Everspin Technologies Inc. Q4 FY2021 Earnings Call

Good afternoon, and welcome to the conference call to discuss Everspin Technologies Fourth 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, Wednesday, March 02, 2022. 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 annual report on Form 10-K which will be filed with the SEC on March 03, 2022 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 undertake no obligation to update any forward-looking statements made on this call to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise. 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, final 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 discussion of certain measures and financial information in the GAAP and non-GAAP terms. Included in the Company's press release, our definitions and reconciliations of GAAP net income to adjusted EBITDA, which provide additional details. A copy of the press release is posted in the Investor Relations section of Everspin's website at www.everspin.com. This conference call will 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. Q4 results came in above the high-end of guidance as mentioned in our press release. We were GAAP net income positive for the third quarter in a row. We also had positive GAAP net income for the year that ended December 31, 2021, which is the first in Everspin's history. Our revenue for Q4 was 23% higher than Q3 and 82% higher than Q4 a year ago. Being GAAP net income positive on a consistent basis is obviously a focus for the company. We believe this demonstrates that being laser-focused on improving product yields, controlling OpEx spending, and growing our topline while keeping gross margins in a healthy range will drive profitability. A few records we achieved in Q4 2021: record annual total revenue, record annual product revenue, record Q4 product revenue, record annual design wins again in 2021 after setting a record in 2020, a record of more than 1,600 volume production customers, and record low distributor inventory showing strength of our sell-through and impact of the supply chain, although I'm not really sure I'm proud of that record. Our record 2022 product backlog is at an all-time high. Despite being impacted by supply constraints that left over $2 million of customer demand 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 every tester we can get. It's doubtful we can get into a healthy inventory range until 2023, assuming all goes well with respect to allocations. 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. On the R&D front, we are in the process of checking out our next-generation STT product, which we expect samples to be out later in March. This is right on track for what we expected. Knock on wood, our checkout so far shows no major issues. We believe this new product will be revolutionary in its ability to serve both the SRAM replacement 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 recognized $3.95 million in revenue in Q4 related to IP transactions. We are pleased to note that our cash and cash equivalents are over $21 million as of the end of the year. I will now turn it over to our CFO, Anuj Aggarwal, who will take you through our fourth quarter financials and first quarter 2022 guidance. Anuj?

Thank you, Darin, and good afternoon, everyone. We are excited to report Everspin's best-ever quarterly results, delivering a strong finish to a record year. Despite supply constraints, I am happy to announce that Everspin reached profitability for the first time at year-end. We delivered solid quarterly results with 23% revenue growth over last quarter, beating the top end of guidance, positive net income of $3.7 million and positive cash flow from operations of $6.4 million for the fourth quarter. Revenue for the fourth quarter of 2021 came in at $18.2 million compared to $14.8 million last quarter and $10 million in the fourth quarter of 2020. MRAM product sales in the fourth quarter, which include both Toggle and STT-MRAM revenue, were $12.6 million versus $12 million in the prior quarter and $9.7 million in Q4 2020. In Q3 2021, the company entered into an IP monetization deal worth $5.25 million. $3.95 million in revenue was recognized in Q4. Licensing, royalties, patents and other revenue in the quarter was $5.6 million compared to $2.8 million in the previous quarter and $0.3 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 23.4% of revenue in the quarter versus 28.5% of revenue in Q3 and 39.9% in the year-ago quarter. Turning to gross margin, GAAP gross margin for the fourth quarter of 2021 was 62.8% versus 57.1% in the prior quarter and 52% in Q4 2020. The higher gross margin compared to the prior quarter is driven by RAD-Hard revenue recognition and the IP monetization deal. GAAP operating expenses for the fourth quarter of 2021 were $7.7 million versus $7.4 million in the prior quarter and $6.4 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 for the fourth quarter of 2021 included $753,000 of stock-based compensation compared to $1.03 million last quarter and $1.3 million in the year-ago quarter. We expect R&D expense to grow in 2022, as we prepare for the launch of our 28-nanometer STT-MRAM product targeted at industrial and other broad-based applications. We are pleased to report fourth quarter positive net income of $3.7 million or $0.19 per share based on 19.4 million basic weighted average shares outstanding. This compares to a GAAP net income of $880,000 or $0.04 per basic share in the third quarter of 2021 and a GAAP net loss of $1.6 million or $0.10 per basic share in the fourth quarter of 2020. Basic EPS of $0.19 was better than our guidance, reflecting our strategic operational discipline and strong gross margins in the face of tightening supplies and high margins from IP deals. Turning to the balance sheet, cash and cash equivalents increased to $21.4 million at the end of the fourth quarter compared to $14.6 million at the end of the prior quarter and $14.6 million in Q4 2020. Cash flow from operations was positive at $6.4 million for the current quarter compared to $1.9 million in the prior quarter and $0.6 million positive for Q4 of last year. Turning to our first quarter 2022 guidance, demand for our Toggle products remained strong. We expect industry supply constraints to limit supply and push some unfulfilled customer demand to Q2. We expect Q1 revenue to be between $13.4 million to $14.2 million, and we expect a GAAP income per basic share of between negative $0.03 and breakeven, primarily driven by expenses related to next-generation 28-nanometer STT-MRAM product and price increases from our suppliers. I'll now turn it back over to Darin for some brief additional commentary before we open it up for questions.

