Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Everspin's third quarter 2018 financial results conference call. At this time, all participants are in a listen-only mode to prevent background noise. If anyone needs assistance during the conference, just press star and zero for an operator. Later, we will have a question-and-answer session, and the instructions will be given at that time. As 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, 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 Winzeler, 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. 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. Third quarter revenue increased to $11.5 million 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 on the Toggle MRAM front, we have returned to baseline yields on Toggle production at our Chandler facility as we exited the third quarter, demonstrating measurable results from our investments in our manufacturing capabilities. Our operations team remains focused on the performance of our manufacturing line in order to drive increased efficiencies and profitability of our Toggle MRAM production.
We expect these investments in yield and productivity improvements on these core products to provide increasing benefits to our financial performance in the coming quarters. To further our efforts towards supporting long-term Toggle growth, we announced earlier this week that we have entered into a multi-year partnership with SilTerra, a world-class semiconductor manufacturing services company located in Kulim, 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, non-volatile memory is critical. Initial Toggle MRAM production at SilTerra is expected to start in calendar year 2020. This partnership is part of a three-way cooperative agreement between Everspin, SilTerra, and Bosch Sensortec, which is a licensee of Everspin's TMR sensor intellectual property.
Let me emphasize that this is a complement 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 of a diversified manufacturing base once SilTerra has come online. I will now turn to some highlights on our STT-MRAM efforts. During our last earnings call, 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 FlashSystem 9100 all-flash array, which contained the NVMe FlashCore Module that uses our 256 Mb STT-MRAM product.
More recently, the same customer also made public that that FlashCore 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 are gaining traction in new accounts that derive benefit from the same value drivers of our STT-MRAM in persistent write buffer applications. We see increasing technical engagements and have been designed into systems that we hope to be able to announce as design wins in the coming quarters. 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 nvNITRO 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 outside the fintech sector with a web service provider that operates its own data centers. We are anticipating one or more proof of concepts for this high-performance storage accelerator to complete by year-end. We expect SMART Modular to make the U.2 form factor of the nvNITRO product line available before the end of this year, opening up new opportunities for this innovative product technology. In addition to the positive developments I have just highlighted on our 256 Mb STT device, we remain on track with the development of the 1 Gb STT-MRAM device, with customer samples expected to be released next month. We believe this product will open up incremental opportunities with new customers and applications beyond what the 256 Mb part addresses.
We continue to expect both products to be contributors to our future revenue growth, with 1 Gb revenues layering on top of revenue from the 256 Mb product. One final comment before turning the call over to Jeff. We recently extended our joint development agreement with our partner, GlobalFoundries. This extension adds one 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 GlobalFoundries and Everspin to each more efficiently manage the parallel development efforts on 22 nm FDX embedded and 28 nm discrete STT-MRAM technology, respectively. Given where we are in our 28 nm development, we believe this revised agreement will help us reduce next year's R&D expenses. This arrangement will benefit both companies and demonstrates the strong relationship we have with this 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 three and six-month periods ending June 30th, 2018, which will reduce gross profit and increase both loss from operations and net loss. We anticipate filing our third quarter Form 10-Q and an amended second quarter Form 10-Q/A on or before November 16th, 2018. Please refer to today's earnings release for more details on the changes to 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 20% year-over-year to $11.5 million from $9 million in the third quarter of 2017, and up 7% from $10.8 million in the second quarter of 2018. Product sales represented 91% of total revenue or $10.5 million, which was up 26% from $8.3 million during the same quarter last year, and up 11% from $9.4 million in the previous quarter. Licensing, royalties, and other revenue in the third quarter of 2018 contributed approximately $1 million, compared to $685,000 in the third quarter of 2017, and $1.3 million in the previous quarter. Revenue from MRAM products in the third quarter, which includes Toggle and STT-MRAM, was $10.4 million, a 36% increase from the $7.6 million in the third quarter of 2017, and a 14% increase from the $9.1 million in the previous quarter.
