Earnings Call: Q1 2021

May 6, 2021

Good afternoon, and welcome to the conference call to discuss Everest Pain Technologies First 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, May 6, 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 Kohl's customer and industry 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 ks filed with the SEC on March 4, 2021, and other SEC filings made from time to time in which we may discuss risk factors associated with investing in Everest Pain. All forward looking statements are made as of the date of this call and except as required by law. We disclaim any obligation to update or alter these forward looking statements in the future. 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 loss to adjusted EBITDA, which provides additional details. A copy of the press release is posted in the Investor Relations section of Everspin's website at www.everspin.com and was filed in the Securities and Exchange Commission on Form 8 ks earlier today. This conference call will also be available for audio replay until May 13, 2021 in the Investor Relations section of Everspin's website. And now, I'd like to turn the call over to Everspin's Team's Executive Chairman and Interim CEO, Darren Bilberg. Darren, please go ahead. Thank you, operator, and thanks to everyone for joining us on the call today. Q1 results came in just below the midpoint of our guidance as we end up recognizing no royalty revenue We do expect to recognize the majority of the RadHard licensing revenue over time. Even with that, our Q1 2021 revenue was up over 3% over Q4 2020 and in line with our goal of double digit growth for the year. More importantly, we increased our gross margin significantly, lowered our cost, generated positive cash flow for the Q3 in a row, While keeping our current distributor inventory in a healthy range of 8 to 10 weeks. For Q1 2021, Toggle revenue was approximately 10% And continues to gain traction as the market recovers. As mentioned in our last earnings call, we expected Toggle to continue to recover beyond the lows We saw in Q3 2020 and they seem to be doing just that. In fact, our current backlog suggests Toggle revenue is growing faster than we expected, A testament to what we seem to believe is a solid economic recovery in the industrial and factory automation areas along with shipping to the new design wins we've been discussing for the past couple of years. We did see a strong start in Q2 backlog over Q1 for our industrial customers and we're encouraged by the signs of all four regions Coming back to growth. STT revenue was a little off plan as we did see some small inventory adjustments we expect to get back on track q2 throughq4. Design wins continue to grow in Q1 2021 as they did in the overall year 2020, And we are back on track to match or slightly exceed the design win total for all of last year. We have refocused our efforts on turning those opportunities into real revenue even changed our compensation of our sales force to be more focused in that area. As mentioned last quarter, Everspin is providing production volume shipments to more end customers than ever before, which we believe reflects a strong future demand pipeline and growing adoption of MRAM in the marketplace. On the operations front, we continued to focus on yield improvements and lowering our costs. We are finally seeing the results of our efforts in various improvements in implementation plans They've created healthy product gross margins across the board. The biggest risk to our gross margins moving forward is mix and getting the capacity we need At the committed pricing in a tight subcon network worldwide, semiconductor companies appear to be struggling to keep up with demand as demand in many sectors Without placing supply. As we discussed last quarter, we won a RadHard design and now finalized that contract and collected $3,000,000 The upfront payments for the related licenses. As we've mentioned in the press release in Q1 press release, our Q1 revenue did not include The $1,000,000 in licensing revenue we anticipated. As I mentioned earlier, we do get to recognize that royalty over time, which reaffirms our deliberate strategy To continue to monetize our IP. Finally, our 28 nanometer next generation industrial product is on track to tape out in Q3. Stay tuned for that. I will now turn the call over to our Interim CFO, Anuj Agarwal, who will take you through our Q1 financials and Q2 2021 guidance. Anuj? Thank you, Darren, and good afternoon, everyone. Today, I'll focus my discussion on GAAP financial results and highlight some key metrics. Highlights include cash flow from operations was positive for the 3rd consecutive quarter. We also generated cash in the quarter and gross margin was higher. Revenue for the Q1 of 2021 was $10,300,000 compared to $10,000,000 last quarter $10,100,000 in the Q1 of 2020. MRAM product sales in the Q1, which include both Toggle and SCT MRAM revenue was $9,100,000 Lower than the prior quarter and Q1 of 2020. Licensing, royalties and other revenue in the quarter contributed $1,200,000 compared to $300,000 in the previous quarter and $500,000 in the prior year period. The increase in revenue is due to the yearly true up in royalty From a customer generally using our IP, which we have previously licensed to them. The RadHard licensing deal is not included in the Q1 results. Turning to gross margin. GAAP gross margin for the Q1 of 2021 was 58.2% versus 52.3% in the prior quarter. The higher gross margin is driven by royalty revenue. GAAP operating expenses for the Q1 of 2021 were 6.3 slightly lower than last quarter's $6,400,000 but down from $6,900,000 in the Q1 of 2020. GAAP operating expenses in the Q1 of 2020 included $700,000 of stock based compensation compared to $1,300,000 last quarter and 0.8000000 A year ago quarter. We expect to grow R and D expense in the remainder of 2021 as we prepare for the launch of our 28 nanometer STT MRAM product targeted at industrial and other broad based applications. Getting to the bottom line, GAAP net loss for the first Quarter of 2021 was $460,000 or negative $0.02 per share based on 19,000,000 weighted average shares outstanding. This compares to a GAAP net loss of $1,600,000 or negative $0.08 per share in the Q4 of 2020 and a GAAP