Enovix Corporation (ENVX) Earnings Call Transcript

Thank you for standing by, and welcome to the Enovix Corporation Second Quarter 2026 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, Monica Gould, Investor Relations for Enovix. Please go ahead.

Thank you, operator. I would like to welcome everyone to Enovix Corporation's Second Quarter 2026 Financial Results Conference Call. Joining me today are President and Chief Executive Officer, Dr. Raj Talluri; and Chief Financial Officer, Ryan Benton. Raj and Ryan will be speaking to the slide presentation displayed on today's webcast. which will also be posted along with our press release on our Investor Relations website at ir.enovix.com. They will provide prepared remarks, and we will then open the call for questions. Before we begin, please note that today's call contains forward-looking statements that are subject to risks and uncertainties. These statements are based on current expectations and may differ materially from actual future results due to a number of factors. For a discussion of these risks, please refer to the disclosures in today's press release and our filings with the Securities and Exchange Commission. You can also find these materials on our IR website. All statements made on this call are as of today, August 12, 2026, and we undertake no obligation to update them, except as required by law. During the call, we may also reference non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in the materials posted on our IR website. And with that, I will turn the call over to Raj.

Good afternoon, everyone, and thank you for joining us. The second quarter showed momentum across all 3 of our primary target markets. In smartphones, we reached an important qualification milestone. Our lead customer confirmed that our cells passed more than 1,000 cycles on the 0.2C discharge cycle test. We have one final cycle life test, and it's already well underway. We expect to finish remaining testing by the end of 2026 and with the customer acceptance and smartphone field testing to follow. In smart eyewear, the production ramp of our lead customer has begun. We shipped approximately 2,100 batteries to a Tier 1 customer, recorded our first smart eyewear product revenue from this customer and expect to deliver roughly 9x that volume in the third quarter. In drones, defense and industrial, we grew the pipeline by 41% from the first quarter. Drones led the way, we advanced product development and the drone pipeline alone exceeds over $100 million [ in Enovix ] now. Revenue for the quarter came in at the high end of our guidance, and we expect continued sequential growth in the third quarter. What is increasingly clear is that Enovix has multiple paths for growth that reinforce one another. Our 100% silicon anode AI platform is progressing towards smartphone deployment, while smart eyewear has entered commercial production. That sequencing is by design. From the start, my strategy has been to go after the hardest market first, smartphones because meeting the most demanding energy density requirements forces us to build the best product. Everything we prove at the smartphone level then flows naturally into adjacent categories. Smart eyewear is the clearest example where the same platform is now shipping commercially. Meanwhile, our MX platform takes that same silicon know-how and manufacturing discipline and aims it at defense, a big, fast-growing high-value market. Our established South Korea operations are serving defense and industrial customers today and their extensive experience with drones in particular, is opening substantially larger opportunities. Briefly on the 2 platforms. The AI platform uses our proprietary 100% silicon anode architecture for space-constrained applications where the volumetric energy density and cycle life are most critical, while the MX platform blends silicon with graphite for greater gravimetric energy density and high-power performance manufactured at our proven facility in South Korea. These are not isolated businesses. They are mutually reinforcing. And we're seeing this convergence translate into new areas for growth today. We are working on silicon blended opportunities beyond our traditional drone, defense and industrial markets. Drilling down a bit further, First, on smartphones, we moved materially closer to completing qualification with our lead customer. The customer has now confirmed the cells passed more than 1,000 cycles under the 0.2C discharge cycle test. This is the same test our internal testing indicated when we shared it with you in February. The customer's own data has now borne it out. Fundamentally, this is a customer-confirmed evidence that the silicon anode batteries can perform at high levels. Remaining work to be done is an accelerated cycle life test built around a hybrid protocol we defined in close collaboration with our customer to replace the traditional 0.7C testing approach for legacy graphite batteries. Testing is now live across several combinations of charge and discharge conditions as well with an enhanced cell design. And the same progression is underway. The enhanced cells are now showing stronger capacity retention and internal work and the data is now with our lead customers' hands for evaluation along with multiple variants of the hybrid protocol. We anticipate completing this final test in 2026. Our second smartphone OEM is also moving towards a similar qualification framework, and we expect to begin sample deliveries in the fourth quarter. As we look towards 2027, we see the pattern repeating and expanding, our lead customer moving into commercial introduction with our second OEM advancing through qualification and additional leading OEMs with whom we are in active dialogue entering the qualification pipeline behind them. We pioneered the qualification testing pathway for silicon batteries and smartphones, so every customer after the first gets a faster, clearer path to execution and deployment. I'm especially proud of our progress in smart eyewear, which has now moved from initial production into early commercial revenue with a Tier 1 customer. Recently, we completed a key international safety certification of our cells and battery packs as well as a full suite of customer reliability test. We shipped approximately 2,100 AI1 batteries in Q2 and recognized our first smart eyewear product revenue. We have now delivery orders in hand for approximately 19,000 packs, which we are planning to deliver in the third quarter, a roughly ninefold increase from Q2. Those delivery orders are part of the customer's 50,000 unit pack order we expect to ship the remaining