Enovix (ENVX) Q1 2026 Earnings Transcript

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Date

Wednesday, May 13, 2026 at 5 p.m. ET

Call participants

• Chief Executive Officer — Raj Talluri
• Chief Financial Officer — Ryan A. Benton

Takeaways

• Revenue -- $7.6 million, up 49% year over year and above the guidance range, driven primarily by shipments to Korean military contractors.
• Non GAAP gross margin -- 26.3%, marking six consecutive quarters of positive gross profit on both GAAP and non GAAP bases.
• Non GAAP operating expenses -- $30.8 million, attributed to investment in customer qualification, research and development, and smart eyewear production readiness.
• Non GAAP loss from operations -- $28.8 million, better than the guided $29 million-$32 million range.
• Non GAAP net loss per share -- $0.14, at the favorable end of guidance despite higher interest expense from the 2030 convertible notes.
• Adjusted EBITDA -- negative $20.3 million, roughly flat year over year.
• Liquidity -- $5.8 billion in cash, cash equivalents, restricted cash, and marketable securities at period end.
• Free cash flow -- Outflow of $36.3 million, increased from the prior year, primarily due to semiannual interest payment on convertible notes and higher inventory levels in Korea.
• Capital expenditures -- $3.2 million during the quarter, below guidance based on the timing of certain payments, the majority expected in Q2.
• Manufacturing yields -- Most production zones are approaching or exceeding 90%; zone 1 dicing yields are approximately 80% with continued improvement noted.
• Smart eyewear -- Commenced commercial production and shipments of the A1 battery for a lead customer’s reference platform, with ramp expected in the second half; 50,000 units targeted for delivery in 2026 and “millions” forecasted for 2027.
• AI-2 platform -- Engineering samples of AI-2 for smart eyewear produced, delivering more than 20% higher volumetric energy density versus AI-1, with initial sampling to customers already underway.
• Smartphone qualification -- Alignment reached with Honor and a second OEM to adopt a new silicon anode-specific framework, replacing the legacy 0.7 C test with a real-world 0.2 C discharge protocol; qualification cycle at Honor is over halfway completed.
• Drone and defense pipeline -- Global pipeline for products manufactured in Korea exceeds $130 million, with drone-related opportunities accounting for over 60% of that figure.
• MX platform launch -- MX1B01 drone cell launched with 360 Wh/kg energy density, manufactured in South Korea, and actively demonstrated at the Michigan Defense Expo and other industry events.
• Q2 guidance -- Projected revenue between $8 million and $9 million; non GAAP loss from operations between $29 million and $32 million; non GAAP net loss per share between $0.13 and $0.17; capital expenditure payments of $9 million-$13 million.
• Share repurchase program -- Authorization approved, but no shares repurchased as of the earnings call.
• Senior leadership addition -- Appointment of Steven Bakos as Senior Vice President of Worldwide Sales, bringing more than 35 years of semiconductor and account sales experience.
• Manufacturing process advancement -- Ongoing transition to a hybrid laser/mechanical dicing strategy aimed at improved throughput and reduced cost, with full mechanical dicing targeted for next year’s demand.

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Risks

• Free cash outflow of $36.3 million increased due to timing of interest payments on convertible notes and rising inventory levels, indicating higher cash consumption in the near term.
• Qualification protocols for smartphones shifted from 0.7 C to 0.2 C/0.1 C tests, which “may take a little bit longer to do 0.1 C, 0.2 C discharge because the time it takes to qualify is a little longer, at least on the first launches.”
• Smartphone battery shipments in the current year expected to be “much lesser” due to overall lower industry volumes, with normalization not expected until higher-volume ramps in coming years.
• The need for further engineering work and capital outlay, including $9 million-$13 million projected Q2 capital expenditures and ongoing improvements for next-generation manufacturing dicing, points to continued investment requirements before full-scale commercialization.

Summary

Enovix (NASDAQ:ENVX) reported revenue growth of 49% year over year, led by shipments to Korean military contractors and progress in manufacturing readiness across multiple production zones. Strategic alignment with key smartphone OEMs removed the legacy 0.7 C test requirement in favor of a 0.2 C protocol, positioning Enovix for broader silicon anode battery adoption. The AI-2 platform achieved more than 20% higher volumetric energy density, and commercial production began for the smart eyewear market, with initial deliveries commencing and a pathway to larger scale next year. The MX1 drone cell, manufactured entirely in South Korea, launched with technology designed to meet demanding defense and industrial use cases, and the global pipeline for Korean-manufactured products grew to over $130 million. Enovix maintained robust liquidity, guided for further revenue gains in Q2, and continued prioritizing disciplined capital deployment and operational expansion.

• Removal of the legacy 0.7 C smartphone discharge test was described as a “gating item” whose elimination led to the adoption of protocols that better reflect “real world usage” and enabled easier qualification for silicon anode batteries.
• The pipeline for Korean-manufactured drone and defense products increasingly targets applications where supply chain security and NDA compliance provide a competitive edge, distinguishing Enovix from peers relying on third-party manufacturing.
• Engineering progress toward a hybrid and ultimately mechanical dicing process is expected to further enhance production throughput and decrease costs over the next year.
• Leadership described the $5.8 billion cash position as providing “substantial liquidity to execute on our operating plan to support commercial scale up, and to pursue strategic opportunities.”
• “AI” platforms and MX platforms are described as mutually reinforcing, sharing technology, supply chain capabilities, and commercial infrastructure. Management stated, “We are increasingly seeing benefits flow in both directions with the AI platform leveraging our Korea manufacturing strength and the MX platform benefiting from our silicon expertise and global commercial reach.”
• Capacity expansion in Korea leverages a recently acquired 300,000-square-foot facility, providing room for sequential scale-up as commercial demand materializes.

