Everspin Technologies Inc

NASDAQ:MRAM

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon and welcome to the conference call to discuss Everspin Technologies' First Quarter 2023 Financial Results. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. As a reminder, this conference call is being recorded today, Wednesday, May 03, 2023.

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 expectation of Everspin's future business, financial performance and goals, customer and industry adoption of MRAM technology, successfully bringing to market and manufacturing products and Everspin's design pipelines and executing on its business plan. These forward-looking statements are based on estimates, judgment, 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 our quarterly report on Form 10-Q, which will be filed with SEC on May 4, 2023, 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 undertake no obligation to update any forward-looking statements made on this call to update or alter our forward-looking statements, whether as a result of new information, , future events or otherwise.

The financial results discussed today reflect our preliminary estimates are based on information available as of the date thereof – hereof and are subject to further review by Everspin and its external auditors. Our actual results may differ materially from these estimates as a result of completion of our financial closing procedures, final adjustments and other developments arising between now and the time that our financial results for this period are finalized.

Additionally, the company’s press release and statements made during this conference call will include discussions of certain measures, of financial information in GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP net income to adjusted EBITDA, which provide additional details. A copy of the press release is posted 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, Sanjeev Aggarwal. Sanjeev, please go ahead.

[Sanjeev Aggarwal, President and Chief Executive Officer]

Thank you operator and thanks everyone for joining us on the call today. Everspin delivered quarterly revenue of $14.8 million, which is at the high end of guidance and a 3% increase year-over-year. We were GAAP net income positive for the 8th quarter in a row, which continues to be a strong focus for the company. A few highlights for Q1 2023. During Q1, we paid off our line of credit and term loan in full. As of the end of Q1, Everspin is debt free. Everspin's, xSPI family of STT-MRAM products was awarded Best in Show Memory and Storage Category at the Embedded World Exhibition and Conference in March of 2023. We successfully completed the first silicon for our new xSPI family of STT-MRAM products from 4 megabit to 16 megabit on 28-nanometer CMOS that was taped out in Q4 of 2022. Engineering samples are now available for this family of products.

We are starting to see some early design-ins and wins for our xSPI family of STT-MRAM products densities from 4 megabit to 128 megabit. For our business outlook, product backlog for balance of 2023 and into 2024 as of March 31, 2023 continues to be high, although we are seeing low levels of cancellations, push-outs and pull-ins. We continue to alleviate some of our foundry chain supply chain constraints, which is helping address our unfulfilled Toggle demand. A little bit about our technology. As mentioned in the last earnings call, Everspin had taped out a new xSPI family of STT-MRAM products on 28-nanometer CMOS with densities from 4 megabit to 16 megabit. We are excited to report that we have verified functionality on first silicon and engineering samples are now available to our customers. As a reminder, in 2022, we had introduced 16 megabit to 128 megabit density xSPI STT-MRAM products on 28-nanometer CMOS.

With these two xSPI family of STT-MRAM products, our customers have access to densities ranging from 4 megabit to 128 megabit. These products will enable our customers to simplify the system architecture and easily replace legacy memory components like SRAM and FRAM. They're ideal for use and electronic systems such as industrial IoT, network and enterprise infrastructure, process automation and control, aeronautics and avionics, medical, and gaming. Everspin continues to get interest from our customers for a high density greater than 256 megabit, discrete STT-MRAM part on 2x CMOS node for discrete NOR flash replacement. The first such product is in the design phase and on schedule for production in 2024. When available this part would be ideal for replacing NOR in FPGA systems to store configuration memory, and simultaneously enabling 100x faster over-the-air updates.

I will now turn it over to our CFO, Anuj Aggarwal, who will take you through our first quarter financials and second quarter 2023 guidance. Anuj?

