Earnings Call: Q3 2020

Nov 5, 2020

Good afternoon and welcome to Everspin Technologies Third Quarter 2020 Financial Results Conference Call. With us today from Management are Kevin Conley Everspin President and CEO and Daniel Bearbaum, Chief Financial Officer. 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. Comments made during today's call 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 adoptions of MRAM Technology successfully bringing to market and manufacturing products and Everspin 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. The company encourages you to review their SEC filings, including the 2019 Form 10 K filed with the SEC on May 8, 2020 and other SEC filings made from time to time in which they may discuss risk factors associated with investing in Everspin. All looking statements are made as of the date of this call and accepts, except, and required by law, the company does not intend to update this information. Additionally, the company press release and statements made during this conference call will include discussions of certain materials, measures, and financial information in GAAP and non GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP to non GAAP items, as well as GAAP net loss to adjust EBTIDA, which provides additional details. As a reminder, this conference call is being recorded today, Thursday, November 5, 2020, This conference call is being available for audio replay for at least 90 days in the Investor Relations section of Erispenn website at www. Everspin.com. And with that, I would like to turn the call over to Everspin President and CEO, Kevin Connolly. Mr. Connolly, please go ahead. Thank you, operator. Good afternoon everyone and thanks for joining our call today. We are pleased to report within the third quarter for the first time since its founding, Everspin delivered positive cash flow from operations. This is an important milestone and reflects both the healthy demand for our products as well as our internal operational improvements. We're also pleased that on a run rate basis, we achieved our targeted $5,000,000 in annual operating expense reduction 1 quarter early. This happened despite a challenging demand environment and continued operational limitations due to COVID 19. This notable achievement is a testament to the laser on our key business initiatives. Throughout the quarter, our operations team has continued to execute under the restricted protocols due to the COVID-nineteen pandemic that have existed for last couple of quarters. I'm pleased to report that the one gigabit production ramp challenges that we faced earlier this year as a result of these conditions have been mitigated and progress is back on track. And as expected, our operations team delivered 1 gigabit production samples to our second customer for a persistent memory card application that sells into the data center segment. Our revenue our Q3 revenue was up 10% compared to Q3 of 2019, but down 14% sequentially. This reflected the anticipated slowdown in near term demand as discussed on our Q2 call and was mostly driven by the fall from a peak Q2 peak in MRAM demand driven by data center applications. Incoming in weaker than anticipated, industrial applications showed noticeably lower demand in the quarter, primarily due to customer uncertainty associated with the pandemic, resulting in inventory digestion at distributors. While revenue was under pressure in Q3, We continue to make measurable progress in new customer engagements, both for our STT MRAM and new Toggle MRAM products. This was our 5th consecutive quarter of expanding design wins with design wins year to date of 50% compared with last year. The good news here is that despite many customer engineering teams working in restricted, limited, or remote work environments, We continue to see progress with programs that, while delayed due to varying degrees, still result in increasing design wins. But we do recognize for now there is a slower pace for deployment to the market for many of these products as continued delays in the end market investments in infrastructure projects continue. While this may not return to historical norms until the global economic situation becomes more stable, there are some signs of strengthening in the broader industrial our expanded Toggle product line and our new line of high performance serial STT MRAM products that we are well that we are well positioned to drive growth in 2021. On the licensing front, we are pleased to see public announcements from customers that are detailing that was developed as part of our JDA with Global Foundries. First, Sony announced that their newest IoT wearable solution for the GNSS market and recently they recently detailed how their chip leverages EMRAM to achieve a new level of system energy efficiency. Another customer announced their newest AI enhanced application processor for the hearables market using EMRAM or again, low energy consumption is a key application requirement. Based upon these announcements, we expect both products will go into mass production in 2021, These applications showcase below energy benefits of MRAN in IoT wearables and artificial intelligence. And we are pleased to see the visible progress global foundries is making with customers leading the path towards increased royalty revenues for Everspin. While these positive forward looking developments unfold against an uncertain market backdrop, we remain focused on cultivating increased sales, driving new customer design wins, operational execution, and providing world class support to our customers as end markets recover. With positive cash flow now achieved, we are well positioned to weather current market conditions and remain deeply committed to further improve gross margins from operational improvements paired with a dedication to further market progress through our expanding customer success. I will now turn it over to our CFO, Dan Baronbaum, who will take you through our third quarter financial results and 4th