Everspin Technologies, Inc.

Good afternoon and welcome to the conference call to discuss Everspain Technologies' first quarter 2021 financial results. At this time, all participants are in the listen-only mode. As a 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, Thursday, May 6, 2021. 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 Everspeen's future business, financial performance, and goals, customer and industry adoption of MRAM technology, successfully bringing to market and manufacturing products in Everspeen'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 annual report on Form 10-K filed with the SEC on March 4, 2021, and other SEC filings made from time to time in which we may discuss risk factors associated with investing in average pain. All forward-looking statements are made as of the date of this call and accept as required by law. We disclaim any obligations to update or alter these forward-looking statements in the future. Additionally, the company's press release and statements made during this conference call will include discussions of certain measures and financial information in COP and non-COP terms. Included in the company's press release are definitions and reconciliations of COP net loss 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 was filed in the Securities and Exchange Commission on Form 8K earlier today. This conference call will also be available for audio replay until May 13th 2021 in the investor relations section of Everspeen's website. And now I'd like to turn the call over to Everspeen's executive chairman and interim CEO, Taryn Billerbeck. Taryn, please go ahead.

Thank you, operator. And thanks to everyone for joining us on the call today. Q1 results came in just below the midpoint of our guidance as we ended up recognizing no royalty revenue from our RadHard licensing deal. We do expect to recognize the majority of the RADHRD licensing revenue over time. Even with that, our Q1 2021 revenue was up over 3% over Q4 2020, and in line with our goal of double-digit growth for the year. More importantly, we increased our gross margins significantly, lowered our cost, generated positive cash flow for the third quarter in a row, while keeping our current distributor inventory in a healthy range of 8 to 10 weeks. For Q1 2021, toggle revenue was up approximately 10%, and continues to gain traction as the market recovers. As mentioned in our last earnings call, we expected Toggle to continue to recover beyond the lows we saw in Q3 2020, and they seem to be doing just that. In fact, our current backlog suggests Toggle revenue is growing faster than we expected, a testament to what we seem to believe is a solid economic recovery in the industrial and factory automation areas, along with shipping to the new design ones we've been discussing for the past couple of years. We did see a strong start in Q2 backlog over Q1 for our industrial customers, and we're encouraged by the signs of all four regions coming back to growth. STT revenue was a little off plan, as we did see some small inventory adjustments we expect to get back on track Q2 through Q4. Design wins continue to grow in Q1 2021, as they did in the overall year 2020, and we are back on track to match or slightly exceed the design win total for all of last year. We refocused our efforts on turning those opportunities into real revenue and even changed our compensation of our sales force to be more focused in that area. As mentioned last quarter, Everspin is providing production volume shipments to more end customers than ever before, which we believe reflects a strong future demand pipeline and growing adoption of MRAM in the marketplace. On the operations front, we continue to focus on yield improvements and lowering our costs. We are finally seeing the results of our efforts in various improvements and implementation plans that have created healthy product growth margins across the board. The biggest risk to our growth margins moving forward is mixed and getting the capacity we need at the committed pricing in a tight subcon network worldwide. Semiconductor companies appear to be struggling to keep up with demand as demand in many sectors is outplacing supply. As we discussed last quarter, we won a rad-hard design and have now finalized that contract and collected $3 million of the upfront payments for the related licenses. As we've mentioned in the press release in Q1, our Q1 revenue did not include the $1 million in licensing revenue we anticipated. As I mentioned earlier, we do get to recognize that royalty over time, which reaffirms our deliberate strategy to continue to monetize our IP. Finally, our 28-nanometer next-generation industrial product is on track to tape out in Q3. Stay tuned for that. I will now turn the call over to our interim CFO, Anuj Agarwal, who will take you through our first quarter financials and second quarter 2021 guidance. Anuj.

Thank you, Darren, and good afternoon, everyone. Today, I'll focus my discussion on GAAP financial results and highlight some key metrics. Highlights include cash flow from operations was positive for the third consecutive quarter. We also generated cash in the quarter and gross margin was higher. Revenue for the first quarter of 2021 was $10.3 million compared to $10 million last quarter and $10.1 million in the first quarter of 2020. MRAM product sales in the first quarter, which include both toggle and SDT MRAM revenue, was $9.1 million, lower than the prior quarter and first quarter of 2020. Licensing, royalties, and other revenue in the quarter contributed $1.2 million compared to $0.3 million in the previous quarter and $0.5 million in the prior year period. The increase in revenue is due to the yearly true-up in royalty from a customer generally using our IP, which we have previously licensed to them. The Rathard licensing deal is not included in the first quarter results. Turning to gross margin, GAAP gross margin for the first quarter of 2021 was 58.2% versus 52.3% in the prior quarter. The higher gross margin is driven by royalty revenues. GAAP operating expenses for the first quarter of 2021 were $6.3 million, slightly lower than last quarter's $6.4 million, but down from $6.9 million in the first quarter of 2020. GAAP operating expenses in the first quarter of 2021 included $0.7 million of stock-based compensation compared to $1.3 million last quarter and $0.8 million a year-ago quarter. We expect to grow R&D expense in the remainder of 2021 as we prepare for the launch of our 28 nanometer SCT MRAM product targeted at industrial and other broad-based applications. Getting to the bottom line, gap net loss for the first quarter of 2021 was 0.46 million or negative two cents per share based on 19 million weighted average shares outstanding. This compares to a gap net loss of 1.6 million or negative eight cents per share in the fourth quarter of 2020 and a gap net loss of 1.7 million or negative 10 cents per share in the first quarter of 2020. Earnings per share of negative 2 cents was better than our guidance range despite revenue coming in just below the midpoint, reflecting our tight operational discipline and strong gross margins. Turning to the balance sheet, cash and cash equivalents increased to 15.5 million at the end of the first quarter compared to 14.6 million at the end of the prior quarter. Cash flow from operations was a positive $1.6 million in the first quarter, making this our best quarter for cash flow from operations and third consecutive quarter of positive cash flow. Turning to our second quarter guidance, we expect revenue in a range of $11 million to $12 million, which at the midpoint of $11.5 million represents 12% increase over $10.3 million from the first quarter of this year. and 11 cents, primarily driven by expenses related to the next generation 28 nanometer STT MRAM product. I will now turn it back over to Darren for some brief additional commentary before we open it up for questions.

