Everspin Technologies Inc. Q1 FY2026 Earnings Call

Good afternoon, and welcome to Everspin Technologies First Quarter 2026 Financial Results Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Amy Grant, Investor Relations for Everspin. You may begin.

Thank you, operator, and good afternoon, everyone. Everspin released results for the first quarter 2026 ended March 31, 2026, this afternoon after market close. I'm Amy Grant, Investor Relations for Everspin. And with me on today's call are Sanjeev Aggarwal, President and Chief Executive Officer; and Bill Cooper, Chief Financial Officer. Before we begin the call, I would like to remind you that today's discussion may contain forward-looking statements regarding future events, including, but not limited to, the company's 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 the company's SEC filings, including the annual report on Form 10-K and other SEC filings made from time to time in which the company 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, the company undertakes no obligation to update or alter any forward-looking statement made on this call, whether as a result of new information, future events or otherwise. The financial results discussed today reflect the company's 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. The company's actual results may differ materially from these estimates as a result of the completion of financial closing procedures, final adjustments and other developments arising between now and the time that the financial results for the 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 non-GAAP net income, 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'd like to turn the call over to Everspin's President and CEO, Sanjeev Aggarwal. Sanjeev, please go ahead.

Thank you, Amy, and thanks, everyone, for joining us on the call today. Before I discuss our first quarter results, I would like to share some exciting news. Today, after market close, we announced a new 2.5-year $40 million agreement with a U.S. prime contractor. Under the agreement, Everspin will be a subcontractor on an existing prime contract and will provide Toggle MRAM process technology capabilities and engineering services for U.S. defense industrial-based customers. In addition, Everspin will provide engineering and foundry services for U.S. Department of Defense, or DoD, products through its recently announced Foundry Services Agreement with Microchip. This agreement builds on our long history of supporting military and aerospace applications where performance, reliability, longevity and domestic production are critical. Now turning to our first quarter results. We are pleased to report results at the high end of our guidance range with revenue of $14.9 million and non-GAAP EPS of $0.11 per diluted share. Our performance this quarter was driven by strength in Industrial Automation, Transportation and Data Center applications. Industrial Automation growth was driven by a recovery in customer demand, including Japan, as inventory levels have been worked down. In the Transportation segment, growth was driven by the transition of design wins to production at several customers, including two rail applications. One such customer is a railroad operator in Asia, who is utilizing our MRAM technology for critical railway signal applications such as train axle counters. Axle counters and, by extension, their components must operate in harsh, vibratory conditions, which MRAM can withstand better than other memory technologies. Modern axle counters use MRAM for storing large amounts of diagnostic and maintenance data, allowing for real-time monitoring such as wheel detection and predictive maintenance. Additionally, MRAM enables more robust data storage, contributing to the high safety integrity levels, SIL4, required for axle counter systems, ensuring accurate detection and reducing false alarms. Another customer is a leading embedded computing company in Asia who chose Everspin's MRAM solutions for rail transit systems because they reliably preserve critical data during power loss and support unlimited erase and write cycles. In Data Center, growth continues to be driven by our ongoing work with IBM on the FCM4 and FCM5 modules and the Redundant Array of Independent Disks, or RAID, reference design at the top five hyperscale operators. With respect to below-the-line items, we recognized $2.1 million in other income in the first quarter and $12.8 million to date from the $14.6 million contract we have with the DoD contractor to develop a sustainment plan for our MRAM manufacturing facilities to provide continuous onshore MRAM capabilities to their aerospace and defense customers. We expect this business to begin to wind down over the coming quarters with estimated completion in the first half of 2027. Turning to some of our product development efforts. During the quarter, we formally introduced our UNISYST MRAM family at Embedded World in early March. This product family represents a new generation of unified memory solutions designed to fundamentally change how embedded systems store and access code and data. UNISYST delivers high-bandwidth read and write speeds in a nonvolatile memory device, enabling fast boot, rapid updates and predictable performance without the trade-offs of traditional flash-based designs. UNISYST will extend our MRAM roadmap to higher densities while giving customers a practical way to start with PERSYST today and migrate to a code-and-data MRAM architecture as soon as it is available. Everspin will initially offer the UNISYST family in densities ranging from 128 megabits to 2 gigabits using a standard xSPI interface operating up to Octal SPI at 200 megahertz. Target use cases include AI at the edge, military and aerospace, automotive, industrial and casino gaming. Engineering samples of UNISYST are expected to be available in the fourth quarter of 2026. As a reminder, the UNISYST family of products will serve the high-density stand-alone NOR Flash market, which will expand our addressable market by approximately $3 billion. Our goal is to capture 5% to 10% of this market in the early years and then grow further. With respect to the high reliability parts that we announced last quarter, customers have our PERSYST 64-megabit xSPI STT-MRAM devices in hand and are engaged in design activity. Additionally, we remain on track to qualify our 128-megabit and 256-megabit high reliability parts and continue to expect them to be available in high volume in the second half of this year. Customers have engineering samples of these parts on hand as they evaluate them in their designs. Building on our existing relationship with Microchip, we recently announced a strategic manufacturing agreement with the company to expand our onshore production capacity and strengthen our long-term supply chain resiliency by creating a second domestic source of supply for our customers. Under the 10-year agreement, we will establish an MRAM line at Microchip's fab in Oregon to manufacture MRAM and TMR sensor products currently produced at our line in Chandler. We expect to ship the first products from the new line in the second half of 2027. I will now turn it over to our CFO, Bill Cooper, who will walk you through our first quarter financials and second quarter 2026 guidance. Bill?

