, of select leading smartphones that are actually shipping in 2023. If we use that as a baseline, our EX-1, which is actually the currently shipping product that we have, has over 18% increase in capacity over that.

Now, it only goes up to 500 cycles, and charges at a standard rate, so it's used in some IoT applications but not in smartphones. To be able to be used in smartphones, you need to get to 1,000 cycles and be able to charge much faster. Our EX-2 has that capability. So we're now, in our EX-2 technology roadmap, we will be able to increase the capacity by +30% over the baseline, but actually still continue and also give the 1,000 cycles and fast charge. That is super exciting for all the smartphone OEMs, 'cause that's an area where people really need this, and it changes the game on how smartphones will be used when we get to that.

This product is extremely well-received by customers, and we plan to sample this next year and ramp to high volume production in Malaysia in the millions of units. With the changes we've made, Enovix is now a vertical business, which means it's focused on a few large customers, where our products are aligned in form, fit, and function to what they need. This contrasts with how our previous strategy at Enovix was. We were making a horizontal business primarily focused on standard-sized batteries to hundreds of customers. The beauty of the vertical first strategy is that the majority of the industry's volume happens to be concentrated in 6-12 large customers, 5-6-7 smartphone customers, a few PC OEMs, a few wearable customers.

So by being successful there, this results in a large business by meeting the demands of these high-volume customers, but our product portfolio can be a lot more focused, and our operating expenses can be a lot more, a lot less and much more targeted in delivering value and performance to markets that need it most. Now, we are very well suited for this vertical strategy because of the tight customer relationships we have forged over multiple decades. Me, myself, and many members on our team have been working with these industry-leading OEMs for a long time. We are well positioned in smartphones. That is a market that we are going after, really with a lot of intent because of the requirements there. From then, clearly, we will move from smartphones into PCs.

Along the way, with the Routejade acquisition, we'll also continue to sell into the IoT and wearable markets. I'm confident that with this EX-2 type technology, we will be able to launch smartphones in 2025-2026 timeframe, and that will help us scale into multiple models of smartphones and PCs in 2026, multiple lines with a solid path to profitability. Now, with that, I will turn over to Farhan to discuss our financials and give some guidance for next quarter.

Farhan Ahmad (CFO)

Thanks, Raj. So I'll keep my comments at a high level and just talk about the quarter and the guidance. And most of the details of the quarter and the guidance can be found in our shareholder letter and the press release. So first, talking about the quarter, we delivered record product revenue in the quarter on the strength of the Army contract and the shipment to Army for that. And we continued to manage the OpEx tightly and keep control on our spending and ended the quarter with $370 million of cash and equivalents.

We plan to continue to manage our spending tightly, and as we disclosed previously, the strategic realignment of Fab-1 will lead to annual savings of about $22 million, and as a result, we are lowering our cash use for the year, operational cash use for the year, $210 million. Now, looking ahead to the fourth quarter of 2023, we forecast revenue to be in the range of $3-$4 million, driven by partial quarter of Routejade revenues and continued strength from the Army contract. And I'll now turn it back to Raj for closing comments.

Raj Talluri (President and CEO)

Thank you, Farhan. In closing, we had a very productive third quarter. We accomplished quite a few things, as we talked about in the beginning. Now, we remain on track to begin high-volume manufacturing in Malaysia next year, while bringing industry's leading batteries to our customers to allow their products to differentiate and excite the consumers, who ultimately will be the ones buying these products. Now, we made significant moves to lower our cost structure, as Farhan mentioned, while at the same time, we're also speeding our technology development and enhancing our manufacturability. Now, we've put in place the right go-to-market strategy, I feel, to deliver on the promise of getting our leading-edge technology to the market most efficiently. Now, with that, I'll open up to questions. Operator?

Operator (participant)

We will now begin the Q&A session. Please note that this call is being recorded. Before we go to questions, we are going to read the two most highly voted questions submitted by shareholders ahead of this call during the call registration. The first question is: When can we expect Enovix to start generating meaningful revenue?