[Anuj Aggarwal, Chief Financial Officer]

Thank you, Sanjeev, and good afternoon everyone. As part of first quarter 2023 financial results, Everspin Technologies is pleased to announce its eighth consecutive quarter of positive net income. We also reached an incredible milestone in paying off our line of credit and term loan in Q1 making Everspin officially debt free. In addition, we generated positive cash flow from operations of $1.2 million during the quarter. We delivered solid quarterly results at the high-end of guidance with revenue of $14.8 million compared to $15.7 last quarter and $14.3 in the first quarter of 2022. We also had positive net income of $0.8 million and positive cash flow from operations of $1.2 million for the first quarter of 2023.

MRAM product sales in the first quarter, which includes both Toggle and STT-MRAM revenue was $13.8 million compared to $14.6 million the prior quarter and an increase from $12.7 million in Q1 2022. Licensing royalties, patents and other revenue in the first quarter remained consistent with the prior quarter at $1.1 million compared to $1.7 million in Q1 2022. Shipments to suppliers for our largest end customer, who we serve with our high density STT product for data center applications, represented 11% of revenue in the quarter versus 5% of revenue in Q4 and 19% in Q1 2022.

Turning to gross margin, GAAP gross margin for the first quarter of 2023 was 56.8% versus 51.4% in the prior quarter, and 58% in Q1 2022. GAAP operating expenses for the first quarter of 2023 were $7.7 million versus $7.5 million in the prior quarter and $6.3 million in the first quarter of 2022. The higher operating expenses in the quarter compared to the Q1 2022 was primarily driven by increased cost to support the xSPI family of STT product that is currently in low volume production. We're pleased to report first quarter 2023 positive net income of $0.8 million or $0.04 per basic share based on 20.5 million basic weighted average shares outstanding. This compares to a GAAP net income of $0.6 million or $0.03 per basic share in the fourth quarter of 2022, a net income of $1.9 million or $0.10 per basic share in the first quarter of 22. Basic EPS of $0.04 was better than the midpoint of our guidance range reflecting our strategic operational discipline and ability to drive profitability in the face of tightening supplies and macroeconomic certainties.

Adjusted EBITDA continues to remain positive. For Q1 2023, adjusted EBITDA was $2.3 million compared to $2.1 million in the prior quarter and $3.1 million in Q1 2022. Cash and cash equivalents ended the quarter at $24.2 million compared to $26.8 million at the end of the prior quarter and $19.9 million in Q1 2022. The decrease in cash quarter-over-quarter is a result of Everspin paying off its term loan and line of credit in full during the quarter. Cash flow from operations was a healthy $1.2 million for the current quarter. Turning to our second quarter 2023 guidance, Everspin is cautiously optimistic. Demand for our Toggle products remains strong. Everspin expects total revenue in a range of $14.5 million to $15.5 million. Everspin expects GAAP net income per basic share to be between breakeven and $0.05, primarily influenced by expenses related to the xSPI family of STT product development and price increases from our suppliers.

I'll now turn it back over to Sanjeev for some brief additional commentary before we open it up for questions.

[Sanjeev Aggarwal, President and Chief Executive Officer]

Thanks, Anuj. In summary, Everspin reported another quarter, now the eighth in a row of profitability, which is a strong focus for the company. During Q1, we paid off our line of credit and term loan in full making Everspin debt free as of Q1 2023. Bolstered by our first quarter performance, guidance for the second quarter and our early views into the rest of the year lead us to believe Everspin is successfully navigating the slowdown in the semiconductor industry. We are pleased that we were able to bring another family of STT-MRAM products to our customers and are excited to see their interest and traction with these products.

Thank you for joining us today. Operator, you may now open the line for questions.

[Operator]

Thank you. [Operator Instructions] First question will come from Richard Shannon of Craig-Hallum. Your line is open.

