Earnings Call: Q1 2019

May 8, 2019

Good afternoon, and welcome to Everspin Technologies First Quarter 2019 Financial Results Conference Call. At this time, all participants and answer session. As a reminder, this conference call is being recorded today, Wednesday, May 8, 2019. Would now like to turn the call to Brett Perry of Shelton Group, Investor Relations. Brett, please go ahead. Good afternoon, and welcome to Everspin Technologies First Quarter 2019 Earnings Conference Call. I'm Brad Perry, Vice President at Shelton Group, Everspin's Investor Relations firm. Joining me today are Kevin Conley, Everspin's President and CEO and Jeff Winsler, Chief Financial Officer. Before we begin the call, I wanna 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 the 2018 Form 10 K filed with the 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 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 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, Brett. Good afternoon to those joining us on today's call. Everspin executed well in the first quarter of 2019, delivering results above guidance under challenging market conditions. The first quarter results represent the new baseline upon which we are building our future growth. I'd like to start with some important STT MRAM updates The first of which is that IBM, our largest STT MRAM customer, announced in April that the NVMe flash core module using our 256 megabit part is now supported in its 3rd enterprise storage array family. The store wise V5000 family targets even greater end customer affordability and expands our reach within this important customer. This further builds upon our existing design wins in the flash system 1100 and the storewide V7000 storage array families. Given the affordability focus of the V5000 product line, Utilization will likely occur in the very high end of the line. And as a result, we don't expect this particular line to drive significant volume. However, we believe this widening adoption signals the confidence our customer has A second important update is on our progress on STT MRAM enablement with enterprise storage controller suppliers. These engagements are a key element to opening a broader opportunity for our STT MRAM products and enterprise storage systems by building support for our that support for our DDR4 based STT MRAM is now designed into 3 enterprise SSD controller ASICs, from well positioned merchant controller companies. We are working closely to complete MRAM qualification in these platforms with these companies and hope to complete MRAM and integration beyond FPGA based designs. This is an important enabler of broader penetration of our CTN RAM into storage systems from leading OEMs in data center applications. And finally, with a further update on our DD 4 based 1 gigabit STT MRAM product, I am pleased to announce that we are now designed into 2 OEM end products. One of which is our first data center application for STT MRAM outside of storage. Furthermore, we have delivered our first unit shipments to allow end customer qualifications to begin. Team remains on schedule. As we look beyond the meaningful near term opportunities we have with our current STT MRAM product portfolio, We're also focused on longer term longer term on paving a path for larger opportunities within existing applications through reducing the bid cost of this crucial technology. We're actively engaged with the manufacturing equipment suppliers and our manufacturing partners to define the path that will get us to more cost effective means producing STT MRAM memory. Coupled with our efforts on the technology and manufacturing front, we're also analyzing a number of expanded market opportunities that these advances make economically viable. We've been pleased with the engagements with strategic customers in these segments and The potential this holds for driving future growth of STT MRAM adoption. We remain committed to the development of STT MRAM discrete memory products as the path to growth for Everspin. Turning to our Toggle MRAM products. As we exited Q1, we saw distributor inventory of our product returning to historical levels in terms of weeks of supply. Also significant is that we are seeing growth in demand from North American customers, mainly driven by increases from the data center segment. Additionally, we have 13 new Toggle design wins in Q1 across a broad set of applications, the majority of which started production or expected to do so by the end of Q2. The breadth of our design pipeline for Toggle MRAM continues to grow and we expect will contribute to revenue growth in the coming quarters. Following our strategic decision to shift away from manufacturing of sensor products and providing back end foundry services, we are now fully focused on adding value Toggle MRAM business to our healthy revenue base, while continuing to position STT MRAM as the main growth driver This focus includes increased customer engagement, reducing, reduced manufacturing costs and other business initiatives that improve fundamentals of the business going forward and provide the path to profitability. As we stated last call, we believe the customer demand for MRAM in our core markets remains solid and that the long term remains on track for 2020 production is looking at new opportunities that can benefit from an extension of our And as customer requirements evolve, it creates new opportunities where next generation Toggle products can provide unique value proposition in mission critical memory application working with customers over the past few months, we've identified opportunities in gaming and industrial automation applications that our extended roadmap will address. We're actively engaged with our customers in these