Raj Talluri (President and CEO)

Yeah, the question about meaningful revenue. I think, as we mentioned, with the Routejade acquisition, our revenue is already getting to grow, nicely. We guided to $3-$4 million in the fourth quarter, and we expect that to continue to grow next year. And as we start producing millions of batteries from our own Malaysia factory, in 2024, 2025 is when you'll see the ramp, and 2026, it'll continue to grow faster.

Operator (participant)

The second question is: With Fab-1 closing, how will Enovix satisfy the contracts with the Army and the medical device maker?

Raj Talluri (President and CEO)

Yeah, the question on Fab-1. So, as I mentioned, we've made quite a few batteries. We've doubled our production every quarter for the last you know few quarters, and we now have enough inventory of batteries to support the production needs of our current customer base. And we are still continuing to make batteries here for the Army contract. So we do have a line on which we can make those batteries, and we will continue to do that through next quarter. And that also gives us a very good way to make larger batteries because our previous line was mostly making small batteries.

The Army batteries are larger batteries that have also the BrakeFlow-enabled in them, and we feel pretty confident that we can meet the requirements. Then when we transition to Malaysia, we'll make what's needed from there.

Operator (participant)

We will now go to the queue. Questions will be answered in the order that they are received. Please ask one question and one follow-up question at most. We will now pause a moment to assemble the queue. Our first question will be from Colin Rusch of Oppenheimer.

Colin Rusch (Managing Director and Senior Research Analyst)

Thanks so much, guys, and congrats on the progress. You know, as we've seen, you know, folks like CATL introduce 4C batteries with a 1,000 cycle life, you know, performance into the market. Can you talk a little bit about the competitive environment and how important the BrakeFlow technology is and other attributes? Obviously, the volume is an important one from a competitive perspective, but what you're seeing, you know, from your customers in terms of what they want and what's continuing to keep them engaged with you guys.

Raj Talluri (President and CEO)

Yeah. Thanks, Colin. Thanks for the question. You know, I think the main reason that our customers are super excited to work with us is the increased capacity and energy density we provide. If you look at the batteries in the market today, even if you take all the batteries out there that are actually producing, you know, the 1,000 cycles or fast charging, our energy density that we can provide is still much, much higher than anything on the market. Now, our current product doesn't hit the 1,000 cycles that they need and doesn't hit the fast charge. As we add those two features to our products while maintaining energy density, that's where we see a clear difference, differentiation from our products, from our customer products.

That is the hardest thing to get, is the amount of, you know, energy density, and we feel like we can accomplish all three of those. And, of course, safety is very important.

Colin Rusch (Managing Director and Senior Research Analyst)

Excellent.

Raj Talluri (President and CEO)

We'll continue to work on the safety aspect also.

Colin Rusch (Managing Director and Senior Research Analyst)

Okay. And then just with the factory acceptance testing, you know, any surprises, either positive or negative, in terms of what you're seeing in that first round of testing?

Ajay Marathe (COO)

No particular surprises. We are doing quite well, actually. We have begun all the FAT work, as we said in the letter, and the video showed all the, you know, work going on. No particular surprises. There were a couple of changes, which is what is typically expected during this rigorous acceptance test, that had to be made, which were already done on the Zone 2 equipment, which I ended up showing in the video. So no particular surprises. Things are on track.

Colin Rusch (Managing Director and Senior Research Analyst)

Thanks so much, guys.

Operator (participant)

Our next question will be from Derek Soderberg of Cantor.

Derek Soderberg (Director and Senior Equity Research Analyst)

Yeah. Hey, guys. My congrats as well on the progress. Ajay, I want to start with you. In the shareholder letter, it says you guys see a clear path to industry-leading yields, as you move to high volume manufacturing in Malaysia. Curious if we should be thinking about a specific number, for yield, with that commentary, you know, be it 90%, 95%, or what have you?

Ajay Marathe (COO)

Sure.

Derek Soderberg (Director and Senior Equity Research Analyst)

Then, you know, just given what you're seeing in factory acceptance testing, what's the path look like for Gen2 as it relates to overall equipment effectiveness?

