Q2 2020 Everspin Technologies Inc Earnings Call

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Ladies and gentlemen, today's conference is scheduled to begin shortly biescas either standby and thank you for your patience.

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Good afternoon, and welcome to the ever seen technologies second quarter 2020 financial results Conference call. This call is being weak like Oh.

All lines have been based on you.

I would like I said question at the end of the prepared remarks.

Suppressed marquee event the number one of your tax downfall.

This time I would like to turn the conference over to misleading Sievers precedent of Shelton group Investor Relations for introductions EVD Sea Harbor speaking no had ma'am.

Good afternoon, and welcome to ever spent technologies second quarter 2020 earnings Conference call I'm Leanne Sievers President of Shelton group ever spent investor relations firm, joining me today or Kevin Connolly ever since President and CEO, Daniel Birnbaum, Chief Financial Officer before we begin the call I want to remind you that this conference call contains forward looking state.

It's regarding future events, including but not limited to our expectations for ever spends feature business financial performance and goals customer in industry adoption of them room technology successfully bringing to market and manufacturing products and never spends a design pipeline and executing on its business plan.

These forward looking statements are based on estimates judgment current trends in 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 the form 10-Q filed with the FCC on May eight 2020 in other FCC filings made from time.

Just on which we may discuss risk factors associated with investing in ever since.

Forward looking statements are made as of the data this call and except as required by law, we do not intend to update that information. Additionally, the Companys press release and management's statements. During this conference call will include discussions of certain measures and financial information and GAAP and non-GAAP terms.

Included in the company's press release, our definitions and reconciliations of GAAP to non-GAAP items as well as GAAP net loss to adjusted EBITDA, which provide additional details.

This conference call will be available for audio replay for at least 90 days in the Investor Relations section of ever spends website at www Dot Everson, dotcom and I would like to turn the call over to ever since President and CEO, Kevin Connolly Kevin. Please go ahead.

Thank you Leann.

Good afternoon, everyone and thanks for joining our call today.

We used to report that in the second quarter, we delivered our ports sequential quarter abrupt gross accompanied by a strong improvement in bottom line results.

It was strong cost containment and execution, we deliver results at the high end of our EPS guidance demonstrating progress towards our goal of profitability driven by Ebrahim sales.

A key milestone we achieved this quarter was our first positive pro forma EBITDA.

Key elements of this result or ramp of the industry's first one gigabit SGT MRM products supported by our expanded portfolio toggle products.

Further demonstrating ever spent leadership of the Atlanta market.

Throughout the second quarter operations team achieved strong results, while executing on the the more restrictive operating protocols, we put in place in response to the coded 19 pandemic.

Steve precautionary measures designed to keep in Boise and assure operational continuity cobot 19 environment allowed us to supply customers without disruption and to progress on our business improvement initiatives.

We continue to actively monitor conditions caused by the pandemic in all geographies in which we operate and in cooperation with our partners worldwide. We're confident in our ability to maintain consistent delivery to our customers of high quality product that is critical for their applications.

In parallel we are working to further improve our overall operating performance.

Our second quarter results were fueled primarily by strong demand across our customers that supplies to server and storage applications and the data center market.

Demand for Amiram utilized in rate controllers for servers and into storage arrays, reaching reached an all time high.

And our operations team was able to execute and to meet the surge in demand with record product shipments.

In addition, we saw strong increase in our sales for gaming applications as well as sustained demand in industrial automation segment.

These areas of strength were partially offset by increasing softness in other industrial market segments, such as retail point of sale systems, and transportation, which includes aviation smart transportation infrastructure and some automotive.

Another contributor to our Q2 revenue and the notable achievement.

Well just started mass production shipments of our 32 megabit toggle and ran product to a growing set of end customers.

We are proud of our product development and operations team in this achievement and are pleased with the level of acceptance its receiving from some of our key industrial customers.

We expect to broaden this product line with different package and temperature grade options throughout Q3 to expand the opportunity with a broader set of customer applications.

Additionally, our second key design win for one gigabit as TTM ran product that we recognized in Q1 is currently scheduled to start production shipments in Q3 into a persistent memory application for an OEM customer of itself into the data Center segment.

This is an important emerging solution space being driven by big data analytics on large databases and we're excited that the high performance persistent Henry hub Amiram has achieved this early adoption.

In terms of forward looking market dynamics. The main unknown factor, if the pace at which customers will progress in qualifying new products and launch into their markets. During a time when they're dealing with unprecedented levels of economic uncertainty.

One silver lining that we see is that we believe a pandemic has caused a meaningful acceleration in the digital workplace.

This pertains continued memory and storage demand from our customers that supply today the centers.

Although we may see fluctuations and shipment timing due to adjustments in inventory level. So touched upon shortly.

