On Wednesday, Enovix (NASDAQ:ENVX) discussed first-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
Enovix Corporation reported Q1 2026 revenue of $7.6 million, a 49% increase year-over-year, with a non-GAAP gross margin of 26.3%.
The company commenced commercial production of its A1 battery for smart eyewear and aligned with smartphone OEM Honor on a new qualification framework for silicon anode batteries.
Enovix is seeing growing demand across drone, defense, and industrial applications, with a global product pipeline exceeding $130 million, driven largely by drones.
Manufacturing improvements at Fab 2 show yields nearing 90%, with significant progress in laser and mechanical dicing technology.
Future outlook includes continued growth in defense and industrial shipments, initial smart eyewear revenue in Q2, and a focus on smartphone battery commercialization in 2027.
Full Transcript
OPERATOR
Thank you for standing by and welcome to Enovix Corp first quarter 2026 earnings conference call. Currently, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. As a reminder, today's program will be recorded. And now I'd like to introduce your host for today's program, Robert Leahy, Head of Investor Relations. Please go ahead sir.
Robert Leahy (Head of Investor Relations)
Thank you. Hello everyone. Welcome TO Enovix Corp's First Quarter 2026 Financial Results Conference call. With me today are President and Chief Executive Officer Dr. Raj Shlouri and Chief Financial Officer Ryan Benton. Raj and Ryan will provide remarks followed by Q and A. Before we begin, please note that today's conference call contains forward looking statements that are subject to risks and uncertainties. These statements are based on current expectations and may differ materially from actual future results due to various factors. For a discussion of these risks, please refer to the disclosures in today's press release and our filings with the securities and Exchange Commission. You can also find these materials on our website at ir.enovix.com all statements made on this call are as of today May 13, 2026 and we undertake no obligation to update them except as required by law. Additionally, during the call we may reference non GAAP financial measures. You can find a reconciliation of these to the most directly comparable GAAP measures in the materials posted on our investor relations website. With that, I'll turn the call over to Raj.
Raj Talluri (President Chief Executive Officer)
Good afternoon everyone and 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'm very excited to share that in the smart eyewear market, we commenced commercial production of our A1 battery for our lead customers reference platform and have multiple customers in in the process of launching smart eyewear products. Initial shipments are underway with production expected to ramp through the second half of the year. We believe this validates our ability to manufacture our 100% silicon anode architecture at commercial scale. On smartphones, we aligned with Honor on 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 with 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 leads customer engagements, we're in active dialogue with Several additional leading OEMs regarding silicon anode battery qualification standards, and 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 quality 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 smartphone market reinforces our belief in the industry's interest in high performance silicon anode battery solutions. We're encouraged to see growing demand across our drone defense and 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 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 in 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 Steve Bakos as Senior Vice President of Worldwide Sales to support Sameera Naraghi, our Chief Business Officer. Steve 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'll 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 one dicing which is our current throughput bottleneck. Since I joined to improve the throughput of Zone one, we have been working on a faster, cheaper way to dice our coated rolls. We've 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. What you saw was our mechanical dicing system processing silicon anode strips directly from coated rolls. We're 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 were 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 life testing under this framework systematically understated silicon anode batteries longevity. We've 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 rigorous and visibility into performance. We are seeing broader industry alignment around silicon anode specific qualification standards. Our second smartphone OEM has joined our lead customer in removing the 0.7 C test from their list of hard requirements as is now progressing towards an updated framework similar to our lead customer. Discussions with Several additional top OEMs are ongoing. We expect broad and 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 two 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 is targeted at smartphones and smart eyewear markets where volumetric energy density is a key requirement. Smartphones represent the largest battery market opportunity for Innovix. However, smart eyewear is emerging as one of the fastest growing new device categories. We think that the smart eyewear battery market opportunity could exceed a billion dollars by the end of the decade. More broadly, the AI platform is applicable to virtually any space constrained device requiring high energy density and and long cycle life, including future applications in wearables, computing, industrial handrails, 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've been able to leverage these capabilities in combination with our silicon anode technology know how to to create high performance MX silicon enhanced platform Our initial targets 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're increasing seeing benefits flow in both directions with the AI platform leveraging Korea manufacturing strength and the MX platform benefiting from our silicon