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spk00: Good afternoon and welcome to the conference call to discuss Everspin Technologies' second quarter 2021 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, Thursday, August 12, 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 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 second quarter report on Form 10Q filed with the SEC on August 12, 2021, 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. The financial results discussed today reflect our preliminary estimates, are based on the information available as of the date 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 the completion of our financial closing procedures, financial 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 definition and reconciliations of GAAP net loss to adjusted EBITDA, which provide additional details. This conference call will be available for audio replay for at least five 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 Executive Chairman and Interim CEO, Darren Billerbeck. Darren, please go ahead.
spk02: Thank you, Operator, and thanks to everyone for joining us on the call today. Q2 results came in at the higher end of guidance, and as mentioned in our press release, we were GAAP net income positive for the first time in company history. Being GAAP net income positive is a key milestone for the company. It is simple proof point. that being laser-focused on improving yields, lowering OPEX spending, and growing our top line will drive profitability, albeit at lower revenue levels if your gross margin is higher. Revenue for Q2-21 was up 15% over Q1-21. For Q2-21, STT revenue bounced back, increasing 56%, and continues to gain traction as the market recovers. Toggle was flat to slightly down due to supply constraints. In fact, our current backlog suggests that toggle Q3 revenue would be even higher if we weren't supply-constrained once again, a testament to what seems to be a solid economic recovery in the industrial and factory automation areas, along with continuing to shift to the new design wins we've been discussing for the past couple of years. We continue to see strength in Q3 with starting backlog over Q2 for industrial customers, and we are encouraged to see that all four regions continue to grow. STT revenue was back on track as expected in Q2 and continues to trend in line with expectations for Q3 and Q4. Design wins continue to grow in Q2 2021 as they did in Q1. We're on track to match the design win total of 2021 versus 2020. As you may recall, 2020 was a record for design wins. We continue to focus our efforts now on turning those opportunities into real revenue with the only limiter being the industry supply. On the Q2 operations front, we continue to focus on yield improvement and lowering our costs everywhere. We expect to see growth margins begin to flatten out through the end of the year as most of our gains are being offset by supplier price hikes. The biggest risk to our plan this year continues to be about getting the capacity at the committed pricing in the tight capacity situation worldwide. As we discussed last quarter, we want a rad-hard design collected $3 million in cash, and finally this quarter were able to recognize some of the revenue. Q2 revenue did include about $1.2 million in licensing revenue, and we expect to recognize the rest of the remaining portion of the $3 million based on development milestones for the next couple of quarters. I will now turn the call over to Interim CFO Anuj Agrawal, who will take you through our Q2 quarterly financials and Q3 quarter 2021 guidance.
spk01: Anuj. Thank you, Darren, and good afternoon, everyone. We are pleased to report GAAP record financial results for the June quarter, reflecting our strong operating results. Highlights include positive net income for the first time, revenue at the top end of guidance, and improved gross margin. Revenue for the second quarter of 2021 came in at $11.85 million, compared to $10.3 million last quarter and $11.8 million in the second quarter of 2020. MRAM product sales in the first quarter, which included both Toggle and ST MRAM, revenue was $10 million versus $8.9 million in the prior quarter and $10.9 million in Q2 2020. Q2 reflected the first time the company recognized $1.2 million revenue from the Radhart deal resulting in licensing royalties and other revenue in the quarter of $1.7 million compared to $1.4 million in the previous quarter and $0.9 million in the prior year period. The increase in revenue is due to strong SDT sales and Radhart revenue recognition offsetting the yearly true-up in royalty that was recognized in Q1. Shipments to suppliers for our largest end customer who we serve with our high density STT product for data center applications, represented 34.7% of revenue in the quarter versus 25.6% of revenue in Q1 and 34.4% in the year-ago quarter. Turning to gross margin, GAAP gross margin for the second quarter