Everspin Technologies Inc. Q3 FY2021 Earnings Call

Good afternoon and welcome to the conference call to discuss Everspin Technologies Third Quarter 2021 Financial Results. At this time, all participants are in a listen-only mode. At 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, November 11, 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 third quarter report on Form 10-Q which will be filed with the SEC on November 13, 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 future 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, final adjustments and other developments arising between now and the time with 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, the definitions and reconciliations of GAAP net loss to adjusted EBITDA which provide additional details. This conference call will be available for audio replay for at least 5 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 for everyone for joining us on the call today. First and foremost, let's begin today by recognizing all those among us who have been part of the great brotherhood and sisterhood, we call the U.S. military. Our veterans, active duty service members, Guardsman and reserves. Your service and sacrifice have kept our country safe and free. Q3 results came in above the higher end of our guidance. And as mentioned in our press release, we were GAAP net income positive for the second quarter in a row and had positive GAAP net income for the first nine months of 2021. Our revenue for Q3 was 25% higher than Q2 and 46.5% higher than Q3 a year ago. Being GAAP net income positive continues to be a focus for the company. We believe this demonstrates that being laser-focused on improving product yields, controlling operational expenses, growing our top line while keeping gross margins in a healthy range will drive profitability. Despite being impacted by supply constraints that left over $2 million of customer revenue unfulfilled, we had the largest toggle quarter since 2018. Distributor inventory is still very lean and well below our target as we continue to fight for every wafer and tester we can. STT revenue was flattish as our largest customer was also saddled with supply constraints. The good news is that Everspin was not the constraint culprit. However, based on other suppliers, we do expect STT revenue to continue to be flat for the next couple of quarters. To date, over 1,500 customers have now reached production status using stand-alone MRAMs. Our design wins continue to grow, keeping pace with our record year in 2020, adding another 40 new design wins in the current quarter. These design wins across many applications in all geographies, including industrial automation, robotics, transportation, aerospace and defense. On the R&D front, we taped out our next-generation STT product which we expect to see for silicon out by the end of this year. We believe this new product will be revolutionary in its ability to serve both the SRAM replaceable market, along with mid-density rugged NOR applications where no other memory can play. Finally, with respect to our deliberate strategy of monetizing our IP, we did close two more IP transactions in addition to the RAD-Hard deal we announced previously in Q1. One of those transactions has been recognized as revenue in Q3, while the other will be recognized as revenue in Q4. Post-Q3 results, the cash from both these transactions have already been collected which puts our cash and cash equivalents over $20 million as of today. I will now turn it over to our CFO, Anuj Aggarwal, who will take you through our third quarter financials and fourth quarter 2021 guidance. Anuj?