segments in Q4. We're excited about these accomplishments as demonstration of our MRAM leadership and the progress towards growing this important emerging market through penetration into applications with increasing potential. It's especially significant as we leave this market into the era of gigabit MRAM memory. Bringing an even stronger solution to solving the data storage latency problems of data center operators. In August, Everspin and our partners will participate in MRAM developer Day in Flash Memory Summit, August 5th through 8th in Santa Clara, where we will present in detail where MRAM is and where we intend to take it. Near term, we still face challenging market conditions, but we believe that these are temporary. We remain focused on our journey to profitability in delivering the long term disrupted potential of MRAM technology. Now over to Jeff to take you through the details on the numbers. Thank you, Kevin, and good afternoon, everyone. I'll start by reviewing the first quarter of 2019 income statement. Revenue in the quarter was above the high end of guidance at $10,000,000 compared to $14,900,000 in the first quarter of 20 18, which included $5,500,000 in licensing, royalty and other revenue, and compared to revenue of $12,300,000 in the fourth quarter of 2018. 1st quarter product sales represented 90 percent of total revenue or $9,000,000, which was down slightly from 9,400,000 or 63% of total sales during the same quarter last year and down 12% from the $10,200,000 or 83 percent of sales in the previous quarter. Licensing royalties and other revenue in the first quarter of 2019 contributed approximately $1,000,000 compared to approximately $5,500,000 The first quarter of 2018 included a fee for the Sensor IP license agreement we secured as part of our strategy to transition our sensor portfolio to a licensing model. The sequential decrease was reflecting our initiative to strategically reduce our exposure MRAM product sales in the first quarter, which includes Toggle and STT MRAM, were $8,500,000 compared to $8,900,000 in the first quarter of 2018, and $9,700,000 in the high end of the year discussed during our last call. As a reminder, the short term impact to Toggle revenues from this program will have minimal to no impact on our long term gross Gross profit for the first quarter compared to $10,000,000 or 67 percent of revenue in the first quarter of 2018, which again included the benefit from a material one time licensing agreement. Gross profit was $5,400,000 or 44.2 percent of revenue in the prior quarter. A 350 basis point sequential increase in Toggle gross margin, I'm sorry, in gross margin, reflects improved manufacturing yields on our Toggle products. Operating expenses for the first quarter of 2019 were 9000000 compared to $11,100,000 Breaking down our operating spend for the first quarter, research and development expenses were $4,000,000 compared to $6,500,000 in the same quarter a year ago and $3,900,000 last quarter. Research and development was up $66,000 sequentially as a result $63,000 sequentially due to higher accounting and professional service expenses associated with our year end audit. Partially offset by lower sales $211,000 compared to $211,000 in the first quarter of 2018 $228,000 in the previous quarter. Other income was $127,000 in the first quarter of 2019 compared to $44,000 of income in the first quarter of 2018 $142,000 of income in the fourth quarter of 2018. GAAP net loss for the first quarter 2019 $4,300,000 or $0.25 loss per share based on 17,100,000 weighted average shares outstanding. This compared with a GAAP net loss of $1,300,000 or $0.09 loss per share during same quarter a year ago and a loss of $3,500,000 or were $18,500,000 at the end of the first quarter compared to $23,400,000 at the end of the fourth quarter of 2018. Total assets at the end of the first quarter were $42,200,000 compared to $45,000,000 Total liabilities were $20,800,000 in the first quarter as compared to $20,100,000 in the fourth quarter of 2018. Stockholders' equity was $21,400,000 compared to $24,900,000 in the fourth quarter of 20 Looking ahead to the second quarter of 2019, we expect revenue to range between $9,600,000 The resulting GAAP loss per share will range between $0.27 loss per share and $0.23 loss per share based on an average weighted Operator? Our first question comes from Richard Shannon with Craig Hallum. Congratulations on the 1 gig wins here. Maybe that's the first couple of questions for me. It seems like these designs came pretty quickly or faster than maybe would have maybe if you can give us a sense of the urgency of design wins here, maybe if you can get a profile of these customers. And I think Kevin, you mentioned one of the applications was outside of storage. Maybe you can give a sense of what that application is, that'd be appreciated. Sure. Good to talk to you, Richard. And thanks for the questions. The urgency or at least the speed at which you see these designs happen is really a function of, you know, with getting to the point of of having our our customer qualification samples ready, were able to re engage with customers who had, who had previously decided to wait on the 1 gig after we changed the priority regarding the 256 in terms of the primary STT MRAM vehicle. So, so that really has paid the path to, to getting some of these, customer engagements up and running, on a very, very quick basis. With regard to the, the nature of the applications, I'm afraid we're under confidentiality and I really can't provide much more clarity on that. That's what I figured, but I thought I tried anyway. And Kevin, did I hear you correctly that your customers are moving to qualify their product with their customers? To get