balance in the fourth quarter. Beyond 2026, we expect shipment volumes to grow as our customers' downstream deployments expand. Turning to our defense sector. I'm proud of the team's execution from initial product launch in the first quarter to a substantial increase in our drone pipeline in the second quarter to customer sampling beginning now in the third quarter. The pipeline for products manufactured in South Korea increased 41% to approximately $183 million from the $130 million at the end of first quarter. As a reminder, this figure represents the estimated peak annual production value, the lifetime opportunities often many multiples more. More than half of the growth came from growing opportunities, which now exceed $100 million on their own. Let me walk through what's inside that number. Because the funnel you see on the slide, more than $40 million of this pipeline is at stages where customers are actively evaluating and testing ourselves or designing them into products. And the breadth is striking, including some of the most recognized names in defense technology and consumer electronics. We also introduced MX-1 to a broader set of customers and industry events in the United States and Europe. At approximately 360 watt hours per kilogram while supporting high continuous and pulse discharge, MXB01 (sic) [ MX1-B01 ] is designed to improve mission execution, flight time, range and payload capability. We've already ordered additional production equipment for the MX1-B01, and we expect it to be operational by mid-2027 with initial commercial shipments and revenue expected to follow as that capacity comes online and customer programs complete qualification. This pipeline growth is also a commercial execution story. For the past 2 quarters, we've been deliberately building out our commercial organization, adding application engineers and product management talent, and we then brought in Steve Bakos, a seasoned sales veteran with more than 35 years in the global semiconductor industry with most recently running large global accounts at Infineon to lead our sales and application engineering teams under Samira Naragh, our Chief Business Officer. We are seeing the early results in that funnel. Our South Korea operation is a meaningful advantage in pursuing these programs. It combines an established history serving defense customers with in-house manufacturing, quality and supply chain capabilities in a TAA-designated country. Our South Korea supply is TAA compliant today and ready for the expected mid-2027 capacity ramp, and we expect NDAA compliance across multiple product SKUs. In July, our drone battery completed UN 38.3 transportation testing, creating an important step for commercial shipment, and we are commencing sampling with numerous customers in the third quarter. The next phase of Korea capacity is expected to come online in mid-2027, a very capital-efficient expansion, utilizing existing land and buildings we own and using readily available equipment. The economics are attractive as well. ASPs are healthy. And because we own our own manufacturing, we believe the scaled volume can support solid margins. Beyond the current product, MX-2 remains targeted for 2027 with the goal of reaching 400 watt hours per kilogram. Let me now come back to the AI technology platform. We produced the first AI-2 engineering samples in the first quarter. AI-2 is expected to provide approximately 20% higher volumetric energy density than AI-1 by combining thinner materials, better packaging efficiency and higher cathode voltage through our EX-3M technology node. We sampled cells to 1 Tier 1 smart eyewear customer in Q2. Many of the same EX-3M innovations are expected to carry into the future smartphone batteries and support another meaningful step forward in performance in that area as well. I want to give you some insight into how our pace of innovation is also accelerating as it is something I'm particularly focused on. In batteries, the grading factor on development speed is cycle life testing. A full cycle life test has historically taken 4 to 5 months that sets the tempo of learning in the entire industry. We are developing AI models that can predict cycle life outcomes much earlier in the cycle life test than has historically been the case. Our models for eyewear cells are getting close, and we're making very good progress on smartphone cell modeling as well. To be clear, customer qualification will always be the physical test, but this is about how fast we can learn and iterate internally. If we get this night, every design generation ramps faster and that speed itself becomes a durable competitive advantage. Turning to manufacturing. The second quarter showed continued improvements across Fab2 with particularly strong results through most of the smart eyewear production flow. In fact, our smart eyewear cell output came in well ahead of our internal plan for the quarter, and our integral yield, the cumulative yield across the entire production line has now improved for 3 consecutive quarters. Outside Zone 1, all but one process step operate at yields of at least 95% with individual steps as high as 99.6%. Zone 1 dicing remains our primary throughput bottleneck and a top focus, but the yield has improved to approximately 84% from 80% in the first quarter. Zone 1 has been a suborn constraint for a long time. This is exactly why we changed the approach rather than simply tuning it. The hybrid dicing configuration uses laser and mechanical processes where each is most effective and is designed to lift Zone 1 throughput to multiples of today's rate. The step change we need to support the production volumes we are planning for 2027. Several of the key mechanical dicing steps are expected to come online around the year-end. Supporting all of this execution is our growing team in India. A team in addition to conducting advanced research directly supports manufacturing execution at both Malaysia and South Korea factories. Finally, I want to spend a moment on leadership because I'm thrilled to have Michael Vyvoda on board as the Chief Operating Officer. Michael brings decades of operations experience, including at Apple. He has a full scope mandate across manufacturing, supply chain, quality and customer delivery. His immediate priorities are increasing smart eyewear output, preparing manufacturing for smartphone field test builds and driving the cost, yield and delivery output improvements underway. Adding Michael gives me even more confidence that we have the right team for the next phase of scale. With that, I will turn the call over to Ryan to review our financial results and outlook.