Thank you, Sanjeev. Our results reflect the consistency of our execution. During the first quarter, we delivered revenue of $14.9 million, up 14% year-over-year and toward the high end of our guidance range of $14 million to $15 million, driven by higher product sales. MRAM product sales, which include both Toggle and STT-MRAM revenue, were $14.1 million, an increase of 28% over the first quarter of the prior year and up 5% sequentially. Licensing, royalty, patent and other revenue decreased to $0.8 million from $2.1 million in Q1 2025 due to fewer currently active projects. Our GAAP gross margin increased to 52.7% from 51.4% in the first quarter of 2025 due to higher capacity utilization. GAAP operating expenses were $10.6 million, up from $8.7 million in the first quarter of 2025 due primarily to litigation costs as well as higher compensation costs for new and existing employees and professional fees. Other income of $2.1 million was related to the strategic award we won in mid-2024 to upgrade manufacturing equipment in our existing manufacturing facility located in Chandler, Arizona. We recorded first quarter non-GAAP net income of $2.6 million or $0.11 per diluted share based on 23.1 million weighted average diluted shares outstanding. This was at the high end of our guidance range of non-GAAP net income of $0.07 to $0.12 per share and compares to non-GAAP net income of $0.4 million or $0.02 per share in the first quarter of 2025. Our reported non-GAAP results exclude the impact of stock-based compensation as well as litigation expenses. Our balance sheet remains strong and debt-free. We ended the quarter with cash and cash equivalents of $40.5 million, down $4.0 million from the $44.5 million at the end of the prior quarter. Cash flow generated from operations decreased to $0.5 million for the first quarter from $2.6 million in the fourth quarter due to the litigation costs I mentioned earlier as well as increased working capital needs. We believe our cash and cash equivalents are sufficient to meet our anticipated capital requirements to execute upon our Foundry Services Agreement with Microchip and continue to invest in product development to support our future roadmap and enable the company to drive growth. Turning to guidance. Excluding any impact from the new subcontractor agreement that Sanjeev mentioned, we expect Q2 total revenue to be in the range of $15.5 million to $16.5 million and GAAP results per fully diluted share to be between a net loss of $0.12 to a loss of $0.07. On a non-GAAP basis, we anticipate results to be between breakeven and net income of $0.03 per fully diluted share. These non-GAAP figures exclude the impact of patent litigation costs in addition to stock-based compensation expense. In summary, we are pleased with our solid performance this quarter and remain committed to maintaining financial discipline while focusing on scaling our business and converting additional design wins to revenue. Operator, you may now open the line for questions.

Now we will open the line for questions. Our first question comes from the line of Neil Young with Needham & Company.

So the $40 million contract that you just announced, could you give us a shape on how you're thinking that revenue layers in? Or anything you can share on the milestone payments such as how achievable you think the milestones are? What are the biggest risks to the milestones? And then lastly, will that revenue live in the licensing, royalty, patent bucket? And then I have a follow-up.

Yes, Neil, this is Bill. Thanks for the question. Yes, so we really aren't giving any guidance related to that particular subcontract agreement just yet. But of course, we do expect to have a significant positive impact over the next 2.5 years to the financials. In terms of meeting and achieving the milestones, yes, that was negotiated with the group involved, and we're very confident in our ability to deliver on the milestones.

Okay. And then could you maybe speak to what drove the gross margin strength in the quarter? As the STT portfolio continues to evolve, are you maybe starting to see higher ASPs come through here? And then also, should we sort of expect to see this gross margin hold in this range or revert back to similar levels of Q4 2025?

Yes, good question. I think a couple of things. The first is a strong quarter on the margins. As we've noted, we target 50% plus in terms of gross margin. As we see that lift in the top line and that volume increase, you benefit from higher capacity utilization. We are also continuously looking at ways to reduce costs and improve our yields. So all those things factor in.

Our next question comes from the line of Richard Shannon with Craig-Hallum Capital Group.

I'm going to follow up on this $40 million contract here. I guess a few questions here for me. I want to follow up from your response, Bill, about why you don't have any revenue thoughts here you can give today, is that because you're not allowed to or because you don't know what the shape and structure and timing looks like? And then also, I want to get a sense of what kind of margin profile we should expect over the life of the contract with this.

