Q1 2024 Enovix Corp Earnings Call

Participants

Charlie Anderson; Senior Vice President, Investor Relations and Corporate Strategy; Enovix Corp

Raj Talluri; President, Chief Executive Officer, Director; Enovix Corp

Farhan Ahmad; Chief Financial Officer; Enovix Corp

Ajay Marathe; Chief Operating Officer; Enovix Corp

Jed Dorsheimer; Analyst; William Blair

Colin Rusch; Analyst; Oppenheimer & Co. Inc

Bill Peterson; Analyst; J.P. Morgan

Derek Soderberg; Analyst; Cantor Fitzgerald & Co

Ananda Baruah; Analyst; Loop Capital Markets LLC

Gus Richard; Analyst; Northland Securities

George Gianarikas; Analyst; Canaccord Genuity Corp

Benjamin Johnson; Analyst; Piper Sandler

Christopher Souther; Analyst; B. Riley Securities, Inc

Sean Milligan; Analyst; Janney Montgomery Scott LLC

Timothy Moore; Analyst; EF Hutton

Presentation

Operator

Thank you for standing by, and welcome to the Nilfisk Corporation's First Quarter 2024 earnings conference call. Currently, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program will be recorded.
And now I'd like to introduce your host for today's program, Charlie Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Charlie Anderson

Thank you, hello, everyone, and welcome to Noble Corporation's First Quarter 2024 financial results conference call. With us today are President and Chief Executive Officer, Dr. Raj delivery, Chief Financial Officer for Oman and Chief Operating Officer, RJ Marazzi, Rajan Ferran will provide an overview and then we'll take your questions after the Q&A session will conclude our call.
Before we continue, let me kindly remind you that we released our first quarter 2024 shareholder letter after the market close today is available on our website at ir dot novavax.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 will 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 in the Investor Relations page of our website.
I'll now turn the call over to Raj, to begin. Raj?

