Everspin Technologies, Inc.
Q2 2018 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Good afternoon and welcome to Everspin Technologies 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 call instructions will be given for the question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded today August 08, 2018. I would like to turn the call to over to Leanne Sievers, President of Shelton Group Investor Relations. Leanne, please go ahead.

[Leanne K. Sievers:]

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 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 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 at www.everspin.com. And now, I'd like to turn the call over to Everspin's President and CEO Kevin Conley. Kevin, please go ahead.

[Kevin Conley:]

Thank you Leanne and good afternoon everyone. I'm pleased to announce the results of our second quarter. This is our first full quarter of STT-MRAM production shipments in which the qualification of our 256 megabit STT-MRAM was completed by a leading enterprise storage provider. In previous earnings calls we are 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 appliance becoming a reality. I'll speak more of this later on the call. With regard to our financial performance during the second 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. Second quarter loss per share also improved compared to the year ago quarter and was slightly better than our forecasted guidance range. Revenue for the quarter ended slightly below our guidance range due to higher than 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 targets discussed last quarter. Nevertheless our pursuit of stronger Toggle production metrics presses on. Our efforts to improve the performance of our backend Fab have achieved progress as measured by early indicators on the line. We expect to realize gradual improvements in productivity and yield at our Chandler facility throughout the second half of this year. In conjunction with this progress I also want to highlight that our facility lease with NXP has been extended into 2021. Turning to market developments, this week we had two significant industry events; the inaugural MRAM Developer Day and Flash Memory Summit. MRAM Developer Day was added by the organizers of the Flash Memory Summit in recognition of the increased attention this technology has received from the storage developer community. As a 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 moving from the emerging technology class towards mainstream adoption. Our partner GLOBALFOUNDRIES also presented at the event 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 MRAM mass production in 2019. It was a great platform for our partnership to demonstrate how far we have come in leveraging our MRAM IP towards our joint goal of producing 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 megabit STT-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 has been our strategic focus; and second, it shows that our new STT-MRAM product is able to pass the robust qualification process of a top tier storage customer like IBM. Our technology is now gaining interest with storage companies with a valuation starting in applications that meet the differentiating benefits our STT-MRAM technology provides. We are also seeing interest in applications outside enterprise storage where similar needs of to the low latency data persistence exist such as medical imaging devices. In addition to this major news we jointly promoted the nvNITRO storage accelerator with SMART Modular. This product started mass production earlier in the quarter and is starting evaluation with customers in key markets including the Fintech segments. SMART also showcased a new U.2 [ph] form factor for the product line opening up new used cases in storage arrays for this ultra low latency 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 in 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 to market adoption for our STT-MRAM products. By partnering with Xilinx we are able to decrease the time to market for applications utilizing MRAM to compliment our work with partners and customers in the storage ecosystem. In addition to this exciting progress on our 256 megabit product we have continued on track with our 1 gigabit STT-MRAM which we target for selective customer sampling at the end of this year. With that I would now like to turn the call over to Jeff Winzeler our CFO who will review the details of our second quarter results as well as provide our third quarter 2018 guidance.

[Jeff Winzeler:]

Thank you Kevin and good afternoon everyone. I'll start by reviewing the second quarter 2018 income statement. Revenue in the quarter was up 21% year-over-year to 10.8 million from 8.9 million in the second quarter of 2017 but was down sequentially from the 14.9 million in the first quarter of 2018 which included over $5 million licensing, royalty, and other revenues. Products sales represented 88% of total revenue or 9.4 million which was up from 7.2 million during the same quarter last year and comparable with the previous quarter. Licensing, royalties, and other revenue contributed approximately 1.3 million in the quarter compared to 1.7 million in the second quarter of 2017 and 5.5 million in the previous quarter largely due to our sensor technology licensing agreement with our selectors. For MRAM products which include Toggle and STT-MRAM revenue in the second quarter was 9.1 million, a 40% increase from the 6.5 million in the second quarter of 2017 and a 2% increase from the 8.9 million in the previous quarter. During the quarter we experienced lower manufacturing yields 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 2018 was 5.3 million compared to 5.8 million in the same period a year ago and 10 million in the first quarter of 2018. The sequential decline in gross profit was primarily attributable to the decrease in licensing, royalty, and other revenue in the quarter. As we stated on previous calls, this part of our revenue is variable from quarter to quarter and is based on size and the terms of each transaction and as such can affect gross profit and margins materially. The resulting gross margin for Q2 2018 was 49%, 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 backend fab and expect to realize gradual improvements in productivity and yields 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 2018 were 11.8 million compared to 10.6 million in the second quarter 2017 and 11.1 million in the first quarter of 2018. Breaking down our operational spending for the second quarter; research and development expenses were 6.8 million compared to 6.4 million in the same quarter a year ago and 6.5 million in the first quarter of 2018. SG&A spending was 5 million in the second quarter compared to 4.2 million in the second quarter of 2017 and 4.6 million in the first quarter of 2018. Interest expense for Q2 2018 was 222,000 compared to 176,000 in the second quarter of 2017 and 211,000 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 2017 and 44,000 of income in the first quarter of 2018. GAAP net loss for Q2 2018 was 6.6 million or a $0.40 loss per share based on 16.6 million weighted average shares outstanding. This compares with a GAAP net loss of 5.2 million or a $0.42 loss per share during the same quarter a year ago and a GAAP net loss of 1.3 million or $0.09 loss per share in the prior quarter. $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 32.7 million at the end of the second quarter of 2018 compared to 33.9 million at the first quarter of 2018. The change in cash results reflected the collection of cash licensing payment from the ops agreement signed in Q1 offset by cash used in operations. Total assets at the end of the second quarter were 52.3 million compared to 57.1 million at the end of the first quarter. Total liabilities were 20.6 million as compared to 20.5 million in the first quarter of 2018. Stockholders equity was 31.8 million compared to 36.7 million in the first quarter of 2018. Looking ahead to the third quarter of 2018 we expect the revenue to range between $10.6 million and $11 million. This revenue range reflects our expectations for MRAM revenues to grow approximately 8% sequentially offsetting an anticipated decline in legacy products sales. Note that this decline in legacy products 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 16.9 million shares outstanding. Now I'd like to turn the call back over to Kevin for some closing remarks.