expertise and global commercial reach. Alongside qualification progress, our R and D efforts continue to advance the platform. This quarter we produced the first engineering samples of Ai2 for smartware, delivering greater than 20% higher volumetric energy density compared to Ai1. This represents a meaningful architectural driven improvement, potentially enabling product categories that require significantly more power within highly constrained form factors. We achieved this improvement through two 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 of our 100% active silicon anode architecture on the future AI product. Roadmap 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 AI2 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 AI2 is important not only for smart eyewear but but also because similar gains in the future smartphone batteries could materially extend our technology advantage. The current AI One smartphone battery delivers 935Wh l and has been independently validated against graphite and silicon roped 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 around 100% active silicon anodes which we believe provides a substantially higher long term scaling opportunity. Now let's Talk about our second platform MX. This week 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 with 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 MXone at 11 additional conferences around the US and Europe over the next two 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 currently available western capacity, which we believe creates a meaningful opportunity for Innovix. These applications prioritize performance, reliability and supply chain security, supporting differentiated positioning relative to commoditized consumer battery markets. While drones are key near time focus, we've 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 Innovex is vertical integration. Because we own our manufacturing operations, we're 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 grading factor becomes commercial conversion, which is why we recently appointed Steve Bakos as a Senior Vice President of Worldwide Sales. He brings more than 35 years of global semiconductor and industrial sales leadership experience and will help build the commercial infrastructure required to support growth. Looking ahead, MX2 is 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'll turn it over to Ryan to walk through our financial results.
Ryan Benton (Chief Financial Officer)
Ryan 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 and 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 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 $582.7 million 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 increased from the same period a year ago, primarily driven by timing related items including the semiannual interest payment on the 2030 convertible notes and 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 2026 guidance revenue is expected in the range of 8 to 9 million dollars, 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 and 32 million dollars. Non GAAP net loss per share between 13 and 17 cents and capital expenditure payments are projected in the range of 9 to 13 million dollars, 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. And with that I think we're ready to take questions.
OPERATOR
We will now begin the Q&A session. Please note that this call is being recorded before we go to live questions. We're going to read the two 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 (President Chief Executive Officer)
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've now aligned with honor a combination of different pathways that we could use. The 0.7 C legacy test requirement that's been mainly based on graphite batteries. We've aligned with our customers that that is not a must have requirement and it's been removed as a gating item. We're now working on a slightly different point 2C test which more better reflects the real world usage of the smartphone. And that's 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 anode batteries become more and more popular they should really change the requirements that are in the market that have been used mostly for graphite. So it's really nice, really great result. I'm really pleased with my team being able to convince them.
OPERATOR
Now the 0.2 C test is more than halfway done at our customer and it's continuing to go and we're tracking it. The second question is for your AI2 platform, when will the samples be submitted to customers so that testing can begin?
Raj Talluri (President Chief Executive Officer)
Yeah, as I mentioned in the remarks, we have engineering samples now inside and they look really good in terms of the 20% energy density increase that from AI one great achievement by the R and D team 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 budget orders now.
OPERATOR
Thank you. 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 Star9 to raise your hand and Star6 to unmute. Questions will be answered in the order they are received. Please ask one question and one 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.
Mark Shooter
Thank you. Hi guys. Congrats on the progress. My first question is just focusing in on on or a bit. I saw in the press release that you have some field testing looking at the second half right Is when you're targeting. So I'm wondering if you could give us a 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 ramp would look like in 27?
Raj Talluri (President Chief Executive Officer)
Yeah. So again as I mentioned now we have a test methodology that align with honor. So so we're in the middle of doing that and the next big step is to actually put the battery inside an existing phone for which we made this custom size cell. It's hard to predict the number of units and they'll be small because it'll be initial test just to make sure that everything is smooth and limited launch maybe but the real volume will be in 27. But more importantly we got the size for that particular battery that's going to be launched in 27 and we're now working on how to make that battery after the feed testing is complete.
