Everspin Technologies, Inc.

Good afternoon and welcome to the conference call to discuss Everspend Technologies' fourth quarter and full year 2022 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 a question and answer session. As a reminder, this call is being recorded today, Wednesday, March 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 Everspen's future business, financial performance, and goals. Customer and industry adoption of MRAM technology successfully bringing to market and manufacturing products in Everspen'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 forward-looking statements. We would encourage you to renew our SEC filings, including our annual report form 110 , which will be filed with the SEC on March 2, 2023, and the 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 expect as required by law. We undertake no obligation to update any forward-looking statements made on this call to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise. The financial results discussed today reflect Preliminary estimates are based on the information available as the date hereof and are subject to further review by Eversman and its internal auditors. Actual results may differ materially from those estimates as a result of completion of our financial closing procedures. Final adjustments and other developments arising between now and the time that our financial results for this period are finalized. Additionally, the company's press release and statements made during this conference call will include discussions of certain measures 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 in the investor relations section of Eversmith's website. at www.everspan.com. And now I'd like to turn the call over to Everspan's President and Chief Executive Officer, Sandeep Agarwal. Sandeep, please go ahead.

Thank you, operator, and thanks everyone for joining us on the call today. Everspan delivered quarterly revenue of $15.7 million above the high end of guidance, leading to an all-time record full-year revenue of $60 million for 2022. We were GAAP net income positive for the seventh quarter in a row, which continues to be a focus for the company. A few records we reached in Q4 for the full year 2022 include record annual total revenue, record annual product revenue, record annual net income, record annual cash flow from operations, record annual EBITDA, Record annual design wins again in 2022 after setting a record in 2021. Next, a few highlights for Q4 2022 and the full year 2022 include revenue for Q4 was $15.7 million, up 3% quarter over quarter. Full year revenue was $60 million, up 9% year over year. Product sales were $14.6 million, consistent quarter over quarter. Product sales for the full year were 55 million, up 25% year over year. Cash flow from operations was 5.2 million in Q4, totaling 9.5 million for the full year. GAAP growth margin was 56.6% for the year, and GAAP net income was 6.1 million for the year. Our business outlook. Our product backlog for balance of 2023 as of December 31st, 2022, continues to be high, although we are experiencing some headwinds from the semiconductor downturn. We continue to alleviate some of our foundry supply chain constraints, which is helping address our unfulfilled toggle demand. Turning to technology. Everspin remains confident in its future opportunities and continues to invest in our leadership in SCTM RAM technology. We have tuned our SCTM RAM technology to deliver high-performance persistent products for multiple non-volatile memory markets including DRAM, SRAM, and NORFLASH. Our SCTM RAM products targeting the replacement of battery-backed DRAM started production in 2017. and are currently shipping in 256 megabit and one gigabit densities with DDR3 and DDR4 derivative interfaces. These products are delivering significant value to SSD, persistent memory cards, fabric accelerator, and other applications in the data center market. In 2022, we introduced a XPI family of SCTM RAM products that was developed by tuning our STD MRAM technology for DRAM to scale our toggle MRAM offerings to higher densities on advanced CMOS nodes. These products are available on 28 nanometer CMOS nodes in densities from 8 megabit to 128 megabit, which standardize SPI, Quad SPI, and Octal SPI interfaces. These products are enabling our customers to simplify the system architecture and easily replace legacy memory components like SRAM and ferroelectric memories or FRAM. Based on the strong interest and feedback from our customers in this new XPI family of STTM RAM devices, we designed and taped out an optimized solution on 28 nanometer CMOS for lower densities from 4 meg to 16 megabit in Q4 of 2022. This allows us to better compete with alternate memory solutions in this density range. This family of products are ideal for use in electronic systems like industrial IoT, network, enterprise infrastructure, process automation and control, aeronautics, medical, and gaming. Due to the limitations of NOR scaling past 45 nanometer, we believe there is a potential for STTM RAM for discrete NOR flash replacement similar to the embedded market. We tuned our STDM RAM technology and introduced the first STDM RAM product addressing this segment of the market in 2022 as well, and are currently shipping in 16 megabit to 128 megabit densities. Everspin, with its experience in high density, greater than 256 megabit STDM RAM products, is uniquely positioned to design and manufacture monolithic, high-density discrete parts for NOR replacement. The first such product is in the design phase, and when available, would be ideal for replacing NOR, for example, in FPGA systems to store configuration memory and simultaneously enabling 100x faster over-the-air updates. Switching to adjacent technologies that could benefit greatly from SPT MRAM. In Q4 2022, we announced a collaborative engagement to develop strategic radiation-hardened FPGA technology. As part of the collaboration, Everspin will provide a STTM RAM solution that acts as the configuration memory in the FPGA, thus eliminating the off or on chip nor die and the SRAM cells that execute the lookup tables. This solution will promote enhanced security and enable instant on characteristics. Further, the STTM RAM-based configuration memory can be programmed multiple times with fast OTA updates or can be hard-coded depending on the application. Since STD MRAM can be scaled to advanced nodes and is already available on 22 nanometer and below, monolithic embedded solutions will be possible. We believe this solution from Everspin will play an important role in next-generation FPGAs. I will now turn it over to our CFO, Anuj Agarwal, who will take you through our fourth quarter financials and first quarter 2023 guidance. Anuj?