[Richard Shannon, Craig-Hallum]

Well, hi, guys. Thanks for taking my questions. Let's see here. Sanjeev, I wanted to follow up on one of your remarks here on your second set of comments about navigating the slowdown in semis. I guess in your earlier comments, you also talked about some push outs and pull-ins and a little bit of cancellation. So I guess I want to get a sense of backlog where that's going up or down. Where are lead times now? And do you expect them to come in? And what does that ultimately imply about your book-to-bill in the first quarter and what you think it might be in the second?

[Sanjeev Aggarwal, President and Chief Executive Officer]

Hi, Richard. How are you doing?

[Richard Shannon, Craig-Hallum]

Doing fine, thank you.

[Sanjeev Aggarwal, President and Chief Executive Officer]

Yes, so in the first section I was basically talking about some push-out, some cancellations and pull-ins and that is basically Everspin business returning to what we call a baseline. We typically see a little bit of that going on in every quarter. So – and in terms of what we are seeing or why I'm saying that we are seeing us successfully navigating the slowdown is because we are actually seeing backlog towards the end of 2023 and going into 2024, and it's a pretty healthy backlog and it makes us feel that we can actually – actually do pretty well in the year. We're actually looking to grow quarter-over-quarter and actually do as well as we did last year.

[Richard Shannon, Craig-Hallum]

Okay, an interesting statement about growing quarter to quarter, and I think probably the part of that that I'm more interested and I think most investors are is specifically thinking about your product revenues. Would you also declare that product revenues can grow quarter-on-quarter the rest of the year, including second quarter?

[Sanjeev Aggarwal, President and Chief Executive Officer]

Anuj?

[Anuj Aggarwal, Chief Financial Officer]

Yes. Hi, Richard. This is Anuj. So product revenue is also doing very well, right? We're seeing strong growth in Toggle sales. And with our xSPI product family coming into low volume production, we're optimistic based on some of the feedback we've gotten from customers and as we begin to get design wins. So we're seeing the ramping of that product as well. And then, as you know, the challenges are really around the data center. And so there's still some sluggishness there, but Toggle is going very strong and the xSPI product is ramping nicely.

[Richard Shannon, Craig-Hallum]

Okay, fair enough. Maybe touching on a couple elements in the financial guidance for the quarter, always try to get a sense of what you're thinking about on – both on gross margins and OpEx. Let me touch on gross margins for a second. If I look at the last five quarters, you had four of those five near the levels you just reported in the fourth quarter was a bit below. I think you talked about some mix and yield dynamics in the fourth quarter. Would you call out kind of last quarter as more of a normal mix in situation or is it more optimized? I know relative to your long-term guidance of 50% to 55% gross margin, a little bit on the high side of that, but you've had some good success in the last four out of five last quarters. And so I want to get a sense of whether you expect that to maintain here or you see as – see the first quarter as more of an optimistic outcome.

[Anuj Aggarwal, Chief Financial Officer]

Yes, yes. Sure, Richard. Let me try to answer that. So, we're – we try to be a little bit cautiously optimistic, I guess, when we provide guidance. And so, that's why you see the 14.5 to 15.5 in terms of revenue just trying to glide slightly higher than the Q1 results, right? But I think in terms of gross margin, you are seeing a little bit of product mix benefit in Q1 and some other items. So we still think that low to mid-50s, maybe more mid-50s is realistic. And so I would without giving guidance kind of stick with that story for now. And then from an OpEx standpoint, we've shared that we're trying to be frugal, but smart in terms of how we're spending money. And so there has been an uptick in OpEx related to the new xSPI industrial product, and it will continue to be at that level as we ramp the product.

[Richard Shannon, Craig-Hallum]

Okay, fair enough. Then I'll ask one more question, jump out of line here, maybe to start the conversation on your new xSPI products, Sanjeev. It sounds like you're getting some, some early stage success and designs and attention here. Maybe if you can give a little bit more color to where you – what family of products or, excuse me, which density, what applications you're seeing in an early? And then to what degree are we going to see the benefits coming in this year versus in calendar 2024?

