Everspin Technologies Inc. Q3 FY2023 Earnings Call

Good afternoon, and welcome to the conference call to discuss Everspin Technologies Third Quarter 2023 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, November 1, 2023. 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 quarterly report on Form 10-Q, which will be filed with the SEC on November 2, 2023 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 statement 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 results, are based on the information available as of the date hereof and are subject to further review by Everspin and 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 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 income to adjusted EBITDA, which provide additional details. A copy of the press release is posted on the Investor Relations section of Everspin's website at www.everspin.com. And now, I would like to turn the call over to Everspin's President and CEO, Sanjeev Aggarwal. Sanjeev, please go ahead.

Thank you, Operator, and thanks everyone for joining us on the call today. Everspin delivered quarterly revenue of $16.5 million, above the high end of guidance and an 8% increase year-over-year. We were GAAP net income positive for the 10th quarter in a row, a strong focus for the company. A few highlights for quarter three 2023. Cash flow from operations was $3.6 million, putting us at $11.1 million year-to-date. We continue to operate debt-free, while increasing profitability. Q3 net income was $2.4 million. Everspin ended Q3 with a cash balance of $34.9 million. We announced the availability of the X5 family of STT-MRAM products from eight megabits to 64 megabit density with the extended temperature range of minus 40 degrees Celsius to 105 degrees Celsius for production orders. We are sampling the 4-megabit density part in the smaller DFN package and the extended temperature range with production planned for the first quarter of 2024. In Q3, we entered into an agreement to develop reliability models for strategic radiation hard and Toggle MRAM. In October, we entered into a new contractual agreement to license our STT-MRAM technology to build a strategic radiation-hardened FPGA. Our business outlook. We continue to have good visibility into our product backlog for the remainder of 2023 and into early 2024 as of September 30, 2023. We have alleviated our foundry supply chain constraints, which is helping us address our unfulfilled toggle demand. Products. We expanded our flagship industrial high-density STT-MRAM product family, the EMxxLX, to include a 5-millimeter x 6-millimeter DFN package that is smaller by 37% compared to the current offering. In addition to the area savings, we are delivering an extended temperature range of minus 40 degrees Celsius to 105 degrees Celsius. This family of xSPI STT-MRAM devices delivers the highest combination of performance, endurance, and retention and are now available in densities from four to 64 meg. It is the only commercially available persistent memory with a full read and write bandwidth of 400 megabytes per second via eight input/output signals with a clock frequency of 200 megahertz. It is the highest performing persistent memory available today, ideal for electronic systems where data persistence and integrity, low power, low latency, and security are paramount. Industrial IoT network enterprise infrastructure, process automation and control, aeronautics, avionics, medical, gaming, and FPGA configuration are examples where this family will simplify the system architecture and offer an alternative solution to legacy memories such as ferroelectric memories, FRAM, battery backed random access memories, NOR Flash, and nonvolatile SRAM. A few comments about our Radiation Hard programs. Since its inception, Everspin has invested in maintaining its leadership in MRAM technology, as evidenced through its IP portfolio and successful licensing of its technologies. We are excited to report that we entered into two new Radiation Hard program agreements, one on Toggle MRAM to develop reliability models for the strategic radiation hardened Toggle MRAM products. The second agreement is to license our STT-MRAM technology to build a strategic radiation-hardened FPGA. These agreements are in addition to the existing Radiation Hard programs on STT-MRAM technologies that we have discussed in previous earnings calls. One, a high-density memory array, and two, a distributed configuration memory for instance on FPGAs with multiple-time programmability. The R&D and design teams delivered on the milestone successfully to further the development of these STT-MRAM-based solutions for these projects. We believe our distributed MRAM we are coining as D-MRAM approach is a revolutionary approach, and will give us an edge on energy efficiency and scaling, as we deploy the solution in FPGA and AI inference engines. I will now turn it over to our CFO, Anuj Aggarwal, who will take you through our third quarter financials and fourth quarter 2023 guidance.