Thanks, Raj. We delivered another quarter of revenue growth and positive gross profit. We came in better than our operating loss guidance, and we ended the quarter with over $550 million in cash on the balance sheet, all while continuing to invest in the customer programs and manufacturing work that support the next phase of commercialization. Second quarter revenue was $9 million, up 21% year-over-year and 19% sequentially at the high end of our guidance, our fifth consecutive quarter of year-over-year revenue growth. Defense shipments from South Korea remained the largest contributor, while smart eyewear generated its first product revenue, modest in amount, but an early proof point of contribution from AI-powered wearable devices. GAAP gross profit was $1.3 million and non-GAAP gross profit was $1.8 million, representing GAAP and non-GAAP gross margins of 14.4% and 19.9%, respectively. The year-over-year decline in quarterly margin primarily reflected the mix of battery products sold through our South Korea operation rather than a change in underlying execution. Even with that change in mix, this was our seventh consecutive quarter of positive gross profit on both a GAAP and non-GAAP basis. And the first half non-GAAP gross margin was up year-over-year to 22.8% from 21.3%. Non-GAAP operating expenses were $30.6 million compared with $28.8 million a year ago. The increase reflects continued spending on smartphone qualification, product development and manufacturing readiness, including support for the smart eyewear ramp. Non-GAAP loss from operations came in at $28.8 million, better than our guidance range of a loss of $29 million to $32 million. Adjusted EBITDA was negative $18.9 million compared with negative $20.1 million in the second quarter of 2025. And non-GAAP net loss per share was $0.13 at the favorable end of our guidance range of a loss of $0.13 to $0.17 and unchanged year-over-year. Turning to cash flow. Net cash used in operating activities was $21.8 million, down from $25.9 million in the second quarter of 2025. And free cash flow was an outflow of $31.4 million versus $33.8 million a year ago, both better year-over-year despite higher capital expenditures supporting our manufacturing scale-up. The operating improvement primarily reflected favorable working capital changes. Capital expenditures were $9.6 million, principally supporting manufacturing readiness and capacity expansion. We ended the quarter with approximately $552.1 million in cash, cash equivalents and marketable securities, including restricted cash. That liquidity allows us to fund the qualification and commercialization milestones already underway while preserving flexibility for selective strategic investments. We did not repurchase any shares during the quarter. Our capital deployment priorities remain unchanged, product qualification completion, disciplined manufacturing investment and commercial execution. For the third quarter, we expect revenue between $9 million and $10 million, up approximately 13% to 25% year-over-year. The range assumes continued defense and industrial shipments from South Korea and a significant sequential increase in smart eyewear deliveries. We expect non-GAAP loss from operations between $29 million and $32 million and non-GAAP net loss per share between $0.13 and $0.17. We expect capital expenditures between $8 million and $12 million, primarily for Fab2 initiatives and South Korea capacity expansion Raj discussed. As always, quarter-to-quarter revenue and gross margin can vary based on product mix, customer delivery timing and the pace of qualification and commercial program ramps. For the third quarter specifically, 2 factors will shape gross margin, product mix in our South Korea business and the early cost of the smart eyewear ramp before volumes reach scale. We will continue to manage spending with discipline and align our investments with measurable customer product and manufacturing milestones. And with that, let me turn the call back over to Raj for some closing thoughts before we open the call up for questions.

