MRAM - NASDAQ

Good afternoon, and welcome to the conference call to discuss Everspin Technologies Third 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, November 1, 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 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 our quarterly report on Form 10-Q, which will be filed with the SEC on November 2, 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 statement 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 are based on the information available as of the date hereof and are subject to further review by Everspin and external auditors. Our actual results may differ materially from these estimates and as a result of the 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 and 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 on the Investor Relations section of Everspin's website at www.everspin.com. And now, I would like to turn the call over to Everspin's President and CEO, Sanjeev Aggarwal. Sanjeev, please go ahead.

Thank you, Operator, and thanks everyone for joining us on the call today. Everspin delivered quarterly revenue of $16.5 million above the high end of guidance and an 8% increase year-over-year. We were GAAP net income positive for the 10th quarter in a row a strong focus for the company. A few highlights for quarter three 2023. A Cash flow from operations was $3.6 million putting us at $11.1 million year-to-date. We continue to operate debt-free, while increasing profitability. Q3 net income was $2.4 million. Everspin ended Q3 with a cash balance of $34.9 million. We announced the availability of the X5 family of STT-MRAM products from eight megabits to 64 megabit density with the extended temperature range of minus 40 centigrade to 105 centigrade for production orders. We are sampling the 4-megabit density part in the smaller DFN package and the extended temperature range with production planned for the first quarter of 2024. In Q3 we entered into an agreement to develop reliability models for strategic radiation hard and Toggle MRAM. In October, we entered into a new contractual agreement to license our STT-MRAM technology to build a strategic radiation hardened FPGA. Our business outlook. We continue to have a good visibility into our product backlog for the remainder of 2023 and into early 2024 as of September 30, 2023. We have alleviated our foundry supply chain constraints, which is helping us address our unfulfilled toggle demand. Products. We expanded our flagship industrial high-density STT-MRAM product family, the EMxxLX to include a 5-millimeter x 6-millimeter DFN package smaller by 37% compared to the current offering. In addition to the area savings we are delivering an extended temperature of minus 40 C to 105 C. This family of xSPI STT-MRAM devices, delivers the highest combination of performance, endurance and retention and are now available in densities from four to 64 meg. It is the only commercial available persistent memory with full read and write bandwidth of 400 megabytes per second via eight input output signals with a clock frequency of 200 megahertz. It is the highest performing persistent memory available today ideal for electronic systems, where data persistence and integrity, low power, low latency and security are paramount. Industrial IoT network enterprise infrastructure, process automation and control, aeronautics, avionics medical, gaming and FPGA configuration are examples where this family will simplify the system architecture and offer an alternative solution to legacy memories such as ferroelectric memories. FRAM, battery back random access memories BRAM, NOR Flash and nonvolatile SRAM. A few comments about our Radiation Hard programs. Since its inception, Everspin has invested in maintaining its leadership in MRAM technology, as evidenced through its IP portfolio and successful licensing of its technologies. We are excited to report that we entered into two new Radiation Hard program agreements, one on Toggle MRAM to develop reliability models for the strategic radiation hardened Toggle MRAM products. The second agreement is to license our STT-MRAM technology to build a strategic radiation hardened FPGA. These agreements are in addition to the existing Radiation Hard programs on STT-MRAM technologies that we have discussed in previous earnings calls. One, a high-density memory array, and two, a distributed configuration memory for instance on FPGAs with multiple time programmability. The R&D and design teams delivered on the milestone successfully to further the development of these STT-MRAM-based solutions for these projects. We believe our distributed MRAM we are coining as D-MRAM approach is a revolutionary approach and will give us an edge on energy efficiency and scaling, as we deploy the solution and FPGA and AI inference engines. I will now turn it over to our CFO, Anuj Aggarwal, who will take you through our third quarter financials and fourth quarter 2023 guidance. Anuj?