[Kevin Conley:]

Thanks Jeff. We're pleased with the growth and revenue from our entire family of MRAM products. Even with this progress there's clearly more opportunity for improvement from an operational perspective especially on our Toggle MRAM products. This is a key area our team will continue to pour effort into improving our results. Our IBM design wins 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 broader adoption. We will continue to focus on the promotion of our STT-MRAM into storage and other applications where data persistence of speed is critical and could 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 will open the call for questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Rajvindra Gill with Needham and Company. Your line is open, please go ahead.

[Rajvindra Gill:]

Yes, thank you and great job on IBM qualification, that's very good. Question Jeff on the margins, so you mentioned that your capacity constraints and you experienced lower utilization yields on the Toggle product. I was 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?

[Jeff Winzeler:]

So Rajvindra 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 tolerances 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 the second quarter. So, that's where we were constrained. We had demand but we weren’t able to completely supply that demand because of the yield output in the 200 mm Toggle factory. 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 yields hit which very much constrains our ability to supply.

[Rajvindra Gill:]

Okay, got it. So, what are the steps that you're taking and you talked a little bit about this on the script recall about to increase capacity to meet this kind of change in demand and the change in the demand profile?

[Jeff Winzeler:]

Yeah, there's two things that are happening; one is we've addressed the issues that have caused a lower yield 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 these yield fall out at the end of the line so we will 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 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 run more Toggle wafers.

[Kevin Conley:]

If I could add just a little color so that with regard to your question of what things are we doing, there's really two primary things, one is that we're making investments in better management of the yield data and being able to tie that to specific processes within the manufacturing flow that will result in better yield. And the second part is just 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.

[Rajvindra Gill:]

Yes, very helpful. And the 1 gig product that is targeting samples at the end of the year can you talk 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?

[Kevin Conley:]

So, adoption of any new product of course takes time. We're reiterating our plan to sample which means that the design will be meeting our customer's requirements and meeting its operational specs and that will be within the parameters of performance and reliability. So our indicators as we track this week to week, month to month are on 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 would be ramping around the middle of 2019 and then of course we'll go through the customer adoption cycles from the point of sampling to their qualifications eventually ending up in volume production with those customers.

[Rajvindra Gill:]

And last question for me, so you had mentioned that the MRAM business was going to grow 8% sequentially offsetting the decline legacy, the sensor on the backend foundry. Any way to kind of quantify what that impact is, what is it going from, from X to Y? Because last year it was pretty significant as I recall I think it was a couple of million -- like 2 million bucks last year if I remember on the sensor revenue which dropped off around that range. I think foundry was 3 million and correct me if I am...?

[Jeff Winzeler:]

You have a good memory, it was about $2 million to $2.5 million dollars last year. So that business is something that we've anticipated would 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 2018 we're seeing the business start to go away. We expect that at some point in time it will reach zero. We're devoting that factory line directly to Toggle MRAM production and so we're getting a lot closer to that point.

[Kevin Conley:]

And I would probably back that up Rajvindra 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 will be our continued focus in terms of sensor.

[Rajvindra Gill:]

Thank you very much.

[Operator:]

Thank you and our next question comes from the line of Richard Shannon with Craig-Hallum. Your line is open. Please go ahead.

