Earnings Call: Q3 2018

Nov 8, 2018

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Everspin's 3rd Quarter 2018 Financial Results Conference Call. And A a reminder, this conference is being recorded. Now, I would like to turn the call to Leanne Sievers, President of Shelton Group, Investor Relations. Ma'am, you may begin. Good afternoon and welcome to Everspin Technologies Third Quarter 2018 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 Jeff Windler, Chief Financial Officer. 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 statements. We would encourage you to review our SEC filings, including the 2017 Form 10 K filed with the SEC on March 15, 2018, and other SEC filings from time to time in which we may discuss risk factors associated with investing in Everspin. All forward looking statements are made as of this 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, Leanne. And good afternoon, everyone. Our Q3 results demonstrated meaningful progress from both a revenue and operational perspective. 3rd quarter revenue increased to $11,500,000 and exceeded the high end of our guidance, increasing 28% year over year. MRAM revenue, including both Toggle and STT MRAM, grew 14% from the previous quarter setting a new quarterly record. This progress comes from both improvements in the performance of our Toggle MRAM Manufacturing coupled with continued growth of STT MRAM sales. To share some good news as we exited the third quarter, demonstrating measurable results from our investments in our manufacturing capabilities. Our operations team remains focused on Toggle MRAM production. We expect these investments in yield and productivity improvements on these core products to provide increasing benefits to our We announced earlier this week that we have entered into a multiyear partnership with Silterra, a world class semiconductor manufacturing services company located in cooling Malaysia. Through this partnership, Everspin will augment its production capacity to meet future demand for its Toggle MRAM products in the industrial, computing, medical and transportation markets, where fast reliable nonvolatile memory is critical. Initial Toggle MRAM production at Filterra is expected to start in calendar year 2020. This partnership is part of a 3 way cooperative agreement between Everspin, Silterra, and Bosch Sensertech, which is a licensee of Everspin's TMR sensor intellectual property. Let me emphasize that this is a compliment to our existing toggle MRAM Manufacturing capacity in our Chandler facility. We continue to invest in this manufacturing line under the existing lease and manufacturing agreement with NXP. It is our intent to continue parallel operations I will now turn we discussed our participation in the MRAM Developer Day And Flash Memory Summit in August, which was a great platform for us to promote our STT MRAM technology. During that week, IBM showcased their flash system 9100 all flash array, which contains the NVMe flash core module that uses our 256 megabit STT MRAM product. More recently, the same customer also made public that that flash core module will be available in a second storage array product line, expanding the traction of our technology in this key account. Building on our FMS engagements bolstered by our design wins in this high profile customer, we're gaining traction in new accounts that derive benefit from the same value drivers of our STT MRAM in persistent Right buffer applications. We see increasing technical engagements and have been designed into systems that we hope to be Another flash memory summit highlight was our collaboration with Smart Modular. We continue to work closely with Smart on the marketing and sales of the STT MRAM based NB Nitro Storage Accelerator and supporting proof of concept evaluations, a key step into data center deployments. Since August, we have seen increasing interest in evaluation activity with prospective customers, including evaluations by major financial institutions. We also now have opportunity We are anticipating 1 or more proof of concepts for this high performance storage accelerator to complete by year end. We expect Smart Modular to make the U. Technology. In addition to the positive developments I've just highlighted on our 256 megabit STT device, We remain on track with the development of the 1 gigabit STT MRAM device with customer samples expected to be released next month. We believe this product will open up incremental opportunities we continue to expect both products to be contributors to our future revenue growth with 1 gigabit revenues layering on top of revenue from the 256 megabit product. One final comment before turning the call over to Jeff We recently extended our joint development agreement with our partner, Global Foundries. This extension adds 1 year to the partnership beyond the termination date of the original JDA. Under the new agreement, there is a revised cost sharing structure that allows both Global Foundries and Everspin to each more