Thank you Sanjeev and good afternoon everyone. As part of our third quarter 2023 financial results we are pleased to announce our tenth consecutive quarter of positive net income. In addition we generated positive cash flow from operations of $3.6 million during the quarter. We delivered solid quarterly results above the high end of guidance with revenue of $16.5 million compared to $15.7 million last quarter and $15.2 million in the third quarter of 2012. WE also had positive net income of $2.4 million and positive cash flow from operations of $3.6 million for the third quarter of 2023. The MRAM product sales in the third quarter which includes both Toggle and STT-MRAM revenue was $13.5 million compared to $13.4 million in the prior quarter and $14.6 million in Q3 '22. Licensing royalties patents and other revenue in the third quarter increased to $2.9 million compared to $2.3 million last quarter and $0.7 million in Q3 2022. Shipments to suppliers for our high-density STT product for the data center applications represented 11% of revenue in the third quarter versus 7% of revenue in Q2 and 19% in Q3 last year. Turning to gross margin. GAAP gross margin for the third quarter of 2023 was 60.2% versus 58.4% in the prior quarter and 58.8% in Q3 2022. The increase in gross margin is primarily attributable to the increase in licensing revenue. GAAP operating expenses for the third quarter of 2023 were $7.9 million versus $7.6 million in the prior quarter, and $7.1 million in the third quarter 2022. The increase in operating expenses in the quarter compared to Q3 2022 and was primarily driven by an increase in professional service costs. We are pleased to report third quarter 2023 positive net income of $2.4 million or $0.11 per share based on 21.8 million weighted average fully diluted shares outstanding. This compares to a GAAP net income of $3.9 million or $0.18 per diluted share in the prior quarter and net income of $1.9 million or $0.09 per diluted share in the third quarter of 2022 Diluted EPS of $0.11 was better and the high point of our guidance range reflecting our strategic operational discipline and ability to drive profitability despite macroeconomic uncertainties. Adjusted EBITDA continues to remain positive. For Q3 2023 adjusted EBITDA was $4 million compared to $5.4 million in the prior quarter and $3.4 million in Q3 of last year. We ended the quarter with cash and cash equivalents of $34.9 million compared to $30.8 million at the end of the prior quarter and $23.4 million as of Q3 2022. The increase in cash quarter-over-quarter is a result of Everspin's continued focus on strong cash management while growing cash flow from operations as the company continues to operate debt-free. Cash flow from operations was healthy at $3.6 million for the current quarter. Turning to our fourth quarter 2023 guidance. Everspin is cautiously optimistic. Demand for our Toggle products remain strong and we continue to see increased demand of our xSPI family of STT products. We expect total revenue in the range of $15.4 million to $16.4 million and GAAP net income per diluted share to be between $0.01 and $0.06. I will now turn it back over to Sanjeev for some brief additional commentary before we open it up for questions.

Thanks, Anuj. In summary, we reported another profitable quarter now tenth in a row which remains a strong focus for the company. We are excited that our Toggle MRAM and STT-MRAM technologies are being selected for Radiation Hard programs taking advantage of our leading-edge capabilities. We believe the extended temperature range capability of minus 40 C to 105 C of our STT-MRAM xSPI family positions us well to address the fast-growing industrial IoT and embedded systems markets. We have good visibility into our Toggle MRAM backlog through 2023 and early 2024 giving us confidence in our business. Thank you for joining us today. Operator, you may now open the line for questions.

Thank you so much. [Operator Instructions] Our first question that comes from Shadi Mitwalli with Craig-Hallum. Please proceed.

Hey, guys. Congrats on another solid quarter. I just had a question on revenues being on the upper end of guidance. It looks to be mainly coming from licensing. So with that is most of the increase in licensing revenues coming solely from the RAD-Hard programs, or are we seeing any meaningful royalties from past licenses contributing to the increase in licensing revenues?

Hi, Shadi. This is Anuj. Thanks for the question. Yeah. For Q3 the good news came from the licensing and royalty side. We had some strong revenue from the QuickLogic deal. And then we had a third RAD-hard deal that Sanjeev mentioned related to Toggle reliability. And so we were able to get some work done there and account for that revenue as well. I will say also though product sales were strong and so total sales continued to be strong in Q3.

Awesome, awesome. And then I just got actually a question on product sales. With products being down Q-over-Q, has there been any unusual activity with the backlog such as pushouts or even cancellations regarding backlog?

Yeah. The interesting thing with backlog Shadi so there's definitely some macroeconomic uncertainty and industry trends that are happening, right? So the supply constraints are loosening. The lead times are reducing like we had mentioned last couple of quarters. And so we are seeing customers booking within the lead time, but they're kind of waiting to book outside the lead time, right? And so we are seeing some impact in APAC for example within the Industrial Automation section.

