Earnings Call: Q1 2018

May 9, 2018

Good afternoon, and welcome to Everspin Technologies First Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference call is being recorded today, Wednesday, May 9, 2018. I would now like to turn the call to Brad Perry of Shelton Group, Investor Relations. Brett, please go ahead. Good afternoon, and welcome to Everspin Technologies first quarter 20 18 earnings conference call. I'm Brett Perry, Vice President of Shelton Group, Everspin's Investor Relations firm. Joining me today are Kevin Conley, Everspin's President and CEO and Jeff Winsler, CFO. 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 markets and manufacturing products and 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 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 in the Investor Relations section of Everspin's website 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, and good afternoon, everyone. I'm pleased to report that our first quarter results achieved records in revenue and earnings per share. Revenue in the quarter including $5,500,000 of licensing royalty and other revenue. Total product revenue grew more than 40% year over year, With MRAM product revenue increasing 60% year over year, demonstrating our continued progress in growing MRAM product sales. We also enjoyed record gross margin of 67%, driven primarily by the exceptionally strong licensing royalty and other revenue. Included in our licensing revenue in the quarter was the upfront license fee associated with the multi year agreement signed with Alps electric at the end of the first quarter. Under the agreement, Alps and Everspin mutually granted licenses to magnetoresistedbased3d sensor patent portfolios for sensor products. This agreement demonstrates our ability to monetize our IP assets and generate an additional revenue stream and source cash for Everspin. This cash and subsequent revenue, coupled with the funds raised in last February's secondary offering, has significantly improved our balance sheet and given us more resources to advance driven primarily through increased Toggle MRAM sales, helped by the increasing shipments of our 256 megabit spin transfer torque or STT MRAM product. In terms of STT MRAM production and shipments, we exited Q1 ahead of our internal plan and expect this trend will continue. We believe that the investments we're making in our operations team and capabilities will help support continued strengthening of our entire business in the coming quarters These investments not only will strengthen our own captive backend fab operations, but also position us better for the coming growth we see in our joint operations Global Foundries. 1 of the demand drivers behind our results was Smart Modular Technologies who recently completed qualification and has started shipping their NV Nitro Accelerator card, which is built using our 256 megabit STT MRAM devices. This product is the world's 1st entirely STT MRAM based storage product and uses NVMe controller technology that was jointly developed by Everspin And Smart Modular Tech Tom and Smart Modular. This is the world's first commercially available product using our STT MRAM's advanced perpendicular empty J technology, delivering its low latency and high endurance to demanding transaction lagging, logging applications that require power loss data protection. It also addresses the safety and costly maintenance concerns that exist with legacy power back DRAM solutions that use batteries, capacitors or super caps. As we look to the 2nd quarter, We approach another significant milestone in the growth of our MRAM business. That milestone is the anticipated completion of product qualification by our lead Flash Array customer, who also utilizes our 256 megabit STT MRAM in their product. We expect to be able to make more details public as they complete this critical milestone and are able focus remains squarely on converting our STT MRAM opportunities into design ins, followed by design wins and ultimately long term revenue growth. With the NV Nitro product now available for purchase, we're putting greater focus on joint promotional efforts with Smart Modular. At such will be jointly demonstrating the value of this innovative technology at various trade shows, including the trading show in Chicago, that is taking place today and tomorrow, May 9th 10th. We are providing live demonstrations at the event, showcasing the performance advantages that we published previously in our FinTech white paper. And coming in the third quarter, Everspin will be lead sponsor at MRAM Developer Day that will occur on August 6, just prior to this year's premier nonvolatile memory trade show, the Flash Memory Summit. This year's MRAM developer day is indicative that MRAM technology has finally reached the forefront of emerging memory technologies, a reality that compelled the organizers that put on the Flash Memory Summit to organize special MRAM technology focused event. This show is attended by system architects and engineers looking at this latest key enabling technology for the industry, not for a distant future but for today's market needs. Having this dedicated business oriented technology forum helps further promote MRAM technology to broader industry influencers, partners and potential customers, and we believe will help us move further into mainstream applications. I will be serving as lead keynote speaker at the event where our partner Global Foundries, also a lead sponsor with a keynote slot of their own, will promote the progress of our joint development efforts on embedded MRAM. We will host joint product demonstrations using our STT MRAM along with Smart Modular and another significant STT MRAM customer at the event. Immediately after