Earnings Call: Q2 2018

Aug 8, 2018

Good afternoon, and welcome to Everspin Technology Second Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen only mode. At the conclusion of today's conference As a reminder, this conference is being recorded today, August 8, 2018. I would like to turn the call over to Leanne Sievers, President of Sheldon Group, Investor Relations. Leanne, please go ahead. Good afternoon, and welcome to Everspin Technologies Second 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 Winsler, 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, 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 made from time time in which we may discuss risk factors associated with investing in inverse spend. 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 lease 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 CEO, Kevin Conley. Kevin, please go ahead. Thank you, Leanne, and good afternoon, everyone. I'm pleased to announce the results for our second quarter. This was our first full quarter of STT MRAM production shipments in which the qualification of our 2 megabit STT MRAM was completed by a leading enterprise storage provider. In previous earnings calls, we have focused on the significant milestone as key to driving our market adoption for this innovative new MRAM technology. It's an achievement that has been our objective for several years, and we are extremely pleased to see our vision of STT MRAM in a mainstream storage app appliance. Becoming a quarter compared to the same quarter a year ago, our revenue increased over 20% total product revenue grew over 30% and the product revenue from our core Focus MRAM products experienced 40% growth. 2nd quarter loss per share also improved compared to the anticipated operational variances, the primary factor behind this was increased demand for industrial and automotive grade Toggle products, which put us behind the yield recovery target discussed last quarter. Nevertheless, our pursuit of stronger Toggle production metrics presses on. Our efforts to improve We expect to realize gradual improvements in productivity and yields at our Chandler facility throughout the second half of this year. In conjunction with this progress, I also want to highlight that Turning to market developments. This week, we had 2 significant industry events: the inaugural MRAM developer day and Flashman Summit. MRAM developer day was added by the organizers of the Flash Memory Summit in recognition of the increased attention technology has received from the storage developer community. As the leading manufacturer of MRAM products, we were honored to have the opportunity to present the lead off keynote address. In that keynote, I reflected on the progress we have made in our technology and why we believe that MRAM is the promoting the importance of 22 nanometer FDX embedded MRAM development and their progress on customer engagements in consumer and industrial applications. They also reiterated their projection for embedded MRAMRAS production in 2019. It was a great platform MRAM solutions in both discrete and embedded form aimed at a broad assortment of market applications. This was significant not just as an opportunity to market our technology, but also to announce that IBM has qualified our 256 SPT MRAM component in a recently launched All Flash Array. This milestone carries significance for us in two ways. First, it demonstrates the value proposition of persistence, performance and endurance in enterprise storage applications, which been our strategic focus. And second, it shows that our new STT MRAM product is able to pass the robust call that need the differentiating benefits outside enterprise storage where similar needs of low latency data persistence exist, such as medical imaging devices. In addition to this major news, This product started mass production earlier in the quarter and is starting evaluation with customers in key markets, including the FinTech segment. Smart also showcased a new U.2 form factor for the product line, opening up new use cases in storage arrays for this ultra low late storage Accelerator. This product also enabled us to demonstrate MRAM's performance benefits in NVME over fabric deployments. One common theme in both of these applications has been our success in qualifying MRAM and FPGA based storage applications. At the Flash Memory Summit, we also highlighted our Xilinx based designs inside our FMS booth as this relationship has become increasingly important path to market adoption for our STT MRAM products. By partnering with Xilinx, we're able to decrease the time to market for applications utilizing MRAN to complement our work partners and customers in the storage ecosystem. In addition to this exciting progress on our 256 megabit product, have continued on track with With that, I'd now like to turn the call over to Jeff Winsler, our CFO, who will review the details of our second quarter results as well as provide I'll start by reviewing the second quarter 2018 income statement. Revenue in the quarter was up 21% year over year to $10,800,000 from $8,900,000 in the second quarter of 2017, but was down sequentially from the 14,900,000 in the first quarter of 2018, which included over $5,000,000 licensing royalty and other revenue. Product sales represented 88 $200,000 during the same quarter last year and comparable