Additionally, as factories resumed manufacturing operations under compressed corker shifts and social distancing, we expect factory automation to become increasingly important and experience long term growth.

We believe commercial aviation segment will have longer term challenge is recovering to historical levels. The aerospace more broadly remains strong.

We also expect medical devices spending to resume growth after focus on managing to covert 19 emergency subsides.

At the end of Q2, we saw some drift upward in customer and distributor weeks with inventory, but they remain within healthy levels.

We believe this is in part due to customer concerns about supply chain disruption, but could also indicate a change in consumption rate.

As a result of datacenter market demand fluctuations and our views of inventory levels, you will see that we're guiding conservatively on revenue in Q3.

That said those customer and channel inventory levels are at lower levels than what we saw at the end of Q2 2019.

And we ended Q2 with our own internal inventory in terms of weeks of supply at the lowest level. They have been in the last four years.

Well these demands in that mix, we're seeing aligned to the macro environment, we see worldwide.

We're increasing our market reach with new design wins, and an expanding customer base.

But we had expected coven 19 conditions caused delays in securing new design wins in the quarter. When in reality, we saw the number of design wins increased by 16% in Q2 over Q1, which is also more than three times the number of design wins in Q2 last year.

There's clearly highlights that the market demand remains strong for our MRM product even in the mid this current environment.

Against this challenging economic backdrop, we remain focused on improving our market position so that as the market recovers, we will be well position to accelerate growth.

It is now my great pleasure to introduce ever spent newly appointed Chief Financial Officer, Dan Beth Baum, who will take you through our second quarter financial results and third quarter guidance Yeah.

Thank you, Kevin and good afternoon, everyone I'm very excited to be or whatever so at some of you on the call me no I spent a long time in semiconductors, both in the industry uncovering stocks on Wall Street, I've been able to observe ever spin for a while now from the outside on the strong believer in the value proposition of M. room and more specifically.

And it ever spins technology leadership.

I'm also looking forward to reconnecting with many of you that I've worked with in the past as well is getting to know a number of new names.

I would also like to thank Matt to Norio freeze outstanding work as interim CFO and for his support during this transition.

Matt along with the entire Everspin finance team deserves a tremendous amount of credit for the great work that we've done over the past house.

With that let me move to the second quarter financial overview.

Focus my discussion on non-GAAP financial results. Please look at today's press release for detailed description of our GAAP results as well as a reconciliation of GAAP to non-GAAP results or non-GAAP adjustments this quarter or primarily to exclude stock based compensation.

Revenue in the second quarter, 2020 was $11.8 million, 17% sequential increase compared to the $10.1 million. The first quarter 2020, and 37% year over year increase from $8.6 million in the second quarter 2019.

Ram product sales in the second quarter, which includes both toggle N.S. TTM room was $10.9 million compared to $9.6 million in Q1 and $8 million in the second quarter of 2019, the strong growth in product sales reflect record revenue contribution from our S. T T M ramp.

Product as well as continued growth of our toggle products.

Licensing royalties and other revenue in the quarter contributed zero point $9 billion compared to zero point $5 million in the prior quarter and your point $6 million into second quarter 2019 gross.

Gross profit for the second quarter, 2020 was $5.2 million, 43.9% of revenue compared to $5.4 million or 52.9% of revenue in the prior quarter and $4 million 46, and a half percentage of revenue in the second quarter 2019.

As mentioned on last quarters earnings Hall meeting our cost targets for one gig S. T. T. M. Ram product has been more challenging than expected due in part to the work from home environment and travel constraints associated with the pandemic. This is put downward pressure on margins. However, we expect our progress product.

<unk> cost to improve sequentially in the second half of 2020 and continue to improve into 2021.

Non-GAAP operating expenses for the second quarter 2020 decreased to $5.4 million from $6.2 million in the previous quarter and $6.8 million in the second quarter 2019, non-GAAP R&D expense was $2.6 million compared to $2.9 billion last quarter.

And $3.4 million in the same quarter, a year ago, non-GAAP SGT was $2.8 million compared to 3.3 million in the prior quarter and 3.5 million in the second quarter of 29 sheet.

The decrease in operating expenses reflects the expected benefit of the cost reduction initiatives that we initiated at the beginning of year. Please note our GAAP R&D and as you know expenses and stock based compensation excluded from those amounts can be found in our press release from our press release from today.

Interest expense for the second quarter 2020 was $172000 flat from Q1 and down from $186000 in the second quarter 2019. Other income in the second quarter was a negative $35000 compared to positive $22000 last quarter I'm positive $111000 during the same.

After a year ago.

Non-GAAP net loss for the second quarter, 2020 was zero point $4 million or a loss of two cents per share based on 18.7 million weighted average shares outstanding. This compares with a net loss of $1 million or five cents per share in the prior quarter and a net loss of two point.

