Everspin (MRAM) Q3 2024 Earnings Transcript

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DATE

Wednesday, October 30, 2024 at 5:00 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Sanjeev Aggarwal
• Interim Chief Financial Officer — Matt Tenorio

TAKEAWAYS

• Revenue -- $12.1 million, in line with guidance range of $11.5 million to $12.5 million, and down from $16.5 million in the same quarter of 2023.
• GAAP Net Income -- $2.3 million, or $0.10 per diluted share, exceeding guidance range of a loss of $0.05 to $0.10 per share; this includes $4 million of other income from a Department of Defense (DoD) award.
• Product Sales -- $10.4 million, decreasing from $13.5 million in Q3 2023 due to timing of customer demand.
• Licensing, Royalty, Patent, and Other Revenue -- $1.7 million, below the $2.9 million reported in Q3 2023, reflecting lower royalties and a decline in RadHard project revenue.
• GAAP Gross Margin -- 49.2%, down from 60.2% in Q3 2023, with management attributing the decline to lower product and licensing revenue from RadHard deals.
• Operating Expenses -- $8.1 million, up from $7.9 million in Q3 2023, with the increase linked to xSPI STT-MRAM product expenses.
• Adjusted EBITDA -- $4.2 million, compared to $4 million in Q3 2023.
• Cash and Cash Equivalents -- $39.6 million at quarter end, versus $36.8 million in the previous quarter.
• Cash Flow from Operations -- $2.8 million for the third quarter.
• Onshore MRAM Strategic Award -- Total potential value of $14.6 million over 2.5 years, with $4 million recognized in Q3 as other income; revenue will be recognized ratably based on milestone achievement.
• Frontgrade Contract -- Initial revenue recognized from a new $9.25 million contract to develop custom radiation-hardened STT-MRAM, with future optional phases possible.
• PERSYST 1 Gigabit STT-MRAM for IBM FCM4 -- New orders and initial revenue recognition; anticipated to supply for this product line for roughly two years.
• Lucid Motors Automotive Win -- PERSYST Toggle MRAM selected for Lucid Gravity SUV, meeting AEC-Q100 Grade 1 standards; shipments began in Q3 and revenue expected over approximately two years depending on SUV market adoption.
• RadHard Programs -- Both strategic programs met Q3 milestones and recognized revenue, with further phases planned.
• Foundry Services -- Project for TMR sensor devices on the Chandler MRAM line progressing as planned, with foundry and NRE revenue recognition beginning in Q4.
• Guidance for Q4 -- Management projects total revenue of $12 million to $13 million and GAAP net income per diluted share between breakeven and $0.05 per share.

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RISKS

• President Aggarwal stated, "Japan continues to be a challenge. And then in Europe, you've seen that Germany seems to be going through some turmoil as well. So I think, those two combined are impacting our revenue profile for Q4 as well."
• Q3 product revenue fell, and GAAP gross margin declined from 60.2% to 49.2% due to lower product and licensing revenue attributable to RadHard deals.

SUMMARY

Everspin Technologies (NASDAQ:MRAM) recognized new revenue streams from both a strategic DoD award and a Frontgrade Technologies contract for custom radiation-hardened STT-MRAM. Key design wins included a PERSYST 1 Gigabit STT-MRAM for IBM's FlashCore Module 4 and a Toggle MRAM for Lucid Motors' Gravity SUV, each supporting anticipated revenue over the next two years. Foundry services and collaborations in AI hardware, including participation in a $21 million Microelectronic Commons project, open incremental revenue channels. Management intends to recognize DoD award income ratably over 2.5 years based on milestone achievement. Projected Q4 guidance calls for flat-to-slightly positive product revenue and subdued margin expansion, with regional headwinds explicitly noted in Japan and Germany.

• CEO Aggarwal said, "So let me start with the PERSYST STT-MRAM product that we brought to the market last year. We continue to see design wins on that project with those products. But as you know, the qualification time is anywhere from 18 -- 12 to 18 months. So I don't think we're going to see significant product revenue from that part or that product line in Q4. But we do expect it to see some ramp in 2025."
• Interim CFO Tenorio clarified that the $14.6 million DoD contract is recognized as other income because "We analyzed the contract and the agreement and our performance obligations against the revenue recognition standard, ASC-606, and found that it did not squarely fit within that."
• Management stated, "We are pleased that our balance sheet remains strong and debt free."
• Quarterly operating expenses rose due to xSPI STT-MRAM product development.
• Collaborative AI initiatives and chiplet ecosystem discussions were highlighted as future growth catalysts, with initial revenue from the Microelectronic Commons program expected in Q4.