Ajay Marathe (COO)

Right. So, yeah, good questions. And I'll answer them in two parts. So the first part is our yield learning that we did here Fab-1. you know, now I've been here eight more days, and I'll be here for a year, and the yields have significantly climbed or did climb Fab-1. and all the learnings of, you know, where the yield losses are happening and that type of thing was done very nicely. We are now Gen2. We will start, you know, where Gen1 ended. We chose to stop the Gen1 line, as Raj mentioned already, and Gen2 begins there, and the ramp begins, you know, from there.

FAT has very rigorous requirements of CPKs, which means process capabilities and achieving the, you know, enough distance away from the spec so that the yields are very predictable and manageable. Yeah, you can imagine in the high 90s is what we are targeting for the yield for the line to be. But it'll take, you know, a little bit time to climb, but the good news is that we are starting where Gen1 ended, and climbing from there.

Derek Soderberg (Director and Senior Equity Research Analyst)

Yeah, that's great. And then as my follow-up, Raj, you've sort of said the plan is to optimize the deployment of Gen 2 lines to sort of match the timelines with demand. You clearly have a sizable revenue funnel. It seems like Gen 2 is on track. Have you determined exactly how many lines you feel is optimal to add during 2024? And if not, you know, what, what sort of are you waiting for? You know, I know there's a lot of variables that kind of go into that decision. Just would, would love to hear your thoughts. Thanks.

Raj Talluri (President and CEO)

Yeah, I mean, look, the demand is very strong. I mean, you know, I mentioned in the previous comments I've made, we are working with multiple smartphone OEMs. We're working with multiple laptop customers and wearable customers, and each of them need a cell of slightly different form factor and shape, and our line is capable of producing them. You know, what the variables we're looking at now are to get the first line up and watch how it goes, and at the same time, we're also giving samples to all these customers, and they're in various stages of validating them and putting into the phones and see how it works.

As we learn from them, what that ramp of their phone models and or the ramp of the laptops will be, we will be putting new lines in, keeping in mind the lead time that it takes to do that. I can't comment exactly when I'm gonna do that, but we are looking now at exactly that kind of situation. For example, we may not have to order the whole line at once. We may order more lasers, for example, to get that bottleneck out. We may order more backend capacity to make sure that goes out. I don't want you guys to think of lines as holistic things we need to order, like, one at a time, you know? That's the kind of optimizations we are making.

But we'll be ready for ramp in 2025 with our customers.

Ajay Marathe (COO)

Just to add to that, to what Raj just said, the building, the Fab-2, as we have been sharing with you, which is nearly ready now, ready to accept the equipment, Gen2 equipment, that building in itself right now, it's ready for four lines, right? So we have built infrastructure, power, and a lot of details, you know, around, you know, how the facility has come up. It is ready for four lines, and the campus itself is expandable all the way to eight lines. That is consistent with what we have shown and shared with you all. Right now, that goes hand-in-hand with what Raj just said in terms of qualification cycles and adding the equipment.

Operator (participant)

Our next question comes from Bill Peterson of JPMorgan.

Bill Peterson (Senior Equity Research Analyst)

Yeah, hi, good afternoon. Thanks for taking the questions. Kind of wanna follow up on one of the prior questions about adding additional lines, lines two through four, I guess, or even just adding to the first line. I guess the question is, are you gonna be waiting for line 1 to be successful before you actually place orders? Or do, I mean, I assume there's pretty long lead time, so when would you actually have to place orders for the subsequent lines, let's say two through four, in order for them to be installed next year?

Raj Talluri (President and CEO)

Yeah, so, like I said, I think it's not a simple answer of this is the whole line lead time. There are pieces of the line that have shorter lead time, there are pieces that have longer lead time. So we are looking at those and figuring and making sure that we have the long lead time ones covered. The short lead time ones, we can wait. Now, we're also improving these lines. As we start making one, Ajay and his team have figured out how to even improve the performance of the lines more, reduce the cost of the lines more. So we want to take all that into account and order them carefully so that we don't spend too much money too soon, but at the same time, meet all the demand of the customers that are coming in 2025.