Gross profit for the third quarter 2018 was $5.4 million or 47% of revenue, compared to the third quarter 2017 gross profit of $5.3 million or 58% of revenue, and the second quarter of 2018 of $4.5 million or 42% of revenue. Operating expenses for the third quarter 2018 were $10.9 million, compared to $10.6 million in the third quarter of 2017 and $11.8 million last quarter. Breaking down the operational spending for the third quarter, research and development expenses were $6.5 million, compared to $6.4 million in the same quarter a year ago and $6.8 million last quarter. SG&A spending was $4.5 million in the third quarter, compared to $4.1 million in the third quarter of 2017 and $5 million in the second quarter of 2018.
Interest expense for the third quarter of 2018 was $229,000, compared to $178,000 in the third quarter of 2017 and $222,000 in the previous quarter. Other income was $139,000 in the third quarter 2018 versus $40,000 of income in the third quarter of 2017, and $132,000 of income in the second quarter of 2018. GAAP net loss for Q3 2018 was $5.6 million or $0.33 loss per share based on 16.9 million weighted average shares outstanding. This compares with a GAAP net loss of $5.4 million or $0.43 loss per share during the same quarter a year ago, and a GAAP net loss of $7.4 million or $0.44 loss per share in the prior quarter. Turning to the balance sheet, cash and cash equivalents were $31.4 million at the end of the third quarter, compared to $32.7 million at the end of the second quarter of 2018.
Total assets at the end of the third quarter were $51.4 million as compared to $51.6 million in Q2. Total liabilities were $23.8 million as compared to $20.6 million in the second quarter of 2018. Stockholders equity was $27.6 million compared to $31 million in the second quarter of 2018. Looking ahead to the fourth quarter of 2018, we expect revenues to increase to a range between $11.8 million and $12.2 million. The anticipated GAAP loss per share will improve to a range between $0.22 loss per share and $0.18 loss per share, based on an average weighted share count of 17.1 million shares outstanding. I'd like to turn the call back over to Kevin for some closing remarks.
Thanks, Jeff. The third 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 256 Mb STT-MRAM product is gaining, both within our lead customers and beyond. We remain on track with the planned sampling of our 1 Gb STT product next month. We continue to focus on controlling our expenses and managing the timing of our investments. 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. We'll open the call for your questions.
Thank you. Ladies and gentlemen, if you have a question at this time, just press star and the number one key of your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. Again, to get in the queue, just press star and one. 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's on your third quarter results, an excellent revenue outcome. Wonder if you could help us understand the reasons for the upside. Was it from products or licensing? If it's within products, any sense of Toggle versus STT-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, you know, one quarter under the belt here, I guess, of your lead Gen3 customer shipping, any sense of how their progress has been relative to your expectations starting last quarter?
I don't have any detail on that. Right now, based upon what we're seeing from future forecasts, we believe that this will continue to be a strong driver of STT-MRAM revenue for us.
Okay. All right. You also talked about another design with this same customer. Any sense of scale, you know, potential design win value versus the first win?
Well, this, yeah, not yet. It launches in a couple quarters, I believe, and we'll be learning more about that as we approach that date.
Okay. I'll look forward to hearing about that at a later time then. I guess my last question, I'll jump on the line, you talked about exiting the third quarter with kind of your baseline yields on your Toggle process. Wonder if you could give us a sense of either quantitative or qualitative, how do we think about gross margins, especially relative to your range you'd given in past quarters.
Richard, relative to our gross margins, you know, we've talked in the past about how some of the yield issues that we've experienced in the fab have depressed that gross margin for the company through Q2 and Q3 of this year. I believe on the call, on the last call that we had in Q2, we talked about the fact that those yields, we'd addressed the root cause issues associated with those yields, and that we believed that we would start recovering, and it would start showing in the financial results of the company more toward the fourth quarter, because that material obviously takes time to get through the line. We're expecting to see, you know, 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, or would it be beyond that?
Yeah, we'll start to see the impact of that in the fourth quarter. You know, assuming that the trends continue as they are, we should definitely see improvement in terms of our product cost through less scrapping of material, and therefore, with a better cost basis, that should improve our margins.
Okay, perfect. That is all from me, guys. Thank you.
You bet.
Thank you. Our next question comes from Kevin Cassidy with Stifel. Please go ahead.
Thank you. Congratulations on the great quarter.
Thank you.