Industry glossary

• 0.2 C / 0.7 C test: Battery discharge protocols, with “C-rate” referring to the rate of charge or discharge relative to a battery’s capacity; 0.2 C is closer to typical smartphone usage while 0.7 C is a high-stress, accelerated test used for graphite-based cells.
• Wh/kg (Watt-hours per kilogram): Metric for gravimetric energy density, measuring the amount of energy a battery delivers per unit mass.
• NDA compliance: Meets U.S. National Defense Authorization Act requirements for sourcing and manufacturing, critical for defense-sector supply chain eligibility.
• AI-1/AI-2 platform: Enovix’s generations of 100% silicon anode batteries, targeting smart devices and wearables, with AI-2 offering a significant volumetric energy density increase over AI-1.
• MX platform: Enovix’s silicon-enhanced battery suite designed for high-performance industrial, drone, and defense applications, with product names such as MX1B01 for specific cells.

Full Conference Call Transcript

Raj Talluri: Good afternoon, everyone. Thank you for joining us. This quarter marked another meaningful step in Enovix's transition towards commercialization and scale. We advanced across the areas we believe are most important for long term value creation, customer engagement, commercial deployment of our silicon anode batteries, and manufacturing readiness. I am very excited to share that in the smart eyewear market, commenced commercial production of our A1 battery for our lead customer's reference platform and have multiple customers in the process of launching smart eyewear products. Initial shipments are underway, production expected to ramp through the second half of the year. We believe this validates our ability to manufacture 100% silicon anode architecture at commercial scale.

On smartphones, we align with Honor, an updated qualification framework designed specifically for silicon anode batteries. This framework, which includes revised specifications and testing protocols, better reflects real world usage conditions. We are pleased to have also aligned our second smartphone OEM on the view that they too will need to adapt a similar testing framework in order to get their products to market on a competitive timeline. Beyond these lead customer engagements, we are in active dialogue with several additional leading OEMs regarding silicon anode battery qualification standards. We are encouraged by the constructive cadence of our discussions with these OEMs as we work towards future qualifications and commercialization programs.

Importantly, we believe we are doing the hard work now that will enable our future OEMs to roll out their silicon anode solutions. More rapidly. The principal structural mismatch in qualification has now been addressed to align with silicon anode performance while maintaining and in some respects increasing qualification rigor. Cycle life testing at our lead customer for batteries that we shipped at the beginning of the year is progressing under the updated protocols with the results approaching required thresholds. The deep partnership and technical engagement we are seeing with multiple customers in the smart market, reinforces our belief in the industry's interest in high performance silicon anode battery solutions.

We are encouraged to see growing demand across our drone, defense, industrial applications, securing new customer design wins during Q1 2026 in each of these markets with deployments expected in 2027. Our global pipeline for products manufactured in Korea now exceeds $130 million. with the majority driven by rapidly expanding drone applications where demand for high performance battery solutions continues to outpace the available supply. This creates an opportunity for an additional scaled high performance supplier. We believe Enovix is positioned to emerge as that differentiated supplier this rapidly expanding market. We continue to improve manufacturing execution at Fab 2. Yields in most production zones are now nearing or exceeding 90%.

Zone 1 dicing, a key throughput driver, is delivering step level yields of approximately 80%, demonstrating continued progress with our laser based equipment. We recently appointed Steven Bakos as senior vice president of worldwide sales to support Samira Naraghi our chief business officer. Steven brings more than 35 years of global semiconductor sales leadership from companies such as Infineon where he served as a vice president of corporate account sales for large global accounts, including Apple. This quarter, revenue was $7.6 million, driven by Korean military contractors above the high end of our guidance range and up 49% year over year. Non GAAP gross margin was 26.3%.

Now I will walk through each of these areas in more detail, starting with manufacturing. On that front, I want to give you an update on our zone 1 dicing which is our current throughput bottleneck. Since I joined to improve the throughput of zone 1, we have been working on a faster, cheaper way to dice our coated rolls. We have been making great progress, Last week, I received a video from our equipment vendor showing this in action. Rather than trying to describe it with another chart, let me just show you the actual process. What you saw was our mechanical dicing system processing silicon anode strips directly from coated rolls.

By implementing a hybrid dicing configuration strategy, that combines both laser and mechanical dicing approaches. I continue to be encouraged by the substantial progress our global operations and advanced manufacturing equipment teams are making in this novel area for silicon anode batteries. As we mentioned on the last call, legacy smartphone qualification protocols originally developed around the graphite-based batteries and relied on a 0.7 c discharge requirement. That standard can artificially stress silicon anode cells at discharge rates far above real world smartphone usage which typically remains well below 0.2 C. The consequence was important. Silicon live testing under this framework systematically understated a silicon anode battery's longevity.

We have aligned with honor on a new silicon anode specific qualification framework. The updated framework prioritizes a version of the 0.2 c cycle test that commenced in Q1. This methodology better reflects real world usage for silicon anode batteries while enhancing the rigor and visibility into performance. We are seeing broader industry alignment on silicon anode specific qualification standards. Our second smartphone OEM has joined our lead customer removing the 0.7 C test from their list of hard requirements and is now progressing towards an updated framework similar to our lead customer. Discussions with several additional top OEMs are ongoing. We expect broad adoption of similar silicon anode specific qualification approaches over time.