quarter guidance. Thank you, Kevin, and good afternoon, everyone. Today, I'll focus my discussion on GAAP Financial Results. We previously used certain non compensation. Moving forward, we intend to use discussions around cash flow to help investors understand our business better we will continue to provide breakouts of stock based compensation, as well as highlighting other components of our expenses, which we think are important for investors to understand our ongoing compared to $11,800,000 in the second quarter of 2020 $9,200,000 in third quarter of 2019. MRAM product sales in the 3rd quarter, which includes both Toggle and STT MRAM revenue, was $9,600,000 compared to $10,900,000 licensing royalties and other revenue in the quarter contributed $500,000 compared to $900,000 in the prior quarter and $800,000 in the prior applications represented 38 percent of revenue in the quarter compared to 25 percent of revenue in the year ago quarter and 34% of revenue in Q2. Turning to gross margin. As part of our normal quarterly review of inventory valuation and currently limited or no demand forecast. In conjunction with this, we also recognized accelerated depreciation for mask sets related to some of these products. This led to a $1,700,000 inventory reserve and a $400,000 accelerated depreciation charge. These are both non cash charges. Roughly $1,000,000 of this combined non cash charge, including the accelerated depreciation charge, was related to our 256 megabit STT MRAM product. Where we ended up with coinciding with a successful charges related to downbend Toggle products where we have been able to recover salable dye at lower categories but where unfortunately there is now limited or no demand. Wrapping this $2,300,000 or 23 percent. Our cost of goods sold include the non cash $1,700,000 inventory reserve and the $400,000 accelerated depreciation, as well as $100,000 related to a prior period cost adjustment. This compares to prior quarter gross margin of $5,200,000 or 43.9 percent of revenue and $4,400,000 or 47.4 percent of revenue in the third quarter of 2019. We expect to see continued improvements in gross margin in Q4 and into 2021 as we continue to mature production of our 1 gigabit STT MRAM products and continue to improve Toggle MRAM costs. GAAP operating expenses for the third quarter of 2020 decreased to $6,000,000 from $6,300,000 in the previous quarter and $7,900,000 in the third quarter of 2019. Research and development was $2,600,000 compared to $2,800,000 last quarter and $3,400,000 in the same quarter a year ago. SG and A was $3,500,000 compared to $3,500,000 in the prior quarter and $4,500,000 in third quarter of 2019. The decrease in operating expenses reflects the ongoing cost reduction initiatives set in motion at the beginning of the year. Operating expenses for each of these periods included non cash stock based compensation of 0.9 $2.1 per share based on 18,900,000 weighted average shares outstanding. To reiterate, this GAAP net loss includes the non cash 1 $700,000 inventory reserve, $400,000 of accelerated depreciation, and $900,000 of stock based compensation. As well as the $100,000 share in the prior quarter and a net loss of $3,700,000 or loss of $0.21 per share in the same quarter a year ago. Year over year, bottom line EPS was flat despite the large inventory reserve in the quarter, which underscores the continuing benefits from our expense reduction initiatives and ongoing cost improvements across our products. Turning to at the end of the 3rd quarter compared to $12,900,000 at the end of the prior quarter. Operations as a direct result of the actions we have taken throughout the year. Cash flow from operations is a positive $700,000 in the 3rd quarter, compared to cash used in operations of $1,600,000 last quarter and used $600,000 in the third quarter of last year. At the end of the quarter, we had a balance of $2,000,000 on our $5,000,000 line of credit. We continue to believe we have sufficient cash to support our operations and growth objectives. Investors should note that today, we will also file an S3 registration statement with the SEC. This will simply replace our the new shelf is similar to the laps, a $100,000,000 mixed shelf. Importantly, with this new filing, we have intentionally allowed our at the market instrument to expire. We had suspended trading on the ATM since March of 2020, Now this simply means that we no longer have an ATM. We no longer have an at the market instrument. To reiterate, we believe that our cash on hand combined with cash we expect Turning to our 4th quarter guidance. We expect revenue in a range of $10,100,000 to $10,900,000, which at the midpoint of $10,500,000 represents an 8.7% increase over a year ago's $9,700,000. We expect a GAAP loss per share between a loss of $0.10 and a loss of $0.04, which reflects expected stock based compensation expenses of approximately 0.9 Your first question from the line of John Fishstrom with stylactic capital, I believe. Yes, that's perfect. Thanks, Dan. And, thanks for taking my question. Congratulations on the cash flow. That's great to see. Love to see the the elimination of an ATM, I think that's a positive statement of the market that you guys are confident in your ability to stay profitable. What I'm really wondering is kind of from here as you guys look out and not really looking for any kind of specific guidance, although if you want to give it feel free, Just trying to get a sense. The company has been hanging out in this $40,000,000 ish give or take 5 or 10 for the last handful of years. Revenue line. And I'm trying to figure out it feels like we hit an inflection recently, whether it's one gig or maybe embedded on the horizon But I'm trying to figure out what the shape of your growth curve is because obviously the world's going to be a little disappointed with this number and the guide in December. Stock traded down on whatever 100 shares after hours known cares. But really just kind of a sense of the future, however you guys want about