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's going to put you well in the running against the current peer set. So I'm wondering if you could speak to maybe some of the customers that you're engaged with and sampling and and say you win all that business today. Everyone you're engaged with. Do you have an idea of what those qual times look like and your current unit volume and revenue capacity?
Raj Talluri (President Chief Executive Officer)
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 established manufacturing facility that beyond we were able to quickly make that the actually is extremely competitive with what's in the market today and is made totally within our factories. It's not contract manufactured actually I have the phone battery here with me. You know we have a bunch of these cells now so we there's a lot of interest and I just got a call from our sales team who's at the Detroit Drone show right now about the tremendous interest they're seeing because this is also NDAI 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's 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 shorter than things like smartphones because of such a demand. And also the cycle life doesn't have to be that long in these ourselves goes to 300 cycles but even shorter cycles are okay in some of these markets.
Ryan Benton (Chief Financial Officer)
And maybe I'll chime in and you know Mark, you asked about volumes. You know again we talked about in the capex forecast and prepared remarks we're already spending dollars to add equipment to one of the existing buildings in the non facility. And you know, one 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're just going to do that in a methodical way as demand presents, presents itself.
Mark Shooter
That's great. Thanks for the color guys.
OPERATOR
Your next question will come from Colin Rush with Oppenheimer. Your line is open. Please ask your question.
Colin Rush
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 the 360 to 400. How much of that is being driven by increased thickness or different form factor or increased concentration of silicon in the anode?
Raj Talluri (President Chief Executive Officer)
Yeah, great question Colin. So when we did this one, the way we did it was to there's an existing requirement for a cell that's in the market today that many of the customers wanted us to provide something that is with the fully NDI compliant made within our factories. So we made that one and we quickly got it to that performance. Actually it performs really well. The cycle life 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's inside a drone and you could put pressure and put it in there. It's not a space constrained situation like a smartphone. And also the discharge rate and the pulse discharge and the number of cycles are variables. We mentioned 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 discharge rate and amount of Swelling will allow. So I think the good news is we've been working on silicon for a long time. So we know exactly what electrolytes work well with silicon. We're working with graphite for a long time. In Nonsan we have that know how and we have a factory that's been supplying for defense 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's why I think that you will see a pretty competitive roadmap from us for this market very quickly.
Colin Rush
And then looking at the laser cutting, I just want to understand kind of the cadence of learning cycle on yield improvement and how we should think about the engineering work that you're doing and how quickly you can implement that to start getting a little bit better output on the overall. Overall facility.
Raj Talluri (President Chief Executive Officer)
Yeah. So as I mentioned, from last quarter to this quarter, we've improved our yield across multiple zones, you know, well into the 90 range. Now in most of the zones the laser like is kind of the 80% range. But that's improved quite a bit from last time. But as you guys saw in the video, we've been working on this for a while and today I thought was a good time to show you a combination of laser and mechanical dricing that actually cuts much, much, much faster and much cleaner when you laser dice. There are also some challenges that we've been working on for a while, which is how to get to the yield and the throughput and so on. It's an expensive way to do things. Right when I started, we've been working on a different way to actually do this. And 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. So for the next year's demand we can use the mechanical dicer with some combination of laser finishing it up. So really exciting results. So I hope you guys saw that video. Also the throughput that we can produce with that.
Colin Rush
Okay, thanks so much guys.
OPERATOR
Your next question will come from Jeff Osborne with TD Cowan. Please unmute your audio and ask your question.
Jeff Osborne
Yeah, thank you. Maybe just a quick two questions, but one quick follow up on Collins. Can you get to 90% yields without that machinery intact or do you need to add the lasers to get there? And that's more of like a 20, 27 event. Getting to 90% maybe I'll take.