Thanks, Anuj. In summary, we continue to build towards a future of profitable, sustainable growth. Positive net income and 2021 GAAP profitability are testaments to the hard work and extra effort every Everspin team member put into controlling our costs, improving our yields and shipping everything we could in a very constrained semiconductor supply network. I am excited not only by what we accomplished in Q4 but to be handing the reins of Everspin's CEO leadership off to Sanjeev Aggarwal to both continue the momentum from 2021 but also pave the way for greater things for Everspin in the future. I'm very comfortable with this move, along with partnering with Sanjeev on our strategic long-range plan. Operator, you may now open the line for questions.

Thank you. Our first question comes from Raj Gill with Needham & Company. You may proceed with your question.

Yes. Thank you for taking the questions, and congrats to Sanjeev, and also congrats on a strong year. Just a question on the supply situation. You mentioned in your prepared remarks that the supply constraints are kind of pushing some unmet demand into the second quarter. I think you had mentioned there was at least $2 million of unmet demand because of the supply constraint environment. I'm wondering how confident you are in terms of that demand being realized in the second quarter, given the current supply-constrained environment that you talked about and kind of given your commentary that it appears that you'll have to wait until 2023 to get a better supply situation. So just wanted to talk a little bit about the long-term in terms of how you're getting supplied this year going into next year and that kind of unmet demand?

Yes. So our backlog for 2022 is as strong as we've ever seen. A lot of that is driven by the fact that we've pushed our lead times out so far because we just can't get the capacity that we need. If you remember when it started to get constrained, we already had a lot of wafers in the pipeline. As it continued to be constrained, that impacts us because the lead times are so long. We were able to fight our way through last year. Then in Q1 and Q2, things are starting to tighten down. We've gotten some upside in the second half of last year, so we've been able to keep our head above water on all these things. But it's starting to get to the point where we're leaning towards better inventory management. We're doing all these other things just to be able to ship. We're comfortable in our position, but even if somebody turned on a significant increase in supply, it still takes us the lead time for us to get that through our pipeline, which can be on the order of almost six months or longer. You wouldn't see those impacts until 2023, and that's what I was alluding to. It's just a long slog for us to get out of this situation. We're doing it a little bit at a time, like we can pull some material forward if we get new materials, expedite step-through testers and also through the back end for packaging, but it's tough. We thought it would ease up a little bit by now, but it really hasn't. We haven't seen a lot of impact from any of the current crisis in the last six days, but I'm sure that could impact things as well.