it 1 year, 3 or 5 years. I'm just kind of curious what this company is building towards and what your vision is because it's not really immediately apparent looking at the immediate present and even short term future. Sure, John. That's a great question. So first of all, these last 3 years have been quite unusual from the standpoint of the industrial recession, industrial semiconductor recession back in 2019 and dealing with the COVID pandemic. This year. If you discount some of the strategic actions that we took from 2018 in terms of profitable customer selection and if you look at what we've been able to do with new products, actually things have gone very well according to plan. And as you noted, our new products are significant sources of new revenue for us now. Certainly the base last year and started to recover coming out of last year. But then when did you this year with with new challenges on the COVID front certainly put some of that damper on those markets. But we do believe now those markets are showing signs of recover COVID front certainly put some of that damper on those markets. But we do believe now those markets are showing signs of recovery. Some of the hardest hit markets of mobile and auto, which passed us by in the beginning part of the year. And are now recovering have already gone full cycle. Our industrial market segments that we participate in little more, delayed in terms of showing that impact. And we believe now that they're also starting to turn the corner and indicating that next year will be will be healthier. So if we think toward next year, how the inflection will go, we do believe that we will see the markets that we serve and the customers that we're very well engaged with will return back to healthier growth trajectories, our new products are doing well. And we'll start to introduce new product segments next year as well that will help grow the share market in those products. Additionally, on the licensing front, as I mentioned, we'll now start to see production revenue from our global foundries engagement. And licensing is, of course, something that we also pursue as a part of our revenue mix. On an ongoing basis. So if we think about next year in some of these recoveries, coming back and starting to give a little tailwind to us. We actually believe that we're very well positioned now, both with our legacy products that we work very hard to, to solidify maintaining their pristine level of quality for the customers and the liability And, as we brought out the new products based upon our more advanced Spintorp Technology offering, new density, new value propositions and new economics to our customer base. So we believe that that will help us get beyond kind of where we've seen things. And I do want to point out that that 40,000,000 ish level in the past included much higher levels of things that were either one time in nature or part of the legacy of non memory portions of the company. So from if you do look just strictly at the memory components that I've been talking about, you do see that we come from kind of the low 30s we're now above headed above 40 this year and then we'll continue growing next year with better market conditions supporting that. So maybe another quick way of asking that if you look back 1 year or 2 years, whatever it's convenient, how much bigger do you think you're served available market is in in the businesses you're in today and in the memory space? Roughly. Well, roughly, I mean, if I look historically and it's a very complicated market in terms of the fragmentation of the various subsegments, but generally how the models that we've built have been fairly consistent growing at about a 6% a year average CAGR. 2018 was kind of inflected kind of a a downward at the beginning kind of flattish to the year, expected something more upward this year. But again, I think we're coming out of more flat. So I think these last 2 years probably did not reach the historical average. I hope that helps. But in terms of total magnitude, we do believe we're probably today around 750,000,000 total TAM. Okay. And John, I'll just add, I mean, that 6% comment, that's a market comment. We are still relatively small, compared to sense. Right. It just seems like you have products that can reach more of the market now. And I'm just trying to figure out like is the opportunity seems like it's bigger and you're just ramping into it what I'm trying to get a feeling for. Just another way of trying to figure out what your growth trajectory should look like. And maybe question and then I'll shut up is it seems like at the very least March should be or even this quarter. Is really a quarter that you're only going to grow off of. I don't know whether there's a seasonality in your business based on kind of the new products introductions and the licensing ramping up. But is it a fair assumption that it should be some form of linear growth from here or is there some kind of lumpiness to this that we should be anticipating as we model it going forward? I think the 2 two parts of our business. I mean, first of all, my general commentary was on the bulk of our products, which serve the industrial customer base. It should be recognized that the one gigabit product that we sell into the data center space is far lumpier than the rest of our products. So on the high density 1 gigabit for the data center market, we would expect that to be lumpy as new customer opportunities go to production. But on the toggle side, as the market recovers, these are a low volume, very high mix type of thing with various cycles of the introductions with the various customers. So it should be much more kind of monotonic in terms of its growth pattern. Got you. And on the data center side, I'm sorry for falling on one last time. On the data center side, I don't know how diverse the customer bases. But from a lumpiness standpoint, obviously, lumps go up and down. Is it getting more diverse? So it's less lumpy? Are you adding customer generally or is it