the MRAM developer day, we will transition our messaging into the broader platform of the Flash Memory Summit from August 7th to 9th. There we will showcase with our partners the performance and reliability benefits that our STT MRAM technology brings to flash memory based storage systems. In summary, I'm pleased with the progress we're making on our MRAM products and promotions. Longer term, we see trends evolving that are aligned to the value that MRAM brings, and we are strategically targeting these opportunities as future demand drivers of our MRAM products. With that, I'd now like to turn the call over to Jeff Winsler, our CFO, who will review the details of our first quarter results as well as provide I'll start by reviewing the first quarter 2018 income statement. Revenue in the quarter was $14,900,000 with product sales contributed approximately 5,500,000 from $7,900,000 in the first quarter of 2017 and sequentially when compared to the $10,100,000 in the fourth quarter of 2017. As a result of adopting the new revenue recognition standard, ACS 606, we are now including our back end foundry revenues which under the new standard must be recognized over time in licensing, royalty and other revenues on the income statement. Last year, we recognized our back end foundry revenues and product revenue and they were recognized like Toggle and MRAM revenue on a point in time basis. On the Form 10Q, both historic and current revenues are stated under the new rules, enabling like for like comparisons of product revenues as well as licensing, royalty and other revenues. For our MRAM products in the first quarter, which includes Toggle and STT MRAM, Revenue was $8,900,000, a 60% increase from the $5,600,000 in the first quarter of 2017 and an 18% increase from the $7,500,000 in the previous quarter. Gross profit for Q1 2018 was $10,000,000, up from 4,200,000 from the same period a year ago and also up from 6,200,000 in the fourth quarter of 2017. The increase in gross profit was primarily attributable to the As we've stated on previous calls, this revenue is variable from quarter to quarter and is based on the size and terms of each transaction. And as such can affect gross profit and margins materially. Gross margin for Q1 2018 was 67%, an increase from 53.5% in the first quarter of 2017 61.5% in the fourth quarter of 2017. Product margin in the first quarter was 50% or lower than our target product margin of 55% primarily driven by product mix and manufacturing variances. Operating expenses for the first quarter of 2018 were $11,100,000 compared to $10,100,000 in the first quarter of 201710.5000000 in the fourth quarter of 2017. Breaking down our operational spending for the first quarter, research and development expenses were 6,500,000 compared to $6,400,000 SG and A spending was $4,600,000 in the first quarter compared to $3,700,000 in the first quarter of 2017, and $4,300,000 in the fourth quarter of 2017. Interest expense for Q1 2018 was 211,000 compared to $230,000 in the first quarter of 2017 180,000 in fourth quarter of 2017. Other gains and losses was $44,000 of income first quarter of 2017 35,000 of income in the fourth quarter of 2017. GAAP net loss for Q1 twenty eighteen was $1,300,000 or $0.09 loss per share based on 14,800,000 weighted average shares outstanding. This compares with a GAAP net loss of $6,100,000 or $0.49 loss per share during the same quarter a year ago, and a GAAP net loss of Now turning to the balance sheet, cash and cash equivalents were $33,900,000 at the end of the first quarter of 2018, compared to $13,000,000 raised in our February 2018 secondary offering, providing us the working capital to ramp our 2 56 Meg STT MRAM product in the market while continuing the ongoing development of current and new technologies in support of our MRAM initiatives. Total assets at the end of the first quarter were $57,100,000 compared to $31,400,000 at the end of the fourth quarter. Total liabilities were $20,500,000 as compared to $20,600,000 in the fourth quarter of 2017. Stockholders' equity was $36,700,000 compared to $10,900,000 in the fourth quarter of 2017. Looking ahead to the second quarter of 2018, we expect revenue to range between 10,900,000 11,300,000 We expect the resulting GAAP loss per share will range between $0.41 loss per share and $0.37 loss per share based on an average weighted I'd like to thank the entire Everspin team. It has worked incredibly hard on the multiple fronts to deliver these notable results. Including both strong year over year growth as well as a stronger cash position. These efforts move us closer to our vision of MRAM as the future of memory technology and more importantly strengthen the focus on Everspin's mission to drive the MRM Revolution. Now, we will open the call for questions. Our first question comes from Kevin Cassidy with Stifel. Your line is now open. Thank you for, excuse me, thank you for taking my question and congratulations on the progress But on the guidance for the 2nd quarter, can you say what's happening with gross margin as product gross margin coming down as the first production of the STT MRAM is ramping? Yeah. So Kevin, we don't really give guidance on the gross margin. We did say, in our prepared remarks that our Q1 gross margins came in product gross margins came in at 50% versus our target of 55%. That was due to product mix and also due to some manufacturing variances that we experienced in the first quarter. It takes a while for that material to work itself through the factory. And so, we anticipate that we'll continue to have some manufacturing variance that bleeds over into the second quarter of the year. Okay. And so there's no change to your long term target of 53% gross margin product gross