Good afternoon, and welcome to Everspin Technologies First Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded today, Wednesday, May 8, 2019. I would now like to turn the call to Brett Perry of Shelton Group, Investor Relations. Brett, please go ahead.

Good afternoon, and welcome to Everspin Technologies First Quarter 2019 Earnings Conference Call. I'm Brett Perry, Vice President at 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 15, 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, Brett. Good afternoon to those joining us on today's call. Everspin executed well in the first quarter of 2019, delivering results above guidance under challenging marketing, market conditions. The first quarter results represent the new baseline upon which we're building our future growth. I'd like to start with some important STT-MRAM update. The first of which is that IBM, our largest STT-MRAM customer, announced in April that the NVMe flash core module using our 256-megabit part is now supported in its third enterprise storage array family. The Storwize V5000 family targets even greater end-customer affordability and expands our reach within this important customer. This further builds upon our existing design wins in the flash system 9100 and the Storwize V7000 storage array families. Given the affordability focus of the V5000 product line, utilization will likely occur in the very high end of the line and as a result, we don't expect this particular line to drive significant volume. However, we believe this widening adoption signals the confidence our customer has in its STT-MRAM-based flash storage product. A second important update is on our progress on STT-MRAM enablement with enterprise storage controller suppliers. These engagements are key element to opening a broader opportunity for our STT-MRAM products and enterprise storage system by building support for our products into storage controller ASIC, upon which these systems are based. We're excited to announce that support for our DDR4 based STT-MRAM is now designed into 3 enterprise SSD controller ASICs from well-positioned merchant-controller companies. We're working closely to complete MRAM qualification in these platforms with these companies and hope to complete one or more this calendar year. These controllers will help to expand the market for our 1-gigabit STT-MRAM integration beyond FPGA-based designs. This is an important enabler, a broader penetration of…

Thank you, Kevin. And good afternoon, everyone. I'll start by reviewing the first quarter 2019 income statement. Revenue in the quarter was above the high-end of guidance at $10 million compared to $14.9 million in the first quarter of 2018, which included $5.5 million in licensing, royalty and other revenue and compared to revenue of $12.3 million in the fourth quarter of 2018. First quarter product sales represented 90% of total revenue or $9 million, which was down slightly from $9.4 million or 63% of total sales, during the same quarter last year, and down 12% from the $10.2 million or 83% of sales in the previous quarter. Licensing, royalties and other revenue in the first quarter of 2019 contributed approximately $1 million compared to approximately $5.5 million in the first quarter of 2018 and $2 million in the previous quarter. The first quarter of 2018 included a fee for the sensor IP license agreement we secured, as part of our strategy, to transition our sensor portfolio to our licensing model. The sequential decrease was a result of lower fab service revenue, reflecting our initiative to strategically reduce our exposure to less profitable foundry business. MRAM product sales in the first quarter, which includes Toggle and STT-MRAM were $8.5 million compared to $8.9 million in the first quarter of 2015 and $9.7 million in the previous quarter. The sequential decline in MRAM product revenue reflects high end of the year distributor inventory levels for Toggle products, exiting last year as well as the program reduction at a large Toggle customer that we discussed during our last call. As a reminder, the short-term impact to Toggle revenues from this program will have minimal-to-no impact on our long-term gross profit dollars, while also freeing our Toggle manufacturing capacity to pursue additional higher…

[Operator Instructions] Our first question comes from Richard Shannon with Craig-Hallum.

Kevin. Just thanks for taking my questions here. Congratulations on the 1-gig wins here. Maybe, first, couple of questions for me. Seems like these designs came pretty quickly or faster than you would have expected. If you can give us a sense of the urgency of design wins here? If we get a profile of these customers? And I think, Kevin, you mentioned one of the applications was outside of storage, maybe if you give us a sense of what that application is, we appreciate it?

Sure. Good to talk to you, Richard, and thanks for the questions. The urgency or at least the speed at which you see these designs happen is really a function of, with getting to the point of having our customer qualifications samples ready, we're able to reengage with customers who had previously decided to wait on the 1-gig after we changed the priority regarding the 256 in terms of the primary STT-MRAM vehicle. So that really has paved the path to getting some of these customer engagements up and running on a very quick basis. With regard to the nature of the applications, I'm afraid, we're under a confidentially, and I really can't provide much more clarity on that.