Your agreement with SilTerra, 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. We haven't really talked about specific capacity in that. This is a shared agreement between three 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 valve for initial growth, but ultimately, a path that can support longer-term growth of our Toggle MRAM production.
Okay. Great. 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 cost, it's definitely stuff that we're modeling and obviously negotiating. It's too early to give any kind of indicator as to whether we would have a better cost profile going forward.
Okay. Just one other on the OpEx. It looks like it was good control this quarter. Can you explain what changed or had OpEx come down, and is it expected to continue to come down? You mentioned cost-sharing with GlobalFoundries. Is that part of it?
Yes. In R&D expense, as we've talked about in the past, the joint development agreement with GlobalFoundries is one of the big-ticket items within our R&D expenditure. The spending associated with JDA expenses is not linear. It's really as materials consumed relative to the qualification of processes, et cetera, that's when we see high spending and high JDA exposure. The majority of our JDA expenses for 2018 have been around our 1 Gb part as we develop 28 nm 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. We've done a lot of the heavy lifting necessary to enable 28 nm technology.
Part of the reason you're seeing a decrease in our R&D spend in Q4 is because some of that joint development expense has already been spent in previous quarters.
I think just to clarify two points there. The JDA expenditures that you see this year are both our 28 nm spend and our shared expenses with GF on their 22 nm expenses. I believe you meant to say the OpEx in Q3.
Right.
Okay, great. Congratulations again.
Thank you, Kevin.
Thank you. Ladies and gentlemen, as a reminder, to ask a question, just press star and the number one key of your touch-tone telephone. Our next question comes from Raj vindra Gill with Needham & Company. Your line is open.
Yes, thanks, and congrats as well on the possible announcement on Toggle and STT-MRAM. As a long-term royalty opportunity with GlobalFoundries.
I'm sorry to interrupt, but it's really hard to hear you.
Can you hear me now?
That's better.
Yeah.
Is that better? Yep, sorry about that. Your long-term royalty opportunity with GlobalFoundries, now that you've kind of extended the agreement, maybe you could update us in terms of the expected revenue recognition for that royalty opportunity by embedding MRAM into GlobalFoundries wafers. Is that still on track that we'll be expecting to see some royalty revenue from GF starting in 2019? I know in the last quarter you talked about getting PDKs for MPW development this year, and sales from customers in 2019. Just want to get a better sense of that royalty opportunity in 2019.
Yeah. GlobalFoundries public statements regarding their progress on 22 nm have been pretty consistent with their targets of going to mass production next year. We believe that the forward-looking visibility on the timing of that remains the same.
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 that have 22 nm technology on it, we earn a royalty associated with that.
22 nm with MRAM.
22 nm with MRAM. The timing of that is completely dependent on their timing of selling those wafers.
Okay. Got it. They're going into mass production next year.
That is what their public statements have reiterated, yes.
Okay. All right. In terms of the 40 nm, the 256 Mb product development, it 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 1 gig density is really gonna be that sweet spot where you'll start to see more broader acceptance relative to the cost of MRAM?
Yeah, you said 40 nm, if your question is regarding the 1 Gb, you mean our 28 nm product. Raji, yeah, we do believe that the 1 Gb opens up new opportunities, and that through its higher density, right? Not through lowering cost 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 256 Mb plays today.
Okay. 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 get to that point, given the fact that the gross margins are kind of volatile, but the OpEx is starting to come down, particularly in the R&D line at [audio distortion] GlobalFoundries. 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 seven quarters. 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, then eventually start turning profits. From a math perspective, it's pretty straightforward. If you're spending $10 million-$11 million and you have a target of a 55% gross margin for the company, you need basically double your OpEx spend to hit breakeven. That's really what we're trying to do.
I mean, you can track our progress towards breakeven by using those metrics of our quarterly OpEx, a target of 55% gross margin, and the necessary revenue to get to that point.
Okay, great. Thank you.
Thank you. I'm not showing any further questions in the queue. I would like to turn the call 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 we'll attend multiple upcoming investor events, including the Needham Networking, Communications & 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 on 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. Operator, you may now disconnect the call.
Thank you everybody for participating in today's conference. This concludes the program, and you may all disconnect.