So with the Industrial Automation segment be one of the guys more weaker end markets you're experiencing?

No. Actually, for Q3, we had good results in the Industrial segment. I was just making a comment that the Industrial segment has some uncertainty in China and so there are some challenges there. But it's been stronger in last few quarters.

Okay. Yes, that makes sense. And then just one more question on end markets. Were there any particular end markets you guys are seeing a little more strength or weakness in?

Not particularly right now. I think just overall there's some macroeconomic uncertainty right as things are happening. So, you're just seeing customers waiting to place orders, right? And just wanting to see what's happening in China and what's happening in the economy in general. But overall the segments look good except for what I mentioned some risk in Industrial.

Awesome. Yes it makes sense. That's all for me and congrats on another solid quarter.

Thanks Shadi.

Thank you. And it comes from the line of Quinn Bolton with Needham. Please proceed.

Hey guys, this is Nick Doyle on for Quinn. I wanted to focus on RAD-Hard it's doing really well. claiming his new wins new licensing. Can you just talk a little bit about the applications and applications that are actually using that? And then the new licensing deal is that a one-time item? Or are we stepping up the kind of baseline of licensing revenue? And then if we could also -- if you could also touch on the products are we still on track to enter production by the end of next year and customers shipping in 2025? Thanks.

Hey, thanks Nick. This is Sanjeev. So, I guess I'll let I'll try to remember all your questions, but if I forget something please remind me. As far as the goodness of the Radiation Hard deals you're right I mean we were really excited that we were picked by the government contractors to actually have one project on Toggle MRAM and another one on STT-MRAM as well. . The licensing deal that you talked about or that we talked about for STT-MRAM that is actually targeted towards an instant on FPGA similar to the one that we announced I believe two or three quarters ago. So, this is a new project with a different vendor although the subcontractor is still through QuickLogic, but they have a different CMOS provider. These licensing deals are obviously very lumpy and they are opportunistic. I would not say that this is the last licensing deal that we'll come across. We hope to get even more going forward. I'm not giving any guidance but we are hopeful that our technology keeps getting recognized and we keep getting picked up for other projects. And just as a reminder I think a year ago we had talked about a deal with Honeywell where we're actually building a 64-megabit array. And there obviously it's more of a persistent memory type solution for Radiation Hard environments. As far as our 64-megabit and the 16 megabit parts that we taped out and brought production this year. They are on schedule. People are looking at our parts and qualifying them. So, we are on schedule to getting them hopefully qualified and into early production towards the end of 2024. If I miss anything please remind me Nick.

No, got it all. Thank you. For the -- we have seen weakness with FPGA guys that were reported AMD and total lead times [ph] and maybe we're seeing that in your products, slightly declining next quarter. Would you say, that's an accurate -- that I noticed that correctly?

So, I don't know, if it is specifically the FPGA or not but like Anuj mentioned, we are cognizant of the macroeconomic conditions in Asia Pacific. As we said -- as Anuj said, we are -- we have been strong for the first three quarters, but we are starting to see some movement in Q4 and also in early 2024. But that is also convoluted by the data, that now that the supply chain constraints are removed, our lead times have actually dropped. So our customers' behavior has also changed with their ordering within the lead times. So, it's not quite clear, if it's because of the macroeconomic conditions, or just because our lead times have changed, but the two combined together has changed the behavior in the backlog over the last couple of quarters.

So just kind of confirming that your lead times, have gotten even lower compared to last quarter and that's kind of impacting the outlook. Just related to -- and the reason I asked is kind of last quarter we were saying, that the backlog is really strong and it gives us visibility into the near-term quarters. But now, because lead times are coming down, that isn't as accurate today?