of 2021 was 60.7% versus 58.2% in the prior quarter and 43.9% in Q2 2020. The higher gross margin is driven by red-hard revenue recognition and improved yields. Gap operating expenses for the second quarter of 2021 were $6.7 million versus $6.3 million in the prior quarter and $6.3 million in the same quarter one year ago. The increase was specifically for 28-nanometer product development. Gap operating expenses in the second quarter of 2021 included $0.7 million of stock-based compensation compared to $0.74 million last quarter and 0.92 million in the year-ago quarter. We expect R&D to grow minimally the remainder of 2021 as we prepare for the launch of our 28-nanometer SDT MRAM product targeted at industrial and other based applications. For the first time in company history, we are reporting a positive net income of 0.256 million, or one cent per share, based on 19.3 million basic weighted average shares outstanding. This compares to a gap net loss of $460,000 or .02 cents per share in the first quarter of 2021 and a gap net loss of $1.29 million or negative seven cents per share in the first quarter of 2020. Earnings per share of one cent was better than our guidance range, reflecting our tight operational discipline and strong gross margin. Turning to the balance sheet, cash and cash equivalents decreased to $14.2 million at the end of the second quarter, compared to $15.5 million at the end of the prior quarter, and $12.9 million in Q2-20. Cash flow from operations was negative at $0.56 million for the quarter, but remained positive at $1.1 million for the first half of the year. Turning to our third quarter guidance, we expect revenue in the range of $11.7 million to $12.7 million which at the midpoint of $12.2 million represents a 3% increase over the $11.9 million from the second quarter of this year. We expect a gap loss per share of between negative 4 cents and negative 7 cents, primarily driven by expenses related to next-generation 28-nanometer STT MRAM product and price increases from our suppliers. I'll now turn it back over to Darren for some brief additional commentary before we open it up for questions.
spk02: Thanks, Anoush. In summary, we continue to build towards a profitable future. Q2's positive net income is a testament to the hard work and extra effort the Everspend team put in to control our costs, improve our yields, and ship everything that we could in a very constrained semiconductor supply network. We're both excited by what we accomplished in Q2, along with our potential opportunities to grow throughout the year. Operator, you may now open the line for questions.
spk00: Thank you, Darren. And as a reminder, to ask a question, please press star and then the number one on your telephone keypad. Again, just press star and then the number one on your telephone keypad. And to withdraw your question, just press the pound key. We'll pause for a moment to compile the Q&A roster. Our first question comes from the line of Richard Shannon from Craig Hallam. Please go ahead.
spk05: Well, hi, guys. Thanks for taking my questions, and congratulations on the first quarter of GAAP head income. I'm sure this is a great time for you guys to celebrate, so congrats on that. Maybe just a couple quick tactical questions here. By the way, can you hear me? I'm getting a little feedback on the line. Is it okay for you, Derek? Yeah, we can hear you perfectly. Yeah, we can hear you. Okay. All right, good. Let's just talk a little bit on the guidance here for the quarter. Kind of get a lot of feedback here. You know, I'm going to go to the – give me a second. I'm going to go off my headphones here. It's working very well. All right, let's try it this way. So on the guidance for the quarter, I couldn't do the quick math in my head regarding and guessing how much of this Radhart license and other licensing is going to build into the third quarter revenue number. So maybe I'll ask the question another way, which is, Are we going to see product growth here happening in the third quarter sequentially?
spk02: Yes. The answer is product growth actually grew. It's grown every quarter, right? It was up Q1 to Q2. It was up about 13%. And then in Q3, it's going to be up again. Up again.
spk05: Okay. Okay. That is helpful. And then any way that you can help us think about the gross margins here for the guidance as well? Obviously, yeah. moving parts within licensing can move that here. So maybe you can help us out, think about that directionally. That'd be a big help.
spk01: Yeah, sure. This is Anuj. So gross margin, we don't typically guide on gross margin. But I will say, for modeling purposes, I think you could stick to about mid to low 50s for gross margin. As you would expect, in Q1, we had a royalty true-up. In Q2, we're seeing higher yields and some of the red-hard deal driving higher margins. But there is some risk to supply chain costs increasing. And so that way, we think that the mid to low 50s is fair.