Raj Talluri

Thank you, Charlie, and thank you to everyone joining us today for our format today. I'm going to start with the recap of our recent results, how we are progressing against our strategy.
Before I turn it over to for Han for the financials and the outlook, I'll also have a few closing comments, and then then we'll take your questions and then after a good start in 2024.
To recap our recent achievements. First, we delivered 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 EX1M. technology this quarter.
Now I'd also note that the SAT for the high-volume. The Gen2 auto line is nearly complete. And given that it's based on the exact same process kernels as agility line, it further 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 Gen two machines. Big picture manufacturing is in a good place we are confident we can scale the Gen two 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 the X. one of them, and I'm thrilled to update you that we have now begun producing samples of X1 and in Fremont for initial testing, which you can see on the cover of our shareholder letter is super exciting for us and the samples of EX. one of them 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. No, what I wanted to show what I'm showing on this slide is basically the size of the smartphone business opportunity for us. The smartphone battery leadership opens a $12 billion opportunity for innovation. If you look at the top bar on the on the slide, you can see all the OEMs that ship around [1. billion] smartphones in 2023, the top eight of them, it represents a 1 billion unit which is 80% of the volume now of the $12 billion lithium-ion battery TAM in smartphones, $9.5 billion is among these topics. Collectively, they produce 280 plus models of smartphones, which means an average smartphone unit volume of $3.5 million units per module.
So three or four modules of this will take a full line of ours. Now six of the top eight of these OEMs are you going to receive samples from EX. one of the smartphone battery from us, so that $7.5 billion smartphone battery down is actually represented here. So we're in good shape, as you can see with the marketplace is something that is 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 the conversations with OEMs about formalizing our relationship with them. As we started making progress over the course of the last year, summer Express desire to be the first to market, which products in 2025 and beyond.
To that end, I am really pleased today to announce our first development agreement with a top five smartphone OEM by volume. What is the agreement reflects the 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 in collaboration from other customers who are also willing would also sampling to who we are going to sample with various modem technology in the coming months. Our goal is very straightforward.
We began with a handful of sku's from this group of customers ramping X1 into production '25, then further differentiate with our EX 2m battery that samples later 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 innovation. Maybe the only company that can help the 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 done just like you before, EX. one is our current technology that we were sampling last year. Yes, one of them is a new technology that we will be sampling this second quarter this year. And this technology is comparable on energy density, the EX, one of which is quite a bit differentiated from all the cell shipping out there in the market. But we made a few important advancements to this battery. We've increased our cycle life. We increased our capability to charge faster, both of which are very important in cell phone market. Now we plan to sample EX. two M., which is the generation after this, where we continue to make improvements on energy density and cycle life and fosters capability.
Our R&D teams have already started working on EX, 3M, where we will further make improvements or EX. two m. in all these three 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 IoT and computing, there is another $12 billion of TAM, the industrial market.
The reason for this is a smartphone battery has the highest bar of all that our small consumer batteries. The demands of on-device AI are very high. So it needs higher energy density, higher cycle life because people like to keep a smartphone for a while fast charge rate. I'd like to charge it quickly and move on highest levels of safety. It's a device you carry with you on the time. So when we produce a battery that meets these requirements. All the other markets are entitlements for us.
Do that is something 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, it should also be not lost 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 for strategy is once we qualify with the smartphone customer take sorry, S1, I'm sample. They are not only qualifying us for smartphones, but also for smartwatches and so on. At 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 engaged with a few high-volume opportunities with leading OEMs that are products that take advantage of the higher energy density and higher battery packs, better battery performance of EX. one M. and EX. two. Presently, our commercial team is focused on select IoT design opportunities for both 1m and 2m with product launches targeted and '25 and '26 for high energy and see progress high density in batteries. So some really meaningful progress. You know, as we look forward, we are approaching some key milestones this quarter as production begins in Fab two, and we get samples of our X1 and going out to the customers.
Now let's take a look at our scale-up strategy. I've shown this slide before Q2 '24 is when we are going to be sampling, our first EX. one M. batteries from our identity line to some of the smartphone customers and also some IoT customers. Second half of '24 is when our Fab two will get ready for production and Q4 of '24, we expect to sample the EX. two m. The next generation of the battery. Now that takes more in the it will take some more time to qualify that. And we expect that to launch the production and '26 in Q4 in 2025, our goal is to launch multiple smartphones and also IoT customers with RTX one embedded.
Now what does scale look like when we get to launching multiple products with multiple customers in the coming years? This is a slide that we haven't shown before. Our R&D is at the sell-side about the smartphone production line unit economics. Our manufacturing R&D team has been very busy at work to reduce the cost of online now we are targeting the CapEx per line to be in the $60 million range in out years. And we've 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 a capability of producing a revenue of $150 million what we're finding is that as we produce higher and higher energy density batteries with better performance, there is the opportunity to increase 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 one year. So very exciting future here as we get into scale of manufacturing, as you can see, they'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 Fab two to the team in India, reducing our R&D cycle times to the team in Korea, improving our coating 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 costs by more than one-third of the more than $35 million annualized by this year. And this significantly reduce our capital needs and accelerates our path to profitability.
With that, I'm going to turn it over to Frank.

Farhan Ahmad

Thanks, Raj. All the relevant financials are in the quarterly report and the shareholder note letter. So I'll kind of keep my comments at a high level and then provide outlook. For Q1. We delivered revenue of $5.3 million, which was ahead of our expectation. And we also had a first positive non-GAAP gross margin. As Raj mentioned, at the EBITDA, the non-GAAP EBITDA came in at a loss of $26.3 million better than the midpoint of our guidance, and 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 of 4Q. 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 our Fab one equipment as we converted to for usage for our product development. So in Q1, you'll 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 reduction in back half of the year and into 2025 as we reduce our spending in high-cost geographies, as Roger mentioned.
And now for our guidance for the second quarter of 2024, we forecast revenue between $3 million to $4 million and 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, our 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 a lot to raj?

Raj Talluri

Yes. Thank you, Brian. 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 Fab two in Malaysia over the summer, and we are planning to have a grand opening of our factory with all the key considerations customers investors in about August time frame. We'll plan to share more details later on should be a very exciting event. We are very excited to showcase this facility and 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.
And with that, we can go to questions now.