I see. In terms of the record backlog that you're seeing, particularly around Toggle, I'm wondering if you can kind of distinguish between unit growth versus price increases when you're looking at the dollar size of your backlog. Are you kind of raising pricing, which is contributing to a higher dollar volume backlog? Or is it really part driven by just unit growth with respect to adoption of Toggle?

Yes. Our price increases were just to cover some of the price increases that we got. We, by no means, tried to raise them. We focus on our customers' longevity, not just the tactical area of it. Our backlog is actually a combination of seeing increased orders as people are concerned about capacity. A lot of people are ordering earlier than they normally would, and we're seeing that. We looked at every single customer that we have and verified nobody is double booking or unusually booking, except for one incident we noted last quarter. We are managing that closely. We still see comforting demand, and for right now, in the foreseeable future, we don't see that demand being perishable.

And in terms of your IP monetization strategy, last year you generated over $11 million, up from about $2 million in 2020, so a substantial increase. How are you thinking about IP monetization this year? And how do we think about RAD-Hard recognition of revenue? I'm just trying to get a sense of what the mix of licensing and royalty will be this year. Do you expect this to be strong in 2021?

Yes. The harder one to call is when you're doing specific licensing that's not related to a product-specific request. Those agreements can be difficult to predict. However, we're always in the process of those discussions. You'll see, over time, we'll announce licensing agreements with various entities. The more significant aspect of the IP deal for us is with ongoing discussions related to government agencies, where the U.S. is bringing more manufacturing onshore. What we're finding is a lot of opportunities that resemble RAD-Hard deals where we have licensing agreements upfront and then have royalty attachments over time. We're keenly aware that we are not giving up any of our IP during those agreements, thus enabling us to help others design their specific products.

And just for my last question. Anuj, the gross margins have improved materially over last year in 2021. A lot of it was due to IP monetization, but you are getting better product yields. As we look into 2022, have you centered around a certain type of gross margin range that you want to operate at?

Yes, Raj, we don't typically guide on full-year expectations. However, for gross margin, we're still very comfortable believing that it will be within the low to mid-50s long-term. We saw some price increases from suppliers. Like Darin mentioned, we took actions to increase pricing to offset some of that. So we feel comfortable that it will be in the low to mid-50s. We were fortunate to see some Toggle yield improvements supporting the gross margin.

Great. If I can just squeeze one more in. In terms of the OpEx, based on the guidance, it seems that OpEx is going to move up almost $1 million. Are we going to see an uptick in OpEx in Q1 for the 28-nanometer, then it kind of normalizes? Or is that going to be the run rate off that high base going forward throughout 2022? Thank you, Anuj.

Yes. We're trying to be frugal and careful regarding OpEx. We are trying to limit that and are making decisions based on what makes sense for growth, such as supporting the 28-nanometer investment. I'd estimate that this quarter might be a little higher in OpEx, but I wouldn't say it would sustain throughout the year.

Yes, let me add on to that a little bit. Whenever you have a new product, you're running many wafers through testing and debugging. A heavy R&D spending is attached at the start. However, once we reach high-volume manufacturing, much of that spending gets converted into product costs. Our hope is to shorten that process. But as Anuj mentioned, we're expecting some increases in spending that will normalize.

Thank you so much.

Thank you. Our next question comes from Richard Shannon with Craig-Hallum. You may proceed with your questions.

Okay, great. Guys, thanks for taking my questions. Let me follow up on the supply chain. From what I heard from you, Darin, you mentioned an impact of about $2 million is going to be pushed into the second quarter. Based on your comments, I assume we're going to hear about some push out of demand next quarter as a result of the supply chain. Is that your expectation, or do you think it's only a one-quarter phenomenon?

Without giving out guidance, I would say that could be likely. We are going to do everything we can to pull everything into each quarter. We know this is going to get freed up eventually where you're not as tight. We do have multiple suppliers that we can push and pull from. The biggest challenge is getting all these wafers through the back end. I think the hardship we're seeing is can we get all this processed, especially when the market is fluctuating. I'm more concerned about margins during the recovery because I think to get more wafers, you're probably going to have to pay more in a constrained environment. Our gross margin model remains unchanged, and although IP does contribute positively, we have confidence in our current model. However, it is hard to predict constraints as things may change quickly.

