Earnings Call: Q2 2019

Aug 7, 2019

Good day, ladies and gentlemen, and welcome to the Everspin Technologies Second Quarter 2019 Financial Results Conference Call. At this at that time. Call is being recorded. I would now like to introduce your host for today's conference Ms. Leanne Sievers of Shelton Group Investor Relations. Ma'am, you may begin. Good afternoon, and welcome to Everspin Technology Second Quarter 2019 Earnings Conference Call. I'm Leanne Sievers, President of Shelton Group, Everspin's Relations Firms. Joining me today are Kevin Conley, Everspin's President and CEO and Jeff Winsler, Chief Financial Sir. 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 product 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 the 2018 Form 10 K filed with the SEC on March 15, 2019. 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 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 at least 90 days in the Investor Relations section of Everspin's web site 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, Leanne, and good afternoon to those joining us on today's call. We are reporting to you today from Santa Clara during a week that includes participation at MRAM Developer Day And Memory Summit. So there's a lot of interesting information to report on a number of fronts. Before going into that, I want to first start by acknowledging the challenging market conditions that we experienced in the second quarter that resulted in revenue coming in below our original guidance. While we had to revise our original guidance, it's important to recognize the strong performance that delivered much higher EPS results, even than we originally forecast. We'll talk more about that contributing factors to these results later on margins returned to our target operating model, when excluding the inventory charge incurred in the quarter. This improvement based upon strong yields for both Toggle and STT MRAM products. It's important to recognize that this includes a growing contribution from the pilot production of our 1 gigabit device. This performance demonstrates solid execution by our operations team in partnership with our foundry and OSAT partners. And lays the groundwork for lower cost structure for our products in the coming quarters. Our FTT MRAM revenue included to 56 Megabit STT MRAM shipments that tracked to expectations despite the NAND pricing challenges the storage market has experienced in the most recent quarter. It also included revenue from growing shipments of qualification units Sales of STT MRAM grew significantly in the quarter and reached a new quarterly record. Internally, we're on track to hit our 1 gigabit production qualification milestone for mass production crossover yield by the end of this quarter. Our team has executed extremely well in working with our manufacturing partner, global foundries, to achieve these results, which are making this important STK MRAM technology relevant as a commercial reality today. On the customer engagement side, we're achieving increased traction with our 1 gigabit part, At MRAM Developer's Day this week, we are extremely pleased to hear IBM confirmed the 1 gigabit part is part of its new next generation flashcore module development. We're pleased that they not only were the first to demonstrate our MRAM technology advantages for enterprise storage, but also are showing their confidence in our latest technology by including it in their next generation architecture. In other exciting development In another exciting development at FMS, the wraps were taken off the Bitware 3 terabyte open copy persistent memory card, that is also using our 1 gigabit STT MRAM part. This is an exciting new data center application that addresses the need for low latency, persistent memory, in the large database applications and again demonstrates the unique value of high performance non volatility that our technology brings. As a result of our operational progress on production yield attainment and other cost reductions, coupled with our customer engagement progress, We anticipate our important one gigabit product to represent a significant portion of our revenue as we enter next year. In other news at Flash Memory Summit this week, we announced that in addition to meeting the specific stringent requirements of data center applications, we are now able to bring this groundbreaking technology to additional usage models. Based upon the progress shown in our 1 gigabit technology qualification, our STK MRAM technology will be able to operate reliably in extended temperature environments and support applications that require a decade or more of data retention. Combined with existing strengths of its performance, endurance and reliability Our STT MRAM now takes another important step towards meeting the requirements of universal memory technology, This is truly another significant advancement for STT MRAM as demonstrated in a production or the 1 gigabit device. On last quarter's call, we talked about growing traction with partners in the enterprise SSD controller ecosystem, that will support our 1 gigabit STT MRAM devices. In the previous 2 weeks, we jointly announced that 2 of these partners, Pfizer Electronics And Sage Micro, have integrated interface functionality for our DDR4 based chips into their next generation enterprise SSD controller platform to accelerate low latency storage and eliminate the risks and limitations associated with capacitor backed DRAM Right buffer. We expect controllers from both of these companies to be Aetna's design systems announced general availability of SCT MRAM support in their DDR4 design IP, further enabling other system designers to build functionality into their controller designs. These are important steps that will enable broader penetration of our STM RAM into storage systems from leading OEMs in the data center applications. All in all, We are pleased with the progress being made on our 1 Gigabit program and are working on many fronts to further expand this important set of product opportunity Now let me turn to our Toggle products. As stated in my opening remarks, we have experienced some headwinds in our business due to current market conditions. I want to emphasize that these challenges have not caused a lack of loss of active designs, I got it impacted underlying end market demand for our customers' products. 