Q3 2023 Everspin Technologies Inc Earnings Call
Participants
Anuj Aggarwal; CFO; Everspin Technologies, Inc.
Sanjeev Aggarwal; President, CEO & Director; Everspin Technologies, Inc.
Nicolas Emilio Doyle; Associate; Needham & Company, LLC, Research Division
Orin Zvi Hirschman; CEO; AIGH Investment Partners
Shadi Mitwalli
Presentation
Operator
Good afternoon, and welcome to the conference call to discuss Everspin Technologies Third Quarter 2023 Financial Results. (Operator Instructions) As a reminder, this conference call is being recorded today, Wednesday, November 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 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 quarterly report on Form 10-Q, which will be filed with the SEC on November 2, 2023, 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 undertake no obligation to update any forward-looking statement 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 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 and as a result of the 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 on the Investor Relations section of Everspin's website at www.everspin.com.
And now I would like to turn the call over to Everspin's President and CEO, Sanjeev Aggarwal. Sanjeev, please go ahead.
Sanjeev Aggarwal
Thank you, operator, and thanks, everyone, for joining us on the call today. Everspin delivered quarterly revenue of $16.5 million, above the high end of guidance and an 8% increase year-over-year. We were GAAP net income positive for the tenth quarter in a row, a strong focus for the company.
A few highlights for quarter 3 2023. Cash flow from operations was $3.6 million, putting us at $11.1 million year-to-date. We continue to operate debt-free while increasing profitability. Q3 net income was $2.4 million. Everspin ended Q3 with a cash balance of $34.9 million.
We announced the availability of the X5 family of STT-MRAM products from 8 megabits to 64 megabit density with the extended temperature range of minus 40 centigrade to 105 centigrade for production orders.
We are sampling the 4-megabit density part in the smaller DFN package and the extended temperature range with production planned for the first quarter of 2024.
In Q3, we entered into an agreement to develop reliability models for strategic radiation-hardened Toggle MRAM. In October, we entered into a new contractual agreement to license our STT-MRAM technology to build a strategic radiation-hardened FPGA.
Our business outlook. We continue to have a good visibility into our product backlog for the remainder of 2023 and into early 2024 as of September 30, 2023. We have alleviated our foundry supply chain constraints, which is helping us address our unfulfilled toggle demand.
Products. We expanded our flagship industrial high-density STT-MRAM product family, the EMxxLX to include a 5-millimeter x 6-millimeter DFN package, smaller by 37% compared to the current offering. In addition to the area savings, we are delivering an extended temperature of minus 40 C to 105 C. This family of xSPI STT-MRAM devices delivers the highest combination of performance, endurance and retention and are now available in densities from 4 to 64 meg.
It is the only commercial available persistent memory with full read and write bandwidth of 400 megabytes per second via 8 input output signals with a clock frequency of 200 megahertz. It is the highest performing persistent memory available today ideal for electronic systems where data persistence and integrity, low power, low latency and security are paramount.
Industrial IoT, network enterprise, infrastructure, process automation and control, Aeronautics avionics, medical, gaming and FPGA configuration are examples where this family will simplify the system architecture and offer an alternative solution to legacy memories such as ferroelectric memories, FRAM, battery-backed random access memories, BBRAM, NOR Flash and nonvolatile SRAM.
A few comments about our Radiation-Hard programs. Since its inception, Everspin has invested in maintaining its leadership in MRAM technology as evidenced through its IP portfolio and successful licensing of its technologies. We are excited to report that we entered into 2 new Radiation-Hard program agreements, 1 on Toggle MRAM to develop reliability models for the strategic radiation-hardened Toggle MRAM products. The second agreement is to license our STT-MRAM technology to build a strategic radiation hardened FPGA.
These agreements are in addition to the existing Radiation-Hard programs on STT-MRAM technologies that we have discussed in previous earnings calls. One, a high-density memory array and two, a distributed configuration memory, for instance, on FPGAs with multiple time programmability.
The R&D and design teams delivered on the milestone successfully to further the development of these STT-MRAM-based solutions for these projects. We believe our distributed MRAM, we are coining as D-MRAM approach is a revolutionary approach and will give us an edge on energy efficiency and scaling as we deploy the solution and FPGAs and AI inference engines.
I will now turn it over to our CFO, Anuj Aggarwal , who will take you through our third quarter financials and fourth quarter 2023 guidance. Anuj?
Anuj Aggarwal
Thank you, Sanjeev, and good afternoon, everyone. As part of our third quarter 2023 financial results, we are pleased to announce our tenth consecutive quarter of positive net income. In addition, we generated positive cash flow from operations of $3.6 million during the quarter.
