Everspin Technologies Inc. Q2 FY2021 Earnings Call

Good afternoon and welcome to the conference call to discuss Everspin Technologies' Second Quarter 2021 Financial Results. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. As a reminder, this conference call is being recorded today, Thursday, August 12, 2021. Before we begin the call, I want to remind you that this conference call contains forward-looking statements regarding future events, including but not limited to our expectations for Everspin's future business, financial performance and goals, customer and industry adoption of MRAM technology, successfully bringing to market and manufacturing products in Everspin's design pipeline, and executing on its business plan. These forward-looking statements are based on estimates, judgments, current trends, and market conditions and involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. We would encourage you to review our SEC filings, including our second quarter report on Form 10-Q filed with the SEC on August 12, 2021, and other SEC filings made from time-to-time in which we may discuss risk factors associated with investing in Everspin. All forward-looking statements are made as of the date of this call. And except as required by law, we do not intend to update this information. The financial results discussed today reflect our preliminary estimates, are based on the information available as of the date hereof and are subject to further review by Everspin and its external auditors. Our actual results may differ materially from these estimates as a result of the completion of our financial closing procedures, financial adjustments, and other developments arising between now and the time that our financial results for this period are finalized. Additionally, the company's press release and statements made during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP net loss to adjusted EBITDA, which provide additional details. This conference call will also be available for audio replay for at least five days in the Investor Relations section of Everspin's website at www.everspin.com. And now, I'd like to turn the call over to Everspin's Executive Chairman and Interim CEO, Darin Billerbeck. Darin, please go ahead.

Thank you, operator, and thanks to everyone for joining us on the call today. Q2 results came in at the higher end of guidance, and as mentioned in our press release, we were GAAP net income positive for the first time in company history. Being GAAP net income positive is a key milestone for the company. It is simple proof that being laser-focused on improving yields, lowering operating expenses, and growing our top line will drive profitability, albeit at lower revenue levels, if your gross margin is higher. Revenue for Q2 2021 was up 15% over Q1 2021. For Q2 2021, STT revenue bounced back, increasing 56% and continues to gain traction as the market recovers. Toggle was flat to slightly down due to supply constraints. In fact, our current backlog suggests that Toggle Q3 revenue would be even higher if we weren't supply-constrained once again. A testament to what seems to be a solid economic recovery in the industrial and factory automation areas, along with the continuing to shift to the new design wins we've been discussing for the past couple of years. We continue to see strength in Q3 with starting backlog over Q2 for industrial customers, and we are encouraged to see that all four regions continue to grow. STT revenue was back on track as expected in Q2 and continues to trend in line with exit expectations for Q3 and Q4. Design wins continue to grow in Q2 2021 as they did in Q1. We're on track to match the design win total of 2021 versus 2020. As you may recall, 2020 was a record for design wins. We continue to focus our efforts on turning those opportunities into real revenue with the only limiter being the industry supply. On the Q2 operations front, we continue to focus on yield improvement and lowering our costs everywhere. We expect to see gross margins begin to flatten out through the end of the year as most of our gains are being offset by supplier price hikes. The biggest risk to our plan this year continues to be about getting the capacity at the committed pricing in the tight capacity situation worldwide. As we discussed last quarter, we won a RAD-Hard design, collected $3 million in cash, and finally, this quarter, we're able to recognize some of the revenue. Q2 revenue did include about $1.2 million in licensing revenue, and we expect to recognize the rest of the remaining portion of the $3 million based on development milestones for the next couple of quarters. I will now turn the call over to the interim CFO, Anuj Aggarwal, who will take you through our Q2 quarterly financials and Q3 quarter 2021 guidance. Anuj?