efficiently manage the parallel development efforts on 22 nanometer FTX embedded and 28 nanometer discrete STT MRAM technology, respectively. Given where we are in our 28 nanometer development, we believe this revised agreement will help us reduce next year's R and D expenses. This arrangement will benefit both companies and demonstrates the strong relationship we have with a strategically important partner. With that, I'd now like to turn the call over to Jeff, who will review the details of our third quarter results, as well as provide our fourth quarter 2018 guidance. Jeff? Thank you, Kevin, and good afternoon, everyone. Before I review the third quarter 2018 financial results, I will point out that Everspin announced today that the company will be restating its second quarter 2018 financial results. Due to a discrepancy related to the timing of recognizing scrapped inventory in the amount of $770,000. As a result, the company will reflect an increase of this amount in cost of sales for the 3 6 month periods ending June 30, 2018, which will reduce gross profit and increase both loss from operations and net loss. We anticipate filing our 3rd quarter 10 Q and an amended second quarter Form 10 QA on or before November 16, 2018. Please refer to today's earnings release for more details on the changes our second quarter financial statements. When discussing the third quarter 2018 results, all comparisons will reflect these restated amounts. I'll now review the third quarter 2018 income statement. Revenue in the quarter was up 28% year over year, to $11,500,000 from $9,000,000 in the third quarter of 2017 and up 7% from $10,800,000 in the second quarter of 2018. Product sales represented 91 percent of total revenue or 10,500,000 which was up 26 percent from $8,300,000 during the same quarter last year and up 11% from $9,400,000 in the previous quarter. Licensing, royalties and other revenue in the third quarter of 2018 contributed approximately $1,000,000 compared to $685,000 in the third quarter of $20171.3000000 in the previous quarter. Revenue from MRAM products in the 3rd quarter, which includes Toggle and STT MRAM, was $10,400,000, a 36% increase from the $7,600,000 in the third quarter of 2017 and a 14% increase from the $9,100,000 in the previous quarter. Gross profit for the third quarter of 2018 was $5,400,000 or 47 percent of revenue, compared to the third quarter 2017 gross profit of $5,300,000 or 58 percent of revenue. And the second quarter of 2018 of $4,500,000 or 42 percent of revenue. Operating expenses for the third quarter 2018 were $10,900,000 compared to $10,600,000 in the 3rd quarter 2017 $11,800,000 last quarter. Breaking down the operational spending for the 3rd quarter Research and development expenses were $6,500,000 compared to $6,400,000 in the same quarter a year ago and $6,800,000 last quarter. SG and A spending was $4,500,000 in the 3rd quarter compared to 4,100,000 in the third quarter of $20175,000,000 in the second quarter of 2018. Interest expense for the third quarter of 2018 in the third quarter of 2017,222,000 in the previous quarter. Other income was 139,000 in the third quarter quarter of 2018. GAAP net loss for Q3 2018 was $5,600,000 or $0.33 loss per share based on 16,900,000 weighted average shares outstanding. This compares with a GAAP net loss of $5,400,000 or $0.43 loss per share during the same quarter a year ago and a GAAP net loss of $7,400,000 or $0.44 loss per share in the prior quarter. Now turning to the balance sheet, Cash and cash equivalents were $31,400,000 at the end of the 3rd quarter compared to $32,700,000 at the end of the 2nd quarter of 2018. Total assets at the end of the 3rd quarter were $51,400,000 as compared to $51,600,000 in Q2. Total liabilities were $23,800,000 as compared to $20,600,000 in the second quarter of 2018 Stockholders' equity was $27,600,000 compared to $31,000,000 in the second quarter of 2018. Looking ahead to the fourth quarter of 2018, The anticipated GAAP loss per share will improve to and $0.18 loss per share based on an average weighted share count of 17,100,000 shares outstanding. Now I'd like to turn the call back over to Kevin for some closing remarks. Thanks, Jeff. The 3rd quarter showed an important return to top line growth for the company. I'm pleased with the ongoing improvement our team has made in our Toggle operations and with the traction, our 250 six megabit STT MRAM product is gaining both within our lead customers and beyond. We remain on track with And finally, we successfully executed multiple strategic agreements that we believe will support long term profitable growth. We look to further build upon these positive steps going forward to create a more sustainable, scalable company. We're proud of what we've achieved this quarter and we remain enthusiastic and optimistic about our future. Now we'll open the call for your questions. Thank you. Our first question comes from Richard Shannon with Craig Hallum. Please go ahead. Kevin and Jeff, thanks