net loss of 1,700,000 Or negative $0.10 per share in the Q1 of 2020. Earnings per share of negative $0.02 was better than our guidance range despite revenue coming in just The midpoint, reflecting our tight operational discipline and strong gross margins. Turning to the balance sheet, cash and cash equivalents increased $15,500,000 at the end of the first quarter compared to $14,600,000 at the end of the prior quarter. Cash flow from operations was a positive $1,600,000 in the first quarter, making this our best quarter For cash flow from operations and 3rd consecutive quarter of positive cash flow. Turning to our 2nd quarter guidance, we expect revenue in a range of 11,000,000 $12,000,000 which at the midpoint of $11,500,000 represents 12% increase over $10,300,000 from the Q1 of this year. We expect a GAAP loss per share of between $0.07 $0.11 primarily driven by expenses related to the next Generation 28 nanometer STT MRAM product. I will now turn it back over to Darren For some brief additional commentary before we open it up for questions. Thanks, Anush. In summary, we continue to build towards the future of profitable growth. We believe the Toggle demand will continue to gain traction as the market recovers. We anticipate increasing our market penetration of our high density STT MRAM products for the data center, both at our top customer as well as other customers as we move through the next few years. We are on track to tape out our low density STT MRAM product targeted at industrial customers and newer replacement in the middle of this year we will continue to monetize our IP with the RadHard FTT MRAM license we mentioned being a big step with still more to come. Operator, you may now open up the lines for questions. Please wait while callers queue further questions. One moment please. Your first question comes from the line of from Peter Mann of Craig Hallum Capital. Your line is open. Hi, guys. Thanks for taking my question. Sam on for Richard here. I guess first, kind of a lot of moving parts in the numbers for Q1 and just thinking about going forward, obviously, a lot The strength in this quarter was Toggle growing and some licensing revenue being recognized too. That sounds like that's Maybe a one time bigger impact. So I'm curious, SDT MRAM had a big drop off there. Curious what kind of recovery We should expect there and can you give a little more color on whether that's kind of if that's supply constraints, if that's Just customer inventory burns or what's going on in that area, that'd be great. Yes. So let me start There was probably more than one question on there, but I'll start with a couple of comments, I will. So we did see some royalty uptick That's a true up from one of our customers that we do a run rate. We don't have a lot of visibility, but obviously they did much better in the markets that they serve on the royalty rates than we normally would get. And we would project that to be slightly higher than what we were anticipating through time. On the specific STT deal, it was down slightly. I think at the end of last year, they actually believed that they would do better than they were in the end market, and we were looking at some of the data. And I think their business was soft. However, This quarter going from Q1 to Q2, we expect some recovery. And then by Q3 and Q4, we expect that to be back to normal. You're going to see a little bit of a ramp up from that. So nothing catastrophic in any way, but I think it's just a normal leveling of their inventory versus their end demand. So I wasn't very concerned about that. It was a negative if you look at it from Q4 to Q1 as far as those numbers are. But the nice news is Toggle grew very well, which we were again, we believed it would continue to grow. We believed The new design wins that we've been focused on the last 2 years would come to fruition and that happened. And we're really excited by the fact that Toggle For Q2 is already ahead of where we were in Q1 and we're feeling really comfortable about the backlog. And now it's changed the game where before We were focused on can we get enough demand, now it's like can you get enough supply. And I'm sure you hear that from everybody. Yes. Hearing that quite a bit. That's really helpful color though. Thanks for that. And I guess on that last point, supply. I know you said in the last call you've been able to mitigate margin impacts from supply constraints pretty well. Have you been able to continue to do that? Is there a point where you could think we could see either margin pressure from supply constraints going forward Or like you just said, a point at which demand is going to outstrip supply in your taco products? Yes. So to answer that, I think clearly our margins aren't going to stay at 58%. That was an artifact of a lot of great things that happened at one time. Well, we want our margins to have that 5% in front of it. And yes, I do think we're going to be impacted by some of the capacity constraints that are out there because is people that we mentioned this in the last earnings call that opportunistically raise their price in order for you to even get capacity. Our strategy today is not to actually pass that on to our customers. And I think that's the right strategy as seeing a recovery in the marketplace. It's right size for our company. So we're going to suck it up as we go through that, but we still believe that our margins will start with that 5 And anything above that as we're moving forward is all within the plan that we have and that we submitted as we walk through this year. We feel comfortable about that today. But you're right, there is going to be an impact. But I don't think for us from a fab perspective, lead times are so long that you wouldn't see a fab constraint For us, for many quarters, it's more assembly and test today. Got it. That's really helpful. That's it for me for now. I'll hop back in the queue. Awesome. Thanks. I am showing no further questions at this time. I would now like to turn the conference back to Mr. Anuj Agarwal. You may proceed. Okay. So with that, we conclude today's call. Thank you all for joining and we look forward to Reporting our progress and results on the next quarter's call. Operator, you may now disconnect the call. Thank you. Thank you.