Thank you, Darin and good afternoon, everyone. We are pleased to report record quarterly financial results reflecting improvement in the business and operational excellence. We delivered solid results with a positive net income of $0.88 million with revenue growth of 25%, exceeding the top end of guidance and positive cash flow from operations of $1.85 million for the third quarter despite some supply constraints. Revenue for the third quarter of 2021 came in at $14.8 million compared to $11.85 million last quarter and $10.1 million in the third quarter of 2020. MRAM product sales in the third quarter, which include both Toggle and STT-MRAM revenue, was $12 million versus $10.2 million in the prior quarter and $9.6 million in Q3 2020. In Q3 2021, the company entered into an IP monetization deal worth $5.25 million. $1.3 million in revenue was recognized in Q3 and the remaining $3.95 million of revenue will be recognized in Q4 '21. Licensing, royalties and other revenue in the quarter was $2.8 million compared to $1.6 million in the previous quarter and $0.5 million in the prior year period. The increase in revenue is due to strong Toggle sales, RAD-Hard revenue recognition and the IP monetization deal. Shipments to suppliers for our largest end customer who we serve with our high-density STT product for data center applications represented 23.3% of revenue in the quarter versus 34.7% of revenue in Q2 and 38.4% in the year-ago quarter. Turning to gross margin. GAAP gross margin for the third quarter of 2021 was 57.1% versus 60.7% in the prior quarter and 23% in Q3 '20. The higher gross margin compared to the prior year quarter is driven by the RAD-Hard revenue recognition and the IP monetization deal. In the prior year, lower gross margin reflected a one-time noncash $1.7 million inventory reserve and $0.4 million in accelerated depreciation. GAAP operating expenses for the third quarter of 2021 were $7.4 million versus $6.7 million in the prior quarter and $6 million in the same quarter one year ago. The increase was primarily for 28-nanometer product development, sales and marketing variable compensation and administrative costs. GAAP operating expenses in the third quarter of 2021 include $1 million of stock-based compensation compared to $0.7 million last quarter and $0.9 million in the year-ago quarter. We expect R&D expense to grow minimally for the remainder of 2021, as we prepare for the launch of our 28-nanometer STT-MRAM product targeted to industrial and other broad-based applications. We are pleased to report a positive net income of $0.88 million or $0.05 per share based on 19.5 million basic weighted average shares outstanding. This compares to a GAAP net income of $0.26 million or $0.01 per basic share in the second quarter of 2021 and a GAAP net loss of $3.9 million or $0.21 per basic share in the third quarter of 2020. Basic earnings per share of $0.05 was better than our guidance range, reflecting our tight operational discipline and strong gross margins. Turning to the balance sheet. Cash and cash equivalents increased to $14.56 million at the end of the third quarter compared to $14.2 million at the end of the prior quarter and $13.9 million in Q3 '20. Cash from operations was positive at $1.85 million for the quarter and $2.95 million positive year-to-date. Turning to our fourth quarter guidance. We expect revenue in a range of $16.25 million to $17.25 million which at the midpoint of $16.75 million, reflects a 13.2% increase over the $14.8 million third quarter 2021 results. The revenue range reflects expected product revenue growth as well as the remaining $3.95 million of revenue expected to be recognized for the IP monetization deal discussed earlier. We expect a GAAP income per basic share of between $0.02 and $0.08, primarily driven by expenses related to next-generation 28-nanometer STT-MRAM product and pricing increases from our suppliers. I'll now turn it over back to Darin for some brief additional commentary before we open it up for questions.

Thanks, Anuj. In summary, we continue to build towards our future of profitable growth. Q3's GAAP positive net income is a testament to the hard work and extra effort the Everspin team put in to control costs, improve our yields and ship everything we could in a very constrained semiconductor supply network. We're both excited by what we have accomplished in Q3, along with the potential opportunities to grow throughout the rest of the year. Operator, you may now open the line for questions.

Your first question comes from the line of Richard Shannon from Craig-Hallum. Your line is open.

Hi guys, thanks for taking my questions here. Sorry for kind of developing questions here on the slide, just getting my model going here. Maybe just a quick one, Anuj, toward the end of your prepared remarks here, I didn't catch the reasons for the lower product gross margins in the quarter. I'm assuming there's some supply constraints or expedite costs or something that are unusual. Can you repeat and expand on that? And to the degree to which you expect that to happen in the fourth quarter and beyond?

Yes. Sure, Richard. So typically, we don't give guidance on gross margin in terms of Q4. But I will say that over the last couple of quarters, as you know, we've seen a strong gross margin relative to our internal model. So the internal model, we typically communicate low 50s to mid-50s. Because of the IP deals as they relate to the RAD-Hard deal and this new IP monetization deal, we have seen an uplift in gross margin over the last couple of quarters.

Right. But I was asking specifically about product gross margin. If I'm doing my calculations right here, it was around 50% for the third quarter and a bit higher than that the last few quarters. So I just want to make sure I'm understanding the dynamics there and if they're going to continue.

Yes. So I think from a Toggle perspective, we've seen some good yield improvements and great work from the operational team. And so we've seen improvements in that space. I think they would hold to these levels going forward? And...