Thank you, Darin, and good afternoon everyone. We are pleased to report GAAP record financial results for the June quarter, reflecting our strong operating results. Highlights include positive net income for the first time, revenue at the top end of guidance, and improved gross margin. Revenue for the second quarter of 2021 came in at $11.85 million, compared to $10.3 million last quarter and $11.8 million in the second quarter of 2020. MRAM product sales in the first quarter, which included both Toggle and STT-MRAM, revenue was $10 million versus $8.9 million in the prior quarter, and $10.9 million in Q2 2020. Q2 reflected the first time the company recognized $1.2 million in revenue from the RAD-Hard deal resulting in licensing, royalties, and other revenue in the quarter of $1.7 million compared to $1.4 million in the previous quarter and $0.9 million in the prior year period. The increase in revenue is due to strong STT sales and RAD-Hard revenue recognition offsetting the yearly true-up in royalty that was recognized in Q1. Shipments to suppliers for our largest end customer, who we served with our high density STT product for data center applications represented 34.7% of revenue in the quarter versus 25.6% of revenue in Q1 and 34.4% in the year-ago quarter. Turning to gross margin, GAAP gross margin for the second quarter of 2021 was 60.7% versus 58.2% in the prior quarter, and 43.9% in Q2 2020. The higher gross margin is driven by RAD-Hard revenue recognition and improved yields. GAAP operating expenses for the second quarter of 2021 were $6.7 million versus $6.3 million in the prior quarter and $6.3 million in the same quarter one year ago. The increase was specifically for 28-nanometer product development. GAAP operating expenses in the second quarter of 2021 included $0.7 million of stock-based compensation compared to $0.74 million last quarter and $0.92 million in the year-ago quarter. We expect R&D to grow minimally, the remainder of 2021 as we prepare for the launch of our 28-nanometer STT-MRAM product targeted at industrial and other applications. For the first time in company history, we are reporting a positive net income of $0.256 million or $0.01 per share based on 19.3 million basic weighted average shares outstanding. This compares to a GAAP net loss of $460,000 or $0.02 per share in the first quarter of 2021 and a GAAP net loss of $1.29 million or negative $0.07 per share in the first quarter of 2020. Earnings per share of $0.01 was better than our guidance range reflecting our tight operational discipline and strong gross margin. Turning to the balance sheet, cash and cash equivalents decreased to $14.2 million at the end of the second quarter compared to $15.5 million at the end of the prior quarter and $12.9 million in Q2 2020. Cash flow from operations was negative at $0.56 million for the quarter, but remained positive at $1.1 million for the first half of the year. Turning to our third quarter guidance, we expect revenue in the range of $11.7 million to $12.7 million, which at the midpoint of $12.2 million represents a 3% increase over the $11.9 million from the second quarter of this year. We expect a GAAP loss per share between negative $0.04 and negative $0.07, primarily driven by expenses related to next-generation 28-nanometer STT-MRAM product and price increases from our suppliers.

Thanks, Anuj. In summary, we continue to build towards a profitable future. Q2's GAAP positive net income is a testament to the hard work and extra effort the Everspin team put in to control our costs, improve our yields, and ship everything that we could in a very constrained semiconductor supply network. We're both excited by what we accomplished in Q2, along with our potential opportunities to grow throughout the year. Operator, you may now open the line for questions.

Thank you, Darin. Our first question comes from the line of Richard Shannon from Craig-Hallum. Please go ahead.

Hi guys. Thanks for taking my questions. And congratulations on the first quarter of GAAP net income. I'm sure this is a great time for you guys to celebrate. So, congrats on that. Maybe just a couple of quick tactical questions here. By the way, can you hear me? I'm getting a little feedback on the line, is it okay for you?

Yes, we can hear you perfectly.

Yes, we can hear you.

Okay. All right, good. Let's discuss the guidance for the quarter. I'm receiving a lot of feedback. Just a moment, I need to remove my headphones; they are working very well. So, regarding the guidance for the quarter, I couldn't quickly calculate in my head how much of the RAD-Hard license and other licensing will contribute to the third-quarter revenue numbers. So, let me rephrase my question: are we expecting to see sequential product growth in the third quarter?

Yes, product growth has actually increased. It rose every quarter, with an approximate 13% increase from Q1 to Q2, and it is expected to rise again in Q3.

Up, yes. Okay. Okay, that is helpful. And then any way that you can help us think about the gross margins here for the guidance as well? Obviously, moving parts within licensing can move that here, so maybe you can help us out to think about that directionally, that would be a big help.

Yes, sure. This is Anuj. So, gross margin, we don't typically guide on gross margin. But I will say for modeling purposes, I think you can stick to about mid to low 50s for gross margin. As you would expect in Q1, we had a royalty true-up; in Q2, we're seeing higher yields and some of the RAD-Hard deal driving higher margins. But there is some risk to supply chain costs increasing, and so that way we think that the mid to low 50s is fair.

Okay, fair enough. Thanks. Darin a quick question on supply constraints, is this impacting you equally across Toggle and STT or is it more on the Toggle side?