margin? Our actual target product gross margin for the company used to be 48% to 52%. We raised that at the beginning of 2018 to 55% or greater. So 55% is kind of our minimum target that we're shooting for with regard to the whole product portfolio. Okay, great. And maybe just one other, very interesting that you're hosting a MRAM developer day. Will Everspin be the only provider of MRAMs, at the conference or at that developer day or some of your MRAM competitors invited to? So there are a variety of companies that participate in the MRAM technology ecosystem. We will be the only company with MRAM components in production to our knowledge that we'll be participating in the show. All the major foundries who have embedded MRAM programs will be presumably presenting there along with their technology partners and other companies that are familiar names in the MRAM ecosystem, I expect to be there as well. Okay, great. Thank you. Our next question comes from Richard Shannon with Craig Hallum. Your line is now open. Hi guys. Thank you for taking my questions as well. Maybe I'll follow-up on Kevin's first question regarding gross margins. It didn't ask the question directly, so I'll do that, which is, is the product mix for product gross margin in the first quarter, is that related to STT or can you give us of the drivers here? Yes. So, we don't really give that type of guidance. Again, we're were the primary products coming out of the factory today are still toggle MRAM products. And as we've explained on calls in the past, Within that Toggle product family, we have roughly 9 different major products all at different densities and different margin profiles. So our goal, across that product portfolio, including STT MRAM, is to achieve 55 percent plus product margin. As SPIN torque starts to ramp, as STT MRAM starts to ramp, clearly, it'll become a bigger part of that product portfolio. But we're trying to manage it as a portfolio. Okay. Fair enough. Maybe I'll ask a question about the sales guidance for the second quarter here. Any sense you can give us of how much growth is coming from Toggle versus as CT or I know you haven't in the past, but I'll just ask a question again whether you're expecting licensing revenues in the quarter as well. Yes. So I'm probably going to give you the same answer I've given you in the past, right? The licensing stuff truly is, so sporadic and variable. At some point in time, we expect that the licenses that were that we've worked on both through our sensor products as well as longer term with global foundries on the embedded MRAM piece. That royalty line will start growing and will start becoming a lot more steady. But in the meantime, the licensing portion of it and the portion of it is very sporadic and pretty opportunistic, I would say. So we really it's really difficult for us to give specific guidance on what we think I think I heard your comments correctly. I just want to verify regarding the Tier 1 FlashArray customer for the 256. Did you say that you expect that to be qualified this quarter? We do. What gives you that confidence level and assuming that qualification happens, would expect to start building inventory or that customer start building inventory immediately afterwards? Take that in two parts. The first one is we work very closely with our top OEM customers that includes sharing details about the development schedules. And so that's what gives us the confidence to comment on the timing of that product. With regard to the inventory We have talked in a general sense that as customers approach the release of products to market generally, the inventory from us is acquired prior to, them building or, let's say, building their internal inventory of their finished goods products, right? So So we tend to be ahead of that curve, in terms of the orders that we receive. I don't know if that directly answers your question, but I hope it's helpful. I guess Kevin, I was just asking where do you expect the inventory build to happen as as the qualification is completed or there's some lag there? I see. We expect the products to to be once it's qualified to start ramping sales in the subsequent quarter. Okay, perfect. I think that's all the questions for me. I'll jump out the line. Thank you. And we have a follow-up question from Kevin Cassidy with Stifel. Your line is now open. Thanks for taking my follow-up. On the toggle, MRM products. Can you talk about the design win pipeline that you have? It seems like the product mix of those. And Jeff, as you pointed out, there's 9 different types. On the new designs, is the pipeline filled with more of the higher end, higher gross margin products, or is it going to be a mix going forward also? I think it's fair to characterize that as a mix going forward, Kevin. Okay, great. And, just housekeeping, Jeff, could you repeat again the loss per share estimate for next quarter guidance? Yes, sure. So from a loss per share perspective, we've said that it will range between $0.45 loss per share and $0.41 loss per share. And the average weighted share count, we're projecting to be 16,900,000 shares, which is reflective of the secondary offering that we did in February. Okay. I had misheard that before. Thank you. At this time I'm showing no further questions. I'd like to turn the call back to management for closing remarks. In closing, I'd like to highlight that Everspin will be participating the upcoming Cowen TMT Conference in New York on May 31st and the Stifel Cross Sector Conference in Boston on June 12th. 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. Ladies and gentlemen, thank you for your participation in today's conference. It does conclude the program. You may now disconnect. Everyone have a great day.