Thank you, Sanjeev, and good afternoon everyone. As part of our third quarter 2023 financial results, we are pleased to announce our tenth consecutive quarter of positive net income. In addition, we generated positive cash flow from operations of $3.6 million during the quarter. We delivered solid quarterly results above the high end of guidance with revenue of $16.5 million compared to $15.7 million last quarter and $15.2 million in the third quarter of 2022. We also had positive net income of $2.4 million and positive cash flow from operations of $3.6 million for the third quarter of 2023. The MRAM product sales in the third quarter, which includes both Toggle and STT-MRAM revenue, was $13.5 million compared to $13.4 million in the prior quarter and $14.6 million in Q3 '22. Licensing royalties, patents, and other revenue in the third quarter increased to $2.9 million compared to $2.3 million last quarter and $0.7 million in Q3 2022. Shipments to suppliers for our high-density STT product for the data center applications represented 11% of revenue in the third quarter versus 7% of revenue in Q2 and 19% in Q3 last year. Turning to gross margin, GAAP gross margin for the third quarter of 2023 was 60.2% versus 58.4% in the prior quarter and 58.8% in Q3 2022. The increase in gross margin is primarily attributable to the increase in licensing revenue. GAAP operating expenses for the third quarter of 2023 were $7.9 million versus $7.6 million in the prior quarter and $7.1 million in the third quarter of 2022. The increase in operating expenses in the quarter compared to Q3 2022 was primarily driven by an increase in professional service costs. We are pleased to report third quarter 2023 positive net income of $2.4 million or $0.11 per share based on 21.8 million weighted average fully diluted shares outstanding. This compares to a GAAP net income of $3.9 million or $0.18 per diluted share in the prior quarter, and net income of $1.9 million or $0.09 per diluted share in the third quarter of 2022. Diluted EPS of $0.11 was better and the high point of our guidance range, reflecting our strategic operational discipline and ability to drive profitability despite macroeconomic uncertainties. Adjusted EBITDA continues to remain positive. For Q3 2023, adjusted EBITDA was $4 million compared to $5.4 million in the prior quarter and $3.4 million in Q3 of last year. We ended the quarter with cash and cash equivalents of $34.9 million compared to $30.8 million at the end of the prior quarter and $23.4 million as of Q3 2022. The increase in cash quarter-over-quarter is a result of Everspin's continued focus on strong cash management while growing cash flow from operations as the company continues to operate debt-free. Cash flow from operations was healthy at $3.6 million for the current quarter. Turning to our fourth quarter 2023 guidance. Everspin is cautiously optimistic. Demand for our Toggle products remains strong and we continue to see increased demand for our xSPI family of STT products. We expect total revenue in the range of $15.4 million to $16.4 million and GAAP net income per diluted share to be between $0.01 and $0.06. I will now turn it back over to Sanjeev for some brief additional commentary before we open it up for questions.

Thanks, Anuj. In summary, we reported another profitable quarter, now tenth in a row, which remains a strong focus for the company. We are excited that our Toggle MRAM and STT-MRAM technologies are being selected for Radiation Hard programs, taking advantage of our leading-edge capabilities. We believe the extended temperature range capability of minus 40 degrees Celsius to 105 degrees Celsius of our STT-MRAM xSPI family positions us well to address the fast-growing industrial IoT and embedded systems markets. We have good visibility into our Toggle MRAM backlog through 2023 and early 2024, giving us confidence in our business. Thank you for joining us today. Operator, you may now open the line for questions.

Thank you very much. Our first question comes from Shadi Mitwalli with Craig-Hallum. Please go ahead.

Hey, guys. Congrats on another solid quarter. I just had a question on revenues being on the upper end of guidance. It looks to be mainly coming from licensing. So with that, is most of the increase in licensing revenues coming solely from the RAD-Hard programs, or are we seeing any meaningful royalties from past licenses contributing to the increase in licensing revenues?

Hi, Shadi. This is Anuj. Thanks for the question. Yeah. For Q3, the good news came from the licensing and royalty side. We had some strong revenue from the QuickLogic deal. And then we had a third RAD-hard deal that Sanjeev mentioned related to Toggle reliability. And so we were able to get some work done there to account for that revenue as well. I will say, also though product sales were strong and so total sales continued to be strong in Q3.

Awesome, awesome. And then I just got actually a question on product sales. With products being down quarter-over-quarter, has there been any unusual activity with the backlog such as pushouts or even cancellations regarding backlog?

Yeah. The interesting thing with backlog, Shadi, is so there's definitely some macroeconomic uncertainty and industry trends that are happening, right? So the supply constraints are loosening. The lead times are reducing like we had mentioned in the last couple of quarters. And so we are seeing customers booking within the lead time, but they're kind of waiting to book outside the lead time, right? And so we are seeing some impact in APAC, for example, within the Industrial Automation section.

So with the Industrial Automation segment being one of the guys' weaker end markets you're experiencing?