Thank you, Sanjeev, and good afternoon, everyone. As part of the fourth quarter 2022 financial results, Everspend Technologies is pleased to announce its seventh consecutive quarter of positive, meaningful net income. In addition, we generated positive cash flows from operations resulted in a healthy cash balance of $26.8 million. We delivered solid quarterly results above the high end of guidance with revenue of $15.7 million compared to $15.2 million last quarter and $18.2 million in the fourth quarter of 2021. We also had positive net income of $0.6 million and positive cash flow from operations of $5.2 million for the fourth quarter of 2022. MRAM product sales in the fourth quarter, which included both toggle and SDT MRAM revenue, was $14.6 million consistent with the prior quarter and an increase from 12.6 million in Q4 2021. Licensing, royalties, patents, and other revenue in the fourth quarter was 1.1 million compared to 0.7 million in the previous quarter and 5.6 million in Q4 2021. Shipments to suppliers for our largest end customer who we serve with our high density SDT product for data center applications represented 5% of revenue in the quarter versus 19% of revenue in Q3 and 16% in Q4 21. Turning to gross margin, GAAP gross margin for the fourth quarter of 2022 was 51.4% versus 58.8% in the prior quarter and 62.8% in Q4 21. GAAP operating expenses for the fourth quarter of 22 were 7.5 million versus 7.1 million in the prior quarter and 7.7 million in the fourth quarter of 2021. The higher operating expenses in the quarter sequentially was primarily driven by increased costs to support the new SDT industrial product that went into low volume production in Q4. We are pleased to report fourth quarter positive net income of 0.6 million or three cents per basic share based on 20.1 million basic weighted average shares outstanding. This compares to a gap net income of 1.9 million or $0.09 per basic share in the third quarter of 22, and net income of $3.7 million, or $0.19 per basic share in the fourth quarter of 21. Basic EPS of $0.03 was better than the midpoint of our guidance range, reflecting our strategic operational discipline and ability to drive profitability in the face of tightening, supplies, and macroeconomic uncertainties. Adjusted EBITDA continues to remain positive. For Q4 22, Adjusted EBITDA was $2.1 million compared to $3.4 million in the prior quarter and $4.8 million in Q4 21. Adjusted EBITDA for the full year of 22 is at a record high of $11.8 million. Cash and cash equivalents increased to $26.8 million at the end of the fourth quarter compared to $23.4 million at the end of the prior quarter and $21.4 million in Q4 21. Cash flow from operations was $5.2 million for the current quarter increasing the year's cash flow from operations to $9.5 million. Turning to our first quarter of 2023 guidance, Everspin is confident in its opportunities and ability to navigate the semiconductor macroeconomic challenges. Demand for our toggle products remains strong. Everspin expects total revenue in a range of $14.1 million to $14.8 million, and Everspin expects gap net income per basic share to be break-even to $0.05, primarily influenced by expenses related to our next generation 20 nanometer SPT MRAM product development and price increases from our suppliers. I now turn it back over to Sanjeev for some brief additional commentary before we open it up for questions.

Thanks, Anuj. In summary, EverSpint reported the best financial year in the company's history with strong fourth quarter results. We continue to build towards the future of profitable, sustainable growth thanks to the hard work and dedication of the Everspin employees. We are confident in our future opportunities and are excited to see the interest from our customers in our SCDM brand products. Thank you for joining us today. Operator, you may now open the line for questions.

Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question. And our first question comes from the line of Richard Shannon with Craig Hallam. Your line is open.