Bill Peterson (Senior Equity Research Analyst)

Okay, thanks for that. I actually. To follow up on that, so is $50 million sort of the right way to think about a full line, or is there opportunities to go lower from there? That's a follow-up to that, you know, last question, but I actually have a separate question related to EVs. You've been kind of talking about EVs for a while, at least in the context of, you know, fast charging and some of the other attributes. I believe at least in the past, the team has at least had an idea to maybe have at least one JDA by the end of this year. Now, mind you, that was the prior management team.

Just trying to get a sense for what is the optimal way you can work with OEMs, how many OEMs are you in discussions with, and you know, when would you really wanna, I guess, take this to another level with a partner?

Raj Talluri (President and CEO)

Yeah, I'll take the EV question, then I'll have Ajay talk about the line question. Look, I mean, our challenge, honestly, has been, the demand has been so strong, my challenge has been to prioritize which one we do first and which one do later, right? We just had one factory here, and we were learning on the yields. We were trying to make small-sized cells that we can get into the customers that had already early on signed up with us. We're trying to learn about, we had learned, we learned about how to improve the yields for the next generation line. Then we had the Army contract that we've been satisfying.

Then we got a lot of this demand from smartphones, which we had to make bigger cells to give them samples to work on. Then the EV opportunity is also still there, and we had to make some cells for them. So, you know, it's just been a lot of things to do at the same time, and we've been prioritizing them and getting to them as quickly as we can. Honestly, now that we... You know, I, I think we've said in our press release, now that we are not making high-volume manufacturing in Fremont, and now we are able to get our Malaysia facility up quickly, we should be able to now start working on those EV-type cells. Because they need, you know, clean room, they need a lot of different, you know, materials and so on.

That's where that is. You know, the discussions are absolutely going well with the OEMs. You know, we've been in the bottleneck of making them, and that's just on me because I prioritize making the smartphone cells and the larger cells for the Army first, because we felt that's where the revenue opportunity in the short term is, and we'll absolutely get to the EV cells in the first quarter next year.

Ajay Marathe (COO)

Just to answer your other question, which is how many batteries per line, you should keep thinking 9-10 million batteries on line one, which is a universal line. As Raj said, we are continuously improving the U- or increasing the UPH, I should say, and reducing and taking cost out. So line two will be copy exact for the most part, but then a little bit higher UPH, removing the bottlenecks, and cost reducing the line. That's how we are thinking line two onwards.

Raj Talluri (President and CEO)

Yeah, and we would like to get to that $50 million - we would like to get to that $50 million range that you talked about. Of course, I'm pushing the team to make it even less cost, but

Bill Peterson (Senior Equity Research Analyst)

All right, thanks.

Operator (participant)

Our next question comes from George Gianarikas, Canaccord Genuity.

George Gianarikas (Managing Director and Senior Analyst)

Hey, everyone, good afternoon. Thank you for taking my question. Just very quickly, I watched the video with Ajay, and I'm curious, you know, it looked very automated, high parallelism. So I'm assuming that you weren't operating at the, you know, the full tilt in terms of UPH. So when that happens. How, you know, what's your confidence level that you can continue with that level of automation with all the metrology happening? Is there you know, what's the risk that those things start to break down as you speed up the process? Thank you.

Ajay Marathe (COO)

Yeah, a good, good observation. And yes, yeah, we were not operating anywhere near full tilt. I just wanted to make sure that we are capturing videos of exactly what's going on per station, so we had slowed the line down quite a bit. FAT will require it to run what we call marathon run, for a certain number of hours at the 1,350 UPH. So that's part of the buying, you know, criteria or qualification criteria for the line. We will continue doing that, and only after that, then we'll give a green light to ship that line. So that's what we were doing.

My confidence in making sure that the line runs without, you know, having to stop, you know, the MTBA, Mean Time Between Assists and Mean Time Between Failures, is exactly meeting the specs that we wrote, which means the OEE has to climb up to that 85%, which is equipment effectiveness, the equipment effectiveness. So yeah, so definitely not running at full tilt in the video.