[Sanjeev Aggarwal, President and Chief Executive Officer]

Yes, so I'll probably start with the last question. Most of our design wins and ins are going to be in the industrial space, so I think it's going to be quite challenging to see any significant revenue in 2023, but best case you could see some upside in Q4 of this year, okay. In terms of design wins, we are actually seeing it across the range all the way from 4 megabit to 64 and even 128 megabit. But most of the design wins are actually with our first family that we brought out the 64 megabit [indiscernible] die. Those are the ones that are actually a major part of the sentence that I was – or the statement that I was making, that we are starting to see early design wins. We do expect the design wins to go up with the new product in the second half of this year once the parts are available to our customers.

[Richard Shannon, Craig-Hallum]

Okay, perfect. That's great news and glad to see the outlook here going very strongly. I will jump in the line, guys. Thank you very much.

[Sanjeev Aggarwal, President and Chief Executive Officer]

Thank you, Richard.

[Anuj Aggarwal, Chief Financial Officer]

Thanks, Richard.

[Operator]

Thank you. [Operator Instructions] We have another question coming. One moment please. And this will be a follow-up from Richard Shannon of Craig-Hallum. Go ahead please.

[Richard Shannon, Craig-Hallum]

Okay, well, I'll jump back in then. Let's see here. A couple other questions. Sanjeev, maybe to follow up on one of your prepared comments. You've talked about this in the last few calls about this more leading edge, higher density STT that's going to be NOR flash replacement. It sounds like you're seeing some continued progress here. If you were to think about a timeframe by which you'd start to see some benefit from that, when would that be? And are these going to be difficult architectural kind of decisions for customers to make? Or is this more drop-in replacement? And do you think it'll be a fairly short sales cycle?

[Sanjeev Aggarwal, President and Chief Executive Officer]

Yes, so the high density part that we're talking about. As far as the revenue is concerned, I think you would start seeing some revenue in 2025 with it going into production sometime in second half of 2024. As far as the architecture for this part, it's going to be a drop-in part, so it will be a direct replacement for standalone NOR. And so the – but the products are still going to be industrial, so I think the qual cycle is still going to be 12 to 18 months. In that sense, it's still going to be a long cycle, but at least it's going to be a drop-in, making it easier for our customers to put them in their systems.

[Richard Shannon, Craig-Hallum]

Okay, perfect. That's helpful. My last question, I'll jump out of line again is kind of highlighting your comments a few times, your prepared remarks about having paid off your debt, being debt free for the first time in your public existence, which is fantastic to see and you've been profitable eight quarters in a row with a good cash balance and very good management of your cost structure here. What does this help you do in terms of being a little bit more aggressive on the growth side and investments or even something that might be inorganic in nature? Should we expect to see – R&D start to tick up as you find other product areas or can – just as we go into, or how should we think about – what – eventually what looks like to be a nicely growing cash balance?

[Anuj Aggarwal, Chief Financial Officer]

Yes, Richard, this is Anuj, great question. We're continuing to evaluate the product roadmap and looking at where the opportunities are. Obviously, there is a lot of focus on the xSPI family in the near-term and the other product that you mentioned in the more longer term. So based on what we're seeing from a cash flow, from operations standpoint and our current cash position, we feel we can support that ramp and really support the products at that time – at this time without borrowing money. And so, it makes sense right now to pay off the debt, right? If there's other opportunities that come up where we feel like we might have to borrow additional funds, we'll look into that. But I think right now what we're trying to demonstrate is that this is a viable business. We can be profitable. We can generate cash. There is a good amount of cash balance on the balance sheet. The balance sheet is healthy. And so, we can support future opportunities and growth from that.

[Richard Shannon, Craig-Hallum]

Okay. Fair enough. That makes sense. I think that's all for me you guys. Thanks a lot and congratulations again, the nice start to the year.

[Sanjeev Aggarwal, President and Chief Executive Officer]

Thank you.