Thanks, Anoush. In summary, we continue to build towards the future of profitable growth. We believe the toggle demand will continue to gain traction as the market recovers. We anticipate increasing our market penetration of our high-density STT MRAM products for the data center, both at our top customer as well as other customers as we move through the next few years. We are on track to tape out our low-density STT MRAM product targeted at industrial customers and neural replacement in the middle of this year, and we will continue to monetize our IP with the RadHard STT MRAM license we mentioned being a big step with still more to come. Operator, you may now open up the lines for questions.

Ladies and gentlemen, if you have a question at this time, please press star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the count key. Please wait while callers queue for their question. One moment, please. Again, ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. Your first question comes from the line of From Peter Mann of Greg Hellum Capital. Your line is open.

Hi, guys. Thanks for taking my question. Sam on for Richard here. I guess first, kind of a lot of moving parts. The numbers for first quarter and just thinking about going forward, obviously, a lot of this strength and this quarter was toggle growing and some licensing revenue being recognized, too, that sounds like that's maybe a one-time thing. bigger impact. So I'm curious, you know, STTM RAM kind of had a big drop off there. I'm curious what kind of recovery we should expect there and if you get a little more color on whether that's, you know, kind of, if that's supply constraints, if that's, you know, just customer inventory burns or what's going on in that area, that'd be great.

Yeah. So let me start. There was probably more than one question on there, but I'll start with a couple of comments that I will. So we did see some royalty uptick. That's a trip from one of our customers that we do a run rate. We don't have a lot of visibility, but obviously they did much better in the markets that they serve on the royalty rates than we normally would get. And we would project that to be slightly higher than what we were anticipating through time. On the specific STT deal, it was down slightly. I think at the end of last year, they actually believed that they would do better than they were in the end market. And we were looking at some of the data. And I think their business was soft. However, this quarter, going from Q1 to Q2, we expect some recovery. And then by Q3 and Q4, we expect that to be back to normal. So you're going to see a little bit of a ramp up from that. So nothing catastrophic in any way. But I think it's just a normal leveling of their inventory versus their in demand. So it wasn't very concerned about that. It was a negative if you look at it from Q4 to Q1, you know, as far as those numbers are. But the nice news is Toggl grew very well, which we were, again, we believed it would continue to grow. We believed that the new design ones that we've been focused on the last two years would come to fruition, and that happened. And we're really excited by the fact that toggle for Q2 is already ahead of where we were in Q1 and we're feeling really comfortable about the backlog. And now it's changed the game where before, you know, we were focused on, you know, can we get enough demand? Now it's like, can you get enough supply? And I'm sure you hear that from everybody. Yeah.

Yeah. Hearing that quite a bit. That's really helpful color though. Thanks for that. And I guess on that last point of supply, I know you said in the last call, you've been able to mitigate, margin impacts from supply constraints pretty well. Have you been able to continue to do that? Is there a point where you think we could see either margin pressure from supply constraints going forward or, like you just said, a point at which demand is going to outstrip supply in your toggle products?

Yeah. So to answer that, I think clearly our margins aren't going to stay at 58%. That was an artifact of a lot of great things that happened at one time. But we want our margins to have that five in front of it. And yes, I do think we're going to be impacted by some of the capacity constraints that are out there because there's people that, we mentioned this in the last earning call, that opportunistically raise their price in order for you to even get capacity. Our strategy today is not to actually pass that on to our customers. And I think that's the right strategy as we're seeing a recovery in the marketplace. It's right choice for our companies that we're going to suck it up as we go through that. But we still believe that our margins will start with that five. And anything above that as we're moving forward is all within the plan that we have and that we submitted as we walk through this year. So we feel comfortable about that today. But you're right, there's going to be an impact. But I don't think for us from a FAB perspective, lead times are so long that you wouldn't see a FAB constraint for us. for many quarters. It's more assembly and test today.

Got it. That's really helpful. That's it for me for now. I'll hop back into the queue.

Awesome. Thanks.

I am showing no further questions at this time. I would now like to turn the conference back to Mr. Anoush Agarwal. You may proceed.

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

This concludes today's conference call. Thank you for your participation, and have a wonderful day. You may now disconnect.