spk05: Okay. Fair enough then. Darren, a quick question on supply constraints. Is this impacting you equally across toggle and SCT, or is it more on the toggle side?
spk02: It's probably more on the toggle side. As you saw on Q2, it actually Our toggle was flat to down in Q2 where STT was up quite a bit. So we were able at least to, you know, we built enough inventory as we moved through on the STT products that we didn't have as big a constraint. The big issues on toggle weren't necessarily front end, they were back end. So it was like packaging and tests and some of the constraints on that. So, you know, one other thing I want to mention is we are trying to be somewhat conservative, Richard, because You know, the company has been known for missing guidance a lot. So as we kind of walk through these things, we're going to see some cost increases because we've already been, you know, pushed on that front. But we're trying to model and maybe we're a little too conservative on that. But I'd rather be up front about what the constraints are and the price increases than, you know, have it be a surprise.
spk05: Okay. Well, that's fair enough. Appreciate that detail. Let's see, a couple questions on your SCT kind of outlook here, both near and long term. I guess I'd love to hear a little bit about engagement with your high-capacity SCT MRAMs, how that's progressing, new applications, customers who recently ramped here, just kind of a general outlook on the high-capacity side.
spk02: Yeah, we still have one big customer, as you're aware of, and we're beginning to ramp the smaller customers. versions of customers in that same product line. So we don't just have one customer on it. We have quite a few, albeit not as big as the one customer. Again, as we mentioned before, I think the biggest thing that will help us is the Phison memory controller that is taped out. And hopefully we can get that thing starting to design in the end of this year and early next year so we can start ramping some larger customers on that. But it's going to take some help because not everybody wants to use that FPGA versus an ASIC solution.
spk05: Okay. And how is the environment for other SSD controllers? I know you're kind of looking for a broader ecosystem there. Is that still expected here, or do you expect Phison to be your primary partner?
spk02: Well, right now Phison's bright because they're kind of in the lead. We are working with other memory controllers as we go through this. So, you know, we're trying the best that we can to at least build some credibility. And because we have the one customer, we do a lot of people are starting to see that. It is more difficult when you're our size to be able to do that. So obviously we can't press people to get these things done, but we can make sure that they have all the capabilities and all the technical definitions of our products and the interfaces so that it makes it easier for them. So we're doing all that. We've been doing it for – it's not a process since I got here. This is a process that's been going on for at least the last year. So that will help us a lot. And I think the other thing that's going to help us with STT as we – tape out the next version of the product, which is our lower density version, that helps a lot because that does have all standardized interfaces on it and densities that we think have high volumes. So not only is the STD that we have today for the enterprise important to us, we think that the future is also pretty rosy with the products we have on the roadmap.
spk05: Okay. I've got a couple more questions, but I'll step out of line here and see if there's others in the queue. If not, I'll jump back in right away. Thanks a lot, Jaron.
spk02: Okay. Thanks, Richard.
spk00: Thank you. Once again, as a reminder, to ask a question, just press star 1 on your telephone keypad. Again, just press star and then the number 1 on your telephone keypad. Our next question comes from Richard of Craig Hallam. Please go ahead.
spk05: Well, I got back in right away. All right. Per one of your last comments there, Darren, about the lower density SCT, I'm not sure if I've asked you this question before, but once you expect those products to be qualified and start to ramp, I mean, obviously, you probably have a good idea when they'll start to be available for production, but I assume some of these design cycles may last some time in certain of those markets. So, When do you foresee that becoming a more noticeable part of your overall revenue profile?
spk02: Well, I think, so we'll get the product at least sampled early next year. We'll have the models out before that. The models will be out late this year, which will help people with the reference designs and such. And so as we kind of move through this, I would expect to start seeing those design wins early next year. And as you know, it's going to probably take a year. So we'll see a little bit of volume next year. but I would anticipate most of the volume to be the 2023, 24 timeframe. Okay.