Ryan Benton (Chief Financial Officer)
Yeah, I think we can. We're capable of getting to nice 90% yield. But again, it goes hand in hand with, with throughput. I mean, again, you saw the video really, the mechanical dyser is just able to operate so much faster. And so ultimately all this, you know, I'm the finance guy, ultimately it's, it's about cost. We just think it's the most economical way eventually in some of the sub process steps to operate.
Raj Talluri (President Chief Executive Officer)
And cost of the machines. Right. These are much. It's a less expensive way to get throughput.
Jeff Osborne
Yeah, perfect. And my, my two questions is one, Ryan, I was just wondering if you can update us on the M and A pipeline. I think you've 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, 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've given you or is the SKU that they gave you what they intend to produce in 27? I'm just trying to get a sense of your relationship is deepening with them and they're giving you a glimpse of what they intend to commercialize after the first product launch.
Raj Talluri (President Chief Executive Officer)
It's exactly the letter. So we actually have SKU that launch in 27, so which is actually a fairly large deal and shows the relationships we have with them. And then in terms of the packs to honor the quantities, any comments on that? Yeah, it'll be small volume. Again, it'll be just to test and make sure that the system level stuff works okay and we get small initial launch and I think that's, you know, again, that's fine with us to just to make sure everything is good before we get into high volume.
Jeff Osborne
Does that like thousands friends and family stuff?
Raj Talluri (President Chief Executive Officer)
That's, that's probably what, that's probably what you should think of.
Ryan Benton (Chief Financial Officer)
And then on the first question in terms of MNA pipeline. So I'm, I'm really pleased with the pipeline that we have multiple opportunities that we're pursuing. Again, as we said and repeated time and time again, we're going to be disciplined. So it has to meet a strategic fit and we're going to be disciplined on price. So it's fair to say that we've looked at quite a few opportunities that we just didn't like the price tag and we've moved on from that. I think we're excited about some of the opportunities we're pursuing. But again, there are. We're not going to waver. We think we're going to be disciplined stewards of the capital and make sure it makes sense. And it's something that Raj really sees the strategic fit and benefit and it's something that I can be here on an earnings call and be proud of the price we paid for it.
OPERATOR
Your next question will come from Ruploo Bhattacharya with Bank of America. Your line is open. Please ask your question.
Ruploo Bhattacharya
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 50,000 units in 2026. How should we think that that scales as we head into next year? And how should we think about the revenue progression from smart eyewear over the next few years?
Raj Talluri (President Chief Executive Officer)
Yeah, so the 50,000 is this year. Firstly, I wanted to say that with the way where the yields are and the throughput is and the way it's working, we're now able to manufacture this cell in our lines and the customer, they're testing them, it looks good. So firstly, that's, I think a great, great result. We, you know, as I mentioned, it is a huge market growing rapidly. It should be in the millions next year. It's 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 don't last the whole day. So this one actually continues to improve on that. And now that's why we decided to launch the next product using our AI2 in that space first, because the market was really asking for even more because there, it's 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, AI2, we're going to sample this summer and that'll go into production next year. So we expect it to be in the millions next year.
Ryan Benton (Chief Financial Officer)
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? Yeah, certainly. So, certainly as we ramp the smart eyewear and the smartphones, you're going to see some change in and you will see Some of the costs right now that we have, an operating expense will move up above the line into the cost of goods sold line. But really, whenever you think about our cost structure, the majority of our cost of sales is materials. So it's, it's really about continuing to drive the bill, materials cost down. And those will be materials that we purchase for those, for those orders as we prepare to ship them. So that's the vast majority of our cogs. So when you talk about direct labor, variable overhead and even a fixed set, fixed overhead to some extent, although we have some, you know, material cost as it relates to the cost of the factory as we get to a decent amount of volume, ends up being a very small percentage of our, of our costs.
Ruploo Bhattacharya
Okay, thanks for all the details. Appreciate it.
OPERATOR
Your next question will come from Derek Soderbergh with Kantor Fitzgerald. Your line is open. Please ask your question.