Yes, Richard, some of the compression in our margins is a result of cost increases. There's a lot happening in the supply network, and we are managing that. Everyone is raising prices, and we have communicated future price adjustments to help offset some of these costs. The expected model should be between 50% and 55%. We performed well last quarter and in the first quarter due to our product mix, which we've discussed before. The key point for us moving forward is that our overall margin remains strong because of various intellectual property monetization strategies we’ve implemented. However, we anticipate that the base model for product-specific margins will trend towards the lower end of that range at around 50% due to numerous price increases on components and others, but we expect it to recover as we adjust pricing for our customers.

Thank you for that insight, Darin. I have a follow-up question regarding the product gross margins, particularly on the Toggle side with STT. You mentioned it's been relatively stable from quarter to quarter, and although there has been some decent growth, it seems you're anticipating strong growth, although it may not be as robust, in the fourth quarter. Both you and your predecessor have referenced a significant increase in design wins over the past couple of years, yet we haven’t seen much growth in Toggle. Are we finally starting to see those design wins translate into production? Or are there larger wins that are beginning to ramp up? At the same time, it appears that your largest customer has flattened out or possibly declined, at least in the third quarter based on my figures. Given the good Toggle wins you've had, I would like to understand their sources and the sustainability of this growth, as well as your outlook for the upcoming quarters.

Yes, the good news is that the unusually high growth in Toggle was due to two main factors. Firstly, Q2 was low because we faced numerous constraints. The improvements we made in Q3 allowed us to deliver much more Toggle on its own, which likely contributed to the growth. It seems to be less about a growth strategy resulting in 30% growth and more about a situation with double-digit growth during this period. Looking ahead to Q4, we anticipate significant growth as well. When examining our customer base, we don’t rely on any single large customer. Most of our biggest customers moved on a couple of years ago, which hindered Toggle's growth. Now, we're beginning to see the benefits of those design wins materializing, with several new customers—around 200 to 300 added, although they are smaller, they diversify our portfolio, which is positive for us. We expect Toggle to maintain strong growth through Q4. We could deliver even more STT if we chose to, but it's important for us to manage inventory levels with our large customers. Therefore, we've decided to keep STT levels flat for Q3 and Q4. It could have been much higher, so we could have seen better results had we pursued that. However, we're opting to pace ourselves a bit and leverage other initiatives within the company, which should facilitate growth in the upcoming quarters.

That's a helpful perspective. One last question from me before I step back. Regarding your 28-nanometer STT device, Darin, could you repeat your comments on what markets you are targeting? I believe you mentioned SRAM replacement and possibly some mid-density solutions, but I would like to clarify that. Additionally, could you explain the value add and the applications you are focusing on and the potential opportunity you see in the coming years?

Yes. So let's start with the product, right? The product itself has the capability to do our traditional market which is more kind of like data logging driven SRAM replacement stuff, right? And that's what we've done forever. That's what Toggle does. That's what a lot of the products that we serve do. In addition, we put all the interfaces on it because it can also act and be and drop into a lower socket. And the reason we did that was because we believe that there is a market out there for highly reliable NOR devices that NOR itself today can't get to. Extreme temperatures, external conditions, fast writes but it's a higher performance device with higher retention and higher cycling counts.

Okay, great. I think that's all for me. I'll jump in the line. Thanks.

Your next question comes from the line of Rajvindra Gill from Needham & Company. Your line is open.

Hey good evening, guys. This is Denis on for Raji.

Good evening.

So my first question is around some of these drivers for Toggle. How is the backlog looking? And do you have - is that anybody knew about buying the product? Any kind of either new markets opening up for new customers?

Same old markets, lots of new customers. And yes, I mean it's good when you have lots of new customers that you haven't dealt with in the past. It's good that you have a competitive product that's out there and it's good when you have supply. And all those things aligning have helped us a lot, right? We've been able to leverage some of the supply constraints that we had in the Q2 front for upsides in Q3. We also can handle some upsides in Q4. Our backlog right now is stronger than it's ever been. In fact, the last two quarters, we were 100% booked.

Great. And as a follow-up to that, could you remind us of kind of between the split for the end market split for Toggle versus STT, kind of at which rate of each one skew in terms of end markets?