Question and Answer Session

Operator

Operator, we will now begin our Q&A session. Please note this call is being recorded if you would like to ask a question, please use the raise hand feature on your screen. If you have dialed in via phone, you start nine to raise your hand questions. Will be answered in the order they are received. Please ask one question and one follow-up question. It must. We'll now pause for a moment to assemble the queue. Our first question will come from Mark Streeter. I William Blair.

Jed Dorsheimer

It's Jim. This is Mark on for Jed Dorsheimer. Congrats on the JDA. That's great news. A nice surprise for us. And 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?

Raj Talluri

Yes. The question is on the PO for a launch in 2025. Consumer electronics, typically the POs and I've been in this business for a long time. Typically the appeals are placed a couple of months before production. And so from now, we're going to give them samples. They're going to qualify the samples, then give us some feedback. And then we're want to get from them the exact battery size that actually need to go into a phone. But once they decide the phone model than when you give them samples in that exact size and they go through some rounds of qualification within that phone. And then the foreign passes, all the EBIT, PBT, 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 a couple of months before lunchtime. So I'd say second half of next year, early to I mean, I guess it's how much the second half.
Probably.

Jed Dorsheimer

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

Raj Talluri

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

Jed Dorsheimer

Great. Thanks, Raj.

Operator

Our next question will be from Colin Rusch of Oppenheimer.

Colin Rusch

Thanks so much, guys. As you've gone through the equipment testing and done everything installed and you've talked about you're kind of starting out at roughly a 65% yield sort of ratio. Can you talk about any surprises or on positive incremental movement as you've gotten through the exception process and gotten everything installed?

Raj Talluri

I'll let Jay handle that.

Ajay Marathe

One is yes, sure, Colin. Good question. No, the FAP, as you have been saying is a pretty rigorous process, right? We go through several different, not just the critical quality parameters, but also the Marathon runs the UPH, uptimes and yield, of course, right. So no surprises we are expecting a high yields and that's what we are getting at FET. There will be more fine-tuning that we will continue to do to SAT site acceptance tests, but generally speaking, I'm particularly quite excited about how the equipment has as performed in the FEED cycles that we are running and pretty much most all the FEED for agility is done and the yields are exactly where we expected and then some so no surprises only on the positive side.

Colin Rusch

Excellent. And then with the customer engagement, and obviously you guys are getting deeper and more intimate with these customers in the performance specs. I'm sure on 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 on B&O and how quickly that's changing. As we start to see generative A., I become a much bigger part of some of the future growth for the phone functionality?

Raj Talluri

Yes. What we're noticing is that the 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 powers and higher?
Um, you know, I think the reason for that is simply that the JNI is just the battery consumption is like crazy and I when they start using these apps, I think last time I showed some data on YouTube versus JGPD. versus Nardelli and so on a clear indication from our customers that they want more energy density, larger batteries and an ability to charge it quickly and different different shapes. But the unfortunate reality is the battery industry hasn't kept up for many, many years. And that's why when we when we come and offer a higher energy density battery, the timing is really good because now it's when they actually really need it. And this is the time that we are showing up with a good battery.

Colin Rusch

Thanks, guys.

Operator

Our next question will be from Bill Peterson.
I'm JP Morgan.

Bill Peterson

Yes, hi, good afternoon. Thanks for taking the questions. In the Technology Products section of the shareholder letter, you mentioned you're working with two leading smartphone OEMs on launch for next year. I'm wondering, is actually the interest in this development agreement? Or is that a separate thing?
That's the first part of the question. But the really the crux of the question is what's the extent of the relation with the second question, and then you mentioned you have for others to receive samples presumably this year next year. Is there potential upside to the two smartphone customer launches in terms of revenue generation in 2025 fiber, really the rest of the customers are sampling or more like '26?

Raj Talluri

Yes. I mean, so I'll speak to it from my experience and how these things typically work typically in smartphones. And 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 in like six of the top eight so far that we have planned. And again, these conversations are going. So people keep asking us for more and more as we get get the samples out. And what happens then is it's a, you know, some customers may decide may the qualification may go faster because they may decide to put us in a particular form, they can qualify faster. Some customers may be a little bit later. So it's hard to tell exactly how many we'll be in production next year. But you also have 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 two. It just depends on how the qualifications go.