Thank you, Ryan. This quarter, all 3 of our markets moved forward at the same time. Smartphone silicon batteries passed a critical milestone; smart eyewear entered its revenue generation stage; and our drone and defense pipeline is growing rapidly. The milestones to watch from here are just as clear, completing the final accelerated smartphone qualification test, initial sample deliveries to a second smartphone OEM, the smart eyewear ramp, converting drone and defense opportunities into design wins and continued improvement in manufacturing, throughput and cost. With that, operator, we're ready to take questions.

[Operator Instructions] Our first question will come from Colin Rusch with Oppenheimer.

I just want to get a sense of volumes as you start to ramp the eyewear business line, how do we want to think about total volumes to get to that optimal margin level? And how many quarters do you think it will take to get there?

Yes. Thank you, Colin. I can take a shot at it, and then Ryan will add some more commentary on margins and so on. Firstly, we're actually very pleased with the progress in manufacturing on the small cells, right, going from a few thousand packs to now roughly 19,000 next quarter and on the way to fulfilling a 50,000 pack order. This shows our confidence in manufacturing of the cell on our technology platform in our Penang fab. And I'm really proud of what the team has done there. Look, the market itself, as I said the last quarter, the market is multiple millions of units and expected to grow year after year. We are sampling now to different customers who are in like various stages of building the products. Exactly how much we'll ship will depend upon how successful their products are and what share we win. But I can say this, the feedback we've got from the customers is the cell has been very strong, mainly driven by the energy density we provide in the small form factor. And it's translating into much longer battery life, particularly with AI running on these glasses. So maybe, Ryan, do you want to take on the margins and?

