Good day, ladies and gentlemen, and welcome to the Everspin Technologies Second 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 introduce your host for today’s conference, Ms. Leanne Sievers of Shelton Group Investor Relations. Ma’am, you may begin.

Good afternoon, and welcome to Everspin Technologies second 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 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 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. We’re reporting to you today from Santa Clara, during a week that includes our participation at MRAM Developer Day and Flash Memory Summit. So there’s a lot of interesting information to report on a number of fronts. Before going into that, I want to first start by acknowledging the challenging market conditions that we experienced in the second quarter that resulted in revenue coming in below our original guidance. While we had to revise our original guidance, it’s important to recognize the strong performance that delivered much higher EPS results even than we originally forecasted. We’ll talk more about the contributing factors to these results later on the call. With regard to our operations this past quarter, product gross margins returned to our target operating model, when excluding the inventory charge incurred in the quarter. This improvement was based upon strong yields for both Toggle and STT-MRAM products. It’s important to recognize that this includes a growing contribution from the pilot production of our 1-gigabit device. This performance demonstrates solid execution by our operations team in partnership with our foundry and [OSAT] [ph] partners and lays the groundwork for lower cost structure for our products in the coming quarters. Our STT-MRAM revenue included 256-megabit STT-MRAM shipments that track to expectations despite demand pricing challenges the storage market has experienced in the most recent quarters. It also included revenue from growing shipments of qualification units of our 1-gigabit STT-MRAM. In total, sales of STT-MRAM grew significantly in the quarter and reached a new quarterly record. Internally, we’re on track to hit our 1-gigabit production qualification milestone for mass production cross-over yield by the end of this quarter. Our team has executed extremely well in working with our manufacturing…

Thank you, Kevin, and good afternoon, everyone. I’ll start by reviewing the second quarter 2019 income statement. Revenue in the quarter was above the high end of our revised guidance at $8.6 million and compared to $10.8 million in the second quarter of 2018 and revenue of $10 million in the first quarter of 2019. Second quarter product sales represented 93% of total revenue or $8 million compared to $9.4 million or 88% of total sales during the same quarter last year and down from $9 million or 90% of sales in the previous quarter. Licensing, royalties and other revenue in the second quarter of 2019 contributed approximately $600,000 compared to approximately $1.3 million in the second quarter of 2018 and $1 million in the previous quarter. Looking specifically at MRAM product sales in the second quarter, which includes Toggle and STT-MRAM. Revenue was $7.9 million compared to $9.1 million in the second quarter of 2018 and $8.5 million in the previous quarter. The sequential decline in MRAM product revenue primarily reflects lower Toggle MRAM sales, which were partially offset by record STT-MRAM sales both sequentially and year-over-year. Gross profit for the second quarter of 2019 was $4 million or 46.5% of revenue compared to $4.5 million or 42% – 42.1% of revenue in the second quarter of 2018 and compared to $4.8 million or 47.7% of revenue in the prior quarter. Cost of goods sold in the second quarter included an inventory charge of approximately $718,000 worth of material that was scrapped. Excluding this 830 basis point impact, gross margin for the quarter was 55%, reflecting improved manufacturing yields on new production. Operating expenses for the second quarter of 2019 were $7.6 million compared to $11.8 million in the second quarter of 2018 and $9 million in the previous…

Thanks, Jeff. Obviously, market conditions are difficult, not just for us, but for a number of other companies in the semiconductor segment. Nevertheless, there is a tremendous amount of new positive achievements as we have just reviewed on this call. Our focus is unwavering, our execution remains on track, and our progress is demonstrated by our bottom line results. We remain focused on responsibly managing our business, growing revenue and achieving profitability. And looking to the future, our expectation that our STT-MRAM technology can fulfill its promise as a universal memory is more compelling now than it ever has been. With that, operator, you may now open up the call for – line for questions.

Thank you. [Operator Instructions] And our first question comes from Richard Shannon with Craig-Hallum. Your line is now open.

Thanks, Kevin, Jeff, for taking my questions. Let’s see, a couple of questions maybe on the guidance here. I just want to get a level set. Want to get a sense of what you’re expecting for Toggle versus MRAM trends from the second to third quarter. I have a guess, but just like to hear from you. And I know that you talked about in your pre-announcement about your second quarter some inventory reductions. Wondering if there are still some more inventory reductions going on or is there filler, is it kind of balance?

Hi, Richard. So, let me talk first about guidance. Our guidance statements, we really have not broken out our Toggle MRAM versus our STT-MRAM. I think we characterize our guidance going forward as experiencing headwinds in the Toggle MRAM portion of our business, just really what we saw this quarter. So while we’re not prepared to give exact numbers for each of these technologies, the continued headwinds in the market are very much as a result of our Toggle and customers’ products.

Yeah, maybe we could address the two things that we did talk about on the call, Richard, which are, one, the U.S./China trade dispute, which again, we don’t see a visible sign of ending at this point; and the other, the trends in server build-outs, which are expected to end. And yet we don’t have specifics to forecast when that happens.

Okay. Maybe I’ll ask along the lines of the STT-MRAM product revenues. You noted a record level in the second quarter. Are you expecting another record in the third?

Yeah, again, we prefer not to give the guidance relative to whether it’s going to be increasing or decreasing from Q2. The challenge is to grow for us. We’re guiding just very, very slight growth from where we are today. And again, I think that’s a function of the fact that we still experience Toggle resistance in Q3. And we don’t expect that same market softness to affect our STT-MRAM.