for taking my questions. I guess my first one is on your 3rd quarter results on an excellent revenue outcome. If you could help us understand the reasons for the upside? Was it from products or licensing and if it's within products, any sense of title versus SCT MRAM? Thank you for the question, Richard. The growth in revenue came from increased MRAM sales, which includes both Toggle and STT MRAM. Okay. Any sense of so far with your 1 quarter under the belt here, I guess, of your lead Gen III customer shipping, any sense of how how their progress has been relative to your expectations starting last quarter? I don't have any detail on that, but right now, based upon what we're seeing from future forecasts, we believe that, that this will continue to be a strong driver of STT MRAM. Seventy bucks. Okay. All right. And you also talked about another design with this same customer. Any sense of of scale potential design win value versus the first win? Well, this yeah, not yet. It launches in a couple of quarters, I believe. And, the will be learning more about that as we approach I'll jump out of line. You talked about exiting the third quarter with kind of your baseline yields on your Toggle process. So wondering if you could give us a sense of either quantitative or qualitative, how do we think about gross margins, especially relative to the, to your range you'd given in past quarters? Richard, relative to our gross margins, we've talked in the past about how some of the yield issues that we've experienced in the fab have depressed that, that gross margin for the company through Q2 and Q3 of this year. I believe on the call, the last call that we had in Q2, we talked about the fact that those yields, we'd address the root cause issues associated with those yields and that we believed that we would start recovering and it would start showing in financial results of the company more toward the fourth quarter because that material obviously takes time to get through the line. So we're expecting to see a positive impact of higher factory yields relative to our gross margin, going forward. I'm not really at liberty to quantify what that is, but the trend is definitely going the right direction based on what we've seen, coming out of the factory and what those yield improvements have been. Would just from a timing basis, Jeff, does that mean you'll see the benefits of that flowing through in the fourth quarter would be beyond that? Yes, we'll start to see the impact of that in the fourth quarter. Assuming that the trends continue as they are, we should definitely see improvement in terms of our product costs through less scrapping of material and therefore, with a better cost basis, that should improve our margins. Our next question comes from Kevin Cassidy with Stifel. Please go ahead. Your agreement with Phil Tarek, can you give us a little more details on that? Will they get a certain run rate, or are they going to just be an overflow foundry at first and eventually grow it? I think the amount of detail that we have was shared in a press release earlier this week, Kevin. And so we haven't really talked about specific capacity in that. This is a shared agreement between 3 companies. Obviously their business model as a foundry is to have a scalable manufacturing base that they can use to support growing customers. And it's our intent to use that initially as a relief file for initial growth, but ultimately a path that can support longer term growth of our Toggle MRAM production. Okay, great. And just as a comparison would you expect gross margins to be slightly lower from the foundry rather than internal? Way too early to determine that. Clearly, how average selling price plays out over time, manufacturing costs. I mean, it's definitely stuff that we're modeling and obviously negotiating But it's too early to give any kind of indicators to whether we would have a better cost profile, going forward. Okay. And just one other on the OpEx. It looks like it was good control this quarter. Is this can you explain what changed or had OpEx come down and is it expected to continue to come down? You mentioned, cost sharing with Global Foundries. Is that part of it? Yes. So in R&D Expense, as we've talked about in the past, the joint development agreement with the Global Foundries is one of the big ticket items within our R and D expenditure. The spending associated with JDA expenses is not linear. It's really As materials consumed relative to the qualification of processes, etcetera, that's when we see high spending and high JDA exposure. The majority of our JDA expenses for 2018 have been around our one gigabit part as we develop 28 nanometer process technology. We're getting to the point Kevin talked about the fact that we're on track to have customer samples of that technology this quarter. So We've done a lot of the heavy lifting necessary to enable, 20 nanometer technology And so part of the reason you're seeing a decrease in our R and D spend in Q4 is because