With this framework now established, the plan with Honor is a targeted system level deployment in the second half of the year to confirm infield performance ahead of the broader commercial launch in 2027. Importantly, we also recently received the battery form factor for their next generation device to support readiness for the next major product launch. Our commercial strategy centers on 2 complementary technology platforms that address large and, in some cases rapidly expanding market opportunities. AI, short for Artificial Intelligence Class, is our flagship 100% silicon anode platform. it is targeted at smartphones, and smart eyewear markets where volumetric energy density is a key requirement. Smartphones represent the largest battery market opportunity for Inovix.

However, smart eyewear is emerging as 1 of the fastest growing new device categories. We think that the smart eyewear battery market opportunity could exceed $1 billion by the end of the decade. More broadly, the AI platform is applicable to virtually any space constrained device requiring high energy density and long cycle life including future applications in wearables, computing, industrial, EVs, and humanoid robotics. Previously, we acquired an established business producing graphite anode based products. These products are in production today, generating revenue in defense, drone, and industrial markets through our Korea facility. We have been able to leverage these capabilities in combination with our silicon anode technology know-how to create high performance MX silicon-enhanced platform.

Our initial target markets for MX represent more than $4 billion in opportunity including approximately $2.4 billion in drones and $1.8 billion in defense technologies beyond drones. These applications prioritize performance and supply chain security with a greater focus on gravimetric energy density. Over the longer term, we believe the MX platform is also well positioned for adjacent markets including robotics, eVTOL, healthcare devices, transportation, agriculture, and broader industrial applications. The first product Enovix is launching on this platform is MX1, a ruggedized, drone cell design, requiring rapid discharge and high gravimetric energy density. I want to highlight something important here. These are not separate bets. They are mutually reinforcing platforms sharing technology, supply chain capabilities, and commercial infrastructure.

We are increasingly seeing benefits flow in both directions with the AI platform leveraging our Korea manufacturing strength and the MX platform benefiting from our silicon expertise and global commercial reach. Alongside qualification progress, our R&D efforts continue to advance the platform. This quarter, we produced the first engineering samples of AI-2 for smart eyewear, delivering greater than 20% higher volumetric energy density compared to AI-1. This represents a meaningful architecture driven improvement. Potentially enabling product categories that require significantly more power within highly constrained form factors. We have achieved this improvement through 2 primary drivers, reducing inactive material to improve packaging efficiency and increasing the cathode voltage.

Together, these advances increase energy density within the same footprint and further demonstrate the advantages of our 100% active silicon anode architecture. We believe this represents the first of many future advancements unlocking the full energy potential of our 100% active silicon anode architecture on the future AI product road map. Display equipped smart eyewear is expected to become a rapidly growing battery market. And we believe increasing power requirements create a strong fit for our technology. Smart eyewear also represents an attractive initial commercialization opportunity for our silicon anode platform. Qualification cycles are generally shorter, more flexible, and durability requirements are lower, and the market is in the early adoption stage.

Customer sampling of AI-2 is planned for later this quarter, We have already received initial sampling orders and engagement commitments from several leading smart eyewear companies. The 20% energy density improvement achieved with AI-2 is important, not only for smart eyewear, but also because similar gains to the future smartphone batteries, could materially extend our technology advantage. The current AI-1 smartphone battery delivers 935 watt hours per liter has been independently validated against graphite and silicon doped alternatives. We believe this positions Innovix with a meaningful competitive advantage in high energy density mobile applications.

Competing approaches remain largely focused on conventional graphite based designs with incremental silicon additions, These architectures continue to face swelling constraints that limit long term performance and energy density improvements. In contrast, our architecture is designed at a 100% active silicon anodes which we believe provides a substantially higher long term scaling opportunity. Let's talk about our second platform, MX. This week at the Michigan Defense Expo, we formally launched MX1B01, a drone battery cell delivering energy density of 360 watt-hours per kilogram positioning us competitively within the high performance drone battery market. We achieved this performance through targeted silicon content enhancements leveraging an already proven manufacturing platform.

MX1 is designed for applications requiring extended flight time high discharge capability for power intensive missions, and a secure supply chain. We believe the product compares favorably to similar leading high density solutions currently available in the market and offers a material cycle life advantage. We are manufacturing these cells from our South Korea factory which has supported defense customers for years, and our commercial focus is on drone manufacturers globally as well as their packaging partners. Following the Michigan Defense Expo, we plan to showcase MX1 at 11 additional conferences around the U.S. and Europe over the next 2 quarters as we continue building customer engagement and commercial pipeline activity.

This slide shows how we see the MX platform evolving beyond the initial MX1 launch. Demand for high performance drone battery supply continues to exceed the currently available western capacity, which we believe creates a meaningful opportunity for Enovix. These applications prioritize performance, reliability, and supply chain security supporting differentiated positioning relative to commoditized consumer battery markets. While drones are key near-term focus, we have also established product offerings for subsea, munitions, and industrial applications expanding the MX platform across multiple high performance end markets. Our Korea and Malaysia manufacturing footprint directly addresses defense supply chain requirements. Backed by years of production history supporting major contractors and deployed programs. A key structural advantage for Innovix is vertical integration.