2 of these deserve special mention based upon our observation. Significant application for our Toggle MRAM is factory automation systems, of which a majority are sold in China With the slowdown in the China manufacturing sector, factory equipment purchases continue to run well below historic levels. This in turn has reduced the demand we see from some of our larger customers that serve this market. A major contributor has been the ongoing U. S.-China trade dispute, which has continued without resolution, and we, like many others, continue to experience an impact on product demand as a result. Another significant market for our Toggle MRAM products has been in rate controllers that are installed into data center servers, Despite an increase in our market expectation as a function of delayed server platform build outs. We believe this mostly has to do with temporary demand dynamics within the service segment and do not believe this is a long term situation as we focus on maintaining our shared position with our key customers in this space. We believe the traction MRAM has established in our core markets remains solid and that the long term opportunity for this disruptive technology continues to grow. Our end customer base has expanded. And while demand has softened for some of our larger customers, we are seeing growth trend in 2nd tier customers. Relative to last quarter, the breadth of our design pipeline for Toggle MRAM continues to grow. And we expect this to generate renewed growth, especially once market conditions improve. We also continue to see new design win activity at or better than what we have seen in the last two quarters. In fact, we had 14 new Toggle Design Wins that entered production in Q2 and will contribute measurable revenue in the coming 12 months. As a result, we feel confident that Toggle MRAM will be back on a growth trajectory as we exit the year. We also have been looking at how best to extend our Toggle roadmap to address new in order to capitalize on new revenue opportunities. This is the first new Toggle product developed in over 5 years. And we expect this product to start contributing sale to sales in the second half of twenty twenty and beyond. In summary, From an execution point of view, our team has made great strides this past quarter on a number of fronts advancing on our new products continuing to improve support to our growing customer base, improving our cost structure, reducing our expenses while continuing to expand our future market opportunities. Jeff will now take you through 2nd quarter financials and third quarter guidance. Thank you, Kevin, and good afternoon, everyone. I'll start by reviewing the second quarter 2019 income statement. Revenue in the quarter was about the high end of our revised guidance at $8,600,000, and compared to $10,800,000 in the second quarter of 2018 and revenue of $10,000,000 in the first quarter of 2019. 2nd quarter product sales represented 93 percent of total revenue or $8,000,000 compared to 9,400,000 or 88% of total sales during the same quarter last year and down from $9,000,000 or 90% of sales in the previous quarter. Licensing royalties and other revenue in the second quarter of 2019 contributed approximately 600,000 compared to approximately 1,300,000 Looking specifically at MRAM product sales in the 2nd quarter, which includes Toggle and STT MRAM. Revenue was $7,900,000 compared to $9,100,000 in the second quarter of 2018 and $8,500,000 in the previous quarter. The sequential decline in MRAM product revenue primarily reflects lower Toggle MRAM sales, which were partially offset by record STT MRAM sales, both sequentially and year over year. Gross profit for the second quarter of 2019 was 4,000,000 or 46.5 percent of revenue compared to $4,500,000 or 42 percent, 42.1 percent of revenue second quarter of 2018 and compared to $4,800,000 or 47.7 percent of revenue in the prior quarter. Cost of goods sold in the 2nd quarter included an inventory charge of approximately $718,000 worth of material that was scrapped. Excluding this 830 basis point impact, gross margin for the quarter was 55%, reflecting improved manufacturing yields on new production. Operating expenses for the second quarter of 2019 were compared to $11,800,000 Breaking down our operating spend for the 2nd quarter, research and development expenses were $3,500,000 compared to $6,800,000 in the same quarter a year ago, and $4,000,000 last quarter. The reduction in R and D spending reflects the fact that our 1 gigabit STT MRAM part has transitioned from R&D to production and is not the result of reduction in development of future technology and product. Which continues to be an ever spent priority. SG and A expenses were $4,100,000 compared to $5,000,000 in both second quarter of 2018 1st quarter of 2019, reflecting a strong focus on reducing our cash spending and positioning the company for profitability. Interest expense in the second quarter of 2019 was 186,000 compared to $222,000 in the second quarter of 2018211,000 in the previous quarter. Other