spk05: All right. That's helpful. Um, Darren, I want to ask on an embedded MRAM, um, how is, how is that looking here? How's that ramping versus your expectations of, you know, say six, nine months ago. And, um, and if there's any way to characterize how, uh, how meaningful it is on a run rate basis today and where do you think it can go?
spk02: Yeah, well, it's, it's where we thought it would be, which is not going to be huge, right? It's, it's, it's, It's a small potato thing today because the products that are currently shipping are not super high volume for global foundries. And so as they begin to get more customers, we're going to see more volume on that. The great thing is the proof points on this are a couple devices that are pretty well known in the industry. So that's encouraging to us. But I don't anticipate that that to be a huge amount of the revenue for another two to three years at least. Okay.
spk05: All right. That is helpful. And then, Darren, a question or maybe two on design wins. I think you said you're on pace to equal number design wins you had last year, which was a record. I guess it'd be great to hear a thought, not on the number of wins, but size of wins. Are there an expectation of seeing the design wins, the values go up here in any meaningful way? Just kind of get a sense of overall pipeline value.
spk02: Yeah, let me answer the question a little differently. So So what I looked at the other day, because we were doing a review of our sales, and I looked at there was probably five customers, let's say, a year to a year and a half ago. And most of those customers were over $1 million to $2 million for the year time point. They were pretty big. And so those customers were just a massive amount. Like the top 20 customers were 44% of the total volumes. What we're starting to see, which I think is really, really encouraging, is we're starting to see that thing really kind of blow out where there's a lot more customers that are 500,000 and new per year versus these big customers. And so that's encouraging to us because we're starting to see more homes in more diverse markets. And it's a nice place to be at because it's not just one big customer moving the needle and then potentially having risk. It's multiple different customers all in that smaller range. which is just continuing to add. And I would say that that's the biggest reason why we're growing. It's a diversification of growth and the fact that there's multiple customers with these lower revenue streams, but still meaningful, and they all add up. And I think that's the big thing, because we have lost quite a few big customers in the million dollars over the last couple of years. And so now you're starting to see that thing grow back with a lot more diverse customer base.
spk05: Okay, great perspective. Last quick one for me, Darren, on... on RadHard here. I think when you announced this license, my recollection is last quarter or near then, I think you had an expectation of eventually being able to ship RadHard parts here, but I thought it was maybe a couple of years in the future. Maybe you can refresh or update us on when that may happen and what's the potential size of this part of the market.
spk02: Yeah, this is a two- to three-year deal. So this was two developing a product on our technology and running it through our fab. So the milestones that are out there are really development and process integration milestones. So what happens is we sign this license, but then there's a lot of activities that need to go through it to actually recognize. The way these contracts are written, we have to recognize that revenue through time. So we expect that we'll recognize that revenue. And then at a later date, you're actually going to get royalties off the products that you ship. So we expect those products to be shipping in the 20, I'm gonna argue it's probably 2023 timeframe is where you start to see those shipments. So you'll see some of the NRE that we're gaining today on our milestones, you'll see that translated to royalties. Not as big for sure, but it's a great revenue stream.
spk05: Okay. Last quick question, I'll get out of line here just on the model here in terms of OpEx. How should we see that in dollar terms And I guess I think it more of in a pro forma basis, including stock comp, but if you want to talk about it in the gap, that's fine too. But how should we see the transition here over the next few quarters go with OPEX?
spk01: Yeah, so that's a great question, Richard. So from an OPEX standpoint, you know, we are seeing some increases in R&D that were expected related to the 28 nanometer next generation product and supporting that. We saw an uptick last quarter. I think we'll see minimal increases from the prior quarter, kind of sustaining at those levels. One of the things that we've done in Q2 is we've been able to reduce some SG&A spending to offset some of those things. So you'll see that in the model for Q2. And so overall, we would say we're trying to keep it within 10% or less of growth in terms of modeling perspective.
spk02: And that doesn't, a lot of that investment that we have is not It does run out. The reason I'm saying run out is because we're doing a lot of upfront investment in both the technology front and modeling of the technology and also the product design itself. So you'll see a lot of that stuff happen in the next probably 12 to 18 months, and then it starts to reduce itself over time.