Well, hi, guys. Thanks for taking my questions here. I think the first one I'd like to ask guys is in the broader dynamics in the semiconductor space here, I've seen some inventory builds and a lot of companies have seen some pretty significant burns here of late. you're not seeing it, at least so far, but I know you've got some capacity constraints you're still working through. So I guess I'd love to get your best take on the degree to which, or I guess maybe think about, first of all, when do you expect these constraints to be overcome? And do you worry, and have you talked to your customers about backlogs and bookings that may fall off as they become more comfortable with the inventory that they can get from you?

Hi, Richard. This is Amit. Yeah, great question. So, let me try to take it in a couple of pieces. So, as we look at the backlog, right, it continues to be healthy. So, in 2023, we've got solid demand. We have demand going out to 2024. So, from that perspective, things are looking good. Really high visibility into 2024 as well, right? There have been, I mean, some cancellations, some push-outs. So, There has been some macroeconomic effects that we've seen. But I think overall what we've been able to do is because of the high amount of backlog, we've been able to pull in demand from future quarters and really work through that. Now, from a customer standpoint, I think you were asking about that as well, we've been working very closely with our customers to understand not only what their current demands are in the current quarter and future quarters, but then also working with them to understand when there are opportunities and capacity frees up, are they interested in getting the product sooner? And so we're working very closely with them to pull in demand where it makes sense as capacity-free sets.

Okay. Okay. Fair enough. I might come back to this topic here in a second. Maybe asking a more tactical question here in the first quarter. I know you don't really delineate with any specifics about how you're building up to the quarter here, but I would assume that – There's probably a big chunk of licensing revenue falling off quarter-on-quarter with some more modest drop-off in toggle to get to the revenues, kind of midpoint of revenues. Is that a fair way to think about this, or is toggle and product revenue going to be down more than licensing?

Yeah, so the way I think about it is the way we built the $14 million to $14.8 million guidance and revenue You know, we continue to feel that toggle is strong. The backlog is very promising in 2023 going out to 24. So I think that piece is strong. The part that's a little bit of a challenge that I think we've shared before is we've seen SDT demand, you know, with our key customer. That's kind of tapered off a little bit. But it's strong in that perspective from a total product revenue standpoint. From licensing, that continues to go up and down, right? So as we see opportunities for patent deals and things like that, none of that's incorporated into the guidance.

Okay. That is helpful. Maybe another line here on the statement to talk about here both for the fourth quarter and going forward here. Gross margins, and I like to focus on the product gross margins if I did my math right, did roughly 49% in the fourth quarter. Well, first three quarters of the year, you're between 54 and 58. I think you had a more optimal mix in the past quarters, but also some strong yields. So, how do you explain the drop-off here into the fourth quarter? How much of that was yields, product mix, and other dynamics?

Yeah, so I'll try to be a little careful here because I know we don't provide too much guidance on gross margin, right? I'll say that, you know, we've always communicated that our internal model is between the low to mid-50s. I think as you're seeing the yield stabilizing and the product mix stabilizing, you're getting back to a more normal expected range for the gross margin, and that's evident in the guidance that we're providing. In Q4, we did see a little bit higher supplier costs and things like that, but overall, we feel like it's more in line with the internal model that we've shared in the past.

Okay, fair enough. Let me jump over to Sanjeev, talking about the new XSPI product here. I just want to kind of ask a big-picture, top-down question here on how you see this product ramping out this year, and if you could give us some maybe bottoms-up thoughts here on, you know, attached to FPGAs, MCUs, and others, and which densities you're seeing to pick up. And ultimately, how can we think about revenue contribution from that product line this year?

Hi, Richard. Thank you for your question. I think it's an important question to understand our revenue profile going forward. So I think the way to think about it is that most of our adoption is in the industrial markets. So it is a long cycle time for qualification. So I don't think you're going to see significant revenue from the 64 meg or the 16 meg in 2023. Having said that, we have seen strong traction with our customers in Q4 and in Q3 last year, which actually prompted us to tape out a more optimized density and die size at 16 megs. And what that did for us is it actually opened up the customers that were using alternate memories like SRAM, NVS RAM, or ferroelectric memories FRAM. So I think about us taking over some of the market with the lower density parts from NVS RAM and FRAM, and then the high density, the 64 meg and the 32 meg, for example, they're going to basically attach to industrial IoT applications, aerospace and defense, process automation, you know, the standard application that you've seen Toggle MRAM get into over the last decade or so.