[Richard Shannon:]

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, you have announced this probably just over 48 hours ago but have you got any initial reaction from other engagements we've been looking at the technology and seen the IBM announcement and any reaction that you can share with us?

[Kevin Conley:]

I'd say the reaction from the other storage manufacturers and even from other Xilinx based designers has been very strong at the Flash Memory Summit. In line with what we expected we did think having 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 customer's application. I will also say with the specs now published and what the product actually is and their level of performance and density that it delivers in a very compact footprint there's a lot of excitement about the product itself and what that will mean for Everspin MRAM sales.

[Richard Shannon:]

Okay, perfect, thank you. Thinking a little bit more tactically in near-term with IBM I was at the event on Monday when 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.

[Kevin Conley:]

I think that's what he said, yes.

[Richard Shannon:]

Okay, so presumably your revenues for the third quarter will include some kind of initial inventory build from IBM is that fair to say?

[Kevin Conley:]

Yes, that's fair to say. As we said our Q2 revenues included a full quarter of production shipments and by that I meant 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.

[Richard Shannon:]

Okay. Anyway that you can characterize in any way the visibility and/or inner forecast that IBM is giving 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?

[Kevin Conley:]

Yeah, I'm not in liberty to share their projected forecast I am afraid.

[Richard Shannon:]

Okay, I thought I'd give that a try, thanks for let me do that Kevin. Last question from me, just talking about overall products gross margins, you talked about the backend line issue for the Toggle. If I cut your comments roughly it sounds like you are expecting the problem to be improved over the second half of the year, so should we get kind of to a normal gross margin with the Toggle products exiting this year or could be faster or slower, any way you can characterize and be more specific on timing expectations there?

[Jeff Winzeler:]

Yeah, as I said in the prepared remarks and we really expect this to start getting better in the second half of this year. I think with the lag of material that's already in the line and the fixes that we put in place we would really expect to see the yields impact to gross margins probably more in the Q4 time frame than the Q3 time frame. But definitely on the uptrend and we think that we will be healthy by the time we exit the year.

[Richard Shannon:]

Okay, that's all I need to know. Thanks for taking my questions guys.

[Operator:]

Thank you. And our next question comes from the line of Kevin Cassidy with Stifel. Your line is open, please go ahead.

[Kevin Cassidy:]

Thanks for taking my question and I'll also add congratulations for the IBM win. With the STT product is that material yields now or is there still room for yields to improve on 256?

[Kevin Conley:]

No, we are still ramping the production Kevin and as most technologies -- memory technologies go through there's continual improvement in the yields until these technologies hit the top. And that takes a pretty good amount of time in sense to specifics of where we are. I hope you can appreciate that's competitive information that we don't make public.

[Kevin Cassidy:]

Sure, just getting an idea directionally if there is still good improvement ahead. And then also IBM made it clear in their presentation on Monday that they engaged with Everspin two years ago, so it was a long product cycle, I know we had to get the STT product qualified into production like GLOBALFOUNDRIES but your next engagements what do you expect the design cycle time would be from the time of engagement with the customer to maybe being able to announce a win?

[Kevin Conley:]

So we will 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 are working very closely with our customer. We're able to get it qualified and into pre production build 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 a equally high level.

[Kevin Cassidy:]

Okay, great and just on the R&D, as you are introducing the 1 gigabit device, should we expect R&D expenses to move up or is mostly R&D completed on the 1 gig?

[Kevin Conley:]

So R&D activities will continue until we hit production and even as we begin to ramp and work on 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.

[Kevin Cassidy:]

Okay, I see. And just one other question about the GLOBALFOUNDRIES. I think they had announced having some wins on their 22 FDX process for next year would that be in the E [ph] and would MRAM be a significant revenue or is that still something that we have to be in the much higher volume?

[Kevin Conley:]

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 are going to be MRAM dependent. The timing of those I don't have much to visibility to other than pointing to that reiteration of risk starts at the end of this year and mass production next year.

[Kevin Cassidy:]

Okay, great. Congratulations again.

[Kevin Conley:]

Thank you Kevin.

[Operator:]

Thank you and our next question comes from the line of Orin Hirschman with AIGH. Your line is open, please go ahead.

[Kevin Conley:]

Hi Orin.

[Operator:]

Orin if your line is muted please unmute it at this time. 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 remarks.

[Kevin Conley:]

Thank you. In closing I'd like to highlight that Everspin will be attending multiple upcoming investor events including the Jeffries conference on August 28th in Chicago. Please contact your Jeffries sales representative or the Shelton Group if you would like to schedule a meeting. Thank you for your participation on today's call. We look forward to reporting our progress next quarter. I want to again thank the Everspin 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.

[Operator:]

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.