kind of a flat you've reached all the customers? So we're just at the whims of their demands. How should we think about that? Well, I think we're still at the beginning. We're now serving 2 customers as we said. It had been a one horse race for a while. The second customer not having tremendous impact on lumpiness as we get to other companies that are based upon, ASICs in the storage space, those could have different inflections and we just kind of have to see how it plays out. Again, these are, these are kind of high end high end specific niches where where we serve there, a very, potential. So I think we have to to wait and see how those other than And next question from the line of Denise Paterson with Needham And Company. Hi guys. Thanks for taking my question. I'll be asking these on behalf of our Rajee Gill today. So my first question is, so can you tell us a little bit more about kind of the ramp of the STT MRAM and maybe what you're seeing from the data center side of the business? Suggesting that was challenging more recently as things kind of fell off from the initial COVID demand. But what's happening in that space right now? Hello? Yes, sorry. I think Kevin's muted there. Kevin, I think you're muted. I'm not muted though, Ally? No, you're not you're not muted. Sorry. Actually, if Kevin line has disconnected. Sorry. When you go ahead and repeat the question again, give me a little bit of time to think while we get the CEO reconnected. So I was basically just curious if you guys could go over maybe like the ramp of STT MRAM a little bit with us, what we can expect going forward? And maybe tell us what you've been seeing from the data center side of things. So I guess that was some of the demand had fallen off there. From the initial kind of COVID spike in demand. So what are you seeing in that space now? Kind of what's the latest and what can we expect perhaps from that space? Yes. So on the STT side, you're in line with, with how Kevin, you answered the question previously, you know, the STT side of the business is certainly lumpier than the toggle side of the business, right? So now we've moved on. We've started production shipments the second customer as we expected to in Q3, but clearly that side of the business is far lumpier than the toggle side of the business. Even within toggle, the data center side of the business, we do serve for things like, like rate arrays, for example, through the Toggle business. So, we've seen that for us be a little bit slower to recover. There's still some inventory digestion that's going on there in the data center side. So, so I hope that helps answer the question. On the SCC side, definitely, it's the way we think about that is more of larger, more discrete customers and, and they grow a bit more lumbarly. Great. Thank you. That was definitely helpful. And then the other question that I wanted to have is definitely a little bit more broad and kind of also kind of a bigger picture like one of the previous ones you'd received. So, I mean, maybe Kevin could chime in as well if he's Well, we'll get them back. Go ahead and answer that question. It's alright. Yes. So, I was wondering, are there any applications where you believe that? I'm back on now. I apologize. We had some telephonic issues. Go ahead. Go ahead. This was a question. Go ahead. Perfect. So my second question was kind of a bigger picture question. And I was wondering if you guys could speak about maybe do you believe that there's some applications where kind of your products up either the STT MRAM or the Toggle products where they're underutilized? Like new space where you think this RAM should be used, but it's not being used. Can you speak about that a little bit? Yes, absolutely. I mean, So yes, there are very many places where this gets used. One that we've been working at for a long time, And growth has been slow beyond the first customer is in storage. We still believe that the best way to produce very economical high performance storage applications is using our non volatile buffer technology. To use the most cost effective NAND flash memory in these storage applications without sacrificing the latency or the performance or the reliability of those devices, especially in enterprise storage. The same value proposition of high performance low latency nonvolatile memory also has a lot of value anywhere where there is mission critical information used in systems. These can be both data storage related such as fabric accelerators, for software defined storage applications, it can be persistent memory cards and, a host of high speed logging type applications as well. So I think there's definitely a broad set of applications today that could benefit from the technology. And we're working with several companies on seeing those come to market. But it is it is something that architects take a lot of handholding to get through to understand how that can not only bring the performance benefit to it, but do it cost economically. Great. And then just to clarify, you'd mentioned something about a buffer technology. Could you, what was the buffer technology that you mentioned? Excuse me, it's a non volatile white buffer. So our one gate of the MRAM is the function that it performs in many of these storage applications is an on vault to write buffer. Perfect. Thank you. And that'll be it for me. Thanks for taking my questions. Thanks, Dennis. You. Your next line comes from the line of Richard Shannon with Craig Hallum. Great guys. Thanks for taking my questions as well. Maybe a couple of simple ones here. You're looking for some nice growth here at the midpoint in your fourth quarter guidance. Kevin, I think you referred to some improvement in industrial. I want to get a sense of how much of that is due to drill and versus how much we could see from other applications, basically your plate might get related to STG? Well, what's the, I mean, in general, I think we're starting to see as we entered the quarter an uptick in demand and kind of an improvement