Okay, that's fair enough. One last question, then we'll jump in line here on OpEx here. You talked about the last couple of quarters about OpEx coming up here as you're investing more in this new STT MRAM line. How much longer are we going to see kind of elevated levels of investment, mostly from the R&D line? And then do we see it getting back down to a level seen earlier last year, or how do we think about that long term?

Yeah, no, great question. So we don't normally provide guidance on the OPEX, but what I can share is, you know, we expect it to be a little bit higher in Q1, right, as we're getting ready and taping out the lower density product and getting everything ready. But I expect it to kind of level off and slightly decrease as the year progresses. So if that helps.

Yep, that does help me. I've asked enough questions, so I think I'll jump out of line, but thanks for all the answers, guys. Appreciate it. Thank you, Richard.

Thank you. One moment for our next question. And our next question comes from the line of Vendra Gill with Needham & Company.

Your line is now open.

Yes, thank you, and congrats on solid results in light of a very tumultuous environment. Just, Sanjeev, a question on the X5 family. and the ability to replace discrete NOR for certain industrial applications, IoT applications. Now that you have kind of a higher density range with respect to the X5 family, what has been the feedback from the customers in terms of the cost benefit of replacing discrete NOR with STM RAM? Is it on the cost side? Is it on the instant on-access side? What's been kind of the feedback? That's been the thesis for a while, is that MRAM combines the benefits of volatile and non-volatile. But the issue has been kind of around density. So just curious of what you're hearing from customers.

Yeah, good afternoon, Rajiv. Good question. Basically, if you look at the way the NOR is used in current FPGAs, right, it's basically it takes forever to write, but the read speeds are pretty fast. So that's where STTM RAM is actually being appreciated by some of our customers. It's basically the writes are much faster, so the faster over-the-air updates. The read speeds are similar. Then the other thing that it does is it actually allows you to store multiple bit streams in the memory. So in that way, you can actually have two streams or three streams stored depending on the number of LUTs and the density of the STTM RAM that you're using. So where people value the faster write speeds, the longer endurance, and the lower power to actually write those configuration streams, I think that's where we're getting good traction from our customers. But where we are in a cost-competitive environment, you know, NOR is obviously much cheaper than STTM RAM, and that's where we're seeing less of a traction. So, again, just like our previous applications, customers that value our performance are adopting our parts.

And we're thinking about, you know, calendar 24. So, First, the opportunity with the Department of Defense for the Rathard product where, you know, the designs are going to – you find an extension of the Rathard deal, which will – has built in some technical milestones before the licensing revenue will come and then the broader push there. Can we talk about kind of that opportunity on the Rathard in Counter24? And then you also talked about, you know, the industrial – since the design cycles are taking a fair amount of time, that you won't see it in 2023, but you'll see it in 2024. And so how do we think about that impact potentially on 2024 with those two budding opportunities? And then for this year, in 2023, what do you think will be kind of the main growth driver for this year?

Right. If I deviate from the question, please stop me, okay? So I'll try and answer. So I'll start with the last question. For 2023, what are the growth paths? And I think there you're seeing our 16 meg and 64 meg STTM rampart. I think those getting traction and starting to see initial revenue from there. It's not going to be huge numbers, but, you know, it's going to be decent numbers that we'll actually talk about by the end of the year. The other thing to look at is these parts, again, the 16 and 64 and 2024, I think will drive significant revenue growth as they get adopted and qualified in the various systems over that. Now, switching to the RadHard product that we're talking about, I just want to comment a little bit over here. So when you're looking at our 16 meg and 64 meg HTM RAM for non-replacement, that is different than the deal that we have signed to develop this strategic RadHard FPGA technology. There you're actually replacing the NOR as well as the SRAM cells that execute the lookup tables. So that is a totally different solution that we have developed based on STD MRAM. I think for that you will see, you know, there are some milestones to be achieved, but then you're going to see royalty, sorry, not royalty, licensing revenue and NRE revenue from that project through 2023. And then I think in 2024 would be the point where you can actually take this technology that we developed for this radiation-hard project and then try and deploy it on advanced nodes in the commercial market. And I think that work needs to be done in 2023 so that we are actually ready for potential new revenue streams in 2024. Did I answer all your questions, Rajiv? I'm not sure.

No, it did. Thank you. And I just want to make sure that the end product would be reconfigurable and would be an instant on FPGA. Is that the ultimate kind of goal? That is correct.

That is correct.