Because we own our manufacturing operations we are not sharing economics with third party contract manufacturers. Which we believe supports both competitive pricing and attractive long term unit economics as volume scales. As product competitiveness becomes increasingly established, the gating factor becomes commercial conversion which is why we recently appointed Steven Bakos as Senior vice president of worldwide sales, who brings more than 35 years of global semiconductor and industrial sales leadership experience and will help us build the commercial infrastructure required to support growth. Looking ahead, MX2, targeted for 2027, with the goal of reaching 400 watt hours per kilogram.

Over time, we intend for MX to evolve into a broader platform strategy spanning multiple product formats and defense and industrial end markets. Now I will turn it over to Ryan to walk through our financial results. Ryan?

Ryan A. Benton: Thanks, Raj. Our first quarter results reflect disciplined financial execution, alongside continued commercialization investment. First quarter revenue was $7.6 million above the high end of our guidance range, up 49% year over year. These are largely batteries deployed in active programs with repeat demand. Non GAAP gross margin was 26.3%, our sixth consecutive quarter of positive gross profit on both a GAAP and non GAAP basis. Non GAAP operating expenses were $30.8 million reflecting continued investment in customer qualification completion, research and product development, and smart eyewear production readiness.

Non GAAP loss from operations was $28.8 million better than the guidance range of $29 million to $32 million Non GAAP net loss per share was $0.14 at the better end of the guidance range despite higher interest expense from the 2030 convertible notes issued last year in Q3. Adjusted EBITDA was negative $20.3 million roughly flat year over year. We ended the quarter with approximately $5.827 billion in cash, cash equivalents, restricted cash, and marketable securities. We believe this provides substantial liquidity to execute on our operating plan to support commercial scale up, and to pursue strategic opportunities from a position of strength.

Free cash flow was an outflow of $36.3 million, an increase from the same period a year ago primarily driven by timing related items including the semiannual interest payment on the 2030 convertible notes working capital movements primarily higher inventory levels in Korea to support planned shipments. Capital expenditure payments were $3.2 million in Q1. Below guidance due to the timing delay of certain payments, the majority of which we expect to be paid in Q2. Turning to Q2 26 guidance. Revenue is expected in the range of $8 million to $9 million reflecting continued growth in defense and industrial shipments and initial smart eyewear revenue as deliveries to our lead customer begin.

Non GAAP loss from operations is expected between $29 million and $32 million. Non GAAP net loss per share between $0.13 and $0.17 and capital expenditure payments are projected in the range of $9 million to $13 million which includes the aforementioned deferred payments as well as initial payments for the investment to support capacity expansion in Korea. Last quarter, we approved a share repurchase authorization to provide additional capital allocation flexibility. We have not made any purchases under that program. Our capital deployment priorities remain unchanged. Qualification completion, scaling smart eyewear and defense production capabilities and selectively pursuing strategic opportunities with a high bar on strategic fit and return. With that, I think we are ready to take questions.

Operator?

Operator: We will now begin the Q and A session. Please note that this call is being recorded. Before we go to live questions, we are going to read the 2 most highly voted questions submitted by shareholders ahead of this call during the call registration. The first question is, previously, management has discussed multiple pathways to achieve final smartphone qualification targets. Could you elaborate on which of these pathways currently appears most promising?

Raj Talluri: Yeah. Thank you for the question. And thank you all for listening. Of the pathways we discussed, as I mentioned in the prepared remarks, we have now aligned with Honor at a combination of different pathways that we could use. The 0.7 C legacy test requirement, that is been mainly for based on graphite batteries. We have aligned with our customers that is not a must have requirement, so it is been removed as a gating item. We are now working on a slightly different 0.2 C test, which better reflects the real world usage of the smartphone. And that is been prioritized now.

And not just with honor, but many of our other lead customers also agreed to the same thing. In general, I feel like smartphone market now people are realizing that as silicon batteries become more and more popular, we should they should really change the requirements that are in the market. That have been used mostly for graphite. So it is really nice, really great result. I am really pleased with my team being able to convince them. Now the point to see test is more than halfway done at our customer. And it is it is continuing to go and we are tracking it.

Operator: The second question is for your AI-2 When will the samples be submitted to customers so that testing can begin?

Raj Talluri: Yeah. As I mentioned in the remarks, that we have engineering samples now inside, and they look really good in terms of the 20% energy density increase from AI-1. Great achievement by the R&D team. You know, harnessing the full potential of silicon. And these will continue to get better over time. But these samples, we expect to sample this quarter. To our customers, and quite a few people have actually expressed interest in that, and we got a few sample batches out as of now. Thank you.

Operator: We will now go to the queue. If you would like to ask a question, please use the raise hand feature on your screen. If you have dialed in via phone, please use star 9 to raise your hand and star 6 to unmute. Questions will be answered in the order they are received. Please ask 1 question and 1 follow-up question at most. We will now pause for a moment to assemble the queue. Our first question will come from Mark Shooter with William Blair. Your line is open. Please ask your question.

Analyst (Mark Shooter): Thank you. Hi, guys. Congrats on the progress. My first question is just focusing in on Honor a bit. I saw in the press release that you have, some field testing looking at, about second half, right, is when you are targeting. So I am wondering if you could give us an updated understanding of what unit volumes may be for that field testing with Honor. And if successful, do you have a better view on what a on a ramp would look like in 2027?

Raj Talluri: Yeah. So again, as I mentioned, now we have a you know, test methodology that we aligned with Honor. So we are in the middle of doing that. And the next big step is to actually put the battery inside an existing phone for which, you know, we made this custom size cell. it is hard to predict the number of units, and they will be small it will be initial test just to make sure that everything is smooth and limited launch maybe. But the real volume will be, you know, in 27.