Yes. No, that's fair. I mean, look, not to be repetitive, but we shipped 2,100 units in Q. The absolute revenue from that is nominal, of course. On pricing, specifically, I'm not going to quote a number there, particularly because we're dealing with one single important customer. And so I can't really go into those economics. But what matters for us really, I consider most important is that we build scale is that we get into a position of incumbency into the growing market. We want to be the default better of choice for smart eyewear, specifically kind of finishing off on margins. Of course, even at the 50,000 unit level for the year, that can absorb the overhead burden that it will face as those costs start to move in geography from operating expenses up above the gross margin line. So we expect it to be negative margin for the balance of the year. It really as we ramp ultimately as we get to some version of scale, and I'm not going to quote a specific number of what the breakeven point is. Raj talked about the market growing as the customer adoption, the pull-through starts to happen, we do expect to have healthy gross margins.

Okay. Excellent. And then in the drone market, obviously, there's a lot of different applications. And so I want to get a sense of how you're sitting within that opportunity and which applications you're competing well on? And what are the key drivers -- which products are really driving some of that progress that you're making in that end market?

Yes. On the drone market, we are seeing tremendous amount of interest from many customers. One of the main reasons is we now have an extremely competitive cell with -- there the main metric is watt hours per kilogram. And that cell actually is made fully in our own factories. And it's a TAA-compliant country in South Korea, and we expect it to get to NDAA compliant path across multiple SKUs in 2027. And this factory, you might remember, Colin, has more than a decade of production history on this site, so into military applications. The main markets we are getting into there are markets where they want a few hundred cycles, for example, of flying time and also safety, public safety, interceptor drones, ISR and markets like that. These are the markets that I feel like have a good margin profile and a lot of demand. And our expectation is that the demand is actually going to outstrip the supply here very quickly with many, many customers wanting that. And we are super excited that we have this -- our own factory that we're able to make it in where the margin profile will be really good. And we are adding more capacity there. And as I mentioned in the prepared remarks, we expect that capacity to come online in mid-'27.

And if I could chime in as well. I mean, as we go through the names of the pipeline and look at it, these are some of the best companies in the world. So some really exciting opportunities. Of course, drones is a big portion and the majority of that funnel that's building right now, we expect that to be strong for many years to come. But then there's other technologies that we think will build right on top of this. So I think robotics is another example that we look a few years out, we think it's going to be a big market as well.

Your next question will come from Ruplu Bhattacharya with Bank of America.

Can you guys hear me now?

Yes, sir.

I had 2 questions. Raj, now that both the lead smartphone customer as well as the second smartphone OEM, they've moved to a silicon-specific qualification framework. How standardized do you think this will become in the industry? And what steps are you taking to enable that? And does the second OEM now have essentially the same qualification path as the lead customer? And when do you expect POs from the first customer as well as the second customer? And I have a follow-up.

Yes. So Ruplu good question. Yes, I think what has happened is over the -- what we've done over the last couple of quarters, we've really been able to convince the customers that when you move from graphite anodes to 100% silicon anodes, some of the legacy tests are not very representative of how the battery will actually perform in real life, which is, I think, a huge step forward that we've been able to accomplish. And as I mentioned, in February, we talked about this 0.2C cycle life test where we're internally seeing that we should be able to go past 1,000 cycles. Now the customer has confirmed that on their own test. So we are very happy about that. And the one test that's left is really the accelerated cycle life test where if you just do at a normal cycle life, 0.2C, it just takes a long time. So people really need an accelerated test. We've now worked with the customers to come up with a hybrid protocol, which is some combination of the different rates of discharge. And that's what the customers are running -- my lead customer is running now. There's 2 or 3 different protocols that we work with them on. And our expectation is one of them will meet the requirements that they have in the fourth quarter. Then we expect to get to a small build of -- they'll put the battery inside their phone to see how it performs. And then we start getting into volume production in '27 and so on. We do continue to talk to our other customers, too, and then we talk to them about -- we have a good engineering relationship where we talk about these protocols. I do expect in time that the market will adapt and change to these kind of protocols because silicon behaves differently than graphite in accelerated tests.

Okay. As a follow-up, can I ask, you've made many manufacturing improvements in Fab2. What is the manufacturing capacity now as it stands today of HVM-1 as well as the agility line? Can you give us a sense for like how much max units of smartphones and eyewear that each of these lines can support?