Bill Peterson

And my follow-up is actually kind of related to that. So I guess for this year, we should 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.
Can this existing minority do up to 1,650, which I guess would infer more like 11 million units. Just to I'm kind of trying to understand that that's just what we should assume for your volumes for the foreseeable future.
And then kind of related. I mean, when when at this point, do you think that we should consider putting more lines into the system at the sort of $60 million clip is presumably a '25 timeframe or how to think about the CapEx cadence for this year and next year?

Raj Talluri

So I'll let I'll let Jay handle the first part, and I'll talk about the second part, I wasn't exactly sure.

Ajay Marathe

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 for the larger cell size. So we are we have been talking about that. So you can expect 1,350 UPH we have clocked in with Marathon runs on this line at 1,350 or FAT, which is what the atrium effort is also underway, as you know, with So 1,350 and {9.5 million} roughly batteries a year for the first line is how we should model it from Second Line onwards. It's 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 a condensed, what can be combined and that type of thing. And that's why 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.

Raj Talluri

Yes, it just 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 and deeper and deeper into building these lines and manufacturing lines, not really a monolithic thing, right? So there's the first part of the line where we do dicing. It has only one to do with the lasers, then there's the stacking. And then there is actually the they're 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're looking at right now is what's really exciting piece of work, which is you have a lot of experience coming from players 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 part of the line had to be ordered earlier, which can be ordered later to make sure that we balance the lead time of the procurement. But at the same time, we will do it in such a way that the that the capacity ramps in sync with customer qualifications.
So stay tuned for that as we work through this year.

Bill Peterson

If confirmed on speaker, how to think about CapEx for this year and maybe high-level thoughts into next year?

Farhan Ahmad

So you're like you lot from for this year and no change from what we have said before, our 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 not just related to we'll have the qualifications go. And based on that, we will auto the lines. It's probably too early, don't guide on CapEx because you know, it's flexible. We want to be flexible and mentioned the flexibility.

Raj Talluri

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

Farhan Ahmad

Yes. And I'll just add one thing come back to your question in terms of thinking about the cost of the line in the 2026 timeframe, you should think of that as $60 million and this year obviously line first line was a lot more expensive than that of the 2025. If we are, it will be closer to $60 million, but it won't quite be there because not all the cost reductions would be our projects will be completed by year-end.

Bill Peterson

Okay, thanks. That's clear.

Operator

Thank you. Our next question comes from Derek Sauter of Cantor.

Derek Soderberg

Yes, hey, guys. Thanks for taking my questions. So just I've got a question on the shareholder letter. You guys were talking about the two smartphone customers in April when you produce 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? Or is it a scenario where once you get SAT. for or the Agility line, you're ready to ship samples. I'm just wondering what what else you have to do on the battery side to start shipping samples?

Raj Talluri

Yes, absolutely. So look, there is two aspects of qualification. One aspect of qualification is making sure the machines are working right? Like FTS. yesterday, D 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 other consumer, all the testing of safety and it meets the cycle life and it meets the performance requirements and 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 that are being fully tested to the customers because you don't want to see any surprise at the customer side when they tested. So you want to test it like how the customers tested, 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 genomics. So now we are testing them exactly like how they would test after the Guardian once we have that are looked at 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.

Derek Soderberg

Got it. I mean, 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? Was it just a little bit more time working West your battery technology. I'm 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. Thanks.

Raj Talluri

Yes, absolutely. So we give many of these customers early samples from our Fremont line, which I mentioned before. We will give them small samples. They're testing them that different stages testing. They have gone through most of the testing now and they see what they're able to get. They came and that 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 and then they felt like they wanted 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 obvious from outside people on just take a battery and slap it on the phone. So they kind of figure out how to fast charge what algorithm used to fast charge, how much energy instead they use and how does it work at different temperatures? And you know, what size do they keep and what different Upshot shape that 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 their 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 forms that they are looking at. And I expect similar things to happen with other customers.

Operator

Our next question comes from a non-pro ha of Loop Capital Markets.

