Earnings Call: Q1 2020

May 7, 2020

Hello. Good afternoon and welcome to the Everspin Technologies First Quarter 2020 Financial Results Conference Call. 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 is being recorded today. Thursday, May 7, 2020. And I would now like to turn the call over to Leanne Sievers of Shelton Group of Investor Relations. Leah. Please go ahead. Good afternoon, and welcome to Everspin Technologies First Quarter 2020 Earnings Conference Call. I'm Leanne Sievers, President of Shelton Group, Everspin's Investor Relations firm. Joining me today are Kevin Conley, Everspin's President and CEO and Matt Tinario, Controller and Interim CFO. 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 statement. We would encourage you to review our SEC filings, including the 2019 Form 10 K filed with the SEC on March 13, 2020. 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. This conference call will be available for audio replay for at least 90 days in 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, Kevin Conley. Kevin, please go ahead. Thank you, Lynn. In these unprecedented times of global pandemic, let me say that I hope you're all healthy and safe. And that we appreciate you taking the time to participate in this earnings call. In the first quarter of 2020, we are pleased to report that revenue was well above guidance. This was our 3rd consecutive quarter of revenue growth as data center demand and the broad diversity of our customer base continue to be positive factors for our call. Solid gross margins supported by our cost control measures help deliver earnings at the high end of our guidance. These results are especially notable when considering our usual first quarter seasonality, along with these compounding effects of the current market environment. Almost 2 months ago, we've responded to the COVID-nineteen pandemic by proactively putting measures in place to protect our workforce and to guard our business from disruption. We moved the majority of non production personnel to remote working arrangements and restructured team assignments to allow our employees to continue to operate safely and productively. Overall, we are optimistic on the direction while we remain alert to the changing dynamics of the current environment. Demand as a whole still looks to be growing in a healthy fashion. With data center demand projected to be strong and memory demand in our core industrial segment relatively solid. While we see minor fluctuations in demand timing and some regional softness, This is being offset by other areas of increased demand. And minimal exposure to the auto market, which key customers and distribution partners while monitoring other key indicators to maintain vigilance on potential implications of the pandemic on our future results. One practical implication of our current work from home posture and travel restrictions is that our progress on the production ramp of our 1 gigabit STT MRAM product is slower than we had hoped. The teamwork with our partners on ramping production and maturing yields has been extremely collaborative Yet the current circumstances have prevented us from ramping fast enough to satisfy all customer demand and achieve our cost targets. Working with our partners, we are actively managing the situation to get us back on track in the coming months. Given the increasing contribution of this product to our future revenue stream, we believe this may temporarily challenge our ability to achieve our gross margin target in the near term. Nevertheless, I want to reiterate that customer as well as the new data center customer design win that is expected to transition to mass production later this year. More broadly, total design wins for our MRAM products in Q1 reached a new high. Despite many customer engineering teams having limited access to their laboratories. Toggle design wins increased over Q4 and more than doubled compared to Q1 of 2019 indicating success in our efforts to drive Toggle MRAM growth. Looking forward, market expectations are positive on enterprise demand for memory in both server and storage which have seen increases due to many companies moving to remote working conditions, thus driving the need for increased data center capacity and bandwidth. Our business remains on solid footing and we continue to focus on further strengthening its fundamentals. With a greatly improved expense structure, supported by reduced costs in our established product lines, we continue to align our efforts to achieve cash flow breakeven before year end. Underlying that focus is driving increased design wins for new and existing Toggle products, converting engagements with customers and system partners into design wins for STT MRAM products and continued expansion of our MRAM product portfolio. This includes continuing to build on the early success