George Gianarikas (Managing Director and Senior Analyst)

And maybe as a follow-up question, there been recently been discussions from China around export restrictions around graphite. I'm curious what you think that does to the your long-term business and also actually to Routejade. You know, how confident are that you can continue to get graphite supplied to your existing business there? Thank you.

Raj Talluri (President and CEO)

Yeah, our cells don't use any graphite, so. You mean the silicon cells that we are making? We haven't seen any effect to the Routejade cells on the graphite restriction so far. So as and when we know about it, we'll comment. I just read as much as you have. I haven't seen any restrictions.

George Gianarikas (Managing Director and Senior Analyst)

Thank you.

Operator (participant)

Our next question will be from Gabe Daoud of Cowen.

Gabe Daoud (Managing Director and Senior Equity Research Analyst)

Thanks. Hey, afternoon, guys. Was hoping we could maybe just start with Fab-2, hoping, Raj, you could maybe just give us a bit more color around the smartphone launch. The cells coming off of those lines, would that be EX-2? And then with the second half 2024 launch, I guess the qual period would only be a few months if you're anticipating commercialization in 2025 with multiple ODMs. Is that right?

Raj Talluri (President and CEO)

Yeah. So, I showed EX-2 as a roadmap to what we can get to. We will be doing something in between the EX-1 and EX-2 to start, where we will improve the cycle life and we'll improve the fast charge, but maybe not push the energy density all the way to where we need to. Because as you saw in the slides, our EX-1 energy density itself is much higher than what is shipping in the market. So we're actually pretty confident on the technology we have. So we'll probably get that to production first. That's what we are in the discussion with our OEMs on, how quickly they want it, which one do we want it? We have programs running on that. We have programs running on EX-2.

So, clearly, our goal is to get cells into the hands of the smartphone OEMs next year, as soon as we're able to from our Malaysia line, and then get ready for production by end of the year, so that we'll be in phones early 2025.

Gabe Daoud (Managing Director and Senior Equity Research Analyst)

Okay. Okay, great. Great, thanks for that. And then I guess just as a follow-up, noted the new vertical strategy as you mentioned, could you though maybe just talk about if some of those customers that you're focused on now, is would that include the quote, unquote, "strategic accounts" that was mentioned by the previous team? Those are the companies that are greater than $200 billion in market cap. I guess just trying to get a sense of, you know, the MOU with Samsung, like, is that moving. Are you pushing the field, the ball down the field there with Samsung? Is there maybe anything that you could speak to there?

Just curious again, if there's an update on specifically those six strategics that you guys had previously mentioned?

Raj Talluri (President and CEO)

Yeah, I mean, it's very consistent. If you think of strategics as having large market cap and shipping millions of units, that is what the vertical first strategy is. We are actually focused on people who can buy millions of cells from us for each product, not aggregate. So that's very important, because each product needs a custom cell of a certain shape and certain characteristics. So it's very important that every product we make ships in the millions of units. That way, we get the right ROI on that. And they're all the top customers that we talked about.

And by the way, these are the same customers that were in the funnel that we used, and it's just that we're focusing more strongly on those and not on all the hundreds and hundreds, because the opportunities have been so much that we needed to pick the ones that can ship the highest volume.

Gabe Daoud (Managing Director and Senior Equity Research Analyst)

Got it. Makes sense. Thanks, Raj.

Operator (participant)

Our next question will be from Gus Richard, Northland Capital Markets.

Gus Richard (Managing Director and Senior Research Analyst)

Yeah, thanks for pronouncing my name correctly and letting me ask some questions. Could you guys give us a split of, you know, Army revenue and Routejade in the fourth quarter and, and sort of a little bit of color on how you see Routejade's business in 2024?

Ajay Marathe (COO)

Sure, I can take that. So in terms of the fourth quarter revenue, Army should be similar to third quarter, plus, minus some, and then the remaining should be Routejade. So Routejade, we have talked about $18 million annualized run rate in the first half of the year, so think of it like $1.5 million per month.