INDUSTRY GLOSSARY

• STT-MRAM: Spin-transfer torque magnetoresistive random access memory—nonvolatile memory using spin-polarized currents for data storage.
• Toggle MRAM: First-generation MRAM technology using magnetic fields to switch data states, offering high endurance and fast write speeds.
• AEC-Q100 Grade 1: Automotive quality standard requiring operation within a −40°C to +125°C temperature range.
• RadHard: Radiation-hardened; refers to electronic components designed for high-radiation environments such as space and defense systems.
• NRE: Nonrecurring engineering; one-time costs associated with development or qualification of a new product or process.

Full Conference Call Transcript

The financial results discussed today reflect the company’s preliminary estimates and are based on the information available at the date hereof and are subject to further review by Everspin and its external auditors. The company’s actual results may differ materially from these estimates as a result of the completion of financial closing procedures, final adjustments and other developments arising between now and the time that the 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 reconciliation 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’d like to turn the call over to Everspin’s President and CEO, Sanjeev Aggarwal. Sanjeev, please go ahead.

Sanjeev Aggarwal: Thank you, Cassidy, and thanks everyone for joining us on the call today. We are pleased to report our third quarter results with revenue of $12.1 million in line with our guidance, and EPS of $0.10 ahead of our guidance range. Contributing to our results were a number of key wins during the quarter, including the selection of our 1 gigabit PERSYST STT-MRAM for the IBM FlashCore Module 4 or FCM4, and the selection of a PERSYST Toggle MRAM for the Lucid Gravity SUV. We ended the quarter with a strong balance sheet, including cash of $39.6 million.

Everspin had a number of key advancements and new contracts during the quarter, most notably with Frontgrade and a Department of Defense, or DoD contractor that demonstrates the strength of our business and breadth of our product portfolio. I'll start by discussing products for which we recognized revenue in the quarter before discussing new wins and other projects with future revenue potential. During the Q3, we started to receive orders and began to recognize revenue for the sale of our PERSYST 1 gigabit STT-MRAM into IBM's FlashCore Module 4, or FCM4, for data center applications. This is the 4th generation of IBM's FCM that has featured Everspin's 1 gigabit STT-MRAM solution.

Our PERSYST solution delivers 2.7 gigabytes per second of both read and write bandwidth, coupled with non-volatility and a DDR4 like interface. We expect to provide parts for this product line for approximately the next 2 years. Everspin continued to see modest growth in its product revenue and design wins with its Toggle MRAM PERSYST products. We observed signs of inventory consumption at our customers and a sequential decrease in our distributor inventory. We are also pleased to share our continued strong traction with our 4 megabit to 128 megabit STT-MRAM PERSYST products.

Based on our ongoing customer discussions, we remain optimistic about the adoption of our PERSYST STT-MRAM product line and continue to expect additional design wins to go into production later this year with revenue ramping in 2025. As a reminder, this product family was brought to production last year and is the highest performing persistent memory solution in the industry. Turning to our licensing, royalty, patent and other revenue. As I mentioned earlier, we began to recognize initial revenue from the new $9.25 million contract with Frontgrade Technologies that we announced in August. Under this contract, we are working with Frontgrade to develop a custom radiation hardened STT-MRAM macro for embedded solutions using our PERSYST STT-MRAM technology.

This deal will support current and future DoD strategic radiation hardened and Low Earth Orbital or LEO Space Systems. Upon successful completion of this first phase of the project, the contract allows for the award of future optional phases. As we noted on previous calls, we are engaged in 2 other RadHard programs that use our STT-MRAM technology. The first program relates to an ad-hoc 64 megabit STT-MRAM project, and the second is focused on building a strategic RadHard FPGA. We are pleased to share that both RadHard programs remain on track to move to their respective next phases as we hit our internal third quarter milestones for both programs and recognize revenue.

In addition, we continue to recognize royalty revenue from our customers that have licensed our IP in the field of STT-MRAM and TMR sensors. Turning to below the line item. During the third quarter, we received a $14.6 million award for the next two and a half years from a DOD contractor to develop a sustainment plan for our MRAM manufacturing facility to provide continuous onshore MRAM capabilities to their aerospace and defense customers. We began to recognize the benefits of this award during the third quarter. This award is being recognized in other income, as Matt will explain later in his remarks.

Now I would like to discuss some of our recent awards that will contribute to revenue in future quarters. Last month we announced that Lucid Motors has selected our PERSYST MRAM for use in its recently released Gravity SUV. Lucid selected our product because it meets the AEC-Q100 Grade 1 specification of minus 40 degrees Celsius to plus 125 degrees Celsius temperature operation. This design win is a clear demonstration of the reliability and performance that our MRAM products deliver in demanding environments.