We delivered solid quarterly results above the high end of guidance with revenue of $16.5 million, compared to $15.7 million last quarter and $15.2 million in the third quarter of 2002 (sic) [2022]. We also had positive net income of $2.4 million and positive cash flow from operations of $3.6 million for the third quarter of 2023.
The MRAM product sales in the third quarter, which includes both Toggle and STT-MRAM revenue was $13.5 million compared to $13.4 million in the prior quarter and $14.6 million in Q3 '22.
Licensing, royalties, patents and other revenue in the third quarter increased to $2.9 million compared to $2.3 million last quarter and $0.7 million in Q3 2022.
Shipments to suppliers for our high-density STT product for the data center application represented 11% of revenue in the third quarter versus 7% of revenue in Q2 and 19% in Q3 last year.
Turning to gross margin. GAAP gross margin for the third quarter of 2023 was 60.2% versus 58.4% in the prior quarter and 58.8% in Q3 2022. The increase in gross margin is primarily attributable to the increase in licensing revenue. GAAP operating expenses for the third quarter of 2023 were $7.9 million versus $7.6 million in the prior quarter and $7.1 million in the third quarter 2022.
The increase in operating expenses in the quarter compared to Q3 2022 was primarily driven by an increase in professional service costs. We are pleased to report third quarter 2023 positive net income of $2.4 million or $0.11 per share based on 21.8 million weighted average fully diluted shares outstanding. This compares to a GAAP net income of $3.9 million or $0.18 per diluted share in the prior quarter and net income of $1.9 million or $0.09 per diluted share in the third quarter of 2022.
Diluted EPS of $0.11 was better than the high point of our guidance range, reflecting our strategic operational discipline and ability to drive profitability despite macroeconomic uncertainties.
Adjusted EBITDA continues to remain positive. For Q3 2023 adjusted EBITDA was $4 million compared to $5.4 million in the prior quarter and $3.4 million in Q3 of last year.
We ended the quarter with cash and cash equivalents of $34.9 million compared to $30.8 million at the end of the prior quarter and $23.4 million as of Q3 '22.
The increase in cash quarter-over-quarter is a result of Everspin's continued focus on strong cash management, while growing cash flow from operations as the company continues to operate debt-free. Cash flow from operations was healthy at $3.6 million for the current quarter.
Turning to our fourth quarter 2023 guidance. Everspin is cautiously optimistic. Demand for our Toggle products remain strong and we continue to see increased demand of our xSPI family of STT products. We expect total revenue in the range of $15.4 million to $16.4 million and GAAP net income per diluted share to be between $0.01 and $0.06.
I will now turn it back over to Sanjeev for some brief additional commentary before we open it up for questions.
Sanjeev Aggarwal
Thanks, Anuj. In summary, we reported another profitable quarter, now tenth in a row, which remains a strong focus for the company. We are excited that our Toggle MRAM and STT-MRAM technologies are being selected for Radiation-Hard programs, taking advantage of our leading-edge capabilities.
We believe the extended temperature range capability of minus 40 C to 105 C of our STT-MRAM xSPI family positions us well to address the fast-growing industrial IoT and embedded systems markets.
We have good visibility into our Toggle MRAM backlog through 2023 and early 2024, giving us confidence in our business. Thank you for joining us today.
Operator, you may now open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Shadi Mitwalli with Craig-Hallum.
Shadi Mitwalli
Congrats on another solid quarter. I just got a question on revenues being on the upper end of guidance. It looks to be mainly coming from licensing. So with that, is most of the increase in licensing revenues coming solely from the RAD-Hard programs? Or are we seeing any meaningful royalties from past licenses contributing to the increase in licensing revenues?
Anuj Aggarwal
Shadi, this is Anuj. Thanks for the question. Yes, for Q3, the good news came from the licensing and royalty side. We had some strong revenue from the QuickLogic deal. And then we had a third RAD-hard deal that Sanjeev mentioned related to Toggle reliability. And so we were able to get some work done there and account for that revenue as well. I will say also though product sales were strong and so total sales continued to be strong in Q3.
Shadi Mitwalli
Awesome, awesome. And then I just got actually a question on product sales. With products being down Q-over-Q, has there been any unusual activity with the backlog such as pushouts or even cancellations regarding backlog?
Anuj Aggarwal
Yes. The interesting thing with backlog, Shadi, so there's definitely some macroeconomic uncertainty and industry trends that are happening, right? So the supply constraints are loosening. The lead times are reducing like we had mentioned last couple of quarters. And so we are seeing customers booking within the lead time, but they're kind of waiting to book outside the lead time. right? And so we are seeing some impact in APAC, for example, within the Industrial Automation section.