spk05: Okay. All right. That's good perspective. I think that's all from you guys. Thank you. Thank you. All right. Thanks.
spk00: Thank you, Richard. Our next question comes from the line of Rajvindra Gill from Needham & Company. Please go ahead.
spk03: Hi, Darren and Anuj. This is actually Dennis on for Raji tonight. I just wanted to ask a quick question about the cost increase. Can you guys provide any of the details of what kind of specific cost increase you're actually seeing in the supply chain and how those are being passed on to you?
spk02: Yeah, I mean, what you'll have is you'll have, for instance, an assembly test person that says, hey, we're getting increases in your substrate cost. And there could be 5%, 10%, something of that nature. Some people, you'll see a 30% in a package cost because it's constrained or more utilization of testers and different switchovers. So it's in all different forms right now, depending on which supplier it is. But we're starting to see those increases. And we don't necessarily want to pass them off to our customers because we're in that design win and growth phase, so I don't think that's appropriate. We could do that. A lot of companies are doing that, but we've chosen not to. And so our plan is offset those by doing cost reductions of our own and margin improvement and yield improvement.
spk03: And would you say that these have just kind of cropped up this quarter in the assembly and test kind of phase of production, or has this been going on for a little longer, or are these more recent?
spk02: I mean, the discussions were happening late last year. You know, obviously everybody's fighting, you know, changing suppliers, doing all sorts of stuff to try to mitigate some of the challenges that are in the supply network itself. But, no, and I expect them to go through 2023, well, probably 2022 at a minimum, and then this thing's going to flip. because then there's going to be more capacity than anyone ever wanted, and then the suppliers will be in a different seat than they are today. But, I mean, everybody's seeing it.
spk03: Gotcha. And then for my follow-up, it's a bit of a more high-level question. Would you mind kind of talking about kind of how you view the mix of toggle and STT going forward? You know, you've got the older, the newer one. Do you expect the toggle will be kind of in play for a while, or – or do you plan to at some point transition to just SDT or even a newer product? How do you think about that?
spk02: Think of Toggle as kind of the workhorse for super reliable, high data retention. I don't know that we've had field failures ever on Toggle. And so it's just a very robust product that has a specific niche, and we're growing that niche as we go because people are starting to realize that having smaller, lighter memory is that they don't ever have to replace or solve it for factory automation, like we talk about in industrial and some automotive applications. So you're going to see toggle continue to grow. I think in the past, people were like, they just didn't focus on it. And we're focusing heavily on toggle because it's a profitable product for us to run, and we have additional capacity that we own that we can run it on. So the good news is, minus assembly tests, toggle's not constrained. STT, on the other hand, is a bigger, broader product that's developed outside of our factory footprint, which means we're relying on subcons and different things. And that's a whole different technology. Our advanced products, the next ones coming out right now, are going to be based on STT because they're scalable. Toggle is not. You can't really do a whole lot of reductions on it, but it does have homes in these markets I discussed earlier. STT is going to have more homes, and those homes are going to be both in SRAM and also in NOR over time. And we talked a little bit about that. We can actually display some of the NOR technology with this product.
spk03: Got it. That was really helpful. Appreciate it.
spk00: Thank you. Our next question comes from the line of Greg Johnson of RBC Capital. Your line is open.
spk06: Hey, guys. Thanks for the Taking the questions, just a little follow-up on Richard's question on the design wins. Since you were willing to give some color, I might see how much more color you would be willing to give on that as far as these $500,000 plus, you know, these are still good longer-term type of contracts, and how many of these do you foresee possibly getting into the, you know, to those larger $1 million to $2 million, maybe even plus contracts?