I guess -- This is Anuj. I guess the way, I would describe it, so what's happened is the lead times were 52 weeks. They came down to about 30-something weeks, and then we reduce them further to about 27, 26 weeks. So we saw lead times, come down. And then in addition to that, one of the things you'll see industry-wide that you might have noticed, is that the supply constraints loosened up as well, right? And so what that did was that created, what we're observing to be a customer behavioral change. And so, they're -- they're mostly booking within the lead time and then they're booking some outside the lead time as well. So, that's really nice. But it's not as much as they were doing historically. And so now it's kind of come back, so let's call it the backlog pre-pandemic levels. And so even though it looks relatively normal from that perspective, it has declined from the really rich backlog from a year ago where there was a 52-week lead time, not enough capacity and people were getting worried about getting capacity, right? So they were just booking well in advance. So, that's the observation that we've seen.

That makes sense. Thanks and wait to ask [indiscernible]

Thank you. [Operator Instructions] Nick, you have additional question go ahead.

Yes. I'll ask one more. Just on that back -- staying on the backlog typically takes 12 to 18 months to convert. Can you give any detail, on how much of your backlog is expected to convert near term versus long term? I know that we are talking some strong growth or -- some growth in the second half 2024, based on the backlog last quarter.

Nick, are you talking about 12 to 18 months of qualification time? Or did you mean?

Right. Yes.

Yes. So that -- the qualification time for that new STT product that we brought out is still 12 to 18 months and we expect the early production to be in late 2024, early 2025. So nothing is "changed or delayed in that process."

Yes. I think the way I would explain the pipeline, if you look at the design wins, they're still healthy and they continue to gain traction, right? I think that's part of where you're going. So there is a strong pipeline and we are seeing backlog outside of the lead time just not as much as before.

Thanks for the clarification.

Thank you. And we do have a question from another line. One moment, please. I have a question from Orin Hirschman with AIG. Please proceed.

Let's see just one more clarification question on that last topic. In terms of the guidance that you put out for Q4, does that assume product increases sequentially? Being too much more specific than what you want to be.

Yes. Hi, Orin, this is Anuj. I would say, we're looking at guidance for Q4 relatively flat to Q3 with a similar mix.

Okay. And you never mentioned AI before. Where does the product fit in the overall scheme of AI? Is it only if it becomes the actual a piece of IP in the FPGA and you go through that a little bit more? And are you mentioning because they are customers that have interest?

Yes. So the – Orin, this is Sanjeev. So the solution that we developed for the FPGA market for the instant on FPGAs. the requirements for the AI inference engines are very similar to the requirements for the – for that instant on FPGA, namely you want it to be low standby or zero standby current. And you want it to be non-volatile and then you need it to be extremely fast so that you're comparing an image for example with something that the GPU processed and brought to the edge for comparison. So this solution basically applies to both. And we've had some early discussions with some of the R&D folks looking at some AI solutions and there seems to be good compatibility. Again, it's only in the early stages but it's something that we are hoping to focus on and over the next year, 1.5 years as a new focus for the company.

Is there enough density in these parts to be able to do anything practical on the AI side? Do they have to be chained together? And how would it work?

So it's mostly targeted towards Edge AI, Orin where they don't require very high density. It's not for the servers where they would require gigabits and much higher densities. But for the Edge AI, we have plenty of density. I mean, we meet the density requirements for the Edge AI applications.

Okay. And just one more follow-up. You mentioned the second instant-on FPGA development. What's going on with the first one? And is the timing -- what is the timing lag on both of these?

So we are -- so both the programs are active as of Q4 of 2023. So the original one with QuickLogic and SkyWater that is progressing just fine. We are making progress on the deliverables and continuing forth with that. And then this is a new program that the QuickLogic has been awarded from the US government where it actually uses CMOS from a different vendor, but has a similar requirement as far as solutions are concerned --as the FPGA solutions are concerned. So these two programs are going to run in parallel at least for the next couple of quarters.

Which one? Is this second one though for commercial use or governmental use?

They are both for government use, Orin.

And I know you'd mentioned before you're working with some of the commercial FPGA vendors on commercial products. Any progress there on the instant-on application?

So the other solutions that we're looking at for the FPGA was basically to replace the traditional NOR Flash memory

Yes.

But there's STT-MRAM 64 meg and 16 megs that we brought out and that work is ongoing.

Okay. Thanks so much.

Sure.

Thank you. [Operator Instructions] Yes, I don't see any further questions in the queue. I will pass it back to Anuj Aggarwal for his final comments.

With that said, we conclude today's call. Thank you all for joining us and we look forward to updating you on our progress next quarter. Thank you.