It's probably more on the Toggle side, as you saw in Q2, actually, our Toggle was flat to down in Q2 where STT was up quite a bit. So, we were able to at least build enough inventory as we moved through on the STT products that we didn't have this biggest constraint. The big issues on Toggle weren't necessarily front end; they were back end. So, it was like packaging and tests and some of the constraints on that. So, one other thing I want to mention is we are trying to be somewhat conservative, Richard, because the company has been known for missing guidance a lot. So, as we kind of walk through these things, we're going to see some cost increases, because we've already been pushed on that front, but we're trying to model in maybe we're a little too conservative on that; but I'd rather be upfront about what the constraints are and the price increases than have it be a surprise.

Okay, that's understandable. I appreciate the details. I'd like to ask a couple of questions regarding your outlook on STT, both in the short term and long term. I would love to hear more about the engagement with your high capacity STT-MRAMs, including how that is progressing through applications and customers that have recently ramped up, as well as a general outlook on the high capacity segment.

Yes, we still have one big customer, as you're well aware of. And we're beginning to ramp none of the smaller versions of customers in that same product line. So, we have, we don't just have one customer; we have quite a few, albeit not as big as that one cluster. Again, as we mentioned before, I think the biggest thing that will help us is the Phison memory controller that is taped out and, hopefully, we can get that thing starting to design in the end of this year and early next year. So, we can start ramping some larger customers on that. But it's going to take some help because not everybody wants to use that FPGA versus an ASIC solution.

Okay. And how is the environment for other STT or excuse me, SSD controllers? I know you're kind of looking for a broader ecosystem there; is that still expected here as you expect Phison side to be your primary partner?

Right now, Phison is excelling because they are leading the market. We are collaborating with other memory controllers as we progress. Our goal is to build credibility, especially with the one key customer we have, which is attracting attention. It's more challenging for a company of our size to achieve this, and we can't pressure others to expedite the process. However, we are ensuring they have all the necessary capabilities and technical specifications of our products and interfaces, which simplifies things for them. We have been engaged in this effort for over a year, and it should benefit us significantly. Additionally, as we release the next version of our product, particularly the lower density version with standardized interfaces and expected high volumes, we anticipate positive outcomes. The STT product we currently offer for enterprises is crucial for us, and we believe that our future products on the roadmap look promising as well.

Okay. And I got a couple of questions, but I'll step out of the line here, and see if there's others in the queue, and if not, I'll jump back in right away. Thanks a lot, Darin.

Okay. Thanks, Richard.

Thank you. Our next question comes from Richard of Craig-Hallum. Please go ahead.

I want to follow up on your last comment about the lower density STT. I'm not sure if I have asked this before, but when can we expect those products to be qualified and begin ramping up? I know you likely have an idea of when they will be available for production, but I assume that some of these design cycles may take time in certain markets. When do you anticipate this becoming a more significant part of the overall revenue profile?

I believe we will start sampling the product early next year; the models will be available before that, with a release late this year. This will assist people with reference designs and similar needs. As we progress, I expect to see early design wins next year, but it will likely take about a year to fully ramp up. We should see some volume next year, but I anticipate the majority will come during the 2023 to 2024 timeframe.

Okay, that's helpful. Darin, I want to ask on embedded MRAM. How is that looking here? How was that ramping versus your expectations of, say, six, nine months ago? And if there's any way you characterize how meaningful it is on a run rate basis today? And where do you think it can go?

Yes, well, it's where we thought it would be, which is not going to be huge, right? It's a small revenue stream today, because the products that are currently shipping are not super high volume for global foundries. And so as they begin to get more customers, we're going to see more volume on that. The great thing is the proof points on this are a couple of devices that are pretty well-known in the industry. So, that's encouraging to us. But I don't anticipate that to be a huge amount of the revenue for another two to three years at least.

Okay. That's helpful. Darin, I have a question or maybe two regarding design wins. You mentioned that you're on track to match last year's record number of design wins. I would like to hear your thoughts not just about the quantity of wins, but also about their size. Are there expectations for the values of these design wins to increase significantly? I’m looking to understand the overall pipeline value.