But we more importantly, we got the size for that particular battery that is gonna be launched in 2027, and we are now working on how to make that battery after the feed testing is complete.

Analyst (Mark Shooter): Okay. Great. Thanks for the color. Switching gears into drones, which is very interesting opportunity, and congrats on the silicon carbon composite, you know, that mixed graphite cell. At 360 watt-hours per kilogram, that is gonna put you, you know, well in the running against, the current peer set. So I am wondering if you could speak to maybe some of the customers that you are engaged with in sampling and say you win all that business today, everyone you are engaged with. Do you have an idea of what those call times look like and your current unit volume and revenue capacity?

Raj Talluri: Yeah. Firstly, thank you for that comment on the drone cell. We are also super proud of the engineering team that came up with it in a very short order, particularly because we have a well manufacturing facility that we own, we were able to quickly make that. You know, the product actually is extremely competitive with what is in the market today. And is made totally within our factories. it is not contract manufactured. Actually, I have the fact, a battery cell here with me. You know, we have a bunch of these cells now. So we there is a lot of interest.

And I just got a call from our sales team who is at the Detroit you know, drone show right now about the tremendous interest they are seeing. Because this is also a NDA compliant cell, which is actually you know, big deal for, many of our customers. The go to market of this works this way. Typically, there are people who take this and put them in packs. And put the BMS around it and the system around it, and that goes into multiple drone makers.

So it is hard to call the volumes right now, but the market is so fast and growing really fast that we think that the cycle times, the qualifications time will be, you know, shorter than things like smartphones because they have such demand. And also a cycle life does not have to be that long in these. Our cell goes to 300 cycles. But even shorter cycles are okay in some of these markets.

Ryan A. Benton: And maybe I will I will chime in. You know, Mark, you asked about volumes. You know? Again, we have talked about in the CapEx forecast in prepared remarks. We are already spending dollars to add equipment to 1 of the existing buildings in the Nonson facility. And, you know, 1 of the great strengths advantages that we have sitting on our balance sheet is we have multiple empty buildings in that facility as well. So we have you know, numerous stages of additional expansion capacity there, and we are just gonna do that in a methodical way as demand presents itself.

Analyst (Mark Shooter): that is great. Thanks for the color, guys.

Operator: Your next question will come from Colin Rusch with Oppenheimer. Your line is open. Please ask your question.

Analyst (Colin Rusch): Thanks so much, guys. You know, could you talk a little bit about the mix of silicon material that you have in the new drone batteries? And the pathway from 360 to 400, how much of that is being driven by increased thickness or, you know, different form factor or increased concentration of silicon in the in the anode.

Raj Talluri: Yeah. Great question, Colin. So when we did this 1, we did it was to there is an existing requirement for a cell that in the market today that many of the customers wanted us to provide something that is with the fully NDA compliant, you know, made within our factories. So we made that 1, and we quickly got into that performance. Actually, it performs really well. The cycle life is really good and the capacity holds. We have about 60% SIC in that cell. But we now believe that we can get that to much higher percentage Because, you know, in this market, some amount of swelling is okay.

Because it is inside a drone, and you could put pressure and put it in there. it is not a space constrained situation like a like a smartphone. And, also, the discharge rate and the pulse discharge, and the number of cycles are variables we can keep tuning. You know, we mentioned know, 400 watt hours per liter as something that we could produce. I believe we can go much higher than that. By just making the right trade offs between cycle life and rate and the amount of swelling that allow You know?

So I think the good news is we have been working on silicon for a long time, so we know exactly what electrolytes work well with silicon. We are working with graphite for a long time in non sun. We have that know how. And we have a factory that is been supplying for difference for a long time. So our quality of the products that we actually supply to defense is very, very high bar, and that factory is actually qualified for that. So that is why I think that, you know, you will see a pretty competitive roadmap from us. For this market very quickly.

Analyst (Colin Rusch): Great. And then, you know, looking at the laser cutting, I did just wanna understand kind of the cadence of learning cycle on yield improvement and how we should think about the engineering work that you are doing and how quickly you can implement that to start getting a little bit better, you know, output on the overall facility.

Raj Talluri: Yeah. So as I mentioned, from last quarter to this quarter, we have improved our yield across multiple zones. You know, well into the 90% range now in most of the zones. The laser dicing is in the kind of the 80% range, but that is improved quite a bit from last time. But as you guys saw in the video, we have been working on this for a while, and today, I thought was a good time to show you a combination of laser and mechanical dicing that actually cuts much, much, much faster and much cleaner.

When you laser dice, there are also some challenges we have been working on for a while, which is, you know, how to get to the yield and the throughput so on. it is an expensive way to do things. So we have always you know, right when I started we have been working on a different way to actually do this. You saw the mechanical Dyson now. So we have enough lasers, and we have enough throughput to meet the demand for this year. And we will get the mechanical dicer. Our plan is to get it online this year. For the next year's demand, we can use a mechanical dicer with some combination of laser finishing it up.

So really exciting results. So hope you guys saw that video also the throughput that we can produce with that.

Analyst (Colin Rusch): Okay. Thanks so much, guys. Thanks, Colin.

Operator: Your next question will come from Jeffrey Osborne with TD Cowen. Please unmute your audio and ask your question.

Analyst (Jeffrey Osborne): Yeah. Thank you. Maybe just a quick 2 questions, but 1 quick follow-up on Collins. Can you get to 90% yields without that machinery in place, or do you need to add the new machinery to get there And that is more of like a 2027 event getting to 90%.