Got it. Okay. Very good. And I guess last question for me, if I'm looking at kind of historically the product growth for the company, it has been, you know, quite impressive. If I have the math right, it's kind of grown from, you know, 40 odd million in 2020 to about 55 million in 2022, so that's a little less than 40% growth, while the licensing has kind of been lumpy as expected. That kind of product growth that you've been seeing the last couple years, maybe you could just summarize just for everybody's purposes, you know, what's been driving that growth, and When we're thinking about longer term in terms of the product growth acceleration, it seems like that, you know, the revenue could kind of inflect, you know, potentially higher in 2024 with some of these new initiatives with the X5 family. So just kind of maybe if you could summarize, you know, how do we get here and kind of where are we going on the product side?

Hi, Raji. This is Anuj. Yeah, so just to kind of reiterate, right, so the product revenue at the end of 21 was about $44 million, and it grew to about $55 million in 2022 for the full year. A lot of that has been around the refocus for Toggle, right? We've had a lot of record design win years, last couple of years. This year as well was a record design win for us where we had 210 design wins. Before that, a couple years of 180 or so design wins. And I think that reinvigoration and that importance of going back to the customers and really looking at the cash cow business for us, right, and making sure we could get those design wins. Because as you know, in industrial, for example, the customer stays for 10, 20 years. And that's critical for us in order to really lock in revenue for long periods of time. So as we've seen, our data center customer Their revenue has maybe gone up and down and been a little bit challenging over the last few quarters. We've really been able to make up with it from all the hard work on the toggle side over the last few years with the design ones. And so that continues to be our focus as we look into this year. And I think that's also what you see in the backlog as well.

So to add to that, Raji, your question on how do we see that in 2023 to 2024, right? So what we have done is we have taken our STT MRAM technology and we've actually tuned it so that it actually extends our toggle MRAM roadmap. So our toggle roadmap basically ended at 16 megabit or 32 megabit parallel. And our serial was only at 1 meg and 4 meg and with a single SPI. So by tuning this technology and making it similar to toggle MRAM, we've now been able to actually extend the density all the way from 4 meg to 128 megabit. And I think that opens up markets for us, and I think that's what's going to lead to the growth in 23 and 24.

Thank you. One moment for our next question. And the next question comes from John Fitchman with Dialog Capital.

Your line is open.

thanks for taking my question. And a nice year in a tricky environment. I was just, you've answered a lot of my questions, but just hoping you could give a little, a little more granular cover on the color and the shape of this year and next, or however you're comfortable talking about the growth path. You know, it looks like you're, Your customer concentration has dropped a lot, which is really encouraging and makes me think you've got a lot more customers and a lot more diversification in your revenue stream at this point, which seems like it should be more stable. You've got more visibility. You've got a lot of industrial design. It should give you more visibility. You've got decent backlog. You had great design. All of these things make me think I'm looking at a business that has a poor base here from which it can grow. So I'd just like kind of some thoughts on that, but then also what does this year look like? Is it seasonal? Is it macro? Is it a pretty linear growth? Help us understand what kind of dynamics are going to push and pull the growth path in here, assuming it is a growth path, and help me think about the backlog, the pipeline, the visibility, and that kind of diversified customer base you've got here, if I am kind of thinking about it the right way. Thanks.

Yeah. Hi, John. This is Anuj. Let me try to tackle it. If I missed something, let me know. So just in terms of the full year, right, we typically only provide guidance for Q1. But what I can say is directionally, you know, without providing guidance, you know, we believe that there's, you know, potential for recovery in the second half as we kind of look at things. From a backlog standpoint, you know, it continues to remain strong. We have a lot of good visibility into 2024. And like I was mentioning before, there is some uncertainty that we've seen because of the macroeconomic challenges within the semi-industry, right? And so we have seen some push-outs and cancellations, but that's really been limited, right? And as we look at the full backlog picture, we've been able to pull in a lot of demand from the big backlogs that we have, right? So from that standpoint, things have been going well. In terms of your comments about customer concentration, yeah, you're absolutely right. As we've diversified into rad heart businesses as we've grown the toggle business and gotten a lot more design wins and now introducing the new 64 meg product as well, we're starting to see the customer base really increase. So we went from 1200 customers to about 1300 customers in 2022. And so that customer base continues to increase. And as we get design wins, we only expect that that to continue to improve, right? And so from a concentration perspective, you'll see that we've reduced the concentration on our big data center customer quite a bit. And that's helped us to achieve some of the numbers that we've shared last few quarters. Did I get all of it or did I miss anything?

Yeah, that's great.

Thank you. At this time, I'd like to turn the conference back over to Mr. Agarwal for closing comments.

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