Yes, let me ask the question a little differently. So, what I looked at the other day, because we were doing a review of our sales and I looked at there was probably five customers, let's say a year to a year and a half ago, and most of those customers were over a $1 million to $2 million for the year time point, they were pretty big. And so those customers were just a massive amount, like the types of top 20 customers were 44% of the total volume. What we're starting to see, which I think is really, really encouraging is we're starting to see that thing really kind of blow out where there's a lot more customers that are $500,000 and new per year versus these big customers, and so that's encouraging to us because we're starting to see more homes and more diverse markets. And it's a nice place to be at, because it's not just one big customer moving the needle and then potentially having risk. It's multiple different customers all in that smaller range, which just continues to add. And I would say that that's the biggest reason why we're growing is the diversification of growth. And the fact that there's multiple customers with these lower revenue streams but still meaningful, and they all add up. And I think that's the big thing because we have lost quite a few big customers and a million dollars over the last couple of years. And so now you're starting to see that thing grow back with a lot more diverse customer base.

Okay, great perspective. Last quick one for me, Darin, on RAD-Hard here. I think when you announced this license, as my recollection last quarter, and you're near than think your expectation eventually being able to ship RAD-Hard parts here. But I thought it was maybe a couple of years in the future; maybe you can refresh or update us on when that may happen? And what's the potential size of this market?

Yes, this is a two to three-year deal. So, this was developing a product on our technology and running it through our fab. So, there are milestones that are out there really development and process integration model milestones. So, what happens is we sign this license, but then there's a lot of activities that need to go through it to actually recognize the way these contracts are written. We have to recognize that revenue through time. So, we expect that we'll recognize that revenue, and then at a later date, you're actually going to get royalties off the products that you ship. So, we expect those products to be shipping in the 2023 timeframe, is where you start to see those shipments. So, you'll see some of the NRE that we're gaining today on our milestones, and you'll see that translate into royalties, not as big for sure, but it's a great revenue stream.

Okay. Last question. I'll get out of line here just on the model here in terms of OpEx, how should we see that in dollar terms? And I guess I think more of a pro forma basis including SATCOM, but if you want to talk about it in GAAP, that's fine too. But how should we see the transition here over the next few quarters go with OpEx?

Yes, so that's a great question, Richard. So, from an OpEx standpoint, we are seeing some increases in R&D that were expected related to the 28-nanometer next-generation product and supporting that. We saw an uptick last quarter; I think we'll see minimal increases from the prior quarter kind of sustaining at those levels. One of the things that we've done in Q2 is we've been able to reduce some SG&A spending to offset some of those things. So, you'll see that in the model for Q2, and so overall, we would say we're trying to keep it within 10% or less of growth from a modeling perspective.

A significant portion of our investment is temporary, as we are making substantial upfront investments in technology development and product design. You can expect to see a lot of progress in these areas over the next 12 to 18 months, after which the investment will begin to taper off.

Okay. All right. That's good perspective. I think that's all for me, guys. Thank you.

Thank you.

All right. Thanks.

Thank you, Richard. Our next question comes from the line of Rajvindra Gill from Needham & Company. Please go ahead.

Hi, Darin. This is actually Denis on for Raji tonight. I just wanted to ask a quick question about the cost increases. Can you guys provide any details on what kind of specific cost increases you're actually seeing in the supply chain and how those are being passed on to you?

Yes, I mean, what you'll have is, you'll have for instance, say, an assembly test person that says, hey, we're getting increases in your substrate costs. And there could be 5%, 10%, something of that nature. Some people you'll see a 30% increase in a package cost because it's constrained or more utilization of testers and different switchover. So, it's in all different forms right now, depending on which supplier it is. But we're starting to see those increases. And we don't necessarily want to pass them off to our customers because we're in that design win and growth phase. So I don't think that's appropriate. We could do that. A lot of companies are doing that, but we've chosen not to. And so our plan is to offset those by doing cost reductions of our own and margin improvement and yield improvement.

Got it. And would you say that these have just kind of cropped up this quarter in the assembly and test kind of phase of production or there's been going on for a little longer? Are these more recent?

The discussion we had late last year showed that many are fighting, changing suppliers, and taking various steps to address the challenges within the supply network. However, I anticipate that these issues will continue through 2023, likely stemming from 2022 at the very least, after which the situation will change as there will be more capacity than needed. This will place our suppliers in a different position compared to now, but it's typical for everyone involved.

Got it. For my follow-up, could you discuss how you view the mix of Toggle and STT going forward? Considering you have both the older and newer versions, do you expect Toggle to be relevant for a while, or will you transition to just STT or perhaps a new product? What are your thoughts on that?