Ryan A. Benton: Maybe I will take It is. Yeah.

Raj Talluri: Yeah.

Ryan A. Benton: I think we are capable of getting a nice 90% yield. But, again, it goes hand in hand with throughput. I mean, again, you saw the video. Really, the mechanical dicer is just able to operate so much faster. And so ultimately, this you know, I am the finance guy. Ultimately, it is it is about cost. We just think it is the most economical way eventually in some of the subprocess steps to operate.

Analyst (Jeffrey Osborne): Perfect. Thanks for that. And cost of the machines. Right? These are much it is a less expensive way to get throughput.

Raj Talluri: Yeah. Perfect. And my 2 questions is 1, Ryan, I was wondering if you can update us on the M&A pipeline. I think you have been out there searching for a couple quarters now. And then just, Raj, a clarification. You mentioned providing packs to honor to put in a phone, small quantities in the second half of the year, but then you mentioned something about getting a second design. It was unclear. Is there a second SKU that they have given you, or is the SKU that they gave you they intend to produce in 2027? I am just trying to get a sense of your relationship as deepening with them.

And they are giving you a glimpse of what they intend to commercialize after the first product launch. it is it is it is exactly the latter. So we actually have a SKU that will launch in 2027. So which is actually a fairly large deal. And shows the relationships we have with them.

Analyst (Jeffrey Osborne): And then in terms of the packs to honor the quantities, any comments on that?

Raj Talluri: It will be small volume. Again, it will be, just a test and make sure that the system level stuff works okay, and we get small initial launch And I think that is you know, again, that is fine with us to just to make sure everything is good before we get into high volume.

Analyst (Jeffrey Osborne): Does that like, thousands, friends, and family and stuff?

Raj Talluri: that is that is probably what it that is probably what you should think of.

Ryan A. Benton: And then on the first question in terms of the M&A pipeline, so I am I am I am really pleased with the pipeline that we have multiple opportunities that we are pursuing. Again, as we as we said and repeated time and time again, we are gonna be disciplined. So it has to meet a strategic fit. We are gonna be disciplined on price. So it is fair to say that we have we have looked at quite a few opportunities that we just did not like the price tag, and we have moved on from. That we are I think we are we are excited about some of the opportunities we are pursuing.

But, again, there are not going to waver. We think we are gonna be disciplined stewards of the capital and make sure it makes sense, and it is something that Raj really sees as strategic fit and benefit. And it is something that I can be here on an earnings call and be proud of the price we paid for.

Analyst (Jeffrey Osborne): Perfect. Thank you.

Operator: Your next question will come from Ananda Baruah with Bank of America. Your line is open. Please ask your question.

Analyst: Hi. Thanks for taking my questions. Raj, I wanted to ask the first question on smart eyewear batteries. I think the press release says that you expect 50 thousand units in 2026. How should we think that scales as we head into next year? How should we think about the revenue progression from smart Eyewear over the next few years?

Raj Talluri: Yeah. So the 50 thousand is, you know, this year. Firstly, I wanted to say that you know, with the way where the yields are and the throughput is and the way it is working, we are now able to manufacture this cell in our lines. The customer will deliver to the customer, they are testing them, it looks good. So firstly, that is, I think, a great result. We you know, as I mentioned, it is a huge market growing rapidly. It should be in the millions next year. it is hard to tell exactly how much.

We have sampled to many different customers now because what we have is a battery that really makes the product, you know, because the energy density you know, right now, as you know, many glasses out there, they do not last the whole day. So this 1 actually continues to improve on that. And now that is why we decided to launch the next product using our AI-2 in that space first. You know, because the market was really asking for even more because they are it just it just very difficult to have the product last all day without that. So we do think that the first product will launch this year.

And next product, you know, AI-2, we are gonna sample this summer, and that will go into production next year. So we expect it to be in the millions next year.

Analyst: Okay. Thanks for the details there. For a follow-up, can I ask Ryan as you ramp the smartphones later this year and next year, the smartphone batteries, how does that impact gross margin? I think some OpEx might move into COGS. So can you just help us understand how we should think about gross margin progression as smartphones become a bigger part of the mix?

Ryan A. Benton: Yeah. Certainly. So certainly, as we as we ramp the smart and the smartphones, you are gonna see some change in and you will see some of the costs right now that we have in operating expense will move up above the line into the cost of goods sold line whenever you think about our cost structure, the majority of our cost of sales is materials. So it is it is really about continuing to drive the bill of materials cost down, and those will be materials that we purchase for those for those orders as we prepare to ship them.

So that is the vast majority of our COGS So when you talk about direct labor, variable overhead, and even a fixed set and fixed overhead to some extent. Although we have some you know, material costs as it relates to the cost of the factory, as we get to a decent amount of volume. It ends up being the very small percentage of our of our costs.

Analyst: Okay. Thanks for all the details. Appreciate it. Yep.

Operator: Your next question will come from Derek Soderberg with Cantor Fitzgerald. Your line is open. Please ask your question.

Analyst (Derek Soderberg): Yeah. Hey, guys. Thanks for taking my questions. I was wondering if there is any way you can segment that $130 million Korea pipeline drones and defense opportunities, how much of that is sort of legacy RouteJade and how much of that is drones?

Raj Talluri: Firstly, this is future looking revenue. Not right. So it is actually, a lot of it is new designs that we are that we are working with customers to get. And so in some sense, some of it is continuation of the defense business that RouteJade had. But majority of it is actually new stuff that we are that we are winning. And drones is, like, you know, over 60% of that.