Derek Soderbergh
Yeah, hey guys, thanks for taking my questions. I was wondering if there's any way you can segment that 130 million Korea pipeline. You know, drones and defense opportunities. How much of that is sort of legacy route Jade and how much of that is drones?
Raj Talluri (President Chief Executive Officer)
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, some sense, some of it is continuation of the defense business that routejet had. But majority of it is actually stuff that we are winning and drones is like, you know, over 60% of that.
Derek Soderbergh
Got it. That's helpful. And then just curious, on the NDA compliance piece, I was wondering how unique that is. I know there's 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 of years? And then, you know, within drones, what kind of drones are you getting interested in? You know, there's a wide variety of, you know, sea drones, air drones, heavy and light. Where do you guys think you can build, you know, a nice business in drones?
Raj Talluri (President Chief Executive Officer)
Yeah. So NDI compliance is actually not that easy to achieve because there's multiple elements to that on the way. The cost of the things that are sourced, what percentage of them have to be from this FIAC and non fiac countries and then where the cells are actually manufactured. So for us, you know, we manufacture them in Nonsan South Korea, which is non fiat country, so which is very, very good there. And then most of the material we have in there, majority of it is actually not sourced there either from fiat countries. Either. So in that sense, it's 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 know, 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 destroyed this one 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'll have a roadmap of products addressing various parts of the market. You know, as we, as we start building out that roadmap. It's an opportunity that really grew very fast and came quickly, you know, and
Ryan Benton (Chief Financial Officer)
I'll chime in, I apologize if you already mentioned it, but obviously we've got a lot of a long history of subsea drones and so that's out of Korea. And so that's something that I think will continue to be a strength for us as well. Perfect.
OPERATOR
Your next question will come from Alec Valero with Luke Capital. Please unmute your audio and ask your question.
Alec Valero
Yeah, hey guys, thank you for taking my question. Yeah, just on smartphones, what, what impact is memory cost inflation having on your lower end phone volumes?
Raj Talluri (President Chief Executive Officer)
We're not shipping much volume right now. 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'll normalize over the next couple of years. By the time we get into higher volume, it may be less, hopefully it'll be less of an impact. But right now, not too much impact.
Alec 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're hoping to remove it, and if so, what, what impact does that have on your smartphone qualification timeline?
Raj Talluri (President Chief Executive Officer)
Yeah, it's. Our customers agree to remove that as a must do. They've agreed to actually have a variation of the.2 C in 0.1 C 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'll probably take a little bit longer because the 0.1 C, 0.2 C take longer to run. The 0.7 C is a faster discharge. It's an accelerated test, but it hurts the battery. So they realized it's hurting the battery. It's 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.
OPERATOR
Your next question will come from Bill Peterson with JP Morgan. Your line is open. Please ask your question.
Bill Peterson
Yeah, hi, good afternoon and thanks for all the details on the call thus far for AI to the 20% increase in energy density using the 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'm assuming that AI one 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'm basically trying to get a sense for what needs to be solved for the next gen to be used in smartphones. And basically it's a question we've asked in the past. But how should we think about your roadmap for smartphones beyond AI1?
Raj Talluri (President Chief Executive Officer)
Yeah, absolutely. I mean look, I think the advantages we showed with a 20% increase on, you know, on the smart glasses, that's why we showed a little bit of color on how we got to that. We increase the cathode voltage, we reduce the amount of, amount of inactive materials in there. We will put those, we'll absolutely put those things into our smartphone battery and you will see us improve it. Similarly, there's a few other things that we're continuing to improve. Packaging efficiency is one of them. How we actually package this, they're slightly different electrolytes. So we have a strong roadmap that will keep increasing energy density. I mean the thing I've mentioned to you Bill, is that as I mentioned before, we use 100% silicon, but we're not getting the full potential of the energy density increase 100% silicon could and should provide because we've 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 too in the smart glass. But we'll quickly roll that into smartphones for next year.
Ryan Benton (Chief Financial Officer)
And the chime in as well here, you know the finance guys happy to report that some of these key things on the roadmap not only improve the energy density, but also reduce cost out of the bill materials and reduce the cost of manufacture. So it's really kind of magic time when that happens.