some of that joint development expense has has already been spent in previous quarters. He was I think just to clarify two points there. The JDA expenditures that you see this year are both our 28 nanometer 2 nanometer expenses. And I believe you meant to say the OpEx in Q3. Right. Okay, great. Congratulations. And our next question comes from Radfinrat Gail with Needham And Company. Your line is open. Yes, thanks. Congress as well on the possible medicine on the Toggle and SPM ramps. The local charter you know, we're building opportunities to enroll the foundry. I'm sorry to interrupt, but it's really hard to hear you Could you hear me now? Is that better? Yes, sorry about that. Your long term royalty opportunity with GLOBALFOUNDRIES. Now that you've extended the agreement, could we maybe you could update us in terms of the expected revenue recognition for that royalty opportunity by embedding MRAM into Global foundries wafers. Is that still on track that we'll be expecting to see some royalty revenue from GS? Starting in 2019. I know in the last quarter, you talked about getting PDKs for MPW elements this year, and sales from customers in 2019. Just want to get a better sense of that royalty opportunity in 2019. Yes. GlobalFoundry's public statements regarding their progress on 22 nanometer have been pretty consistent with their targets of going to mass production next year. So we believe that the forward looking visibility on the timing of that remains the same So then it's fair to assume that you'll start to generate some royalty revenue as they embed MRAM into their wafers? Well, as the agreement works, whenever they sell wafers, they have 22 nanometer technology on it, we earn royalty associated with that. 22 nanometer with MRAM. 22 nanometer with MRAM. So the timing of that is completely dependent Okay, got it. But they're going into mass production next year. That is what their public statements have reiterated. Yes. Okay. All right. And then in terms of the, the 40 nanometer, the 256 product development is progressing well. I wanted to get a sense in terms of when MRAM as a technology will start to get validated at a kind of a larger scale Do you believe that one gig densities is really going to be that sweet spot where you'll start to see more broader acceptance relative to the cost of MRAM. Yes, you said 30 nanometer, but if your question is regarding the 1 gigabit, you mean our 28 nanometer product. So, Rajee, yeah, we do believe that the 1 gigabit opens up new opportunities. And that through its higher density, right, not through, lowering costs, but really providing a different density point, for certain applications, which, as I said, will be a new set of applications that complement where the 2256 megabit plays today. Okay. And Jeff, in terms of thoughts around breakeven, Can you give us an updated view in terms of breakeven? What revenue levels do you think we need to get to that point, given that the fact that the gross margins are kind of volatile, but the OpEx is starting to come down particularly in the R and D line is vis a vis global foundries. Thoughts on breakeven. Raji, our business model is unchanged. We've talked about this in the investor presentations our goal is really to continue to maintain the type of OpEx spending that we have today. We've been really consistent in terms of that number over the past 7 quarters. And so what we're trying to do is maintain that level of OpEx and start ramping the business to the point that we're generating gross profits that cover that OpEx and then eventually start turning profits. From a math perspective, it's pretty straightforward. If you're spending $10,000,000 to $11,000,000 and you have a target of 55% gross margin for the company you need, you need basically double your OpEx spend to hit breakeven. And that's really what we're trying to do. So I mean, you can track our progress towards breakeven by using those metrics of our quarterly OpEx a target of 55 percent gross margin and the necessary revenue to get to that point. Okay, great. Thank you. Back to Kevin Conley, President and CEO, for his final remarks. Before we conclude today's call, I'd like to let you know that will attend multiple upcoming investor events, including the Needham Networking Communications And Security Conference on November 13th, and the Craig Hallum Alpha Select conference on November 15th, both in New York. We're also planning to be the East Coast for investor meetings in Boston and Philadelphia the week of December 17th, and we'll be attending the Needham Growth Conference in New York in mid January. We encourage you to contact your sales representatives at each of these respective firms or the Shelton Group Investor Relations if you would like to schedule a meeting with us. Thank you again for joining us today, and I look forward to reporting our future progress during our next call. Thank you everybody for participating in today's conference. This concludes the program and you may all disconnect.