Analyst (Derek Soderberg): Got it. that is helpful. And then just curious on the NDA compliance piece. I was wondering how unique that is. I know there is a couple others that have that, but not too many at this point. You know, might it be difficult for others to sort of achieve that over the next couple years? And then, you know, within drones, what kind of drones are you getting interest in? You know, there is a wide variety of you know, sea drones, air drones, heavy and light. Where do you guys think you can build a nice business in drones?

Raj Talluri: Yeah. So a NDA compliance is actually not that easy to achieve because there is multiple elements to that on the way the cost of the things that are sourced, what percentage of them have to be from this and countries, and then where the cells are actually manufactured. So for us, you know, we manufacture them in Nonsan, South Korea, which is a non-free country. So which is very good there. And then most of the material we have in there majority of it is actually not sourced there either from a few countries either. So in that sense, it is a big advantage for us and that we own our factories and we have the material.

You know, in terms of drones, we are seeing it in, like, training, you know, public surveillance, inspection, public safety, multiple markets like that. What varies between these drones is, you kind of like a discharge rate, then it also depends upon how many cycles. The first product we made is, as I showed, you know, 300 cycles. High discharge rate, this 1 that I talked about. But we have the technology, and we have the know-how, and we have the factory now to make different products optimized for slightly different lesser cycles, but more energy density, and so on. So we will have a roadmap of products addressing various parts of the market.

You know, as we as we start building out that roadmap.

Analyst: it is an opportunity that is really grew very fast and came quickly. You know?

Ryan A. Benton: And I will touch on my apologies if you already mentioned it, but, obviously, we have got a long history of subsea drones. And so that is something that I think will continue to be a strength for us as well.

Analyst (Derek Soderberg): Perfect. Thanks, guys.

Operator: Your next question will come from Alek Valero with Loop Capital. Please unmute your audio and ask your question.

Analyst (Alek Valero): Yeah. Hey, guys. Thank you for taking my question. Yeah. Just on smartphones, what impact is, memory cost inflation having on your lower end phone volumes?

Raj Talluri: We are not shipping much volume right now. Right? So I think not so much impact right now, but we do see that the number of units shipped this year will probably be much lesser in terms of the total number of smartphone units shipped. Hopefully, that will normalize over the next couple of years by the time we get into higher volume may be less of hopefully, it would be less of an impact. But right now, not too much impact.

Analyst (Alek Valero): Okay. Thank you for clarifying that and Yeah. Another clarification question. Did you say that the 0.7 C testing requirement was removed or you are hoping to remove it? And if so, what impact does that have on your smartphone qualification timeline?

Raj Talluri: Yeah. it is our customers agreed to remove that as a must do. They have agreed to actually have a variation of the 0.2 see and 0.1 C and so on, which is actually how the phone is actually used. As the gating requirement. So that does help. You know, in terms of timelines, it will probably be a little bit longer because the 0.1 C, 0.2 C take longer to run. The 0.7 C is a fast discharge. it is an accelerated test, but it hurts the battery. So they realized it is hurting the battery. it is not really helping.

So in that sense, it may take a little bit longer to do 0.1 C, 0.2 C discharge because the time it takes to qualify is a little longer, at least on the first launches. But once we get to it, we understand what it is, we understand the trend, it should become normalized.

Analyst (Alek Valero): Got it. Thank you. Mhmm.

Operator: Your next question will come from William Peterson with JPMorgan. Your line is open. Please ask your question.

Analyst (William Peterson): Yeah. Hi. Good afternoon, and thanks for all the details on the call thus far. For AI-2, the 20% increase in energy density, you know, using this sort of the next generation platform, can you speak about the trade offs of this, including cycle life that we can consider? I realize this at least in the first stages for eyewear, but assuming I am assuming that AI 1 will be your focus for your initial and second smartphone customer. But do you have a plan to sample AI-2 for smartphones next year, or is this longer dated?

I am basically trying to get a sense for what needs to be solved for the next gen to be used in smartphones and you know, basically, it is a question we have asked in the past, but how should we think about your road map for smartphones beyond AI 1?

Raj Talluri: Yeah. Absolutely. I mean, look, I think the advantages we showed with the 20% increase on the smart glasses, that is why we showed a little bit of color on how we got to that. We increased the cathode voltage. We reduced the amount of inactive materials in there. We will put those and we will absolutely put those things into our smartphone battery, and you will see us improve it similarly. there is a few other things that we are continuing to improve. Packaging efficiency is 1 of them, how we actually package this. They are slightly different electrolytes. So we have a strong roadmap that will keep increasing energy density.

I mean, the thing you got I have mentioned to you, Bill, is that as I mentioned before, we use 100% silicon, but we are not getting the full potential of the energy density increase 100% silicon could and should provide because we have been trying to solve these other problems like cycle life, 0.7 C, you know, accelerated testing. Fast charge, and so on. But once we now work with the customers to get those things you know, understood and how exactly to do the qualification, we will continue to improve our energy density. And first instantiation of our improvement energy density we showed in the in the AI-2 in the smart glass.

But we will quickly roll that into smartphones for next year.

Ryan A. Benton: And the I will just chime in as well here. You know, the finance guy's happy to report that of these key things on the road map, not only improve the energy density, but also reduce cost out of the bill materials and reduce the cost of manufacture. So it is really a kind of magic time when that happens.

