Good afternoon, ladies and gentlemen and welcome to the Everspin Technologies Third Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Leanne Sievers, President of Shelton Group, Investor Relations. Please go ahead.

Good afternoon and welcome to Everspin Technologies third quarter 2019 earnings conference call. I’m Leanne Sievers, President of Shelton Group, Everspin’s Investor Relations firm. Joining me today are Kevin Conley, Everspin’s President and CEO; and Jeff Winzeler, 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, 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 the 2018 Form 10-K filed with the SEC on March 15th, 2019 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 do not intend to update this information. This conference call will be available for audio replay for at least 90 days in 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, Kevin Conley. Kevin, please go ahead.

Thank you, Leanne and good afternoon to those joining us on today’s call. The third quarter marked another period of solid execution by the Everspin team and was further supported by other positive developments across our business. We achieved record STT-MRAM product revenue and sequential Toggle MRAM revenue growth over Q2. Operations delivered well to its key objectives on product delivery and cost reduction. Additionally, we recently expanded our product roadmap, signed another meaningful patent license and have line of sight to increasing royalty revenue next year. These positive developments are happening against a backdrop of signs of recovery for many of our key markets and demand drivers. Leading MRAM growth this quarter were components sold into the datacenter segment as a function of the rising number of new server builds, coupled with continued strong demand on the storage side. We saw meaningful increases in rate controller card builds in an enterprise server application, which benefit our Toggle products as well as continued progress in storage arrays for our STT-MRAM products. We expect this trend to continue throughout year end and as we enter 2020. More broadly, we have also seen demand from industrial applications starting to show modest recovery in most geographies. This trend coupled with increasing distributor restocking is a positive indicator in a segment that was significantly challenged in the first two quarters of this year. As an early indication of further recovery, in Q3, we secured nearly 60% more design wins than Q2 for our Toggle products, giving further indication of longer-term growth potential for these products. The recent resolution of the trade conflict at the core of the previously discussed China factory automation segment challenges, since finally at hand and may bring relief as the sector recovers. Although certain challenges still exist in some of…

Thank you, Kevin, and good afternoon, everyone. I’ll start by reviewing the third quarter 2019 income statement. Revenue in the quarter was above the high end of our guidance at $9.2 million and compared to $11.5 million in the third quarter of 2018 and revenue of $8.6 million in the second quarter of 2019. Looking specifically at MRAM product sales in the third quarter, which includes Toggle and STT-MRAM, revenue was $8.4 million compared to $10.4 million in the third quarter of 2018 and $7.9 million in the previous quarter. The sequential increase in MRAM product revenue reflected growth of both Toggle and STT-MRAM revenues. Licensing, royalties and other revenue in the third quarter of 2019 contributed approximately $808,000 compared to approximately $1 million in the third quarter of 2018 and $600,000 in the previous quarter. Gross profit for the third quarter 2019 was $4.4 million or 47.4% of revenue compared to $5.4 million or 47% of revenue in the third quarter of 2018, and compared to $4 million or 46.5% of revenue in the prior quarter. During the quarter, we continued to see the yields necessary to hit our target margins on Toggle products. This will somewhat offset by the cost penalty of underutilization of our 200 millimeter fab. Operating expenses for the third quarter of 2019 were $7.9 million compared to $10.9 million in the third quarter of 2018 and $7.6 million in the previous quarter. Breaking down our operating spend for the third quarter, research and development expenses were $3.4 million compared to $6.5 million in the same quarter a year ago and $3.5 million last quarter. SG&A expenses were $4.5 million compared to $4.5 million in the third quarter of 2018 and $4.1 million in the prior quarter. We remain focused on tight spending controls as…

[Operator Instructions] Your first question comes from the line of Richard Shannon with Craig and Hallum. Your line is open.

Thank you, Kevin and Jeff. Thanks for taking my questions. Kevin, one of the more interesting comments from your prepared remarks regarding your STT products that are now have a 10-year retention. It seems like a pretty significant opportunity here. Maybe if you can give us a sense of where you’re seeing interest? How long would the design cycles be? And when might you start to see an effect of those products in terms of revenues?