$99 million or 17 cents per share during the same quarter a year ago.

Significant improvement in year over year bottom line results underscores the continuing benefits from growth in our STG MRM products combined with the expense reduction initiatives and ongoing cost reductions in order to shore product lines.

Adjusted EBITDA for the second quarter 2020 was a positive zero point $2 million compared to a negatives your point $3 million in the prior quarter and a negative $2.2 million in the second quarter 2019. This is the first positive pro forma EBITDA in the history of the company an important miles.

Stone on our journey to sustained cash generation.

Now turning to the balance sheet cash and quest cash equivalents were $12.9 million at the end of the second quarter compared to $14 million at the end of the prior quarter.

Cash used for operations, plus Capex was $1.9 million in the second quarter compared to $2.6 million last quarter and $1.9 million in the second quarter of last year.

In July 2020 rigs, we restructured our loan with Silicon Valley bank to reduce interest rates and extend the interest only period as a result, the interest only period has been extended through Twentytwenty and cash used for debt service in 2020 will be reduced by approximately zero point $8 million.

The reduction in debt service costs is a key component of our strategy to preserve cash and provide the necessary resources for the company to continue driving sustainable growth.

At the ended the quarter, we had a balance of $2 million on our 5 million dollar line of credit. We continue to believe we have sufficient cash to support our operations and growth objectives.

Total assets at the end of the second quarter were $35.1 million compared to $34.7 million. The end of the prior quarter total liabilities were $14.7 million in the second quarter as compared to $14.7 million at the end of the first quarter 2020, stockholders' equity was $20.4 million can.

Her to $20.0 million the into the first quarter 2020.

Turning to our third quarter guidance, we expect revenue to be in a range of 10 million to $10.8 million, we expected GAAP loss per share between 11 cents and five cents and on a non-GAAP basis, a range of a loss of six cents per share to breakeven.

As Kevin mentioned, we believe we're seeing a period of inventory digestion, particularly in some of our end markets that are served through distribution.

We're confident that long term demand for industrial Aiotv automotive and other markets that we served through distribution remain healthy, but we are likely to continue to see swings related to supply chain disruptions related to the pandemic. We're also confident in the growth trajectory of our data center products, there as well, we expect near term demand.

Could be a bit lumpy.

We remain focused on funding or critical R&D programs, while at the same time executing on operational improvements and rigorous cost discipline.

Operator, you May now open the line for questions.

That is no name and Ethirty nine years I asked the question you will need to press star one on your telephone to address your question. Please press the pound.

And please standby boldly composite Guinea roster.

Your first question comes from the line of Rajiv Gill from Didnt have been company.

Your line is now open.

Yeah, Thanks for taking my questions and welcome Daniel.

A couple of questions one on the on the gross margin for Twoq, you the big dropped to 43.9%.

You talked about kind of product cost related to.

I am Ram wondering if you could kind of go into detail in terms of you know.

Why are the product costs, so high water they larger than anticipated that you talked about kind of working from home, having an impact but.

That seems kind of odd, but maybe you could explain explained the product costing high.

And just on the guidance the sequential decline in the in the guidance for third quarter.

But maybe you can elaborate a little bit further when you're talking about inventory inventory digestion via the distribution.

Certain end markets what end markets are those what's the inventory situation in the channel.

And when do you expect that to be clear. Thank you.

Roger just to clarify where the commentary from last quarter's call. We explain that we're seeing a pretty.

Pretty strong demand, it's we're ramping the one gig product and the issue was progress on that ramp from a cost perspective and in the crane normally the engineering teams would be working together in the same location. So we talk about the impact on or the anticipated impact of.

The restricted environment there on on slowing that down so I hope that kind of explains what we had commented on relative to the one game.

But for for the other commentary on on how that's heading into the gross margins. We just presented as well to the second half of your question I'll hand, it off to Dan.

I think Kevin I think you pretty much covered covered it I mean, Roger you simply are I think this was mostly covered non a lot of surprises from what had been discussed in prior call.

Things were just a bit slower on the gross margin front on the cost improvement side than we had hoped that they would be.

That said, we are executing to two pretty aggressive plans. There. So we do expect to see gross margins move up because of those cost improvements on both the S.P.T. and toggles sides in Q3.

Yeah, and then Mike My question on the revenue guidance.

So.

On the on the revenue going down yeah, Yeah, we talked about a period of you're talking about it.

Right. So what we could you elaborate further on the inventory digestion, which end markets why is happening when how longer the how much inventories in the channel et cetera, So they're kind of basic questions.

So so Ravi I think the.

Yeah, we talked about.

Again, it some indication in terms of current levels that we see drifting up towards the higher end of what we consider a normal range that six to 10 weeks of supply.