Raj Talluri: Okay. And 1 other thing, Bill, maybe since you asked about density road map, I know, it is a question that is come up. Our battery swells very little. So the existing batteries, even with the ones with the silicon dope, still swell. So the most of the smart OEMs actually leave a space in the phone for to allow the battery to swell at end of life. So we actually do not need that space. So when if we get that space also, that is what we are working with our customers. They allow us to use that. Our energy density can be even higher.

So we will be once we get to qualification, we will be able to take advantage of that piece also.

Analyst (William Peterson): Thanks for that color. On the timeline for shifting or the general trend to move towards mechanical dicing, Are there any new challenges that we need to be mindful of? I am wondering about, you know, particles or mechanical stress or other technical issues you need to overcome. Or maybe even said another way, why was not mechanical dicing the primary path for this relative to laser dicing?

Raj Talluri: Well, I mean, you know, again, as you saw in the video, I wanted to show you guys a little bit of the This is a complex machine that we have been working on building for a while. it is not like you just take a roller and put a roll in it. Right? So we have to build roll to roll roller. We have to ablate. You know, we have to dice it. We have to find the right kind of binders and materials to actually make the right kind of coating in electrolytes so that, as you said, when you do it mechanically, it still holds.

So there is a lot of R&D, lot of know how has gone into it. We have been working on it for since I joined. So in that sense, it is a it is a very excited by it is a great technology that our teams have advanced. And there is still you know, again, there is still issues to be solved. Right? So we have to finish the dicing of it. We have to finish the anode, finish the cathode, and put it in a full cell. We are gonna take this year to actually do that because we have enough lasers to you know, meet all the demand we have for this year.

And, absolutely, next year is when we would like to roll that out.

Analyst (William Peterson): Great. And if I could sneak 1 more in, it is it is on the part that you wrote. So 70-5, 72 to 75 tests to life cycle and 1 below freezing power test. Mhmm. I think the power I am not sure about the freezing power test, but is there any insights to how your, you know, expectations? I think you feel I think you feel more confident about the life the cycle life, but what about this freezing power test? Something that I do not think I have heard much about in the past.

Raj Talluri: Yeah. it is it is it is 1 of those common use case because what happens is silicon behaves differently than at very low temperatures. So if your phone with a silicon battery at extremely cold when you start using the phone, and you suddenly have a use case where you pull a lot of energy out is very quickly, you know, there are some challenges to how much energy a battery can put out So these are the kind of situations where we are working very closely with our customers to see at what use cases does this happen, how much does it pull in, and which parts of the world and so on.

So it is, again, like the 0.7 C test, silicon is different from graphite. So the test you had before do not quite work exactly the same. But, you know, so that is 1 of those things that we are working with them. And I do believe that we will we will slowly get past that also as we continue with the journey. Thanks, Raj and Ryan for the details.

Analyst (William Peterson): Yeah. Thanks, sir.

Operator: Your next question will come from Gus Richard with Northland Capital Markets. Please unmute your audio and ask your question.

Analyst (Gus Richard): Yes. Thanks for taking the questions. You mentioned the 130 million of pipeline for military projects. Is that an annual number or is that, you know, a lifetime opportunity and, you know, how much currently how much capacity in Korea do you have to support that?

Raj Talluri: Yeah. So it is it is a total. We keep terms of what are the new designs that we are talking to customers and they are coming. So We typically can update that every quarter. it is not, like, annual. it is lifetime of those designs we have. They may take 1 year. They may take 2 years, you know, time to launch. We have enough capacity right now, but we are adding capacity now as Ryan mentioned, and we are building out that factory more. Fortunately, in the last acquisition we made, we got almost 300 thousand square feet factory with lots of buildings and power and dry rooms and so on.

Very good acquisition we were fortunate to get from SolarEdge. We are now feeding it to keep increasing the capacity. In line with the demand because the qualifications take a little time. So we are going to work on the capacity increase in line with that demand. In a relative basis, of course, this is, you know, relatively standard equipment. So it is it is just blocking and tackling.

Analyst (Gus Richard): Got it. And then when you mentioned the eyewear customer, I believe you said it was a reference design. I was wondering if that is an OEM or like, chip company's reference design.

Raj Talluri: Yeah. Well, you know, again, because of confidentiality, I cannot say really more than who that is. But 1 thing I will say is, I wear maybe I add a little color to it. If you actually think of things like eyewear, there are things people wear on their on their personality. So it is a very style based thing. So most of the eyewear things we buy, as you know, comes from a fashion brands. Right? So like, I mean, you can think of Gucci's and Prada's and Ray-Bans, and you know, and so on that you buy from Sunglass Hut.

So most of the tech companies are even chip companies and so on will actually make a reference platform. So the ultimate product is actually branded as a fashion product. Right? So that is why it is very key to get a reference design, you know, with 1 of those leading technology providers. So that then the channel to market can be through the fashion brands. Got it.

Analyst (Gus Richard): Thanks so much. Thanks, guys. Yeah.

Operator: Are no further questions at this time. With that, I would like to turn it over to doctor Raj Talluri for closing remarks.

Raj Talluri: Yeah. I mean, thank you, everyone, and thank you for your all the questions. You know, over the past year, much of the discussion has been on validation of the technology and its commercial readiness. You know, we believe this quarter, we provided additional evidence. And the conversation can increasingly shift towards you know, disciplined execution against commercial commercialization milestones The markers to watch over the coming quarters are clear: continued progress and qualification targeted system level deployments, initial smartphone production ramp, and conversion of this drone pipeline into revenue. Now we view these as tangible operational milestones. We expect to demonstrate progress methodically over time. And thank you all for your support.

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