Ananda Baruah

Yes, hey, thanks, guys. Good afternoon. Thanks for taking the questions and congratulations on the progress, and that's really great to see. I guess, Raj, just I guess sticking with capital, can you can you walk through like how you're thinking about raising capital and I guess what you have bond gave some context by year, you'll how to think about CapEx per line in the coming years and but like how should we think about timing? And what are the various methods that you have to raise capital? And I have a quick follow-up. Thanks.

Raj Talluri

Yes, I think the previous question I didn't answer the second part as we discussed 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 government about that. So I let for farhan more color to it. But yes, those are happening now as we make more progress on our batteries.

Farhan Ahmad

Yes. So you know, in terms of the funding for the lines, I don't think it's so 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 and even without asking a desire to pay or if needed to make us successful and make the factories up, bring them up. So you know that those conversations are happening. We are also talking to sovereign wealth funds and things like that to see if we can get some more funding and where the stock is right now, like, you know, it's not at a level where you know, I can have support of the Board to consider any further capital. And we also don't feel like, you know, like 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 costs, 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.

Ananda Baruah

And that's great context, Ferran. Thanks.
Thanks a lot. And the quick follow-up, is that maybe just for RJ there is in the prepared remarks, guys, there is some mention of 90% yields at this point in time. I guess as far as I guess sneak that in and the idea that you get in. But I can. Yes, just clarification of that. And then are you still on is sort of on track or 90% yield by the end of the year with, if I speak high that. Yes, thanks.

Ajay Marathe

Yes, thanks, John. And I knew somebody would would catch up to that. And I'm asked that question because we are quite proud of where we are in terms of units at FAT, like I mentioned earlier. So the three key processes that we have, obviously, as some of you are closer to the laser dicing and stacking process, which is in the front end. And that typically is where we are in Gen one, at least we lost a good amount of yield, and that's where we feel very confident now that we have even in the four short FAT when we did the FEED, not only the 25 parameters of CT. views were looking very good more than 1.1, 1.3 CPK.s. So for people who are close to that, that's upwards of 95% yield in those boxes alone, right. So we have it again. Like I said, you know, the operations guy gets pretty excited actually when when you see anything, that is about 95%. So that's where we are right now, we will only get better and with the we are very confident about what we talked about about yields by the end of the year.

Ananda Baruah

Excellent. Great guys. Thanks, really appreciate it. Thanks, guys.

Operator

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

Gus Richard

Thanks for taking the question. I'm just curious on when you start sending samples to customers and Tom from Fab two and how quickly that can ramp, we'll start to send samples out of Fab two and Q3. Where will that have to wait until Q4?

Ajay Marathe

No, it'll definitely be Q3 out from Fab two. We are getting up to finishing up. The equity is, like I said, done we are going to finish up SAP here up in Q3, but the samples definitely and going to the same customers that we lodge and for and have talked about in Q3.

Raj Talluri

Yes. So a little bit more color, but we are making samples now of this EX. one M. here. So those will go to the customers first. And so they all they'll start doing some testing and so on. Meanwhile, we'll also start building on our site. 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 test also of the samples that come out from from Penang, and then we will we'll send them those in Q3.

Ajay Marathe

So just a quick clarification for I'm reminded me. So first batteries out of Fab two 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 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.

Gus Richard

Then still you're still sampling customers at Fremont and sort of what's what's the volume that you're able to ship to customers at this point? Or was that a significant portion of Q1 revenue.

Raj Talluri

Noting that these are not not big volumes, these hundreds of samples and we added like as you guys know, we don't have a manufacturing high volume manufacturing line here, we mainly have an R&D line and with which we can make 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, customer one samples from from our agility line, which as I mentioned, we're super excited that it is all done and the machines are all almost there in Penang. So in a short order, we'll be getting samples from there.

Gus Richard

Thanks so much.

Operator

Our next question comes from George Jagger from Canaccord.

George Gianarikas

Everyone, thank you for taking my question. Appreciate it. And wondering if you can update us on what's happening with your materials related conversations with companies like group 14? Specifically, if you could help us at a 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.