income was $111,000 of income in the second quarter of 2018 127,000 of income in the first quarter of 2019. GAAP net loss for the second quarter of 2019 was $3,700,000 or $0.21 loss per share based on 17,100,000 weighted average shares outstanding. Per share during same quarter a year ago and a loss of $4,300,000 or $0.25 loss per share in the prior quarter. Now turning to the balance sheet. Cash and cash equivalents were $15,300,000 at the end of the 2nd quarter compared to $18,500,000 at the end of of debt service payments and $1,400,000 of operating burden. We've made significant progress in our cash management strategies since the last earnings call. This week, we signed a revised loan agreement with Silicon Valley Bank that will push out principal payments on our existing debt for a year significantly reducing cash going to service debt. Additionally, we have focused on improving the profitability of our products through product cost reductions and consuming less cash for operating expenses through a strong focus on spending reduction. This is evidenced by our Q2 OpEx levels which were the lowest since the company went public in late 2016. These actions will better position the company to preserve cash in the short term and generate positive cash as our revenues ramp up. To keep our balance sheet strong, we've put an equity facility in place that will enable the company to periodically raise cash through issuing equity and market pricing. Our intention is to use this facility in a measured way that minimizes dilution of our shareholders while providing capital as required. All of these actions give us the ability to keep the balance sheet healthy while growing our business. Total assets at the end of the 2nd quarter were $37,500,000 compared to $42,200,000 in the previous quarter Total liabilities were $18,800,000 in the 2nd quarter as compared to $20,800,000 in the first quarter of 2019. Stockholders' equity was $18,600,000 compared to $21,400,000 in the first quarter of 2019. Looking ahead, we expect the market headwinds for Toggle MRAM that Kevin spoke of to continue through the third quarter of 2019. As a result, we expect share is anticipated to range between a $0.21 loss per share and $0.17 loss per share based on an average weighted share count of 17.2000000 shares outstanding. I'll now turn the call back over to Kevin. Thanks, Jeff. Obviously, market conditions are difficult, not just for us, but for a number of other companies in the Semiconductor segment. Nevertheless, there is a tremendous amount of new positive achievements as we have just reviewed on this call. Our focus is unwavering Our execution remains on track and our progress is demonstrated by our bottom line results. We remain focused on responsibly managing our business, growing revenue and achieving profitability. And looking to the future, our expectation that our STPM RAM technology can fulfill its promise as a universal memory is more compelling now than it ever has been. With that, operator, you may now open up the call for Thank you. And our first question comes from Richard Shannon with Craig Hallum. Let's see a couple of questions maybe on the guidance here. I just want to get a level set. Want to get a sense of what you're expecting for Toggle versus MRAM trends from the second to third quarter, I guess, but just like to hear from you, I know that you talked about in your pre announcements about your second quarter. Some inventory reductions. Wondering if there's still some more inventory reductions going on? Is there filler? Is it kind of else? Hi, Richard. So let me talk first about guidance. Our guidance statements, we really have not broken out, our Toggle MRAM versus our STT MRAM. I think we characterized our guidance going forward as experiencing headwinds in the Toggle MRAM portion of our business, which is really what we saw this quarter. So while we're not prepared to give exact numbers for each of these technologies, the continued headwinds in the market are very much, as a result of our Toggle and customers' products. Yes, maybe we could address the 2 things that we did talk about on the call, Richard, which are, 1, the U. S.-China trade dispute, which again, we don't see a visible sign up ending at this point and the other of the, the trends in server build outs which are expected to end, and yet we don't have specifics to forecast when that happens. Okay. Maybe I'll ask along the lines of the ST- STT MRAM product revenues, you noted at record level in the 2nd quarter. Are you expecting another record in the 3rd? Yes. Again, we prefer not to give the guidance relative to whether it's going to be increasing or decreasing from Q2. The challenges to growth for us, we're guiding just very, very slight growth from where we are today. And again, I think that's a function of the fact that we still experience Toggle resistance in Q3, and we don't expect that same market softness go back our STT MRAM ramp. Okay. Fair enough. That's helpful. Question on gross margins. You mentioned an inventory reserve in the 2nd quarter and that outside of that is about 55% for the 2nd quarter given the similar level of revenues here. Is it fair to think about a similar level of gross margins or any other mix or other dynamics affecting that? I think the important trend here, Richard, is that underlying margins are returning back to kind of our business target. So by that, I mean, the material that we're actually producing that's coming out of the factory now allows us to get our business back to that mid-50s percent margin that we've been targeting. The charge that we took in the second quarter was really reflective of a charge we've taken before. And this relates to