Yes. Think of STT as mostly enterprise, right? So it's high-speed caching in the big drives, right? So it's a big enterprise play. Toggle is more of the industrial robotics, factory automation just everything could be aerospace. We've announced the Lucid design which is an electric vehicle. So automotive also. And you're starting to see a lot of uptick in those types of applications where we're finding that a lot of the electric car manufacturers and probably even some of the non-electric are realizing that they can't have any failures. And it's really difficult to get high retention products out there that they can count on for many, many, many years, especially when cars are becoming computers.

Great, that's really helpful. And then for my second question, with regards to the Phison partnership, is there anything new there? I think the last year because they were taping out, how is the progress there going?

We research that every quarter and it's the same message, right? We looked at it like they think production is going to be Q2, Q3 of 2023. And eventually, it's been taped out. And if we can get that rolling it can help us. We did get some other design wins on the STT product line, albeit they'll take time to ramp and they're maybe not as big as those ones but we are making progress even without the Phison. But the Phison makes a big difference for us because it's the standard memory control that we're looking for.

So you mentioned sometime in '23, this is expected to roll out? You mentioned a quarter date in there...

It's supposed to be around the second quarter of 2022, not 2020. The next six months are when it's expected to go into production, which will be beneficial for us since we will have our silicon, although they don't have theirs yet. From what I hear, they're currently sampling, so hopefully, we can gain some momentum from that.

Got it. That's it for me. Thanks.

All right. Thanks, Denis.

Thank you.

Your next question comes from the line of John Fichthorn from Dialectic Capital. Your line is open.

Yes, hey guys, great work and thanks for taking my question; a couple. One is, could you talk a little bit about the IP monetization. What are you giving up? What IP are you selling off? And what does it validate? I don't know, just a little bit about that? And then I've got a couple of others.

Yes. We have two main strategies, and now we actually have a third. The first strategy involves licensing our technology to those who wish to use it, which we continue to pursue successfully. A good example of this is RAD-Hard, where we engage in multiple projects. This is beneficial for us since we don't lose anything; they are creating custom products for markets we are not involved in, which is excellent. We will keep this approach going. The second part of our strategy focuses on protecting our intellectual property. We ensure that people license our technology when they are either infringing on it or unknowingly using it. Additionally, we have many patents and intellectual property that we no longer utilize as we shift direction. As we engage in discussions with potential partners regarding valuable assets, these conversations can lead to monetizing our intellectual property, which you are currently observing.

So you're not really giving away anything. This is kind of extra value. You're not selling your patent portfolio to capture $4 million or whatever it is?

That's correct. You're asking about the maintenance fee and whether it’s necessary for your long-term strategy, especially since we have numerous patents. This situation isn't unique to us; after defining a strategic direction, companies often realize they can do without certain things. It's quite straightforward.

Great. It seems there has been a buildup of demand during COVID, which has now been released in this period. At the same time, you've gained a lot of new customers. There appears to be some level of product validation or acceptance occurring. I'm uncertain whether your future outlook has improved or worsened. I'm also not sure if that’s a question for the short term, medium term, or long term, but I would appreciate your thoughts on the relationship between the release of pent-up demand and future visibility.

Yes, there are several questions in your remark, so let me address them. A few years ago, we didn't secure enough design wins in our core business, which prompted us to focus on that area. As a result, we're now seeing a typical momentum, with new customers coming in and launching products during COVID that have been successful, creating demand. We're maintaining our push on design wins for the Toggle for that reason. However, in the first and second quarters, we faced significant supply constraints and various supply chain issues that were challenging to navigate. In the second quarter, there was a surge in demand that coincided with these constraints. As supply began to improve, we were able to meet demand better. Nonetheless, in Q2, the demand outstripped our capacity to service it. By Q3, we received some of the supply that was held up in Q2, which helped. In Q4, we have sufficient supply to meet demands, though we still estimate leaving around $3 million to $5 million of potential revenue untapped. Despite our results, demand is still greater than supply, and current orders will likely be fulfilled in Q1 or Q2.