[Anuj Aggarwal, Chief Financial Officer]

Thanks, again, Richard.

[Operator]

Thank you. [Operator Instructions] The next question is coming up. One moment please. Our next question will be coming from Orin Hirschman of AIGH. Please go ahead.

[Orin Hirschman, AIGH]

Hi. I can also give congratulations on a very tough environment and thank God you're showing real progress.

[Sanjeev Aggarwal, President and Chief Executive Officer]

Thanks, Orin.

[Anuj Aggarwal, Chief Financial Officer]

Thanks, Orin.

[Orin Hirschman, AIGH]

I wanted to just go back to one of the questions that was asked. So, you got – you have great analyst asking great questions. So we – he didn't leave a lot for anybody else. So, just in terms of the actual – you mentioned the design cycle. When is the actual sampling you're hoping for in some of the replacement products versus when you actually hope to begin volume production and then seeing real revenues? Can you just review that one again?

[Sanjeev Aggarwal, President and Chief Executive Officer]

Yes, sure. So, remember the part that we taped out in 2022, that was a native 64 megabit die and we were sampling between 8 megabit and 128 megabit. And the new one that we brought out is actually from 4 megabit to 16 megabit. So, there is an overlap between 8 megabit and 16 megabit going all the way up to 128 megabit. So, people that were able to use that original die to actually integrate into their systems and start a qual procedure, I think they will benefit from the first die that we taped out and we will see the benefit for the 8 meg and the 16 meg going into production. So, it will actually cut down some of the qual cycle. So, in that case, let's assume if it's a 12-month cycle or a 15-month cycle, it'll probably come down to nine months based on the samples being available six months before this other part that we just brought out. Did I answer your question, Orin?

[Orin Hirschman, AIGH]

Yes. So, in terms of design-ins that's going on already...

[Sanjeev Aggarwal, President and Chief Executive Officer]

Yes. That is correct, except for the 4 megabit part, which is new now. Yes.

[Orin Hirschman, AIGH]

And in terms of the customer feedback, what's the customer feedback like? And how does that – how does – what have you seen in terms of the niches, where are you getting the traction early on?

[Sanjeev Aggarwal, President and Chief Executive Officer]

Yes. So, in terms of customer feedback, there is some very early feedback. It's not very detailed. The part seems to perform to the spec that we have published. So, that's always good. And that feedback is always appreciated. I'm sorry I forgot the second part of the question, Orin.

[Anuj Aggarwal, Chief Financial Officer]

Customer feedback.

[Sanjeev Aggarwal, President and Chief Executive Officer]

Customer feedback.

[Orin Hirschman, AIGH]

Yes. Which verticals seeing the...

[Sanjeev Aggarwal, President and Chief Executive Officer]

Yes. So, the markets that are seeing traction right now or the early traction is in the aerospace and defense industry and then also in some of the industrial space.

[Orin Hirschman, AIGH]

Okay. And just going back to some of the work that you've been doing on your IP, a huge open project, MEMS project. What can you tell us in terms of timing when it comes something over [ph] to you, A, on the licensing side and B, on a revenue product-related side, royalty side, because I realize that might be very far out.

[Sanjeev Aggarwal, President and Chief Executive Officer]

So, Orin, just to confirm, you are breaking up over there. Are you referring to the QuickLogic FPGA project?

[Orin Hirschman, AIGH]

Yes.

[Sanjeev Aggarwal, President and Chief Executive Officer]

Yes. So, that project is progressing on schedule. And I think the tape-out for that design, so the tape-out of that design is expected in the second half of this year. So, we will start seeing some early data on the silicon, which would be a 19-nanometer silicon from SkyWater on which we do the design. So, we'll start seeing some data in 2024, let's say, Q2 or Q3 of 2024. I think the product revenue or the foundry revenue and royalty revenue associated with those products are at least two years out from there, Orin.