No. Actually, for Q3, we had good results in the Industrial segment. I was just making a comment that the Industrial segment has some uncertainty in China, and so there are some challenges there. But it's been stronger in the last few quarters.

Okay. Yes, that makes sense. And then just one more question on end markets. Were there any particular end markets you guys are seeing a little more strength or weakness in?

Not particularly right now. I think just overall there's some macroeconomic uncertainty, right, as things are happening. So, you're just seeing customers waiting to place orders, right? And just wanting to see what's happening in China and what's happening in the economy in general. But overall, the segments look good except for what I mentioned some risk in Industrial.

Awesome. Yes, it makes sense. That's all for me and congrats on another solid quarter.

Thanks, Shadi.

Thank you. And it comes from the line of Quinn Bolton with Needham. Please proceed.

Hey, this is Nick Doyle standing in for Quinn. I wanted to discuss RAD-Hard; it’s performing very well, with new wins and new licensing. Can you explain a bit about the applications that are actually using it? Also, regarding the new licensing deal, is that a one-time revenue item, or does it represent an increase in our baseline licensing revenue? Additionally, could you update us on the timeline for production and customer shipping planned for the end of next year and into 2025? Thanks.

Hey, thanks, Nick. This is Sanjeev. So, I guess I'll try to remember all your questions, but if I forget something, please remind me. As far as the goodness of the Radiation Hard deals you're right, I mean we were really excited that we were picked by the government contractors to actually have one project on Toggle MRAM and another one on STT-MRAM as well. The licensing deal that you talked about or that we talked about for STT-MRAM is actually targeted towards an instant-on FPGA similar to the one that we announced, I believe, two or three quarters ago. So, this is a new project with a different vendor although the subcontractor is still through QuickLogic, but they have a different CMOS provider. These licensing deals are obviously very lumpy and they are opportunistic. I would not say that this is the last licensing deal that we'll come across. We hope to get even more going forward. I'm not giving any guidance, but we are hopeful that our technology keeps getting recognized and we keep getting picked up for other projects. And just as a reminder, I think a year ago we had talked about a deal with Honeywell where we're actually building a 64-megabit array. And there obviously it's more of a persistent memory type solution for Radiation Hard environments. As far as our 64-megabit and the 16-megabit parts that we taped out and brought production this year, they are on schedule. People are looking at our parts and qualifying them. So, we are on schedule to getting them hopefully qualified and into early production towards the end of 2024. If I miss anything, please remind me, Nick.

No, got it all. Thank you. We have noticed some weakness with FPGA companies that AMD reported and total lead times, and it seems we might be experiencing a slight decline in your products for the next quarter. Would you say that's an accurate observation?

So, I don't know if it is specifically the FPGA or not, but like Anuj mentioned, we are cognizant of the macroeconomic conditions in Asia Pacific. As we said, as Anuj said, we have been strong for the first three quarters, but we are starting to see some movement in Q4 and also in early 2024. But that is also convoluted by the data, that now that the supply chain constraints are removed, our lead times have actually dropped. So, our customers' behavior has also changed with their ordering within the lead times. So, it's not quite clear if it's because of the macroeconomic conditions or just because our lead times have changed, but the two combined together has changed the behavior in the backlog over the last couple of quarters.

So just confirming that your lead times have decreased even further compared to last quarter, which is affecting the outlook. Last quarter, we mentioned that the backlog was very strong, providing visibility into the near-term quarters. However, with the lead times decreasing, that information is not as reliable today.

This is Anuj. I would describe the situation as follows: the lead times were initially 52 weeks, then they decreased to about 30 weeks, and we have now further reduced them to around 26 to 27 weeks. We have observed a decrease in lead times. Additionally, there has been a loosening of supply constraints across the industry, which has led to a change in customer behavior. Customers are now mostly booking within the lead time but are also placing some orders outside of it, which is a positive development. However, this is not as significant as historical trends. Currently, the backlog has returned to levels seen before the pandemic. While it appears fairly normal from that standpoint, it has declined from the much stronger backlog experienced a year ago, when lead times were longer and there were concerns about capacity. That’s the key observation we’ve made.

That makes sense. Thanks and wait to ask.

Thank you. Yes, I don't see any further questions in the queue. I will pass it back to Anuj Aggarwal for his final comments.

With that said, we conclude today's call. Thank you all for joining us, and we look forward to updating you on our progress next quarter. Thank you.

Thank you everyone for participating and you may now disconnect.