of our newly introduced Toggle capacities, 2 megabit, 8 megabit, and 32 megabit, as well as preparing our customers for use of MRAM in environments that require various levels of radiation immunity such as space applications. A market we have already have a proven track record in. We believe that despite the current environment, we are increasingly well positioned to drive long term growth. I'd like to make one final comment on our search for a permanent CFO We have talked to further positive updates in the near future. With that, I will hand it over to our interim CFO, Matt Senorio who will now take you through our first quarter financials and second quarter guidance. Thank you, Kevin. And good afternoon, everyone. As part of my financial review today, I'll focus my discussion on non GAAP financial results and refer you to today's press release for a detailed description of our GAAP results as well as a reconciliation of GAAP to non GAAP results. The non GAAP adjustments exclude stock based compensation, restructuring and other charges as applicable. Starting with a review of the first quarter 2020 income statement. Revenue in the quarter exceeded the high end of our guidance, at $10,100,000 compared to $9,700,000 in the fourth quarter of 2019 $10,000,000 in the first quarter of 2019. Looking specifically at MRAM product sales in the first quarter, which includes Toggle and FTT MRAM, revenue was $9,600,000 compared to $9,200,000 in the previous quarter and $9,000,000 in the first quarter of 2019. The increase in product sales reflects continued growth of our Toggle products combined with strong contribution from SCT MRAM products. Licensing, royalties, and other revenue in the first quarter of 2020 contributed approximately 500,000 compared to $500,000 in the previous quarter and approximately $1,000,000 in the first quarter of 2019. Gross profit for the first quarter of 2020 was 5 point compared to $5,200,000 or 53.6 percent of revenue in the prior quarter and $4,800,000 or 47.7 percent of revenue in the first quarter of 2019. The 5 20 basis point year over year increase in gross margin reflects the significant improvements in manufacturing yields of our mature products as well as a one time benefit from the sell through of previously expensed fully qualified 1 gig FTT MRAM product. Non GAAP operating expenses for the first quarter of 2020 was 6.2000000 compared to $6,300,000 in the previous quarter The breakdown of operating expenses were $2,900,000 compared to $3,100,000 last quarter and $3,900,000 in the same quarter a year ago. SG and A expenses were $3,300,000 compared to $3,200,000 in the prior quarter and $4,400,000 in the first quarter of 2019. SG and A baseline expenses would have declined from the previous quarter without expenses related to year end audit. Interest expense for the first quarter 2020 was 172,000 compared to $179,000 in the previous quarter $211,000 during the first quarter of 2019. Other income in the first quarter was $22,000 compared to $127,000 last quarter $127,000 during the same quarter a year ago. The non GAAP net loss based on 18,100,000 weighted average shares outstanding. This compares with a net loss of 1,200,000 or a $0.07 loss per share in the prior quarter and a net loss of $3,600,000 or a $0.21 loss per share during the same quarter a year ago. The significant improvement in year over year bottom line results underscores the benefits from our expense reduction initiatives combined with ongoing improvements in mature product cost reduction. Adjusted EBITDA for the first quarter of 2020 was a loss of $300,000 compared to a loss of $600,000 in the previous quarter and a loss of $2,900,000 in the first quarter of 2019. Now turning to the balance sheet. Cash and cash equivalents were $14,000,000 at the end of the 1st quarter compared to $14,500,000 was $2,600,000 in the first quarter compared to $3,000,000 last quarter and $3,400,000 in the first quarter of last year. Cash used this quarter included installment payments based on timing of deliverables and some one time payments, which we do not expect to occur. As mentioned on our conference call last quarter in mid March, we suspended trading on our at the market or ATM facility. Prior to which we generated approximately $2,100,000 from the issuance of new stock in Q1. We currently have no plan restart trading on our ATM. During the quarter, we had an average balance of $2,000,000 utilization We continue to believe we have sufficient cash to support our operations and growth objectives. Total assets at the end of the first quarter were 34.7000000 compared to $35,400,000 in the previous quarter. Total liabilities as compared to $16,900,000 in the fourth quarter of 2019. Stockholders' equity was 20,000,000 compared to $18,500,000 in fourth quarter of 2019. I will now turn to our 2nd quarter guidance. We expect 