That sounds challenging to manage through. Thank you for that detail, Darin. Another quick follow-up: you mentioned lead times have increased significantly. Can you quantify that? What was the norm a year, or a year and a half ago?

Right now, we're quoting out to Q3 and Q4 of 2022. In some cases, we already have demand for 2023. It's clear that what's happening is that customers are inserting their demand well in advance due to market constraints. We had previously indicated that a percentage of backlog would carry us through the quarter, but now we enter the quarter fully booked.

Perfect. Thanks for that detail, Darin. Let's discuss the new STT products. You're set to start sampling these soon. What timeline should we expect for milestones regarding sampling completion, customer engagement, and subsequent revenues? I assume revenue generation will begin in 2023, but I need clarification on your expectations.

Yes. We expect to sample this month; that's our goal. There’s nothing indicating we'll not get our alpha samples out for customers. Following this, it’s imperative to provide reference designs and development kits. Design wins will take time, given the complexity, but it’s part of our growth strategy for 2023. We don't foresee any significant revenue in 2022; instead, we expect modest growth in 2023.

Does this product require special interfaces for customers, or is it a straightforward transition due to prior products?

We expect it to be drop-in compatible for SRAM with some changes to firmware. This should be relatively standard practice for high-volume customers, making their design wins essential. Therefore, we’re looking at the transition throughout 2023.

From my understanding, you grew Toggle revenue roughly in the mid-teens over the past year, with acceleration in the latter half. How should investors gauge growth opportunities for Toggle in the next couple of years?

For 2021, quarter-on-quarter, we saw high single-digit growth between Q3 and Q4. Year-on-year, we were able to achieve double-digit growth. Looking ahead, while I cannot provide precise guidance, we should be able to maintain similar growth, dependent primarily on supply availability and supporting design wins. We see significant momentum and believe the overall market is favorable for growth. These expectations hinge heavily on our continued dominance in supply and the demand created by our design efforts and new customers.

Thank you for answering my questions.

Alright. Thanks, Richard.

Thank you. Our next question comes from Orin Hirschman with AIGH Partners. You may proceed with your questions.

Hi. I always prefer to hear Richard ahead of me. So I'm okay with that. Regarding the new products, to follow up on what Richard said, can you go through again the drop-in replacement concept? Does that shorten the design cycle? Are customers preparing in advance of sampling?

In reality, it’s straightforward; if your product is drop-in capable, you can integrate it into existing designs. Designers might still need some firmware updates, but it's generally seamless. The challenge lies in the design verification, which takes time.

Does that mean this new product is also a drop-in replacement for NOR?

Yes, it is designed to have the necessary interfaces. While some firmware changes will be needed, it’s mostly straightforward. This strategy is especially useful in industries requiring high reliability and data retention, where customers are keen to avoid redundancy.

Regarding the required densities, when do you anticipate achieving greater densities on the NOR replacement?

Our current product family ranges from 32-megabit to 128-megabit capacities. There is potential for scaling to 256-megabit. However, it is critical to note that no one globally can produce a 1 gig NOR memory cost-effectively right now. Thus, while we can articulate and investigate these densities, it's not the short-term strategy we're banking on.

Lastly, regarding your large licensing deal and other IP aspects, could you estimate what portion will be amortized into Q1 revenue?

While we avoid forecasting specific revenue streams, we target IP to represent roughly 10% of our total revenue. That proportion can fluctuate, but it symbolizes our overarching goal for revenue stability.

Understood. Thank you.

Thank you. As there are no further questions, I would now like to turn the call back over to Anuj Aggarwal for any further remarks.

Thank you, operator. Since there are no further questions, we can now disconnect the call. Thank you.

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