[Orin Hirschman, AIGH]

And both – you said both product royalties and also licensing or licensing happens – or has happened already or licensing happens gradually when you hit certain milestones?

[Sanjeev Aggarwal, President and Chief Executive Officer]

The licensing happens gradually over 2023 and 2024. And then the foundry revenue and the royalty revenue starts when we go into production, which is probably 2025 timeframe.

[Orin Hirschman, AIGH]

Okay, great. And one quick question on data center. Any signs of life bottoming or how would you term the overall picture there?

[Sanjeev Aggarwal, President and Chief Executive Officer]

So, Orin, are you asking about the data center products?

[Orin Hirschman, AIGH]

Yes. Just in terms of the overall – what's going on there right now? Do you think that's stabilized and still declining coming back...

[Sanjeev Aggarwal, President and Chief Executive Officer]

Yes, I mean, we definitely like Anuj reported, we did better in Q1 compared to Q4. But still we were not as good as we were at the peak at about – I think the number that Anuj provided was 19% versus 5% in Q4 and then 11% in Q1. So, we have recovered some from Q4 to Q1, but we are not seeing indications that we're going to get up to that – up to the 19% level that we had earlier.

[Orin Hirschman, AIGH]

So and then my follow-up on that question is just in terms of your guidance for the year, hoping to see some progress quarter-to-quarter on the product side. Does that take a conservative enough stance considering what happened on the data center side, meaning that's not assuming any upside of any sorts in data center rather just stable? And do you think stable is a fair assumption even at this point or that assumes data center coming down and other products are making up the gaps?

[Anuj Aggarwal, Chief Financial Officer]

Yes, Orin, this is Anuj. So, I think as you'll see, our concentration with this largest customer has decreased, like Sanjeev was mentioning. But on the flip side, we continue to have strong design wins in Toggle and then that is ramping nicely. The revenue continues to be strong quarter-over-quarter. And in addition to that, we've got the rad-hard deals that have increased and other things that are happening. So, just naturally now, the concentration is moving out. And as the xSPI product gets more design wins and things happen, that will help as well. But we're fairly conservative on the data center piece, but everything on the other side is looking good. Industrial is looking good.

[Orin Hirschman, AIGH]

And my last question just is on the companion chip or the FPGA companion chip demoed. Where's that up to? What's the thoughts on commercialization of it? And I'll end on that.

[Sanjeev Aggarwal, President and Chief Executive Officer]

So, we have been in communication with the FPGA companies to actually integrate our xSPI family product with their FPGA. So, I think it's in early stages and we cannot really comment on that too much, but it is an ongoing process right now.

[Orin Hirschman, AIGH]

So, [indiscernible] saying is, are they interested enough to do some commitment on their part [indiscernible]

[Sanjeev Aggarwal, President and Chief Executive Officer]

I think it's too early for commitment, but there is enough interest that we are actually continuing to engage and with more than one company to basically end up with a design win with a customer in the FPGA market. With an end customer, I guess. I shouldn't say FPGA market – indeed with an end customer.

[Orin Hirschman, AIGH]

But that's through them or that's through you directly?

[Sanjeev Aggarwal, President and Chief Executive Officer]

It would be through the FPGA vendor.

[Orin Hirschman, AIGH]

Okay, good. Okay. Congratulations again on the progress.

[Sanjeev Aggarwal, President and Chief Executive Officer]

Okay, thank you.

[Anuj Aggarwal, Chief Financial Officer]

Thank you.

[Operator]

Thank you. [Operator Instructions] One moment please. And at this time, there are no more questions in the queue. I would like to turn the call back over to management for closing remarks.

[Sanjeev Aggarwal, President and Chief Executive Officer]

Okay. With that said, we conclude today's call. Thank you all for joining us and we look forward to reporting our progress and results on the next quarter's call. Operator, you may now disconnect the call.

[Operator]

Thank you, everyone for joining, and the call is disconnected. Have a great evening.