We began to ship our Toggle MRAM to support prototypes for this project during the third quarter and expect to continue to recognize revenue for approximately the next two years, depending on consumer reception of the SUV in the marketplace. We are also pleased to share that in collaboration with Purdue University, we won a project to advance artificial intelligence hardware through the Microelectronic Commons program in collaboration with the Silicon Crossroads microelectronics common or SCMC hub. This project CMOS plus MRAM hardware for energy efficient artificial intelligence or Cheetah will leverage the unique capabilities of MRAM for designing efficient computing hardware fabrics.

Everspin will provide its state-of-the-art SST-MRAM technology optimized for fast switching and high read margins to support energy efficient AI solutions. In addition, Everspin will deploy its manufacturing expertise to fabricate reliable SST-MRAM. We were one of the four projects to receive funding from the Applied Research Institute, and the project will receive a total of $21 million over four years to be distributed across all contributors. Everspin is one of several contributors to this project, and we expect to start recognizing revenue in Q4 ‘24. Earlier this month, we attended the automotive chiplet forum. The event brought together key players from the global automotive ecosystem to discuss how to jointly tackle the inevitable evolution towards chiplet architecture in cars.

This complimented our attendance at SEMICON West in July, where we had a number of meaningful conversations with automotive companies about the capabilities of our planned SST-MRAM chiplets to manage the vast amounts of data that EVs generate. Through these events and ongoing discussions, we continue to support the development of the ecosystem for our SST-MRAM chiplets in the automotive sector. We believe this will expand our market opportunity and enhance our growth over the coming years. As mentioned in the past, a first step would be alignment on the interface for the chiplets, and then the protocol that manages the data across this interface. We expect to see chiplets addressing these applications over the next three years.

As a reminder, the chiplet is part of our Unisys Unified Code and Data Memory Solutions, which are currently in the design phase. Last quarter, we discussed having entered into a strategic agreement with a leading provider of sensor devices to provide foundry services for the latest generation TMR sensor device on our MRAM line in our Chandler facility. The project is progressing well based on result from the first silicon, and we expect to meet our customers’ Q4 schedule and milestones. We expect to recognize nonrecurring engineering or NRE revenue for helping with the qualification. We also expect to recognize foundry revenue starting in Q4 from their initial production order.

This revenue stream will be recognized in our licensing and royalty revenue. During the Q3, we continued to have meaningful conversations with customers, which we believe will turn into additional design wins for our STT-MRAM PERSYST product over the coming quarters. We are particularly excited to start working on the microelectronics commons project to deploy STT-MRAM for the development of energy efficient AI solutions. I will now turn it over to our Interim CFO, Matt Tenorio, who will take you through our Q3 financials and Q4 2024 guidance. Matt?

Matt Tenorio: Thank you, Sanjeev, and good afternoon, everyone. For the Q3, we are pleased to deliver quarterly results with revenue of $12.1 million in line with our guidance range of $11.5 million to $12.5 million compared to $16.5 million in the Q3 of 2023. MRAM product sales in the Q3, which include both Toggle and STT-MRAM revenue was $10.4 million compared to $13.5 million in Q3 '23. This year-over-year decrease was a result of a decline in product sales due to the timing of customer demand. Licensing, royalty, patent and other revenue in the Q3 decreased to $1.7 million compared to $2.9 million in Q3 '23 due to lower royalties and a decline in revenue from our RadHard projects.

Turning to gross margin. Our GAAP gross margin was 49.2% for the Q3, down from 60.2% in Q3, 2023. The decrease was due to a decline in product sales and licensing revenue related to our RadHard deals. GAAP operating expenses for the Q3 of 2024 were $8.1 million compared to $7.9 million in the Q3, 2023. The slight increase in OpEx was largely due to expenses related to our new xSPI family of STT-MRAM products. In August, as Sanjeev mentioned, we announced a strategic award to develop a long term plan to provide manufacturing services for aerospace and defense segments.

Pursuant to the award, Everspin may receive cash payments totaling up to approximately $14.6 million upon the achievement of certain technical tasks and deliverables over a span of 2.5 years. Due to the nature of the agreement and our performance obligations, we will recognize these payments over time as other income below the line. In the Q3 of 2024, the company recorded $4 million of other income relating to this award. Driven primarily by this award, we recorded third quarter GAAP net income of $2.3 million or $0.10 per diluted share, substantially ahead of our guidance range of a loss of $0.05 to $0.10 based on 22 million weighted average diluted shares outstanding.