That's what I figured, but I thought I try it anyway. And Kevin, did I hear you correctly that your customers are moving to qualify their end, their product with their customers, to get a sense of how fast that might occur?

So yes. I didn't say anything about their end customers, that's their program. This will be allowing our parts to be qualified within our customers' product.

Okay. All right. You also mentioned, announced or maybe in the announcement, you mentioned something about the ASIC controllers are going to now support MRAM. Wondering how fast we can see those guys qualify and then get into end products like SSDs. And there's, when does that lead to revenues, I'm assuming it sometime later in mid to later in 2020, but just want to get a sense of that time frame is approved at all?

Sure. You know, while the timing of these releases isn't really within our control, our understanding is that one or more of these devices are at least plan to be available in late 2019, enabling OEMs to subsequently design products. OEM design cycles vary, but our expectation is that this will make revenue toward the end of 2020 or possibly, well, 2021 is likely where we'd expect the majority of volume from these designs to be enabled.

Okay. Fair enough. One last question for me, and I'll jump out of line. Kevin, in your prepared remarks, you talked about both last quarter and now this quarter about eventual return to growth here. Are you still believing that the second half will show growth over the first half or maybe, third quarter over second quarter in Toggle? Or maybe if you can give a little clarity as to your thought process there?

I think, we reiterated the previous statement we made, which is that we believe that, in the second half of this year, we'll return back to sequential growth.

And our next question comes from Kevin Cassidy with Stifel.

On your improvement on yield store, the Toggle devices, is there a more room for improvement? Can we expect gross margins to expand based on better yields going forward?

Yes. So I believe that there is continued improvements. We have specific goals for each of the products that we have in the Toggle product portfolio. We're making progress in moving toward those goals, and we've seen good improvement in manufacturing yields. We still have additional upside in terms of yields, and it's a very large focus for us, as you know, obviously, it increases our profitability. And, so there's a lot of focus going on there, but in answer to your question, yes, we do have additional room, and we are confident that our manufacturing line will continue to improve.

Okay. Great. And I wonder if you could describe a little more of your pipeline or the funnel of the designs that you're working on, on the STT product, the 1-gigabit? How many samples do you have out to customers? Some information like that just to know what we can expect in the future?

Yes. I don't know if a lot of detail on how many customs we sampled is helpful. But I will say that we've sampled several customers, Kevin, and are engaged with several ecosystem partners as well beyond the design-ins that we mentioned during the leading script here. So we have announced 2 customers design-ins and 3 ecosystem design-ins at this point with several customers and ecosystem partners.

Okay. And one other question for me. On the embedded MRAM, can you say any progress that's GLOBALFOUNDRIES has had? Or even, is there an opportunity to move your technology to other foundries?

We have no indications beyond the public statements regarding GF, other than them starting production in 2019. That means that initial royalties would still be possible this year based upon them shipping product that contains MRAM. Beyond that [indiscernible] any other royalties from any other foundries [indiscernible].

And our next question comes from [indiscernible] with Needham & Company.

I'm asking on behalf of Raji Gill. And when it comes to the mix between your STT-MRAM and Toggle product for the rest of, I guess, for this quarter and for the rest of the year, how should we think about the mix?

All right. We don't give guidance in terms of the mix of those products. They're both, as we've talked about, we believe they're both on a growth path. And so we're expecting them to continue along that path, but we don't break that out between Toggle and STT-MRAM.

Okay. And one more question. With regards to China tension, do you see any risks to your business, especially given recent years?

What I'd say is, we have seen the China situation having some impact in the, especially in the industrial segment overall. And there's been a slowdown in China manufacturing. And that's definitely [indiscernible] or at least put some pressure on some of our customers. For the moment, that has stabilized for us. And we believe that with any improvement in the trade relations between the U.S. and China, then actually that pressure will hopefully return us back to the potential that, that segment holds for us.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Kevin Conley for any closing remarks.

Thank you, operator. Before closing out today's call, I'd like to highlight that Everspin will be participating in the upcoming B. Riley FBR Institutional Conference in Beverly Hills on May 22, the Cowen TMT Conference in New York on May 29, and the Stifel Cross Sector Conference in Boston on June 12. Please contact your sales representatives at their respective firms for the Shelton Group, if you would like to schedule a meeting with us. Thank you for your participation in today's call. And we look forward to reporting our continued progress next quarter. Operator, you may now disconnect the call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.