Raj Talluri (President and CEO)

The fourth quarter tends to be a little bit stronger than that, so just a little higher maybe. So, you know, that gets it to maybe $3-$4 million of guidance. So that should give you color, that should give you fourth quarter revenue and the breakdown. Talking about 2024, we should expect some growth from 2023. So we talked about $18 million annualized run rate in the first half of the year, and so from that, 2024, we should expect more growth. We should expect some growth in revenue from that number. As we have talked about it, this is a company with a very good cost structure.

It's in a remote part of Korea, so, the cost structure, what we are paying per employee is actually very good. And, even at that level of revenue, the profitability is comparable, to what you see with the large, companies in the graphite space. And so, you know, a very competitive, cost structure there.

Gus Richard (Managing Director and Senior Research Analyst)

Got it. Very helpful. Thank you. Then, in terms of, you know, production and shipments out of Fab-1, you know, can you give us just the numbers for, you know, what you produced in the quarter and, and what you shipped?

Raj Talluri (President and CEO)

The number of produced in the quarter and what you. I think we talked about what we produced, and I don't know exactly how much we shipped and how much we didn't, but we kept quite a bit in inventory because, as I mentioned, we have to make sure that we're not making any more of those in third quarter. So we need to make sure we have enough to satisfy the needs of the people that have already designed us in. So some of it is we are holding to satisfy that market, and some also we are using for our experiments quite a bit. For our EX-1.5, EX-2, we need a lot of cells to do that. So, that's where that majority of that cells went.

Chris Souther (Director of Equity Research)

Got it. Thanks so much.

Raj Talluri (President and CEO)

Sure.

Operator (participant)

Our next question will be from Ananda Baruah, Loop Capital Markets.

Ananda Baruah (Senior Equity Analyst)

Yeah, good afternoon, guys. Thanks for taking the questions. Really appreciate it. Hey, so on PCs, Raj, I think you had mentioned PC kind of as a volume revenue in 2026, and so is it 25 when you start volume sampling, you know, on the PC side? And then how does AI PCs kind of play in as well? Like, you know, folks like HP have talked about, I think in 3 years they expect, you know, 40% of their PCs to be AI-enabled. And so does that play into the demand backdrop as well for the PC TAM demand backdrop? And I have a quick follow-up. Thanks.

Raj Talluri (President and CEO)

Yeah, a great question, Ananda. So, you know, the key thing about the PC market is the time it takes to qualify the customer is actually much longer, even longer than smartphones, just in terms of the qualification process that they go through in that market. So we will be sampling them in 2024, actually, and then also more in 2025, but by the time they get to production, you know, volume production, meaningful millions of units of production, it'll be 2026. But some of the PC makers may actually go to production sooner, I'm hoping in 2025, using our smartphone-like cells. So that's kind of how I see that.

But your point on AI PCs is actually clearly what has been tremendously exciting for us because, as you saw, in some of the slides, in the slide that I showed, when you run Edge AI, it just hogs the battery like there's no tomorrow. So it's very, very, and that's why we are seeing a lot of interest from the PC OEMs actually wanting a higher capacity battery. The use cases are a little bit different. For example, you know, how long they keep it, how many cycles it needs to charge. Fast charge is not a big requirement like in the phone, so we are optimizing our recipes to actually target those more precisely, so we can give them more energy density, maybe give them less fast charge, and so on.

But that's another super exciting market for us because of this, you know, push of AI into the edge.

Ananda Baruah (Senior Equity Analyst)

That's super helpful. And then just quick follow-up. Ajay, you mentioned I forgot the exact language on yields, but you said it would take just a little bit, I think you said, to get to the nineties. Do you think you would be at the 90% yields when you're going to volume in 2025 on smartphones? And that's it for me. Thanks, guys.

Ajay Marathe (COO)

Yeah, absolutely, Ananda. The plan right now, to which we are tracking, we will get to the +90%, closer to the high 90s, before the actual, you know, good, nice ramp begins on line one. So yes, 25? Yes, absolutely in the high 90s.

Ananda Baruah (Senior Equity Analyst)

Awesome. Thanks, guys.

Operator (participant)

Our next question will be from Chris Souther, B. Riley.