Yes. I mean, look, like I said, when we first said what the lines were, we have continued to keep that. 1,350 UPH was what the nameplate capacity of the line was. We haven't really staffed to all of that because we are managing that through the qualification time line with the customers so that when the demand is there, we are there. And again, it's not really a question of how much capacity we have. It's more a question of pacing the line with the right number of people and working on the yields and working on the ramp in line with as the customer qualifications are going. So that's kind of where we are on that.

Your next question will come from Mark Shooter with William Blair.

You can hear me, right?

Yes, sir.

Awesome. Raj, congrats on passing the 1,000 cycles. That's a big accomplishment. I do think that we thought that this would be the last milestone stage gate, though. So can you walk us through what the last test, what are we trying to prove there? I mean I know it's a hybrid approach, but is there something that your lead smartphone customer saw that required a little bit more digging in? Any color there would be helpful.

The last test basically is what I call accelerated test, which basically means that they would like to discharge at a faster rate, as I mentioned, but not just all the way at the high rate, but some combination of a faster rate and some combination of a slower rate, which is kind of more representative of what a phone might actually do in the real world. And we are working with them on the protocol that actually will get that done, and they have a number that we need to meet to get to that. And that's what we are working on. The next stage after that is to actually do the test inside a phone, right? These are bench tests on the battery on the table. So that's the next step to it. Like I said, the main gating item right now is an accelerated cycle life test so they can complete the test in time. And we have multiple protocols that we are working jointly with the customer, and they're all underway. And by fourth quarter, we expect to see some good results.

And Mark, at the risk of being repetitive again, it's like go back to the February print, and we showed in the presentation and talked about how we passed the 0.2C test internally. We're waiting on the customer to run that test themselves. And that's what we've put in the headline here today, and we're very proud of that we've got that independent verification from the customer. What we also talked about in the February print and follow-up in the May print was the 0.7C test, and that's the traditional graphite test that we need to define a proxy or a substitute. And now we've got the framework in place we mentioned last quarter. And now we have cells running under a handful of separate variant protocols, and we expect one or more of those to pass by the end of the year.

Okay. Got it. Switching over to the drone opportunity, which is increasing here with a $100 million pipeline. It's a big number, and it's an exciting business. The -- what I'm interested in is, can you walk us through maybe some of the time frame of what that engagement looks like with the customer. So you have $5 million in wins already. But can you walk us through how long it may take to move somebody from a pipeline opportunity to down subsequent steps? Is it 9 to 18 months? And when do you see some of a decent conversion from that pipeline opportunity into backlog?

Yes. Like as I mentioned, right, I think we have a pipeline that has grown significantly. The $5 million is only just design win, awarded one. The better number is like there's $40 million already in active testing and design win for the customers to our cells right now. Defense qualification cycles are shorter than smartphones because just of the need -- of what they need to get to production faster. And the revenue and scale aligns with our Korea capacity coming online in mid-2027. So we start to expect to see ramp of this -- some of this pipeline in the mid-'27. And again, this capital expansion is very capital efficient because it's on the land and buildings we already own.

Yes. And if I could comment as well because I said to those same pipeline reviews, it's -- there's some splits within that group as well, right? So the drone companies themselves, it's -- they're all trying to move really fast, in my opinion, in the sort of 6 to 9 months and we're sampling those. And quite frankly, within our internal teams and cell teams, everyone is fighting over samples in terms of how we prioritize. And then there's a separate split of the defense primes. And as we start to focus on supporting those type of activities, those tend to be a little bit longer runway. So 18 months is, I think it's not an unfair number to say what we think the average time is to get to production with some of those. But those represent some enormous opportunities. And so in both of these areas, it's really about us putting capacity in place and the equipment that we've ordered is in flight right now, pardon the pun, is just hopefully the beginning.

Your next question will come from Derek Soderberg with Cantor Fitzgerald.