Okay. Fair enough. That’s helpful. A question on gross margins, you mentioned in inventory reserve in the second quarter and that outside of that is about 55% for the second quarter. Given the similar level of revenues here, is it fair to think about a similar level of gross margins or any other mix or other dynamics affecting that?

I think the important trend here, Richard, is that our underlying margins are returning back to kind of our business targets. So, by that, I mean the material that we’re actually producing that’s coming out of the factory now allows us to get our business back to that mid-50%s margin that we’ve been targeting. The charge that we took in the second quarter was really reflective of a charge that we’ve taken before. And this relates to Toggle product that we produced in mid to late last year, when we were having the yield issues that we were. We subsequently re-tested some of these parts. And some of them, we were able to ship for revenue. And others failed retest and therefore were scrapped. And that’s really what the charge is about. We continue to have the parts in inventory that were tested before and we’re planning to re-test going forward. I would characterize the exposure of that being significantly less than what we experienced this quarter.

Okay. That’s fair enough. One last question or maybe a multi-part question for Kevin, regarding STT-MRAM, specifically the 1-gig part here, sounds like a great deal of enthusiasm here is building with customers. Maybe, A, could you relate the ramp-up of 1-gig versus what you experienced in 256-gig, how it’s different in terms of customer breadth? And then, also I think last quarter you talked about being – the 1-gig that’s being designed and the two OEM products, one of which is outside of storage. You mentioned the IBM as one of those customers. Wondering if you can give us an update, anything quantitatively or qualitatively on that.

In terms of the ramp itself, it’s more or less at or above what we experienced with the 256 in terms of yield attainment, et cetera. So we’re pretty pleased on that. We are sampling several customers as we’ve talked about in the past, so much broader distribution of our 1-gigabit parts than we had experienced with the 256-meg. I hope that’s helpful in kind of understanding where we’re at in the early days of this product. The two OEM customers that we talked about, both were here at MRAM Developer Day. I talked about those on the call, one being IBM with their next-generation platform as well as BittWare with their persistent memory card.

Okay. Perfect. That’s all for me. I’ll jump at lines, guys. Thank you.

Thank you, Richard.

And our next question comes from Ari Shusterman with Needham & Company. Your line is now open.

Hey, guys. This is Ari taking the question for Rajvi Gill. So congrats on a strong quarter, and just want to start off by turning to the China situation. Has this effect been more pronounced this quarter compared to the last few quarters? I remember last earnings call you mentioned that having some effect. But yes, wondering if you’ve seen an exacerbation like with regards to it on your business and things you’re seeing moving forward. Thank you.

It’s at or maybe slightly below what we saw last quarter, Ari, so it’s not a big change. Really, the – that impact started manifesting itself in Q1. And with those particular customers, we more or less saw it then continue on for the entire Q2 at that level.

Okay. That makes sense. And with regards to your moves towards profitability given the steps – you guys have taken some steps to reduce cash burn. Is there – do you have a time line to profitability? Or maybe help – things you can give on that?

Yeah, Ari. So I would point to the fact that we’ve always talked about profitability for our company is a matter of revenues at 50% to 55% gross margin covering our OpEx. And the thing that we’ve done in this quarter and we kind of talk about going forward is we’ve significantly reduced the bar necessary to get to profitability by reducing that spending pretty dramatically. As I stated on the call, our total OpEx was the lowest it’s been since the time we went public, and so we’re really focused on that. In terms of the time line to get to profitability, obviously, we’re going to still need to ramp revenues above what we experienced this quarter. And a lot of that I think gets back to a return to growth for the Toggle portion of our business, which is something that we believe will happen. We’re getting a lot of new design wins. We have new customers in Toggle. And as we see the kind of headwinds with our existing large customers start to ease, that should give us a very solid path to position the company for profitability.

Yeah. So three things we’d ask – just keep in mind three major factors are what sort of revenue we’re able to drive, what sort of profitability we’re able to do by means of what our products cost us to build, and third is what we spent operationally. And so two of those are obviously within our control, and we put a lot of effort into driving the third one. So what I’d say is look at our progress that we’ve made on the operations side over the last quarter. We’ll continue to do that, both improving our product cost and margins while we control our spend. And meanwhile, we’ll work on driving that top-line to help us get there sooner.

Okay. That makes sense. Just one more question with regards to your progress of GLOBALFOUNDRIES on – and then on MRAM. Have you seen any updates to that?

Yeah. GLOBALFOUNDRIES was present here at MRAM Developer Day. In one of their sessions, they announced that they had achieved their pilot production milestone. So that’s allowing them now to go out and fully sample customers. They talked about a number of customers that they have in the pipeline that they’ll be giving prototype parts to in the coming quarters. And so they’re on track for customer shipments next year.

Okay. Great. Thanks so much.

Thank you, Ari.

Thank you. And I’m showing no further questions at this time. I would now like to turn the call back over to Kevin Conley for any closing remarks.

Thank you for the questions and for participating in today’s call. For interested investors, we want to inform you that we’ll be attending the Jefferies Semiconductor, Hardware & Communications Summit in Chicago on August 28, and the Dougherty Institutional Investors Conference in Minneapolis on September 5. We look forward to reporting our progress across our business on our next call 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.