Q4 2023 Everspin Technologies Inc Earnings Call
Participants
Anuj Aggarwal; CFO; Everspin Technologies, Inc.
Sanjeev Aggarwal; President, CEO & Director; Everspin Technologies, Inc.
Cassidy Fuller; IR; The Blueshirt Group
Neil Anthony Young; Research Analyst; Needham & Company, LLC, Research Division
Presentation
Operator
Good afternoon, and welcome to the conference call to discuss Everspin Technologies fourth quarter and full year 2023 financial results. (Operator Instructions) As a reminder, this conference call is being recorded today, Wednesday, February 28, 2024.
I would now like to turn the conference over to Cassidy Fuller, Investor Relations for Everspin.
Cassidy Fuller
Thank you, operator, and good afternoon, everyone. Everspin released results for the fourth quarter and full year 2023 ended December 31, 2023, this afternoon after the market closed. I'm Cassidy Fuller, Investor Relations for Everspin. And with me on today's call are Sanjeev Aggarwal, President and Chief Executive Officer; and Anuj Aggarwal, Chief Financial Officer.
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, the company's expectations for Everspin's future business, financial performance and goals, customer and industry adoption of MRAM technology, successful bringing to the 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 the company's SEC filings, including the annual report on Form 10-K and other SEC filings made from time to time in which the company 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, the company undertakes no obligation to update or alter any forward-looking statements made on this call, whether as a result of new information, future events or otherwise. The financial results discussed today reflect the company's preliminary estimates and are based on the information available as of 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 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'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 record annual revenue and profitability for 2023 with a strong gross margin, a solid balance sheet with no debt and the highest cash balance in our company's history.
During the fourth quarter, we delivered revenue of $16.7 million, above the high end of our guidance range of $15.4 million to $16.4 million. This led to a record full year revenue of $63.8 million, which was up 6% year-over-year. We delivered gross margin of 58.1% in the fourth quarter, up from 51.4% in Q4 2022. We recorded our 11th quarter in a row of GAAP profitability, a strong focus for the company. And we ended the year with a cash balance of $36.9 million.
On the product side, we had a total of 217 design wins in 2023, up 3% year-over-year. Our pipeline of new design wins for our MRAM products remained strong and exceeded our internal expectations. We expect our existing Toggle MRAM product customers will qualify our new industrial STT-MRAM products this year, while our newer MRAM customers will qualify later in 2025. Additionally, our new industrial STT-MRAM product line has continued to gain momentum in terms of design wins, showcasing the importance of ramping technology from the last few quarters. Looking ahead, we expect to begin translating these design wins into revenue in the second half of 2024.
We remain committed to preserving Everspin's position as a leader in MRAM technology, and this is reflected in our extensive intellectual property portfolio and the successful licensing of our technologies. As we discussed on our last earnings call, we entered into 2 new radiation-hard program agreements. The first related to Toggle MRAM to develop reliability models for strategic radiation-hardened Toggle MRAM applications. The second agreement was to license our STT-MRAM technology to build a strategic radiation-hardened FPGA. This second project remains ongoing into the first quarter of this year. As the project progresses, we anticipate additional government funding to help support the build of this FPGA device. We anticipate this project to continue progressing this year.
We also want to provide an update on our existing ad hoc 64-megabit STT-MRAM project that we started in early 2022. We expect to receive additional silicon from our supplier, which we will use to create a demonstration of working silicon. This will be a higher-margin, lower-volume product, and we expect to recognize revenue from this project throughout 2024.
As we mentioned on our previous call, a new key focus for us is distributed MRAM or D-MRAM. As discussed, we believe our D-MRAM approach is revolutionary and will give us an edge on energy efficiency and scaling as we deploy the solution in FPGAs and AI inference engines. We look forward to updating you on our progress here over the coming quarters.
Turning to our outlook for 2024. We continue to have good visibility and a strong pipeline driven by solid product backlog. We expect the first half of the year to be more muted given economic weakness in China and softness in industrial and automotive sectors, in part due to inventory digestion and rebalance. However, we expect a ramp in the second half of 2024 as we begin to recognize revenue from our design wins for our STT-MRAM products that we have discussed over the past 2 years. Moreover, we expect to see continued growth in our Toggle MRAM products as well as additional design wins.
I will now turn it over to our CFO, Anuj Aggarwal, who will take you through our fourth quarter financials and first quarter 2024 guidance. Anuj?
Anuj Aggarwal
Thank you, Sanjeev, and good afternoon, everyone. As part of our fourth quarter and full year 2023 financial results, we are pleased to announce that we have achieved record annual revenue of $63.8 million and record profitability with net income of $9.1 million in 2023. Q4 2023 also marks our 11th consecutive quarter of positive net income.
In addition, we generated positive cash flow from operations, resulting in the highest cash balance of our company's history of $36.9 million. We delivered strong quarterly results above the high end of our guidance range of $15.4 million to $16.4 million with revenue of $16.7 million and diluted earnings per share of $0.09. We also recorded positive cash flow from operations of $2 million. Our revenue outperformance was preliminarily driven by the success we have seen in our Rad Hard deals, which have continued to progress well from a technology standpoint.
MRAM product sales in the fourth quarter, which includes both Toggle and STT-MRAM revenue, were $12.4 million compared to $14.6 million in Q4 2022. Licensing, royalties, patents and other revenue in the fourth quarter increased to $4.3 million compared to $1.1 million in Q4 2022. Shipments to suppliers for our high-density STT product for data center applications represented 17.1% of revenue in the fourth quarter versus 4.7% of revenue in Q4 2022.