a sense of how fast that might occur? So, yeah, I didn't say anything about their end customers that's their program, DSUdi, allowing our parts to be qualified within our customer's product. Got Alright. Let's see here. You also mentioned, announced or maybe not announced, but you mentioned something about the AC controllers you're gonna support MRAM. Wondering how fast we can see those guys qualify and then get into end products like SSDs and when does that lead to revenues? I'm assuming it sometime later in mid to later in 2020, but just want to get a sense if that timeframe has improved at all? Sure. While the timing of these releases isn't really within our control, our understanding, is that 1 or more of these devices or at least plan to be available in late 2019, enabling OEMs to subsequently design products. OEM design cycles vary, but our expectation is that this would make revenue toward the end of 2020 or possibly Well, 2021 is likely where we'd expect the majority of volume from these designs to be enabled. Okay. Fair enough. One last question for me and then we'll jump out of line. Kevin, in your prepared remarks, you talked about both last quarter now this quarter about eventual return to growth here. Are you still believing that the second half will show growth over the first half or maybe third quarter over 2nd quarter in Toggle or maybe if you can give a little clarity as to your thought process there? I think we'd reiterate the previous statement we made, which is that we believe that in the second half of this year will return back to sequential growth. Okay. I think that's all the questions for me. Thank you very much. Thank you, Richard. Thank you. And our next question comes from Kevin Katz with Stifel. Your line is now open. Yes, thanks for taking my question. On your improvement on yields for the Toggle devices, is there more room for improvement? Can we expect gross margins to expand based on better yields going forward? Yes. So I believe that there is continued improvement We have specific goals for each of the products that we have in the Toggle product portfolio. We're making progress in moving toward those goals and we've seen good improvement in manufacturing yields. We still have additional upside in terms of yields. And it's a very large focus for us. Obviously, it increases our profitability. And so there's a lot of focus going on there, but in answer to your question, yes, we do have additional room and we are confident that our manufacturing line will continue to improve Okay, great. And I wonder if you could describe a little more of your pipeline or the funnel of the designs that you're working on, on the SVP product, the 1 gigabit, how many samples do you have out to customers some information like that just to know what we can expect in the future. Yeah. I don't know if it's a lot of detail on how many customers we sampled is is helpful, but I will say that we we've sampled several customers, Kevin, and, are engaged with several ecosystem partners as well beyond the design ins that that we mentioned during the, during the the leading script here. So We've announced 2 customer design ins and 3 ecosystem design ins at this point. With several customers and ecosystem partners. Okay. And one other question for me. On the, embedded MRAM, can you say any progress that, global foundries has had or even is there an opportunity to move, your technology to other foundries? We have no indications beyond the public statements regarding, GF other than, you know, them starting production in 2019. That means that initial royalties would still be possible this year based upon them shipping products that contain Emirates Beyond that, we haven't talked publicly about it. Any other royalties from any other company too. To us. Thank you. And our next question comes from Ari Shusterman with Needham And Company. Your line is now open. Hey, guys. Thank you for taking my question. So I'm asking on behalf of Rajiv Gill. And when it comes to the mix between your STT MRAM and Toggle product, for the rest of, I guess for this quarter and for the rest of the year, how should we think about the mix? Thank you. Ari, we don't give guidance in terms of the mix of those products. They're both as we've talked about, we believe they're both on a growth path. And so we're expecting them to continue along that path. But we don't break that out between Toggle and STT MRAM. Okay. Thank you. And one more question. With regards to China tensions, do you see any risks to your business, especially given recent news? What I'd say is, we have seen the China situation having some impact in the, especially in the industrial segment overall. There's been a slowdown in China Manufacturing and that's that's definitely it or at least put some pressure on some of our customers. For the moment, that hasn't that has stabilized for us. And we believe that, with any improvement in the trade relations between the U. S. And China that actually that, that pressure will hopefully return us back to the potential that that segment holds for us. I'm not showing any further questions at this time. I would now like to turn back over to Kevin Conley for any closing remarks. Pating in the upcoming B. Riley FBR Institutional Conference in Beverly Hills on May 22nd. The Cowen TMT Conference in New York on May 29th and the Stifel Cross Sector Conference in Boston on June 12. Please contact your sales representatives at the respective firms or the Shelton Group if you would like to schedule a meeting with us. Thank you for your participation on today's call, and we look forward to reporting our continued progress next Operator, you may now disconnect the call. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.