Shadi Mitwalli
So with the Industrial Automation segment be one of the more weaker end markets you're experiencing?
Anuj Aggarwal
No. Actually, for Q3, we had good results in the Industrial segment. I was just making a comment that the Industrial segment has some uncertainty in China, and so there are some challenges there. But it's been stronger in last few quarters.
Shadi Mitwalli
Okay. Yes, that makes sense. And then just one more question on end markets. Were there any particular end markets you guys are seeing a little more strength or weakness in?
Anuj Aggarwal
Not particularly right now. I think just overall, there's some macroeconomic uncertainty, right, as things are happening. So you're just seeing customers waiting to place orders right? And just wanting to see what's happening in China and what's happening in the economy in general.
But overall, the segments look good, except for what I mentioned some risk in Industrial.
Shadi Mitwalli
Awesome. Yes, it makes sense. That's all for me, and congrats on another solid quarter.
Operator
One moment for our next question. And it comes from the line of Quinn Bolton with Needham.
Nicolas Emilio Doyle
This is Nick Doyle on for Quinn. I wanted to focus on RAD-Hard, it's doing really well, claiming its new wins, new licensing. Can you just talk a little bit about the applications and applications that are actually using that?
And then the new licensing deal, is that a onetime item? Or are we stepping up the kind of baseline of licensing revenue?
And then if we could also -- if you could also touch on the products, are we still on track to enter production by the end of next year and customers shipping in '25?
Sanjeev Aggarwal
Thanks, Nick. This is Sanjeev. So I guess I'll let -- I'll try to remember all your questions, but if I forget something, please remind me. As far as the goodness of the Radiation-Hard deals, you're right, I mean we were really excited that we were picked by the government contractors to actually have 1 project on Toggle MRAM and another one on STT-MRAM as well.
The licensing deal that you talked about or that we talked about for STT-MRAM, that is actually targeted towards an instant-on FPGA similar to the one that we announced I believe, 2 or 3 quarters ago. So this is a new project with a different vendor, although the subcontractor is still through QuickLogic, but they have a different CMOS provider.
These licensing deals are obviously very lumpy and they are opportunistic. I would not say that this is the last licensing deal that we'll come across. We hope to get even more going forward. I'm not giving any guidance, but we are hopeful that our technology keeps getting recognized and we keep getting picked up for other projects.
And just as a reminder, I think a year ago, we had talked about a deal with Honeywell where we're actually building a 64-megabit array. And there, obviously, it's more of a persistent memory type solution for Radiation-Hard environments.
As far as our 64-megabit and the 16 megabit parts that we taped out and brought in production this year. They are on schedule. People are looking at our parts and are qualifying them. So we are on schedule to getting them hopefully qualified and into early production towards the end of 2024. If I miss anything, please remind me, Nick.
Nicolas Emilio Doyle
No, got it all. For the -- we have seen weakness with FPGA guys that was reported, AMD, Entel, Lattice and maybe we're seeing that in your products slightly declining next quarter. Would you say that's an accurate? That -- I noticed that correctly?
Sanjeev Aggarwal
So I don't know if it is specifically the FPGA or not, but like Anuj mentioned, we are cognizant of the macroeconomic conditions in Asia Pacific. As we said -- as Anuj said, we are -- we have been strong for the first 3 quarters, but we are starting to see some movement in Q4 and also in early 2024. But that is also convoluted by the data that now that the supply chain constraints are removed, our lead times have actually dropped.
So our customers' behavior has also changed with their ordering within the lead times. So it's not quite clear if it's because of the macroeconomic conditions or just because our lead times have changed. But the 2 combined together has changed the behavior in the backlog over the last couple of quarters.
Nicolas Emilio Doyle
So just kind of confirming that your lead times have gotten even lower compared to last quarter, and that's kind of impacting the outlook. Just related to -- and the reason I asked is kind of last quarter, we were saying that the backlog is really strong and it gives us visibility into the near-term quarters. But now because the lead times are coming down, that isn't as accurate today?
Anuj Aggarwal
I guess -- this is Anuj. I guess the way I would describe it, so what's happened is the lead times were 52 weeks. They came down to about 30-something weeks, and then we reduce them further to about 27, 26 weeks. So we saw lead times come down.
And then in addition to that, one of the things you'll see industry-wide that you might have noticed is that the supply constraints loosened up as well, right? And so what that did was that created what we're observing to be a customer behavioral change. And so they're mostly -- they're mostly booking within the lead time, and then they're booking some outside the lead time as well. So that's really nice. But it's not as much as they were doing historically.