Toggle product that we produced in, mid to late last year when we were having the yield issues that we were. We subsequently retested some of these parts and some of them we were able to ship for, revenue and others, failed retest and therefore were scrapped. And that's really what the charge is about. We continue to have parts in inventory that, that were tested before and were planning to retest going forward. I would characterize the exposure of that being significantly less than what we experienced this quarter. Okay. That's fair enough. One last question or maybe a multi part question for Kevin. Regarding SCT REM, specifically the 1 gig part here. It sounds like a great deal of enthusiasm here is building with customers. Maybe a, could you relate the ramp up of one gig versus what you experienced in 2 56 gig, how it's different in terms of customer breadth And then, and then also, I think last quarter, you talked about being the one gig that's being designed into 2 OEM products more than which is outside of storage. You mentioned the IDM. As one of those customers, wondering if you can give us an update, any anything quantitatively or qualitatively on that? In terms of the ramp itself, it's more or less at or above what we experienced with the 2 6 in terms of yield attainment, etcetera. So we're pretty pleased on that. We are sampling several customers as we've talked about in the past. So much broader distribution of our 1 gigabit parts than we'd experience the 26 Meg. So I hope that's helpful in kind of understanding where we're at in the early days of this product. The 2 OEM customers that we talked about both, were here at MRAM Developer Day. I talked about those on the call. One being 0 8 one being IBM with their next generation platform, as well as, bidware with their persistent memory card. Okay. Perfect. That's all for me. I'll jump on the line guys. Thank you. Thank you. Our next question comes from Ari Shusterman with Needham And Company. Your line is now open. Hey, guys. This is Ari taking the question for Raji Gill. So congrats on a strong quarter. And want to start off by turning to the China situation. Has this effect been more pronounced this quarter compared to the last few quarters? I remember last earnings call, you mentioned that having some effect, but, yes, wondering if you've seen an exacerbation regards to it on your business and things you're seeing moving forward? Thank you. Pad or maybe slightly below what we saw last quarter, Ari. So it's not a big change. Really, that impact started, manifesting itself in Q1. And with those particular customers, we more or less side than continue on for the entire Q2 at that level. Okay. That makes sense. And, with regards to your moves towards profitability, given the steps you guys have taken some serious cash burn, Is there a timeline for profitability or any help things you can give on that? Yeah, Ari. So I would point to the fact that we've always talked about profitability for our company is a matter of revenues at 50% to 55% gross margin covering our OpEx. And the thing that we've done in this quarter and we kind talked about going forward is we've significantly reduced the bar necessary to get to profitability by reducing that spending pretty dramatically. As I stated on the call, our total OpEx was the lowest it's been since the time we went public. And, so we've really focused on that. In terms of the timeline to get to profitability, obviously we're going to still need to ramp revenues above what we experienced this quarter. And a lot of that I think gets back to a return to growth for the Toggle portion of our business, which is, which is something that we believe will happen. We're getting a lot of new design wins. We have new customers in Toggle And as we see the kind of headwinds with our existing large customers start to ease, that should give us a very solid path to position the company for profitability. Yes. So the three things we'd ask, just keep in mind, the three major factors are what sort of revenue we're able to drive, what sort of, profitability we're able to by means of what our products cost us to build. And the third is what we spend operationally. And so two of those are obviously within our control, then we put a lot of effort into driving the third one. So what I'd say is look at our progress that we've made on the operation side over the last quarter. We'll continue to do that, both improving our product costs and margins while we while we control our spends, and meanwhile, we'll work on driving that top line to help us get there sooner. Okay. Yes, that makes sense. So just one more question with regards to your progress of global foundries. On embedded MRAM? Have you seen any updates to that? Yes, global foundries was present here at MRAM Developer Day, in one of their sessions, they announced that they'd achieved their pilot production milestone. So that's allowing them now to go out and fully sample customers. They talked about a number of customers that they have in the pipelines that they'll be giving, prototype parts to in the coming quarters. And, and so they're on track for, customer shipments next year. Thank you. And I'm showing no further questions at this time. I would now like to turn the call back over to Kevin Conley for any closing remarks. Thank you for the attending the Jefferies Semiconductor Hardware And Communications Summit in Chicago on August 28, and the Doherty IT institutional Investors Conference in Minneapolis on September 5th. We look forward to reporting our progress across our business on our next call next quarter. Operator, you may now disconnect the call. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.