2nd quarter revenue to increase to a range between $11,500,000 $12,500,000. We expect a GAAP loss a loss of between $0.06 and approximately breakeven per share. The ranges for both GAAP and non GAAP EPS are based on an estimated average weighted share count As Kevin mentioned, while demand as a whole looks relatively healthy, we remain vigilant on potential implications of the pandemic. Including the impact of work from home and travel restrictions on our 1 gig FET MRAM production ramp. These dynamics were factored into our guidance ranges, which to reiterate reflect revenue growth and breakeven results at the high end of our non GAAP EPS. Operator, you may now open We have our first question from Ari Chesterman Your line is open. This is Ari Shusterman on behalf of Raja Gill. Thank you for taking my questions. So I want to 1st start off by asking about the impact of COVID on data center demand, particularly as it relates to increased demand for MRAM technology within data center applications? Any color on that would be appreciated. Thank you. Thanks for the question, Ari. Data center demand as we have put in our commentary over the past couple of quarters, has been, has been on the increase as the normal cyclicality had led to increased server builds as we entered Q1 that continued to strengthen and has continued, to strengthen even further as we've as we completed the quarter. So data center demand, we do see some, positive factors as a function of, of demand on data centers driven by the COVID-nineteen pandemic. Got you. Thanks. Yeah, and then with regards to your new Toggle products, particularly 8 a bit and 32 megabit. Can you talk about traction you've been seeing in those? We can. We we talked on our our last call that we had actually already, already qualified the 8 gig I'm sorry, the 32 megabit part, and and have also gotten qualification of our 8 megabit parts. So those those two parts, already have production orders being placed, that'll start helping us this year. Got you. That's helpful. We're now just switching a bit towards global foundries. So with regards to your 12 nanometer process, now you guys have been doing with Global Foundries. So when can you give some color on that? And when do you expect substantial sales with regards to those embedded MRAM products? So the announcement that we made was a technology, partnership that we have had in longstanding with Global Foundries. That has, so far produced 3 different technology nodes of MRAM, that are original 40 the 28 nanometer, which is our 1 gigabit product as well as global foundries 22 nanometer. FDX embedded MRAM. So, so we should look at the 12 nanometer as the next chapter of that, in the next logical step of that technology development roadmap, we've opened the door now for that collaboration to, to go to a deeper level and, at this point, we're not putting specifics out there with regard to technology availability or product at this time. Got you, Sam. Sorry, just one more question regards to your restructuring efforts. So can you talk about, the progress regarding that and how can we expect OpEx to trend for the remainder of the year? What we talked about, on the restructuring that we completed on January 31st, was that our target was to reduce operating expenses in 2020 by $5,000,000 over what we spent in 2019. You now have the first glimpse of of how that's played out in Q1. Of this year. And you can see that we significantly reduced our expenses relative to last year quarter over quarter. And given that the completion of our restructuring happened at the end of January in this quarter. We didn't enjoy a full quarter of, the total benefits from that, plus we have ongoing restructuring expenses that will continue for some months. So it will it'll gradually be played out over the coming quarters and, and and should give us a a pretty significantly reduced run rate. Got you. Thanks. We have no questions at this time. You may continue with the presentation. In closing, I would like to recognize the efforts of the entire Everspin team as well as our partners, who have done so much to keep our The growth implied by the guidance we provided in the current environment distinguishes us from many of our industry peers, and we will work to continue to successfully deliver on our objectives. At the Oppenheimer Emerging Growth Conference on May 12th. We also are scheduling virtual investor meetings with Needham on 13th 14th, followed by the Craig Hallum Virtual Conference on May 27th. For those interested in scheduling a meeting, please contact the Shelton Group or the hosting firm. We look forward to reporting our progress with our new products and business results on our call next operator, you may now disconnect the call. Thank you, presenters. This concludes this conference call. Thank you for participating. You may now disconnect.