Sure. Thanks, Richard for the question. So going from the datacenter requirement of three months data retention to 10 years opens up a host of industrial and IoT applications that I referred to, many of which we are servicing in lower densities with our Toggle products. So the opportunity – we see that expanding the opportunity for us pretty significantly. We would expect our target for production of these products is in the 2021 timeframe. So we would expect to see revenues after qualification of products that we would be sampling customers at that time.

Okay. Are these displacing Toggle sockets or in addition to the socket security?

These are in addition. So our Toggle products, they top out with our newest announced product, the 32 megabit. They top out at 32 megabit. So these will be 64 megabit and upward.

64 and upward. What is the high end of the density range you’re expecting for that 10-year retention?

These would be up to 256 megabit.

256, okay. Excellent. Kevin, maybe you can discuss the progress you’re seeing here with 1 gig engagements, qualifications, et cetera. Obviously, we’ve seen two customers that you’ve announced so far. Maybe you can describe the progress in the last quarter? And again, maybe describe the pipeline here relative to what it looked like with the 256 at a similar stage of development?

As I said in the prepared remarks on the yield ramp we’ve been ahead of our targets, which were more or less in line with what we saw on the 256 megabit. And I think we’re about on similar, if not ahead of qualification milestones from what we experienced with our 256. So things are looking pretty good.

Okay. Let’s see here. Maybe one more question, and I will jump out of line here. I think one of the opportunities you’ve talked about a lot this year regarded that 1 gig market expansion once you see ASIC controllers should the SSD market start to support MRAM. And I think there were – I think you’ve – Kevin, if you’ve announced one or more than one partner so far, but I think you’re expecting some more at some point during this year or next. I wonder if you can give us an update on the progress there and when do you expect that market to really help the 1 gig product line inflected in terms of sales?

Yeah, so we announced two partners in August, Sage and Faison and there are two others that we haven’t yet named publicly. Engagement with all four companies continues. And again those controllers would be expected to be released to their customers in the 2020 timeframe. And therefore, we wouldn’t expect to see products using those controllers before the 2021 timeframe.

Okay. Okay actually maybe I’ll ask you another quick question here for Jeff on the numbers side here. I think last quarter you talked about your OpEx levels kind of coming down nicely, which is great to see and then it would kind of level off there. Is that a safe assumption as we try to model your December quarter guidance to try to reach the bottom line number you gave?

Yeah, so our OpEx has come down. In Q2, we reported $7.6 million total and this quarter $7.9 million. We’ve reached a level of OpEx as I’ve talked about in the past, where we really feel we can service the business going forward. We’re continuing to look at additional opportunities to reduce that number. But from an OpEx budgetary perspective, I think the last couple of quarters were pretty indicative of what we expect to spend.

Okay, perfect. That’s all the questions for me. Thanks guys.

Thanks, Richard.

Your next question comes from the line of Ari Shusterman with Needham & Company. Your line is open.

Hey, guys. I’m taking this question for Raji Gill. So I want to first talk about the factory automation application of Toggle. So I recall last quarter it was impacted by some softness in China. And I think you said in your prepared remarks, there has been a bit of recovery. So can you kind of talk about kind of the impact you’re seeing from a macro on your Toggle business, STT-MRAM business as you head into the next quarter? Yeah, any signs of softness? Yeah and thank you.

Thanks for the question, Ari. To clarify the comment. The comment was that, the challenges that we had seen in the demand to our end customers was from supply chain redesign that resulted as a function of the international trade dispute. Now that those disputes have been resolved. This is, we think a positive indication for that will allow that segment to recover. To-date, we haven’t seen that. There still challenges in terms of the amount of demand we’re seeing there. But at least this clears the way for that segment to recover.

Got you, that makes sense. And other applications, actually can you break up Toggle into the biggest applications or like what percent of Toggle would you say roughly is factory automation as compared to datacenters, et cetera?

Yeah, Ari. We don’t those into specific buckets, needless to say that factory automation is one that we highlight quite frequently as one of the major applications as our rate controllers for datacenter servers. We highlight a lot of these top segments in our earnings deck, but we don’t provide direct guidance in terms of precise percentages on those.