This compares to net income of $2.4 million or $0.11 per diluted share in the Q3 of 2023. Adjusted EBITDA was $4.2 million compared to $4 million in Q3, 2023. Looking ahead, we remain on track to maintain positive GAAP net income in Q4. We are pleased that our balance sheet remains strong and debt free. We ended the quarter with cash and cash equivalents of $39.6 million, up from $36.8 million at the end of the prior quarter. Looking ahead, we continue to believe our capital is sufficient to meet our anticipated capital requirements for the next year. Cash flow generated from operations was $2.8 million for the third quarter.

Turning out a guidance looking to the remainder of 2024, we believe that product revenue will be essentially flat with the third quarter. We continue to see positive signs of recovery and inventory consumption of our customers, particularly in Europe, and expect this to drive additional demand in the coming quarters. Taking these factors into consideration, we expect Q4 total revenue in the range of $12 million to $13 million and GAAP net income per diluted share to be between breakeven and $0.05. In summary, we are pleased with the continued progress we have made with our customers in the form of design wins and new contracts.

Going forward, we remain committed to scaling our business and converting additional design wins to revenue. Operator, you may now open the line for questions.

Operator: [Operator Instructions] Our first question comes from Quinn Bolton with Needham & Company.

Shadi Mitwalli: Hey, this is Shadi Mitwalli dialing in from Quinn Bolton. Thanks for taking my question guys. I'd like to start-off on the onshore MRAM strategic award. Sorry, if I missed this, but are you guys able to give more details on why this is getting recognized in other income versus actual revenue?

Matt Tenorio: Yes, thank you for the question. We analyzed the contract and the agreement and our performance obligations against the revenue recognition standard, ASC-606, and found that it did not squarely fit within that. Because of that, we have decided to recognize it as other income below the line.

Shadi Mitwalli: And then my follow-up question is on gross margin. Gross margin was relatively flat sequentially, even though licensing revenue kicked up nicely. So I was wondering if you guys can give some more details on what kept margins flat.

Matt Tenorio: I think, we continued to see the effect of the lower demand of our toggle products, which run through the Chandler Fab facility. So we are having to absorb the fixed cost associated with that facility against a smaller amount of units that are flowing through that fab. But as we sense forward, we would expect that to improve.

Operator: Our next question comes from Richard Shannon with Craig-Hallum.

Richard Shannon: I'm going to follow-up on the topic of the DoD contract you're recording in non-operating income here. I guess two questions from me. First of all, is this something that's recognized ratably every quarter, milestone based or otherwise? And then can you kind of maybe qualitatively or quantitatively describe how much is built into your guidance for the Q4?

Matt Tenorio: Thank you, Richard. Yes, so as I said, it did not fit into the criteria of the accounting standard for revenue recognition. However, we analyzed and we are using some principles of the revenue recognition by analogy, meaning we will recognize it over the 2.5 years ratably based on the efforts and some of the milestones that are laid out in the agreement.

Richard Shannon: Okay. So I guess I'm trying to fit the numbers here into the guidance, trying to see how these work together here. And it seems to be implying either higher OpEx or lower gross margins, all the things being equal to kind of get to the midpoint of the EPS guide here. Is there dynamics that are hitting either of those categories that help explain this or is this just some conservatism built in here?

Matt Tenorio: I think it might be a combination of both. We have factored in what we believe might be contributing from the DoD agreement that we've discussed, and we are also contributing some of the contribution that Sanjeev had mentioned with those other RadHard projects that we have and combined with our continued STT-MRAM data center strength.

Operator: And our next question comes from Richard Shannon with Craig-Hallum Capital Group.

Richard Shannon: All right. Well, lucky me, I get you right back in here. Let's see here, Sanjeev, maybe a question or 2 for you here. So Matt's guidance that he mentioned in his prepared remarks is for product revenues being flat here. Last quarter and again this quarter you talked about some signs of inventory to get the word used stabilization or improvement or whatever. But seeing flat products cadence here to the 4th quarter doesn't necessarily show that.

Maybe you can just help us understand those dynamics here and then when should we expect to see sequential growth kind of layering in overtime and then maybe help us kind of build in how much the new PERSYST products are going to help you do that?

Sanjeev Aggarwal: Yes, good question, Richard. So let me start with the PERSYST STT-MRAM product that we brought to the market last year. We continue to see design wins on that project with those products. But as you know, the qualification time is anywhere from 18 -- 12 to 18 months. So I don't think we're going to see significant product revenue from that part or that product line in Q4. But we do expect it to see some ramp in 2025. And as far as the product revenue with respect to our existing products, the Toggle MRAM and the 1 gigabit, we have a very modest growth built in going in from Q3 to Q4.