in the, in the non data center levels of inventory. So I think based upon that, I think we're seeing a general improvement in the broad industrial channel. Okay. That is helpful. And it sounds like based on the other comments, Kevin, that you're seeing or at least hopeful of a general sustained improvement, obviously, absent any strange happenings from COVID. Is that a fair statement as you look into next year? I'm I'm not going to jinx it by coming up with strange events because dealing with recessions and pandemics and economic shutdowns, I think will weather storm. I think the good news here, Richard, is that despite the pressures that we've been under this year, we've come through each one of them pretty strongly. We've stayed on track with our with our operational objectives and our business initiatives, we continue to support customers who remain dedicated to programs that we've been working on. So, given where things are at, we're confident in our current positioning and our ability to continue to execute. As Dan said, we're signaling part of that by not renewing the ATM at its expiration. And, we think we're in a good positioned to grow as the market starts to recover. And hopefully the initial signs that we're seeing over the past few weeks will be a positive harbinger of things to come? I'll just add, something we mentioned briefly before, our design wins do continue to tick up. And so one of the things that we had talked about last quarter, the behavior that we continue to see this quarter is the new product introductions have been delayed because of COVID conditions, but our design wins continue to tick up. And we have think that's a great leading indicator for our future revenue. So that gives us good positive indications for the future. And we do expect gross margin to continue to improve. We've had some real improvements on our product costs on our TT MRAM side, which we talked about. And longer term, we clearly think this is a greater than 50% margin business. So, we will be executing to get there. Okay, that's helpful. A couple more questions for me. I guess following up on the design win environment here, I think, Kevin, you would mentioned a 50% growth in wins here. How long does it take in general for these wins to come to production? And obviously, we're not in normal times here, but what's the general time lag between the win and production? Normally, I mean, normally it's fairly short. Our experience, is that, you know, a design win when we when we qualify a design win, when we qualify that is that we've received a letter from our customers saying that they've completed qualification of those products and they're going to production. So generally that's an indication that we're near production order. Sometimes it's indicated with a production order, right? So it can be a couple of weeks. And it can be up to a few months depending on product introductions and timings, etcetera. These days, it's actually quite a bit different for a number of reasons in the factory automation space, as you know, the over the last 2 years, there's been delays in investments there. So even though the companies are our customers are developing their new platforms, be readying those for introduction, many of them are delaying those introductions due to the end market demand. As we said, we believe that some of that is now starting to turn around. And that's kind of the dynamic that we went into this year, although it was exacerbated with the conditions of COVID and what that was doing to the end markets as well? But I will say on the positive side, it's been surprising to us. We had mentioned in the Q1 call, that we expected the design win activity to slow down. And while we do have several bit of information about engineering teams working remotely and being challenged in their work, the numbers continue to go up. So as Dan said, I think that's a very positive forward looking indicator for, for the potential once these products then do start to see the ability to come to market? Okay. That's helpful perspective. Thanks, Kevin. Couple last questions for me. You identified a 10% customer and I can't remember the exact number I think they were in the 30% range or so. I'm assuming those customers are also taking not just they're taking not just STT, but also taking toggle. Is that fair? Our largest customer is there was 38 percent of revenue in the quarter. We did not breakout if they were taking both Toggle and STT. Last question for me. You mentioned in your prepared remarks, about some announced customers using embedded MRAM at your, at your go to foundry. Partner. Are you getting any visibility into royalties there? And what visibility like how far out do you if you're not getting it how far out do you expect to get that kind of visibility? So we had, as we've talked about on previous calls, while we do expect something to hit production this year. We don't expect it to be immaterial. Since we've mentioned from the public announcements of both the companies that I did refer to, in their statements those both look like, at least one of them is, kinda mid next year in summer. And, and Sony will be sometime during the year. I don't know specifically which quarter. Okay, that's that is all the questions for me. Thank you guys. And at this time, no other questions. I would like to turn the call over to Mr. Bammabrom for closing remarks. Thanks, at Everspin will be participating in the Craig Hallum Virtual Alpha Select Investor Conference on November 17. And in the Benchmark Capital discovery 1 on 1 conference on November 18. We will also be presenting and meeting with investors at the Needham Virtual Growth conference of the week of January 11, 2021. Please contact me or the Managing Firm to request a meeting. With that, we conclude today's call. You all for joining us, and we look forward to reporting our progress and results for the year in next quarter's call. Operator, you may now disconnect the call. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.