I see Toggle as a reliable product with high data retention and minimal failures. It's a strong option in its specific market, and we're expanding that market as more people recognize the benefits of smaller, lightweight memories that don't require replacement, especially in factory automation and automotive applications. Toggle will continue to grow, and we've realized that it has been overlooked in the past. We're now putting significant focus on it because it's a profitable product for us, and we have the capacity to support it beyond assembly and testing. In contrast, STT is a larger product developed outside our facilities, which means we depend on subcontractors. It's a different technology altogether. Our upcoming advanced products will be based on STT due to its scalability, whereas Toggle has limitations in regards to reductions. However, Toggle remains relevant in its specific markets. Over time, STT will find more applications, particularly in SRAM and NOR, and we can showcase some of the NOR technology with this product.

Got it. That was really helpful. Appreciate it.

Thank you. Our next question comes from the line of Greg Johnson of RBC Capital. Your line is open.

Hey, guys, thanks for taking the questions. Just a little follow-up on Richard's question on the design wins. Since you were willing to get some color, I might see if how much more color you would be willing to give on that as far as these $500,000 plus. These are still good longer-term type of contracts. And how many of these you foresee possibly getting into those larger $1 million to $2 million, maybe even plus?

Well, I think if you get a $500,000 per year when it usually turns into multiple things, because what’ll happen is people then are attracted to your product. They find different homes for the product. So I always tell people, you'd start to get a $100,000 order before you get the $2 million order. So the good thing is these customers, and once they see our support, our supply, or reliability and all the other things about the product, then you're going to start to see that grow. So for me, the risk is much lower having $100,000 to $500,000 customers versus $5 million customers. And so we're trying to look at it that way. It's just like, hey, let's find this diverse, doesn't mean we won't go after the big fish. But those big fish also turn into risky things, which it did in the past, because I think at one time Toggle was running at $12 million or $13 million a quarter. And then it dropped way down. And now we're kind of fighting our way back up to those levels. And we have STT, and we'll have a new STT product. So, we're a lot more bullish on this, especially as we focused on it. And we've been focusing on these designs for about three years.

It's great to see that the numbers are still strong. Do you have any updates regarding the ASIC side of the business?

Yes. I mean, the Phison ASIC is in play. We've heard it has taped out. We've been watching that; as I said last call, I saw we were on their website, which is really, really cool. But then it's just going to take time for people to be able to design it in and those things. So, but we expect to see some good evidence of that working next year. So I would expect at least to get a few design wins as we go through this and hopefully a couple big ones.

All right. Any anything on a timeframe on any of those as far as in process or that's still not yet?

Well, we have a few little ones right now. But those are made, those are custom designs. But now based on the Phison, once the Phison thing actually comes out then I'll have more clarity on that. But my expectation is we actually do have a lot more opportunity to win, because it's easy to design it in, and they have a reference design. We didn't have that for the original product that we shipped on the one gig.

Hi. Good afternoon, everyone. Thank you for taking my question, and congratulations again to the team on a wonderful quarter; there were many great moments. I have two quick questions. I was wondering if you could share any thoughts on a competitor that recently announced a STT in RAM product and avalanche?

Sure. We expect them that's a lower density product than what we provide. And there's always competition, I don't know that they've shipped anything to my knowledge. I don't know if they're shipping it; the specifications look pretty good. From what I can tell, so I'm not going to dismiss that we have competition. The good news is that, we'll have more than one person in the market. And when you have more than one person, then there's probably going to be a lot more opportunity for both.

Okay. Thanks for that. And then my last question, just real quick. Any updates on the official executive search process? I noticed that both of your titles are still interim. So, I'm just curious on timing and process there's? Thank you.

We're currently addressing the executive search process. It's funny because we anticipated someone would ask this question, and you did. The bottom line is, we're actively working on it, and the Board is involved as well. We aim to resolve this sooner rather than later. You can trust that both of us are committed to ensuring the leadership team remains strong, and the right individuals are in place to achieve our objectives. This isn't a major concern for us at the moment, but we acknowledge the need to either simplify titles or make other adjustments, which will take place.

Yes. I mean, I guess the question is, what's your vote? Based on the financial?

Yes. Do we need to change everybody based on the financial or you think we're doing okay?

I think you're doing well. Keep up the good work. I'm glad to hear you're committed for the long term. I just wanted to clarify that. Thank you.

Yes, no problem. We are not going to leave anytime soon, and we are definitely not going to leave the company.

Okay. With that said, we conclude today's call. Thank you all for joining us, and we look forward to reporting our progress and results in the next quarter. Operator, you may now disconnect the call.

Thanks, everyone.

Thank you, Darin and Anuj. This concludes today's conference call. Thank you for participating. You may now disconnect.