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 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, 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 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 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 five days in the investor relations section of Everspin's website at www.everspin.com. 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, guardsmen, and reservists. 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 OpEx spending, 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 standalone 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 cross 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 first 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 RadHard 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 has 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 2021.
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, RadHard 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% 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 2020.
The higher gross margin compared to prior-year quarter is driven by the RadHard revenue recognition and the IP monetization deal. In the prior year, lower gross margin was reflected in a one-time non-cash $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 20 nm 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 the remainder of 2021 as we prepare for the launch of our 20 nm 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 2020. 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-$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 20 nm 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 to control costs, improve our yields, and ship everything we could in a very constrained semiconductor supply network. We are 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.
Well, hi guys. Thanks for taking my questions here. Sorry for kind of developing questions here on the fly. Just getting my model going here. Maybe just a quick one, Anuj, on your 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?
Yeah. Sure, Richard. Good afternoon. Typically we don't
Give guidance on gross margin in terms of Q4. I will say that over the last couple of quarters, as you know, we've seen strong gross margin relative to our, you know, internal model. The internal model, we typically communicate low 50s%-mid 50s%. Because of the IP deals as they relate to the RadHard deal and with this new IP monetization deal, we have seen an uplift in gross margin over the last couple of quarters.
All right. I was asking specifically on 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. Just wanna make sure I'm understanding the dynamics there and if they're gonna continue.
Yeah, I think, you know, from a Toggle perspective, we've seen some good yield improvements and great work from the operational team. We've seen improvements in that space. I think they would, you know, hold to these levels going forward. You know-
Yeah. Richard, some of the compression on this stuff, on the margins is due to obviously cost increases. There's a bunch of stuff going on in the supply network. We're overcoming that. Everybody's raising prices. In fact, we had to move our prices up. We've notified everybody of that to try to, you know, offset some of that. The model should be between 50% and 55%. We've been running hot, you know, last quarter.
First quarter and last quarter, we ran pretty strong due to the mix, and we talked about that before. I think the biggest thing for us as we move forward is the overall margin is very strong because of a lot of the IP monetization strategies that we've had.
We do expect that model, your base model for product-specific margins, to be in that 50%-55% range. It's gonna slide closer to 50% because we got so many price increases on us on the piece parts and everything else, and it'll move back up as the price increases come back in on our side to our customers.
Okay. That's helpful there, Darin. Next question. You know, if I'm looking at the product gross margins here, and I guess, or excuse me, product sales and specifically on the Toggle side with STT, I think you said it was roughly flattish quarter-over-quarter. Had some pretty nice growth, and it seems like you're implying some fairly strong growth, well, maybe not as strong, but still good growth here coming into the fourth quarter.
You know, both you, Darin, and your predecessor talked about a fairly substantial increase in design wins for a couple of years and didn't really see Toggle growing that much. Are we starting to see finally the evidence of those design wins running to production or are there larger, you know, wins here that are ramping here?
Because at the same time, we're seeing your largest customer kinda flatten out or actually, I think, decline, if my numbers are right here, at least in the third quarter. You're getting a lot of good Toggle wins here, and I'd love to get the understanding of where they're coming from and how sustainable and how you see growth coming in the next, you know, few quarters.
Yeah. I mean, the good news is I think that the abnormally high growth on Toggle was caused by two things. One is that Q2 was low 'cause we were so constrained in so many areas. The fact that we would be able to kinda unhinge some things in Q3 that gave us the ability to ship so much Toggle by itself. That's, you know, what probably caused it. It was probably less of a growth strategy than the 30%. It's more probably double digits as we were going through it.
That's what happened. Then when you look at Q4 moving forward, you're seeing a pretty big growth also. When you look at those customers, there's no one big customer.
In fact, most of the largest customers, remember, kinda walked away a couple of years ago, which caused Toggle to kinda retreat from a growth perspective. Now what we're starting to see is those design wins are coming to fruition, and it's multiple people. We've added, like, 200-300 customers, albeit smaller, but they're more diversified. That's a good thing for us. We expect Toggle at this point to grow through Q4 with pretty strong growth.
We could ship quite a bit higher STT if we wanted to. You know, we could go in, but again, you're just gonna put it in inventory. What we're trying to do is work with our large customers and make sure that they don't have too much inventory.
We've taken the ability to just say, "Hey, let's call it flat for Q3 and Q4 on STT." It could have been much higher. I mean, we could have had even better results had that happened. We're gonna just, you know, slow it down a little bit and take advantage of some of the other things we're doing as a company, and then that should regrow in the future quarters.