Turning to gross margin. Our GAAP gross margin for the fourth quarter of 2023 was 58.1%, up from 51.4% in Q4 2022. GAAP gross margin for 2023 was 58.4%, an increase from 56.6% in 2022. The year-over-year increase in gross margin is a result of being able to offset increased pricing from suppliers with increased yields on our Toggle products and increased licensing revenue to offset the decrease in product sales.
GAAP operating expenses for the fourth quarter of 2023 were $8.1 million compared to $7.5 million in the fourth quarter of 2022. The increase in operating expenses in the quarter compared to Q4 2022 was primarily driven by the development and enhancement of our new xSPI family of STT-MRAM products and increased professional service costs.
Fourth quarter 2023 net income was $2 million or $0.09 per diluted share based on 21.7 million weighted average fully diluted shares outstanding. This compares to net income of $0.6 million or $0.03 per diluted share in the fourth quarter of 2022.
Fully diluted EPS of $0.09 was above the high end of our guidance range, reflecting our strategic operational discipline and ability to drive profitability in the face of macroeconomic uncertainties. Fully diluted EPS for 2023 was $0.42 compared to $0.29 in 2022.
For Q4 2023, adjusted EBITDA was $3.6 million compared to $2.1 million in Q4 2022. Adjusted EBITDA for 2023 was $15.3 million, which includes the employee retention credit of $2 million, compared to $11.8 million in 2022.
We ended the quarter with cash and cash equivalents of $36.9 million, up from $34.9 million at the end of the prior quarter. 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 $2 million for the fourth quarter. For the full year, cash flow from operations was $13.1 million, up from $9.5 million in 2022.
Turning to guidance. We anticipate revenue to ramp as we move through the year with the first half a bit lower than our traditional seasonality given ongoing economic weakness in China and softness in the industrial and automotive sectors. We expect growth to accelerate in the second half of 2024 as we begin to recognize revenue from design wins of our STT and Toggle MRAM products. Taking these factors into consideration, we expect Q1 total revenue in the range of $13.5 million to $14.5 million and GAAP net income per diluted share to be between breakeven and $0.05.
In summary, we are pleased to report another solid year of growth with record annual revenue, profitability and earnings per share. Our financial position remains strong, boasting a debt-free balance sheet and the highest cash balance in company's history. While we expect to experience a slower start to the year, we expect a solid second half of 2024. We also expect to see additional growth in our Toggle MRAM and DRAM products, and we expect to begin recognizing revenue for our STT-MRAM products.
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 the line of Quinn Bolton of Needham & Company.
Neil Anthony Young
This is Neil Young on for Quinn Bolton. I first wanted to ask about the gross margin number in the fourth quarter. So you gave some color on the year-over-year change. But I was hoping you could share what drove the sequential decline in gross margin considering that the licensing, royalties, patents and other revenue appear to be strong.
Anuj Aggarwal
Yes. It's Anuj Aggarwal. Yes. So the gross margin has performed really well over last year, right? So we've been saying we'd be mid-50s in gross margin. I think what you're seeing is as the yields kind of tapered off, and we had slightly lower licensing revenue compared to the prior quarter. You see a decline in the gross margin, but it's still above our internal model and expectations.
Neil Anthony Young
Okay. And then my follow-up is, last quarter, you talked about some of the weakness in industrial automation in China. It sounds like that continued in the fourth quarter given the quarter-over-quarter decline in product revenues. So did you see that weakness spread across other geographical areas or end markets? And then regarding the first quarter outlook, I was hoping you could share what you're thinking across the 2 segments, products and licensing. And then maybe within products, what you're thinking separately for Toggle and STT-MRAM.
Anuj Aggarwal
Sure. Absolutely. So it's a couple of questions. Let me try to go one by one. So I think from a backlog perspective, right? As you look at the backlog, you're seeing challenges within the industrial and automotive space. And to your question in terms of geographies, APAC in general has shown some weakness. So Japan and China, there's been some challenges there. So we saw that starting in Q4, and we see that in Q1 as well. And then from a guidance perspective -- sorry, what was the second part of the question for guidance?
Neil Anthony Young
Yes. So I was wondering if you could share what you're thinking across the 2 segments, between products and licensing, and then maybe within the product segment, what you're thinking separately for the 2 buckets.
Anuj Aggarwal
Yes, absolutely. So for revenue, we're expecting $13.5 million to $14.5 million. We expect Q1 to be strong again from a licensing and royalty perspective. We do see some decline in product revenue. And so that's why we're guiding to that number. It's again mainly because of the APAC challenges and the challenges in China. We're also seeing customers looking at bleeding down inventory and concern with their inventory. And so because of that, we're conservatively setting guidance at those numbers.
Sanjeev Aggarwal
So just to add to that, Neil, I think we are still optimistic on the second half of this year. And we're really focusing on a few things. One is the low-density STT-MRAM product that we brought out a couple of years. We are seeing good traction in the industry, even in Asia Pac. So we expect that we'll be able to get some traction in the second half of 2024.
And as you know, with all the supply chain issues that everybody had last year and the year before, Everspin actually managed the supply chain very well. And because of that, we have some -- earned some goodwill with our customers so -- with our Toggle customers. So we're actually going back and talking to our customers to see we can actually precipitate some design wins, actually win sockets from some of our customers. And those discussions are going well.
And giving you color on the Rad Hard deals, basically, we do expect the project that we are working on for the FPGA to continue throughout the year. And so we will see some -- we expect to see some licensing Rad Hard revenue from there. And then also our initial project, the 64-megabit STT-MRAM will continue through this year, and we will recognize our revenue along the way.
Operator
(Operator Instructions) I'm showing no further questions at this time. I'd like to turn the call back over to Anuj Aggarwal for any closing remarks.
Anuj Aggarwal
Okay. With that, we conclude today's call. Thank you all for joining us, and we look forward to updating you on our progress next quarter. Operator, you may now disconnect the call. Thank you.
Operator
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