spk02: Well, I think if you get a $500,000 per year win, it usually turns into multiple things because what will happen is people then are attracted to your product. They find different homes for the product. So I always tell people you start to get in a $100,000 order before you get the $2 million order. So the good thing is these customers, and once they see our support, our supply, our reliability, and all the other things about the product, then you're going to start to see that grow. So for me... The risk is much lower having $100,000 to $500,000 customers versus $5 million customers. And so we're trying to look at it that way. It's just like, hey, let's find this diverse. It doesn't mean we won't go after the big fish, but those big fish also turn into risky things, which it did in the past. Because I think at one time, Toggle was running at $12 or $13 million a quarter, and then it dropped way down. And now we're kind of fighting our way back up to those levels. and we have STT, and we'll have a new STT product. So we're a lot more bullish on this, especially as we focused on it. And we've been focusing on these design ones for about three years.
spk06: Good to hear the numbers continue to be strong there. And then any update on anything on the ASIC side of the business?
spk02: Yeah, I mean, the FISON ASIC is in play. We've heard it taped out. We've been watching that. As I said last call, I saw we were on their website, which is really, really cool. But then it's just going to take time for people to be able to design it in and those things. But we expect to see some good evidence of that working next year. So I would expect to at least get a few design ones as we go through this and hopefully a couple big ones.
spk06: All right. Anything on a time frame on any of those as far as in process or that's Still not yet.
spk02: Well, we have a few little ones right now, but those are custom designs, but not based on the Fison. So once the Fison thing actually comes out, then I'll have more clarity on that. But my expectation is that we actually do have a lot more opportunity to win because it's easy to design it and then they have a reference design. You know, whereas we didn't have that for the original product that we shipped on the 1 gig. Okay, right. All right, thanks. You got it.
spk00: Thank you. And our next question comes from the line of Michael Seiler of SRT. Your line is open.
spk04: Hey, good afternoon, guys. Thanks for taking my question. And congrats again to the team on a great quarter. A lot of good moments in there. Two quick questions for me. I wondered if you had any comments on a competitor of yours that recently announced a STT in RAM product. And that competitor is Avalanche.
spk02: Sure. We expect them. That's a lower density product than what we provide. And there's always competition. I don't know that they've shipped anything, to my knowledge. I don't know that they're shipping it. The specifications look pretty good from what I can tell, so I'm not going to dismiss that we have competition. The good news is that we'll have more than one person in the market. When you have more than one person, then there's probably going to be a lot more opportunity for both.
spk04: Okay, thanks for that. And then my last question, just real quick, any updates on the official executive search process? I noticed that both your titles are still interim, so just curious on timing and process there. Thank you.
spk02: Yeah, well, we're looking at it. I'll tell you this. So we're looking at it. We're both laughing because we said someone's going to ask us that question, and you did. So that was great. Yeah, so bottom line is, yeah, we're looking at that, the board's looking at that, and we'll solve that shorter rather than in a longer duration. And you can count on the two of us both to be very committed to making sure that no matter what happens, that you've got the right leadership team in here and the right group of individuals that still hit the results that we've been talking about. Yeah, not a big issue for us right now, but we know that we have to either remove those titles or do something different, and that's going to happen.
spk01: Yeah, I mean, I guess the question is, what's your vote based on the financials?
spk02: Yeah, do we need to change everybody based on the financials, or do you think we're doing okay? You doing okay?
spk04: I think you're doing just fine. Keep up the good work, and I'm glad to hear you're both on board for the long haul. So just wanted to kind of clear that up. So thank you.
spk02: Yeah, no problem. Yeah, we're not going to leave anytime soon, and we're definitely not going to leave the company high and dry.
spk04: Okay, awesome. Thanks again, and congrats.
spk02: You got it. Thanks, man.
spk00: Thank you. Once again, to ask a question, just press star and then the number one on your telephone keypad. Just press star and then the number one on your telephone keypad. There are no questions on cue. I will now turn the call over back to Anj. Please go ahead.
spk01: Okay, with that said, we conclude today's call. Thank you all for joining us, and we look forward to reporting your progress and results in the next quarter. Operator, you may now disconnect the call. Thanks, Rachel. Thank you.
spk00: Thank you, Darren and Anuj. This concludes today's conference call. Thank you for participating. You may now disconnect.
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