Okay. That's helpful perspective. One last question from me, and I'll jump out of line here. Your 28 nanometer STT device here, Darin, I wonder if you could repeat your comments about what they're going after. I think you said SRAM replacement and even some mid density. I'm not sure if you said NOR or something. I just wanna get a repeat on that. Maybe if you can help us understand kind of the value add and the applications that you're going after here and how big of an opportunity you see this over the next few years.
Yeah. Let's start with the product, right? The product itself has the capabilities to do our traditional market, which is more of kinda like data logging driven, you know, SRAM replacement stuff, right? 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 in to a NOR socket. 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, extreme endurance, 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 will jump on 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 Dennis on for Rajiv.
Good evening.
Hi, Dennis.
My first question surrounds some of these drivers for Toggle. How's the backlog looking? Is there anybody new buying the product? Any kind of either new markets opening up or new customers?
Same old markets, lots of new customers. Yeah, 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. All those three 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 frame 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. As a follow-up to that, could you remind us kind of between the split for the end market split for Toggle versus STT? Kind of which way does each one skew in terms of end markets?
Yeah. Think of STT as mostly enterprise, right? It's high speed caching into big drives, right? It's a big enterprise play. Toggle is more of the industrial robotics factory automation. You know, just everything. Could be aerospace. You know, we've announced the Lucid design, you know, which is an electric vehicle, so automotive also. 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.
It's really difficult to get, you know, 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. Thank you. Then for my second question, with regards to the Phison partnership, is there anything new there? I think the last piece was they were taping out. How's the progress there going?
You know, we research that every quarter and it's the same message, right? You know, we looked at it was like, they think you know, production's gonna be Q2, Q3 of 2023. They said 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. The Phison makes a big difference for us 'cause it's a standard memory controller that we're looking for.
Okay. You mentioned sometime in 2023 this is expected to roll out. You mentioned a quarter date in there. I'm confused.
Oh, 2022. Sorry. It's Q2. From what I heard it's supposed to be Q2. They call it Q2-ish of 2022. Sorry, I didn't mean to say 2023.
Okay.
It's in the next six months. Yeah, it's the next six months, supposedly it's in production. That'll help us 'cause then we have our silicon, but they don't have their silicon. Once they can sample, they're sampling today from what I hear, so hopefully we can get some momentum going on that.
Got it. That's it for me. Thanks.
All right. Thanks, Dennis.
Thank you.
Your next question comes from the line of John Fichthorn from Dialectic Capital. Your line is open.
Yeah. Hey, guys. Great work, and thanks for taking my question. 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 kind of what does it validate? I don't know, just a little bit about that, and then I've got a couple others.
Our strategy, we have two different strategies. Actually we have three now after this one. We had a first strategy was like, hey, let's go license our technology, the people wanna utilize it. We continue to do that. We've done that in multiple cases. The RadHard is the exact case of that, where it's multiple things that we do. Really good business for us. We give away nothing because they're building custom products for specific markets that we don't even play in, so that's great, and we're gonna continue that.
The second piece of this thing is protecting our IP, where we go out and we essentially, people have to license our technology 'cause they're either violating it or using our technology and they may not know it, right? That's one area, and we do a lot of protection on that.
There's also another element where there's pieces that we have a lot of patents and we have a lot of IP that we don't necessarily use anymore with the direction that we're heading. As we find people that we're having discussions with about valuable assets, we have those discussions, and in some cases, they result in IP monetization, which is what you're seeing.
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.
Great.
You're basically saying, you know, what's the maintenance fee? What's all this? Do I really need that? Is that my long-term roadmap? 'Cause we have a ton of patents. This is no different than almost any other company, right? Is once you pick.
Yep.
your strategic direction, you're like, "Yeah, we don't need that." You know, is it-
Great.
Yeah, it's simple.
Great. There's been a build up over COVID and some of that was released into this period. Yet, at the same time, you've got a whole lot of new customers. There's a little bit of a product validation here, product acceptance, I think more is the right word. I can't tell whether you have better visibility into the future or worse, and I don't know whether that's a better question for the very near term or the medium term or the long term, but I'd love your kinda thoughts on what we're seeing here of release of pent-up demand relative to visibility going forward.
Yeah, I mean, there's a couple questions in there, but let me try to answer. On one side of it, I think that we didn't have enough design wins two, three years ago on our base business until we put a deliberate focus on that. You're starting to see just a normal, like, momentum size, where new customers coming in during COVID, they're releasing products. Those products are successful. We're getting demand off of that, and that's what you would expect, right? We kept the throttle on the design win for the Toggle just for that reason.