with the previous quarter. Licensing, royalties and other revenue contributed approximately $185,500,000 in the previous quarter, largely due to our Sensor Technology licensing agreement without Selector. For MRAM products, which include Toggle and STT MRAM, revenue in the 2nd quarter was 9,100,000 a 40% increase from the $6,500,000 in the second quarter of 2017 and a 2% increase from the 8.9 on Toggle MRAM products, which constrained our output and limited our revenue in the quarter. Our backlog for Toggle remains strong and the demand will carry over into the third quarter. Gross profit for Q2 20 18 was $5,300,000 compared to $5,800,000 in the same period a year ago and $10,000,000 in the first quarter of 2018. The sequential decline in gross profit was primarily attributable As we stated on previous calls, this and as such can affect gross profit and margins a decrease both from the 65% in the second quarter of 2017 and from 67% in the first quarter of 2018. As Kevin mentioned, we saw measured improvement in the performance of our back end fab and expect to realize gradual improvements in productivity and yield at our Chandler facility throughout the second half of this year. This should have a positive effect on both capacity and margins. Operating expenses for the second quarter of 2018 were $11,800,000 compared to $10,600,000 in the second quarter of 2017 and $11,100,000 in the first quarter of 2018. Breaking down our operational spending for the second quarter Research and development expenses were $6,800,000 compared to $6,400,000 point $5,000,000 in the first quarter of 2018. SG and A spending was $5,000,000 in the second quarter compared to $4,200,000 Interest expense for Q2 2018 was $222,000 compared to $176,000 in the second quarter of 2017211,000 in the first quarter of 2018. Other income was $132,000 in the second quarter of 2018 versus $24,000 in the second quarter of $1744,000 of income in the first quarter of 2018. GAAP net loss for Q2 2018 was $6,600,000 or $0.40 loss per share based on 16.6 1,000,000 weighted average shares outstanding. This compares with a GAAP net loss of $5,200,000 or $0.42 loss per share during the same quarter a year ago and a GAAP net loss of $1,300,000 $0.30 of the change from the prior quarter was directly due to the reduction in licensing revenue from the last quarter. Now turning to the balance sheet, cash and cash equivalents were $32,700,000 at the end of the second quarter of 2018, compared to 33,900,000 agreements at the end of the second quarter were $52,300,000 compared to $57,100,000 at the end of the 1st quarter. Total liabilities were 20,600,000 as compared to 20,500,000 in the first quarter of 2018. Stockholders' equity was $31,800,000 compared to $36,700,000 in the first quarter of 2018. Looking ahead to the third quarter of 2018, we expect revenue to range between $10,600,011,000. This revenue range reflects our expectations offsetting in legacy product sales opens up production capacity for our core MRAM products. We expect the resulting GAAP loss per share will range between $0.34 loss per share and $0.30 loss per share based on an average weighted share count of 16,900,000 share outstanding. Now I'd like to turn the call back over to Kevin for some closing remarks. Thanks, Jeff. We're pleased with the growth in revenue from our entire family of MRAM products. Even with this progress, there's clearly more opportunity for improvement from an operation perspective, especially on our Toggle MRIN products. This is a key area our team will continue to pour effort into improving our results. Our IBM design win represents the culmination of a long and successful engagement with a major player in the enterprise space. We believe this is an important step in gaining storage and other applications where data persistence at speed is critical and can be rapidly integrated. We are developing a product roadmap to expand the market opportunities for this technology and continue to focus on long range technology investments that will propel us into the future. Now, operator, we'll open Our first question comes from the line of Rajvindra Gill with Needham And Company. Your line is open. Please go ahead. Yes, thank you. And a great job on the IBM qualification. That's very good. Question, Jeff, on the margins. So you mentioned that your capacity constraint, and you experienced lower utilization yields on the Toggle product. I'm wondering if you could maybe elaborate a little bit further on what occurred during the quarter and kind of what are the utilization rates now? And where do you think they can go in the second half? Yes. So, Rajiv, the utilization rate of capacity was high. The issue is that our product mix over the last couple of quarters has shifted a lot toward automotive and industrial products, which require higher temperature testing and, have different tolerance than a typical commercial grade Toggle product. And so that has resulted in less output from the factory. Our yields are less, which has constrained our output or our ability to deliver on the revenue in because of the yield output in the 200 millimeter Toggle. And that yield output, unfortunately, is at the very end of the line. So that product gets all the way through the manufacturing cycle, and that's where we're seeing the yield hit, which very much constrains our ability to