Okay. I guess switching gears a bit. As we go to gross margins, can you talk about some puts and takes and how we can think about gross margins trending, I guess I mean as we enter into Q4 in 2020, what is your gross margin target at the moment?

Yeah, Ari as I said in my prepared remarks, the key component for us from a gross margin perspective like most semiconductor companies is product yield and we’ve been very happy that our yields are at a point where we can achieve the target margins that we have in the business of 50% plus. So that’s good. I also talked about the fact that we’ve talked about our Toggle business being down because of these macroeconomic factors and that has put a tax on the product cost associated with manufacturing Toggle products. So I think as we see recovery and as we see increased volume for Toggle, we would expect that gross margin to trend up.

Right. Yeah, that makes sense. And just one more question. As it relates to your Toggle opportunity in 32 megabytes as well as 2 megabytes and 8 megabytes. How would you compare the opportunity in the higher density of 32 megabytes versus what we’re seeing in 16 megabytes? I think it will continue increasing from 32 megabytes to 64 megabytes to 128 megabytes, et cetera, what would be kind of the incremental opportunity as we move up?

As we said, we’re seeing increasing demand for higher densities. Our 16 megabit is one of our best-selling Toggle products today. So we’re pretty enthusiastic about the opportunity for the 32 meg. And as I said, it’s being received well by customers that are already taking samples and qualifying them in a number of our key market segments. In the engagements with customers about the new STT product line likewise we’re seeing a lot of enthusiasm for higher densities, where a lot of the non-volatile options don’t compete. So it allows that to be done also using STT, which is much more cost effective on a bit-per-bit basis versus Toggle. So we’re pretty enthusiastic about both these opportunities.

Right. Actually just one more question. So when it comes to STT-MRAM, I know you guys wouldn’t break up the mix between STT-MRAM and Toggle, but when would you say roughly you expect STT-MRAM revenue to be greater than Toggle, if you had to give a rough timeframe?

I think that’s pretty hard for us to predict for you, Ari.

Okay, no worries. Thank you.

Thank you.

We have a follow-up question coming from the line of Richard Shannon with Craig-Hallum. Your line is open.

Thanks for taking my questions, guys. I have a couple more here. Kevin, you’d mentioned some details from the GlobalFoundries Tech event or whatever the name was. And you mentioned they said a TAM of $500 million or so. Have they started to give you a forecast or some sort of production schedule about when we can start to see that pickup? And are you confident it can happen next year or is that just an assumption on your part right now?

So first just to clarify, it wasn’t a $500 million TAM, it was actually a $500 million design pipeline. So that’s their quantification of the customers that they are tracking designs with on, that are using embedded MRAM on their 22 FDX. And we continue to track what they’ve said publicly, which is that they expect their first customers to go into production next year. And that’s probably the best guidance that I can give you there Richard. I think based upon what we’re seeing, we’re confident that they have the capability. The partnership has been great. It’s produced some great technology for us. We think that gives them a good advantage with their customers as well.

Okay, fair enough. My last question. I know that you’re building out an expansion for your Toggle business with SilTerra, maybe just give us a quick update there and when do you expect that to be up and running? And when do you think you would need that capacity as you start to fill up where you are today?

Yeah so that partnership goes along well. We’ve made tremendous progress towards our goal of getting into production. We’ve previously talked about that starting in 2020 and that will be towards the beginning of 2020. So yeah, everything continues to go on track there. In terms of doing it on a needs basis, there are several advantages that gives us besides just the expanded capacity. We hope that that will be something that we can take advantage of as things continue to recover throughout the year, but there’s also other benefits that come from having a diversified supply chain.

Okay. I think that’s all I need to know. Thanks a lot, Kevin and thanks, Jeff.

Right.

Right, thank you.

As there are no further questions at this time, I would now turn the call back over to Ms. Leanne Sievers.

Thank you, operator and thank you, everyone for participating on today’s call. One final comment. We want to inform you that management will be attending the Craig-Hallum Alpha Select Conference in New York on November 12th and the Benchmark Discovery Conference also in New York on December 4th. For those interested in scheduling a meeting, please contact the Shelton Group or the hosting firms. We look forward to reporting our progress and business results on our next quarter’s call. Operator, you may now disconnect.

This concludes today’s teleconference. You may now disconnect.