And so now it's kind of come back to, let's call it, the backlog pre-pandemic levels. And so even though it looks relatively normal from that perspective, it has declined from the really rich backlog from a year ago, where there was a 52-week lead time, not enough capacity and people were getting worried about getting capacity, right? So they were just booking well in advance. So that's the observation that we've seen.
Operator
(Operator Instructions) Quinn, if you have additional question, go ahead.
Nicolas Emilio Doyle
Yes. I'll ask one more. Just on that back -- staying on the backlog, typically takes 12 to 18 months to convert. Can you give any detail on how much of your backlog is expected to convert near term versus long term? I know that we are talking some strong growth or -- some growth in the second half '24 based on the backlog last quarter.
Sanjeev Aggarwal
Nick, are you talking about 12 to 18 months of qualification time? Or did you mean?
Nicolas Emilio Doyle
Right. Yes.
Sanjeev Aggarwal
Yes. So that -- the qualification time for that new STT product that we brought out is still 12 to 18 months and we expect the early production to be in late 2024, early 2025. So nothing is "changed or delayed" in that process.
Anuj Aggarwal
Yes. I think the way I would explain the pipeline, if you look at the design wins, they're still healthy and they continue to gain traction, right? I think that's part of where you're going. So there is a strong pipeline and we are seeing backlog outside of the lead time, just not as much as before.
Operator
And we do have a question from another line. We have a question from Orin Hirschman with AIG.
Orin Zvi Hirschman
Let's see, just one more clarification question on that last topic. In terms of the guidance that you put out for Q4, does that assume product increases sequentially? Being too much more specific than what you want to be.
Anuj Aggarwal
Yes. Orin, this is Anuj. I would say we're looking at guidance for Q4 relatively flat to Q3 with a similar mix.
Orin Zvi Hirschman
Okay. And you never mentioned AI before. Where does the product fit in the overall scheme of AI? Is it only if it becomes the actual, a piece of IP within the -- in the FPGA, and you go through that a little bit more? And are you mentioning because they are customers that have interest?
Sanjeev Aggarwal
Yes. So the -- Orin, this is Sanjeev. So the solution that we developed for the FPGA market for the instant-on FPGAs, the requirements for the AI inference engines are very similar to the requirements for the -- for that instant-on FPGA, namely, you want it to be low standby or 0 standby current, and you want it to be nonvolatile and then you need it to be extremely fast, so that you're comparing an image, for example, with something that the GPU processed and brought to the edge for comparison.
So this solution basically applies to both. And we've had some early discussions with some of the R&D folks looking at some AI solutions, and there seems to be good compatibility. Again, it's only in the early stages, but it's something that we are hoping to focus on and over the next year, 1.5 years as a new focus for the company.
Orin Zvi Hirschman
Is there enough density in these parts to be able to do anything practical on the AI side? Do they have to be chained together? And how would it work?
Sanjeev Aggarwal
So it's mostly targeted towards Edge AI, Orin, but they don't require very high density. It's not for the servers where they would require gigabits and much higher densities. But for the Edge AI, we have plenty of density, I mean, we meet the density requirements for the Edge AI applications.
Orin Zvi Hirschman
Okay. And just one more follow-up. You mentioned the second instant-on FPGA development. What's going on with the first one? And is the timing -- what is the timing lag on both of these?
Sanjeev Aggarwal
So we are -- so both the programs are active as of Q4 of 2023. So the original one with QuickLogic and SkyWater, that is progressing just fine. We are making progress on the deliverables and continuing forth with that. And then this is a new program that the QuickLogic has been awarded from the U.S. government, where it actually uses CMOS from a different vendor but has a similar requirement as far as solutions are concerned -- as the FPGA solutions are concerned. So these 2 programs are going to run in parallel at least for the next couple of quarters.
Orin Zvi Hirschman
Which one? Is the second one though for commercial use or for governmental use?
Sanjeev Aggarwal
They are both for government use, Orin.
Orin Zvi Hirschman
And I know you'd mentioned before you're working with some of the commercial FPGA vendors on commercial products. Any progress there on the instant-on application?
Sanjeev Aggarwal
So the other solutions that we're looking at for the FPGA was basically to replace the traditional NOR Flash memory but there's STT-MRAM 64 meg and 16 megs that we brought out, and that work is ongoing.
Operator
(Operator Instructions) I don't see any further questions in the queue. I will pass it back to Anuj Aggarwal for his final comments.
Anuj Aggarwal
With that said, we conclude today's call. Thank you all for joining us, and we look forward to updating you on our progress next quarter. Thank you.
Operator
Thank you, everyone, for participating, and you may now disconnect.