supply. And so what are the steps that you're taking? And you talked a little bit about this on the scripted call about to increase to meet this kind of change in demand and this change in the demand profile? Yes, there's 2 things that are happening. One is have addressed the issues that have caused lower yields in the factory. So we've identified root causes of those yield variances and we have active programs in place to go fix those. So that will help. Although, as I mentioned, a lot of this yield fallouts at the end of behind. So we'll continue to see somewhat depressed yields, but it should start getting better in the second half of the year. The other issue that we talked about in terms of capacity is that our legacy products which are primarily the sensor and backend foundry services that have been part of our revenue for the last couple of years those are starting to decline. And the bad news is it somewhat mutes the growth that we're seeing in our core Toggle MRAM products, the good news is by running less wafers devoted to sensor and other products, we're able to to your question of what things are we doing. There's really 2 primary things. One is, making investments in better management at the yield data and be able to tie that to specific processes within the manufacturing flow that will result in better yields. And then second part is, as Jeff said, taking some of those issues, which today and in the past, have been more end of line issues and moving those earlier in the line to lessen their impact on the overall results. Yeah, that's very helpful. And the 1 gig product that's targeting samples at the end of the year, can you talk a little bit about any updates there since the last quarter? And when do we think we should start to see some revenue or what the customer profile could look like as we go into maybe next year? So adoption of any new product, of course, takes time. We're reiterating our plan to sample, which means that the the design will be meeting our customers' requirements and meeting its operational specs and that will be within the parameters of performance and ability. So our indicators, as we track this week to week month to month, are track indicating that we're still on our plan, to meet that milestone in December. Looking at typical technology ramps, that would mean that our main production 2019. And then, of course, we'll go through the customer adoption cycles from the point of sampling through their qualifications eventually ending up in volume production with those customers. And last question for me. So you had mentioned that the MRAM business was going to grow 8% sequentially, offsetting the decline in legacy the sensor in the back end foundry. Any way to kind of quantify what that impact is is, what is it going from, from X to Y? Yes. Because last year, it was pretty significant. If I recall, I think it was a couple like $2,000,000 last year, if I remember on the sensor revenue, which dropped off around that range. I think Townview was $3,000,000 and correct me if I'm Yes. You have a good memory. It was about 2,000,000, 2 point $1,000,000 last year. Go away. As you know, we're moving to a licensing and royalty model with regard to the sensor business specifically, And it's just that that volume has lasted a lot longer than we thought it would. It's definitely in 20 we're seeing the business start to go away. We expect that at some point in time, it will reach 0 we're devoting that factory line directly to Toggle MRAM production. And so we're getting a lot closer to that point. And I would probably back that up, Ravi, by highlighting that in our strategy, we've taken more of a licensing approach, to the sensor business and successfully completing our second license of this technology. And that'll be our continued focus in terms of sensor. Thank you very much. Thank you. And our next question comes from the line of Richard Shannon with Craig Hallum. Your line is open. Please go ahead. Thanks, Kevin and Jeff for taking my questions. I'll add my congratulations on the IBM design win as well. Kevin, maybe I know this is kind of early if you announced this probably just over 48 hours ago. But if you got any initial reaction from other engagements who have been looking at the technology and seeing the IBM announcement heading your action that you can share with us? I'd say the reaction from the other storage manufacturers and even from other Xylene based designers has been very strong at the Flash Memory Summit in line with what we expected. We did think a lighthouse customer like IBM was going to attract a lot of attention. So we saw a great deal of interest and discussion about how MRAM could bring benefits into a variety of customers' applications. I will also say with the specs now published in what the product actually is and the level of performance. And I density that it delivers in a very compact footprint. There's a lot of excitement about the product itself. What that will mean for Everspin MRN sales. Thinking a little bit more tactically in near term with IBM. I was at the event on Monday when the IBM announced the product and if I heard them correctly, they said the products would be available by the end of August. Did I hear that correctly, Kevin? I think that's what he said, yes. Okay. So presumably your revenues for the 3rd quarter will include some kind