Raj Talluri (President Chief Executive Officer)
Okay. And one other thing, Bill, maybe since you asked about the energy density roadmap, I know it's a question that's come up. Our batteries swell very little. So the existing batteries, even with the ones with silicon dope, still swell. So the most of the smartphone OEMs actually leave a space in the phone for the allow to allow the battery to sell at end of life. So we actually don't need that space. So when you forget that space also, that's what we're working with our customers, they allow us to use that. Our energy tends to be even higher. So once we get to qualification, we will be able to take advantage of that piece also. All right, 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'm wondering about particles or mechanical stress or other technical issues you need to overcome. Or maybe even said another way, why wasn't mechanical dicing the primary path for this relative to laser dicing? Well, I mean, you know, again, as you saw in the video, I wanted to show you guys a little bit of the machine. This is a complex machine that we've been working on building for a while. It's 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, 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 the electrolytes. So that as you said, when you do it mechanically, it still holds. So there's a lot of R and D, a lot of know how has gone into it. We've been working on it for since I joined. So in that sense it's a, it's a very excited by. It's a great technology that our teams have advanced and there's still, you know, again, there's still issues to be solved. 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. So we're going to take this year to actually do that because we have enough lasers to meet all the demand we have for this year and absolutely next year is when we'd like to roll it out. If I could sink one more in on the part that TJ wrote. So 72 to 75 tests, two life cycle and one below freezing power test. I think the power. I'm not sure about the freezing power test, but is there any insights to how your expectations. I think you feel more confident about the light, the cycle life. But what about this freezing power test, something that I don't think I've heard much about in the past? Yeah, it's one of those corner use cases. Because what happens is silicon behaves differently than graphite at very low temperature. So if you have 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 can 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's again like, like the.7 C test. Silicon is different from graphite. So the tests you had before don't quite work exactly the same. But, you know, so that, that's one 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 the journey. Thanks. Thanks Raj and Ryan for the details. Your next question will come from Gus Richard with North Capital. Northland Capital. Please unmute your audio and ask your question.
Ryan Benton (Chief Financial Officer)
Yes, thanks for taking the questions. You mentioned 130 million. A pipeline for military product projects. Is that an annual number or is that a lifetime opportunity? And how much capacity in Korea do you have to support that? Yeah, so it's a total we keep in terms of what are the new designs that we are talking to customers and they're coming so we can update that every quarter. It's not like annual, it's lifetime of those designs we have, they may take one year, they may take two years time to launch. We have enough capacity right now, but we are adding capacity now.
Raj Talluri (President Chief Executive Officer)
As Ryan mentioned, we are building out that factory more. Fortunately, in the last acquisition we made, we got almost 300,000 square feet of 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 Fitting 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 increased in line with that demand on a relative basis. Of course, this is relatively standard equipment, so it's just blocking and tackling. And then when you mentioned the eyewear customer, I believe you said it was a reference design. I was wondering if that's an OEM or a chip company's reference design. Yeah. Again, because of confidentiality, I can't really exactly comment more than who that is, but one thing I'll say is eyewear, maybe add a little color to it. If you actually think of things like eyewear, there are things people wear on their personality. So it's a very style based thing. So most of the eyewear things we buy, as you know, comes from fashion brands. Right. So like, I mean you can think of Gucci's and Pradas 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. So that's why it's very key to get a reference design with one of those leading technology providers so that then the channel to market can be through the fashion brands. Got it. Thanks so much. Yeah, there are no further questions at this time. With that, I'd like to turn it over to Dr. Raj Talluri for closing remarks. Yeah, I mean, thank you everyone and thank you for all the questions. Over the past year, much of the discussion has been on validation of the technology and its commercial readiness. We believe this quarter we provided additional evidence and the conversation can increasingly shift towards disciplined execution against 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 operation milestones that we expect will demonstrate progress methodically over time. And thank you all for your support.
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