It's just that the signals that we're seeing are very difficult to decipher. Some are positive and some are not so positive. So, there is some conservatism built into the plan over here.

Richard Shannon: Okay. Maybe touching on that last comment, any way you can describe where in markets, geography, where you're seeing this in the past, you've talked about some weakness in Europe and I think Japan. I think Japan maybe even hit by some currency dynamics there. Maybe you can help us kind of peel the layer back that one a little bit.

Sanjeev Aggarwal: So I think, like we've discussed in the past, I think Japan continues to be a challenge. And then in Europe, you've seen that Germany seems to be going through some turmoil as well. So I think, those two combined are impacting our revenue profile for Q4 as well. So.

Operator: Our next question comes from Quinn Bolton with Needham & Company.

Shadi Mitwalli: This is more of a technical question on MRAM's PERSYST family of products, but maybe can you guys clarify the differences between PERSYST, Unisys and AgILYST and then maybe talk about the different use cases and markets, those product lines specifically address.

Sanjeev Aggarwal: I can give it a shot. So the PERSYST family, the way to think about it is, you're looking for very fast read and writes, and you're looking for a large number of read and writes. So for example, 10 to the 12, 10 to the 14th or larger read and writes. And you're looking for basically persistence in the operating temperature range, which is anywhere from minus 40 to 125 degrees C if it's automotive or minus 40 to 85 is if it's industrial grade. And that's the PERSYST family. That includes our one gigabit STT-MRAM that we are shipping to the IBM FlashCore modules.

It includes the new product family that we brought to the market last year, the xSPI family that goes from 4 megabit to 128 megabit. And then our Toggle MRAM family, which is basically, we've been selling since our inception in 2008. So all of those products come into the PERSYST family, and they have this characteristics that I was talking about where you have fast data read and writes or data logging, and then unlimited number of read and writes in the operating temperature range, which could be automotive or industrial. The Unisys product family is basically, you're looking for not so many reads and writes.

You're looking for, let's say a million to 10 million or a 100 million read and writes only. And you're looking for, again, fast read writes, that is the built-in advantage of SST-MRAM compared to other technologies out there that include, north Flash or nine flash or even resistive. So that's the Unisys family. That includes the triplets that I was talking about during my script, and it also includes any SOC type solutions using this type of product. And AgILYST is actually our forward looking, where we are still in a research environment. We are trying to build a fast data logging, zero standby current, and trying to match the speeds of an SRAM.

And that's a project that we talked about with Purdue and the E Commons that we are just getting started and we are really excited to show what SST-MRAM can do over there. Now, backing up, PERSYST applications we should think of. Industrial automation like PLC computers. You can think of gaming, casino gaming and you can think of medical and aerospace and defense industry. For the Unisys products. You should think about automotive, FPGA, configuration memory and also industrial applications as well over there. And with the AgILYST, it's going to be mostly artificial intelligence, AI solutions on the edge. I think I can speak a lot more to it, but I think this is enough for now.

So if you have any further questions, we can take it offline maybe, Shadi.

Operator: And our next question comes from Richard Shannon with Craig-Hallum.

Richard Shannon: Sanjeev, just one question for me, kind of touching on one of your prepared remarks and something you just mentioned here, but the Purdue program. Maybe you can talk to us a little bit about any more detail that what you expect out of this over what time, any sort of financial contributions to your model over time, etcetera?

Sanjeev Aggarwal: So as far as the financial contributions over time, Richard, we haven't actually signed the contract with Purdue. So I don't have visibility into that, that I can talk about today. But as far as the output of the product is concerned, I think we're going to learn how to tune our STT-MRAM technology for AI solution. And one thing we already know is when you're looking for very fast read and write and you're looking for much higher signal margin for reads, because it's going to be a read intensive application.

And then you got to basically build the fabric around it to be able to transfer the data from the edge to the center -- to the data center. I think that is what we're going to learn out of this. As far as the product is concerned, I think we'll take the learning and have to go and build a product outside of this project. This project is not going to lead to any product solutions that we can talk about today.

Operator: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Sanjeev Aggarwal for closing remarks.

Sanjeev Aggarwal: Thank you, operator. And I want to thank everyone again for joining the call today. I also want to take the advantage of those of you that are actually celebrating the Indian Festival Diwali. I want to wish you guys all a Happy Diwali. And also for those of you guys that are celebrating Halloween, Happy Halloween, and talk to you at the next earnings call. Thank you.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

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