of initial inventory build from IBM. Is that fair to say? Yes, that's fair to say. As we said, our Q2 revenue included full quarter of production shipments and by that, and then we're going into production and preproduction builds with a variety of customers. So the revenue that we're shipping today to them is going into units that will be in product shipments. Okay. Any way that you can, characterize in any way the, visibility and or forecast that I may giving you regarding this product? I know it's very new and early stage, but anything you can share to help us think about this would be helpful. Yes, I'm not in liberty to share, their projected forecast with us. I'm afraid. Okay. I thought I'd give that a Thanks for letting me do that, Kevin. Last question for me. Just talking about overall products gross margins, you've talked about the back end of line issue for the toggle. If I caught your comments correctly, it sounds like you're expecting the problem to be improved over the second Fidiers. So should we get kind of to a normal gross margin with the Toggle products exiting this year or could it be faster or slower? Any way you can characterize and be more specific on timing expectations there? Yes. As I said in the prepared remarks, we really expect this to start getting better, the second half of this year. I think with the lag of material that's already in the line, in the fixes that we put in place, we would really expect to see the yields impact to gross margins, probably more in the Q4 timeframe than the Q3 timeframe, but definitely on the uptrend and we think that will be healthy by the time we exit the year. Okay. That's all I need to know. Thanks for taking my questions guys. Sure. Thanks. Thank you. And our next question comes from the line of Kevin Cassidy with Stifel. Your line is open. Please go ahead. Thanks for taking my question and I'll also add congratulations for the IBM win. With the STT product, is that a, mature yields now or is there still room for yields to improve on the 256? So we're still ramping the production, Kevin. And as most technologies memory technologies go through, there's continual improvement in the until these technologies hit the top. That takes a pretty good amount of time as to specifics of where we are. I hope you can appreciate that, competitive information that we don't make public. Sure. Just getting an idea directionally if there's still good improvement ahead. Then also IBM made it clear in their presentation on Monday that they engaged with Everspin 2 years ago. So it was a long product cycle. I know we had to get the STT product qualified into production at GLOBALFOUNDRIES, but your next engagements, would you what do you expect the design cycle time would be from the time engagement with the customer to maybe being able to announce a win? So we'll maybe bring back what we've said on previous calls that, qualification with enterprise storage customers could take anywhere from 9 to 12 months. In terms of how well we've done with 256 at this point, you'll recall my early commentary on changing strategy and reengaging with customers, on the 256 megabit, And so I think we actually, working very closely with our customer, we're able to get it qualified and into, preproduction builds in pretty record time. So it will be the focus of our team to stay at a high pace of driving those customer engagements and hopefully perform at equally high levels. Okay, great. Just on the R and D, as you're introducing the 1 gigabit device, should we expect R and D expenses the move upper is mostly R and D completed on the 1 gig? Activities will continue until we hit production and even as we begin to ramp and work on the early yields. So as we've said on previous calls, and, Jeff and I are focused with the team on keeping our operating expenses more or less in line with historical averages. Just one other question about the global foundries. I think they had announced having some wins on their 22 FDX process, for next year, would that be, would E MRAMBA, a significant revenue or is it still something that has to be into much higher volume? What their statements mean in terms of next year revenue is hard for me to comment on. I think they did talk about significant design wins and a good portion of those, were going to be MRAM dependent. The timing of those I don't have much visibility starts at the end of this year and mass production next year. I think you have embedded MRAM. You, Kevin. Thank you. And our next question comes from the line of Oren Hirschman with AIGH. Your line is open. Please go ahead. Hi, Oren. Alright. I'm showing no further questions at this time. And I would like to turn the conference back over to Mr. Kevin Conley for any further Thank you. In closing, I'd like to highlight that Everspin will be attending multiple upcoming investor events in including the Jefferies conference on August 28th in Chicago. Please contact your Jefferies sales representative or Shelton Group, if you would like to schedule a meeting. Thank you for participation on today's call. We look forward to reporting our progress next quarter. Want to again thank the Emerson team for the strong work across the board that delivered these results and look forward to the future progress. Operator, you may now disconnect the call. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.