Raj Talluri

Yes. I mean, you know, look, we are a major diagnostic company and we're using different kinds of materials. Luckily, we now also have a have a graphite battery that Rajan mix. So we can or we are also able to figure out how to improve those batteries with some amount of this new newer, newer silicon that we can put on top of that, everything we've seen between 5% and 8% if you more put anymore than that, the battery swells up. So the only architecture that I know of that can actually allows people to use more of silicon in a battery is genomics architecture, and we are at any reasonable amount that actually meaningfully increases the energy density. And that's what we're 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 fare different kind of fast charge and so on. But to get the higher energy density, we absolutely Phil, we need the Intermix architecture to constrain the swelling of silicon.

Operator

Our next question comes from Ben johnson, Piper Sandler.

Benjamin Johnson

I don't have a question at this moment.

Operator

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

Christopher Souther

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

Farhan Ahmad

You know, no, that's definitely a big from consideration on whether to take customer financing or not. We have also talked to Asian banks in terms of project financing options. So I think if we have signed agreements with demand confirmed and economics of that are attractive, I don't think it will be very difficult choice for us.
To get debt financing on a project financing. And so, you know, whether we take customer financing or we project finance, it would 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. And if you look at EXWM., it's far superior to anything that's on the roadmap that's out there from any of our competitors and, you know, customer feedback and we already know what the pricing is now for the 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 a assuming that in all the cost reductions that RJ is targeting, we are also able to execute on. And so I think like in all its stub, we have all the pieces to get to that model. And we just have to execute towards getting that. .

Operator

Our next question comes from Sean Milligan have Jane.

Sean Milligan

It's Raj. Thanks for taking my question. 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 months of qualification time line for the smartphone customers. And I saw the press release starting to deliver samples six of eight in 2Q. Just curious if you could comment on that nine to 12 months of 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 arm, I guess, the iterations of samples that may go to them if that's happening concurrently in that whole time line or not?

Raj Talluri

Yes. I mean, look, we are able to deliver some samples are now from 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 what Exxon and batteries and 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 an agility line from Malaysia to really start the call process so that we mentioned is when we start shipping in in 2Q, we produce the first one centric, you produce the next one. So you can think of nine to 12 months from, you know, the summer when we start shipping samples, right?
That's why I was saying later half of next year is when we expect to see those see those productions happen now we'll have a few customers do them sooner, I hope so. But that's not what I what my experience has been with batteries. It typically takes a 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 in like I mentioned, once we get there, it's qualified by their by their technology teams is qualified by their sourcing teams and we are in the system next products NEXT products can come much faster. So the first one is the one that takes nine to 12 months.

Sean Milligan

Okay. So would the idea be that I'm sorry. So just trying to understand with the smartphone customers, maybe like with their main on sales season. Would you hope that you would have volumes in commercial phones like the second half of next year? Is it more like the first half of '26 new devoted inventory kind of the second half of next year to serve that 2026 launch.

Raj Talluri

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

Operator

Our next question comes from Tim Moore of earphones.

Timothy Moore

I think paying some in my first question is on now that you're into a development agreement with a top five volume smartphone OEM. I'm wondering if you maybe could share a little bit more color and 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 or capacity that's coming on based on proposal that come across your desks from other customers.

Raj Talluri

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

Timothy Moore

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

Farhan Ahmad

And 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. So now immunome 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 two quarter period. So you know, Q4 and Q1 and so and we disclosed that in Q1, $18.5 million were included in the R&D expenses, and that will not repeat in now in the Q2.
So basically, you take like an unlike our 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 same similar level and then decline for operating expenses. We should decline after that, Tom, and because of the further actions that we announced today. Does that answer your question?

Timothy Moore

That's helpful. Yes, it does. It does. I thought it would last two quarters, but I just want to double check.
You tried to factor in the extra cost. You took that clarifies everything. Thank you. That's it for my questions.

Raj Talluri

Thank you.

Operator

There are no further questions at this time.
With that, I'd like to turn it over to Dr. Ross Tillery for close.

Raj Talluri

Yes. Thank you, everyone, for your questions and thank you for tuning in. And before we wrap up I want to highlight that we'll have a live stream of MA or ask me anything on our YouTube channel on Monday May sixth. If your question didn't get answered today, please feel free to submit your questions for next week, and we look forward to what should be a great dialogue and Thank you once again.