On the other hand, in Q1 and Q2, there was a lot of supply constraints and different issues within the supply chain.
It was difficult for us to overcome because, remember, everyone had this giant push, excuse me, in Q2, where I think it all just happened at one time, and then as stuff started freeing up, you started seeing us be able to meet the demand. In Q2, we had a higher demand than we could have serviced because of the constraints. Q3, we got some of the supply back from Q2, which helped us. Q4, we have enough supply to be able to deal.
We're still leaving probably $3 million-$5 million for the year on the table. Even with all these results, there's still our demand is higher than our supply, and when people order today, it's like Q1, Q2 is when we can supply it.
That's great. You have good visibility. 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 wanna say unlimited, but a lot of additional growth going forward that you can just see through execution?
Well, you can see it through the customers, right? 'Cause if you look at the customer names who we're shipping to today, it's a different base. It's a bigger base than what you had before. If you remember, probably 3 years ago, we lost, like, 2 or 3 big customers that hurt us because people raised prices, did a bunch of stuff. In this case, we're not. You know, these people are all. It's like, you know, divisible by 1,500 is what your revenue looks like, which is a lot less risky.
The big challenge that I'm looking at, you know, just as a CEO and you're looking forward, you're like, "Okay, we have a really strong backlog." You get backlog that's like almost 100% in the first, you know, 1 or 2 quarters. How long does that last?
Is that also an artifact of other constraints? You know, because our product may not be the most expensive product in these things. There is always a concern, does this hold? I can tell you this, we don't really care at this point because we're so hand to mouth, and our inventory levels are so low that we need to replenish that anyway. There's a little bit of buffer in that just because you're, you know, you've got to build all this product anyway just to get our inventory levels through distribution correct. We don't have them correct today, just like everyone else. They're bled down, and they're pretty low.
Great. Last question, and then I'll drop off, which is the NOR opportunity. You mentioned in response to another question, kind of your sense around NOR. I'd love your thoughts around that opportunity. How additive is it? How big is it? How immediate is it? Just any thoughts on that would be great. Thank you.
Yeah. 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. 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. If you look back on 65 nm, the retention data on a lot of the NOR devices is not as good as people say, and it's all built on error correction, block, you know, management and different things. It's a lot of software. If you don't need software, it simplifies the design.
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 gonna have to find out as we move through it. 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 got it. Yep.
You have another question from the line of Richard Shannon from Craig-Hallum. Your line is open.
Great. Thanks for taking the last couple questions here, Darin. Following up on the topic of SSD controllers, you mentioned Phison. How about any other partners or potential partners you've talked about and whether there's any progress in visibility into getting other guys doing MRAM-based SSD controllers?
Yeah, I mean, not a lot of other people doing it from what I know. Phison's 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, you know, quite a few more design wins, which is helpful for us, right? Because then it kinda extends the life of what we're doing and hopefully it'll grow it through time. Yeah, we're kind of in the wait mode until we can get that controller out because that standardizes our product. 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 crystal ball sorta stuff here, but how long do you think the issues are gonna be you know at hand here, both for you specifically and for your customers? Any sense of what you're hearing out there?
Haven't heard anything, but if I just go back to Moore's Law, not Moore's Law, but the cyclical nature of supply and demand, it should be over, you know, sometime in 2023. I think you'll have people say something of that nature. But if you look at the constraints, it's been going on now for almost a year and a half, from what I can tell, maybe longer. Yeah, it's like one of those things. I remember when I ran the flash business for Intel, I could predict it to the day.
You know, 'cause we put on a new factory, everyone else put on a new factory, here's all the volume, and then you all of a sudden supply was bigger than demand. You waited, and then it all caught up, and then it got constrained, and prices went up.
Then you added more factories. About every 2.5 years, it's flipped. I don't know if COVID has changed that, but if it follows a logical thing, it'll end in 2023 sometime.
Okay. Most people out here are calling for some time next year, and you think it's gonna be longer than that then?
Oh, I'm sorry, 2022. Sorry, I didn't mean to say 2023.
Okay.
Twenty twenty-
Okay. Yeah.
2023, sorry.
Okay.
Sorry, 2022.
That's all.
Sorry, I said that wrong again. I'm saying 2022, sorry.
Yeah. All right. Heard that loud and clear. Thanks for clarifying, and that's all for me, Darin. Thank you.
Thanks. Thanks, Richard.
Once again, to ask a question, please press star then the number one on your telephone keypad. Again, that's star then the number one on your telephone keypad.
Yeah.
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.