Thanks. Good questions. The contract itself is just being finalized. It will have a significant impact on the financials, and so we're looking at all of the various impacts. As we run through Q2, get the results and kickoff of the contract and all the various pieces, we'll give you better guidance as we go into the end of Q2 results. In terms of margin, I would expect that it will have a beneficial impact to margin as well. Again, we target 50% plus for gross margin, and we need to sort through all the pillars of that significant contract before providing more detailed guidance.

Okay. I want to ask a follow-up about this contract in the context of other activities you have or may have going on in the future. So you've referenced today and in the past this $14.6 million contract for a continuity plan and I think there's an RFI out there from the U.S. government about maybe establishing 300-millimeter capacity. And then you've obviously recently announced adding more capacity at Microchip. To what degree do all of these things interrelate? Can you tie these things together or if they're not tied together, tell us? I'd just love to get some context, please.

Richard, good question. I can help clarify. The bottom line is the RFI for the 300-millimeter MRAM line is independent of the three other items you mentioned, namely the $14.6 million contract that we got in 2024, the Microchip Foundry Services Agreement and the new contract that we just announced today. Regarding the $14.6 million contract from 2024, that provided support from the U.S. government to improve the supply chain for Toggle MRAM for the U.S. government. That revenue is being recognized below the line. There is a lot of CapEx and supply chain robustness involved in that initiative. The Microchip Foundry Services Agreement is simply between Everspin and Microchip to increase our capacity, independent of those other contracts. We pursued additional capacity given the high demand we've been seeing over the last several quarters. The new agreement we just signed involves providing technology information, a recipe and a compendium for military and aerospace Toggle MRAM to the prime contractor. They would have a right to second source Everspin Toggle MRAM for mil/aero applications in case Everspin ever decided to exit the business. We have no intention of exiting, but the agreement grants them rights, technology and recipes associated with that scenario. Under this agreement, they also get access to the Microchip fab that we are bringing up to qualify their existing products on that line, so there is NRE associated with that activity. Finally, there is a new product the U.S. government plans to tape out. R&D for that product and the production support for it are also part of this contract. Hopefully, that helps.

That does help a lot. I appreciate that. If you don't mind, I'm going to throw one more question before jumping back into the queue. That's really about the guidance here. It sounds like we should expect most of the sequential growth in dollar terms to come from product sales. How do we think about it between STT, which is mostly going to IBM, versus other products? And then any idea — or can you just give us a sense of what kind of litigation spend you're expecting in the second quarter?

On the first point, we are seeing very strong product sales. We're up 28% year-over-year, and most of the growth from Q1 to Q2 should be in product sales. We are seeing solid product sales across various categories. On your second question, we expended $1.6 million in Q1 on litigation costs. Litigation is expensive, and we expect it to continue in that range for at least the next couple of quarters, but we'll see how it ultimately plays out.

Ladies and gentlemen, I'm showing no further questions in the queue. We did have a follow-up question come through. One moment.

Okay.

We have a follow-up question from the line of Richard Shannon with Craig-Hallum.

Well, I guess I didn't have to jump out of line. But let's hear maybe a couple more from me. I noticed you've had a couple of quarters of some above-trend CapEx numbers in Q4 and now Q1. While I could expect some of that coming from your Microchip agreement, I'm not sure. How should we look at that going forward?

Yes. We had a unique period of capital spend related to improvements in the Chandler facility across a couple of different contracts. That flurry of activity should start to settle down until we get into the main phase of the Foundry Services Agreement.

This Foundry Services Agreement, is that referring to Microchip specifically?

That's right. Yes.

When do we start to see that pick up? Any idea how to think about that sum total over what period of time we should expect? I assume it's at least a couple of years, but what should we think about?

There will be some significant capital spend over the next two years. It will be spread out over time, with some later this year as well as early next year. In terms of overall CapEx, it is not so significant that we can't manage it; it should be in the range of our historical annual spend.

Okay. Fair enough. My last question, I will jump out of line. I seem to recall being consistent with what I've heard about the UNISYST product line: you're talking about a $3 billion TAM and expecting a 5% to 10% share early on. A 5% share is $150 million in a year, and last quarter you talked about a goal of $100 million within 3 to 5 years. So are we thinking it will take longer to get that kind of share? Or is there upside in timing to hit that $100 million corporate goal?

Good question for clarification. UNISYST is not likely to strongly contribute to the $100 million target in the next 3 to 5 years because qualification at customers typically takes about 18 to 24 months. If samples are available in Q4 2026 and production begins in Q1 or Q2 of 2027, you would then expect another 18 months before a meaningful ramp to production. So I don't think UNISYST will contribute significantly to that $100 million near-term target, though it will contribute some over time.

Okay. So early on would be after that qualification period that you said takes up to two years, then, correct?

That is correct.

I will now turn the call back over to Sanjeev for closing remarks.

I just want to say thank you, everyone, for joining the call today, and we look forward to talking to you at the end of Q2. Thanks a lot for your time. Bye now.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.