That's great. So you have good visibility. And does that extend on a longer-term basis? Like in other words, is the base for this product, are we finally at this inflection point where this is now a growth market and you've got kind of, I don't want to say unlimited but a lot of additional growth going forward that you can just see through execution?

You can see it through our customers, as the names of those we are shipping to today reflect a larger base than before. A few years ago, we lost a couple of significant customers due to price increases and other factors, which negatively impacted us. Currently, our revenue appears to be more stable and less risky. As a CEO, my main concern is looking at our strong backlog, which is nearly fully accounted for in the first one or two quarters. I wonder how long this will sustain and if it’s influenced by other constraints, as our product might not be the most expensive in this market. However, at this stage, our focus is on our immediate needs, given our low inventory levels that require replenishment. While there’s a bit of leeway since we have to manufacture enough product to reach proper inventory levels, similar to the situation everyone else is facing, our stock is down and quite low right now.

Great. Last question and then I'll drop off which is the NOR opportunity you mentioned in response to another question, kind of your science around NOR. I'd love your thoughts around that opportunity, how additional is it? How big is it? How immediate is it? Just any thoughts on that would be great.

So back in my past, I used to run the NOR division for Intel. And I was the one that shut it down because there was no technology advancement over time and you haven't seen that for four or five years. And so the theory that we have is that not only can we displace SRAMs but we can also put these really rugged devices with real high retention because remember, we were designing for an infinite endurance with SRAM. You don't need that for NOR. And if you look back on 65-nanometer, the retention data on a lot of the NOR devices is not as good as people say and it's all built on air correction, block management and different things. So there's a lot of software. They don't need software, it simplifies the design. So for people that want rugged devices that can outperform what's out there today, they'll choose this. Now, I don't know how big this market is today and how big the NOR market is, but we're going to have to find out as we move through it. And it's not the only thing we're putting this product out. Remember, it's a traditional SRAM market but we do have the opportunity to go test this other market. Same product, it has both interfaces; it has SRAM and it has NOR.

That's great. Thank you so much.

You bet.

You have another question from the line of Richard Shannon from Craig-Hallum. Your line is open.

Great, thanks for taking the last couple of questions here, Darin. Following up on the topic of SSD control, as you mentioned, Phison. How about any other partners or potential partners you've talked about and whether there's any progress and end visibility into getting other guys doing MRAM-based SSD controllers?

Yes. I mean not a lot of other people doing it from what I know. Phison is the biggest one but they're also the biggest supplier. So that's good. I think the better thing is that at our largest customer, we've gotten quite a few more design wins which is helpful for us, right, because then it kind of extends the life of what we're doing and hopefully, it will grow it through time. But yes, we're kind of in the wait mode until we can get that controller out because that standardizes our product. And right now, it's hard because a lot of people are using FPGAs and different things to interface with it.

Right. Okay. Last question here is on supply constraints. I know this is a crystal ball sort of stuff here but how long do you think the issues are going to be at hand here, both for you, specifically and for your customers? Any sense of what you're hearing out there?

I haven't heard anything specific. But if we consider the cyclical nature of supply and demand, it should improve sometime in 2023. I think you'll hear comments along those lines. However, if we look at the constraints that have been present for almost a year and a half, maybe even longer, it seems like a recurring pattern. I remember when I managed the flash products at Intel; I could predict the cycles accurately because when we launched a new factory, everyone else did too, resulting in an oversupply that eventually caught up with demand. Then, you faced constraints, prices increased, and you would add more factories. This trend typically flipped every 2.5 years. I'm unsure if COVID has altered this pattern, but if it follows the usual cycle, we should see an end to these issues sometime in 2022.

Okay. Most people think that you're calling for some time next year and do you think it's going to be longer than that then?

I'm sorry, I meant to refer to 2022.

Yes, all right. I heard that loud and clear. Thanks for clarifying and that's all for me, Darin. Thank you.

Thanks, Richard.

There are no further questions at this time. I would now like to turn the conference over back to Mr. Anuj Aggarwal.

Okay. With that, 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's call. Operator, you may now disconnect the call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect. Presenters, please stay online for a post conference.