That said, it's still within that normal range.

And you know that having an impact on on turns business. So thats kind of a signal that we're looking at their again not.

That's something that we are panicked about but is something that we have to be conscious of as as we look at at the next quarter.

Specifically, we have seen a lot of other market commentary and we hear from our customers as well in terms of.

Case.

At which are demand is showing up to our customers from data center segment, which is pretty significant.

And as Dan talked about and his like his term lumpy that he used in terms of how that comes in so those are the main factors that that we're looking at that are.

Driving us to be more and more conservative in terms of that outlook that you might otherwise expect.

I will also call out I mean, MRM product sales product sales in the quarter were up pretty significantly year over year. So.

That was a very strong quarter of a period of a little bit of digestion after a quarter like that I.

I don't think thats very surprising, particularly given the uncertainty that we see in the world now.

I appreciate it thanks.

Your next question comes from the line of Richard Shannon from Craig Hallum. Your line is now open.

Hi, Thanks, guys.

Kevin and welcome to handle the core to working with you.

I guess, maybe a tactical question here on the guidance for the third quarter.

If I'm trying to run some run some numbers here and a and taken Daniels Ah comments on Opex, you're an account it seems like the gross margin you're implying here would probably get into the 50 plus percent range is that a fair interpretation of what to what you're intending here.

So rich, we're not going to guide gross margins specifically.

All I can say is that we the comments that we made or we do expect gross margin to improve as we execute on our cost reduction projects.

And we do intend to maintain tight control over both cash flow and operating expenses.

Okay fair enough.

Regarding the inventory digestion I apologize I got on the call just a little bit late so I made some comments, but is the digestion here just through distribution and customers are served through distribution or is there an inventory burn or direct customers as well.

So as I mentioned, Richard the if it's a combination of customer hand channel inventories.

Okay, and ER to Mike if I caught the comments Kevin that she said she gave us across a number of industries here or for sectors, including datacenter in parts of industrial and automotive is that catch that writer are there other specific industries you called out.

No. That's that's correct doesn't moments.

Okay. That's helpful. Then.

Let's see here had one other question or a couple other questions here Oh in a in your prepared remarks, you talked about the 32, Meg toggle product, which I think you announced a few quarters ago, how should we think about the scale of benefit here should we then we should see over time, how big can this be relative to your current toggle business. If you can give.

Some sense and also maybe end markets, where you're seeing initial traction.

[noise] its hard for me to give you a precise answer on that the cheered, but as we've talked about when we release that product in response to what we saw has.

Pent up demand for higher capacity products in our in our target portfolio.

And that's that's part of you know normally as we see more integration of data sources, such as sensors and more compute ticket seen those those data.

The the need for more memory is going up. So so we do think that it gives us number one potential to to ride that wave of demand and allow customers to do it without impacting that form factors et cetera.

Which is actually unique relative to the competitive technologies that we sell again. So we do think it's a good opportunity there.

But it's hard for me to help you out was that a specific number on that.

Okay. That's fair enough my last question I'll jump out of line, maybe a follow up on Rogers questions. A a nature here would you expect this inventory burn to be largely over and the third quarter and certainly given all the positive comments. We've heard from me for a few quarters in a row about a very strong design win progress would you expect the fourth quarter to.

Directionally up.

In sales.

What I would say is that you know, we're certainly going to be working to prepare for.

First for stronger demand coming out of Q3, Hum and laying the groundwork there should it appear it is it is hard for me to give you much color beyond.

Q3 in the current environment Richard but.

Certainly we do think there are some.

Areas of our business that have the potential to track quotes in the fourth quarter.

Okay fair enough that is all the questions for me Thanks, Kevin thing.

Thank you Rick.

I'm showing no further questions at this time I would like to technical conference back to Mr., Kevin Kindling.

Thank you operator.

In closing I'd like to thank the entire Everspin team and partners in creating a sustainable new normal for operational excellence.

Our customers can continue to rely on supply up world class quality in ramp products to meet their needs because of these efforts.

Our progress and strengthening our business is clearly visible even under the current adverse market conditions and we'll work to continue to successfully deliver on our objectives. Most important that these objectives is to achieve cash flow breakeven. This year, while we execute on our long term growth strategy.

Before we go I want to inform investors that will be scheduling and bear a virtual investor meetings with Oppenheimer on August Twentyth.

We're also participating virtually at the Jefferies annual semiconductor conference on September 1st hand second.

For those interested in scheduling a meeting please contact the Shelton group core the hosting firm.

We look forward to reporting our progress and business results on our call next quarter. Thank you for joining US today operator, you may now disconnect the call.

Ladies and gentlemen that concludes today's conference call. Thank you for participating you may now disconnect.

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