Chris Souther (Director of Equity Research)

Hey, guys. I just wanted to kind of get a little bit more color around, you know, focusing more on specific kind of higher volume customers, you know. Does that mean there are specific, you know, subsectors here that, you know, are very small today, but might become kind of volume that you might miss? Like, how do you evaluate, you know, potential where some of the stuff is pretty kind of cutting edge, I guess you could say, as far as the customer base?

Raj Talluri (President and CEO)

Yeah. So, what I've seen in my history is, you know, the 30 years I've been doing this kind of consumer electronics chip business, is that, you know, at this stage of the company, it's very important that we focus on a few customers that can drive very high volume and satisfy the requirements of those customers. You know, fast charge, cycle life, energy density, form factor, how they're used, you know, how the PMIC interacts with that, how they're charged, how they're discharged.

Once we get that nailed, and we are able to have a few of those customers drive meaningful volume, we now will have scale, and then those exact same cells, we'll have the ability to sell them into all the other markets, which may not take as many of them, but they are more willing to compromise on the form factor of the battery and so on. And those will be some new cutting-edge markets that could come up, you know, AR/VR and a few other ones like that. But then we can then optimize to those as they get bigger. So the idea is to get your product ready for the vertical markets, get to volume, get to scale, get to the right yields, you know, pay for our manufacturing lines, then use them to seed this broad market and then grow into those markets.

So I expect in time, 80%-85% of our business will probably be in large verticals, and 20%-25% will probably be in broad, broad market. So it's a vertical first, horizontal second strategy.

Operator (participant)

Our next question will be from Tim Moore of EF Hutton.

Tim Moore (Senior Equity Research Analyst and Managing Director)

Thank you. Thank you. The question I had was, just about the purchase closing of your recent transaction for the acquisition. When do you expect it to be fully integrated to achieve your forecast cost savings? And separately, how many months maybe until you can speed up the battery development cycle there?

Farhan Ahmad (CFO)

Yeah. So, I wanna be clear, the cost savings that we have talked about. They are dependent on the coating capacity and how we are utilizing that. So the shift to the coating capacity is, and the cost savings from that are related to how the manufacturing lines ramp up. So most of those cost savings, you will see it in 2025 and beyond that. And we are keeping Routejade pretty much as a separate entity for their existing business. Where we are focused on is primarily on using their coating and making sure that all the innovation in coating that we wanted to drive for cost reductions and also for yield improvement in our manufacturing processes, that we are really executing towards that plan.

So, you know, yeah, like, the things there are going well, and we are on track to execute towards ramping with Routejade in our manufacturing in 2025.

Tim Moore (Senior Equity Research Analyst and Managing Director)

Yeah, that makes sense. Just out of curiosity, for the Accurate Meditech Mini, you know, how many months in advance would you maybe start to recognize revenue before it starts selling in CVS, Walgreens, and Walmart?

Farhan Ahmad (CFO)

So, look, like, what I can tell you is that our revenue recognition is not contingent on their shipments. But, you know, when we ship the batteries to them and we get paid for it, we will recognize revenue after fulfilling all our obligations. We do expect those to start selling sometime towards the in next year. Like, I don't wanna be too specific on that, but yeah, like, that's what we know.

Tim Moore (Senior Equity Research Analyst and Managing Director)

That's okay. Fair enough. My last question is, you know, a comment you had on the last earnings call was, you know, that capital expenditure next year will be higher than this year, which makes sense given all the great strategic expansion and moves you're making. Is there any way maybe to give us a sneak peek, maybe, by how much higher the CapEx might be next year now that we're about seven weeks away from the year end?

Farhan Ahmad (CFO)

So look, we are not guiding next year CapEx at this point, but we will control CapEx and our spending very tightly and spend as needed. Right now, we are not expecting CapEx to be up year on year next year, and we will continue to manage it tightly.

Tim Moore (Senior Equity Research Analyst and Managing Director)

Okay. That's it for my questions. Thank you.

Operator (participant)

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 (President and CEO)

Yeah, thank you all for listening to our earnings call, and thank you for all the great questions, and looking forward to talking to you next quarter. Thank you.