Q3 2024 Akoustis Technologies Inc Earnings Call

Participants

Kenneth Boller; Chief Financial Officer, Corporate Controller; Akoustis Technologies Inc

Jeffrey Shealy; President, Chief Executive Officer, Founder, Director; Akoustis Technologies Inc

Drew Wright; Corporate General Counsel; Akoustis Technologies Inc

David Aichele; Executive Vice President - Business Development; Akoustis Technologies Inc

Craig Ellis; Analyst; B. Riley Securities, Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Akoustis Technologies fiscal 2024 third quarter conference call. As a reminder, this conference is being recorded (Operator Instructions) A replay of the call will be available on the Investor Relations section of the website. Thank you.

Kenneth Boller

Thank you, operator, and good morning to everyone on the call. Welcome to Akoustis's third quarter fiscal 2024 conference call. I am Ken Boller, CFO; and I'm joined today by our Founder and CEO, Jeff Shealy; Corporate General Counsel, Drew Wright; and EVP of Business Development. David Aichele.
Before we begin please note that today's presentation includes forward-looking statements about our business outlook. All statements other than statements of historical facts included in this conference call such as expectations regarding our strategies and operations, including the timing and prospects of product development and customer orders and design wins, possible collaborative or partnering relationships, litigation matters and expected financial and operating results are forward-looking statements such forward-looking statements are predictions based on the company's expectations as of today, and they're subject to numerous risks and uncertainties. The company and our management team assume no obligation to update any forward-looking statements made on today's call. Our SEC filings mentioned important factors that could cause actual results to differ materially. Please refer to our latest Form 10-K and Form 10-Q filed with the SEC to get a better understanding of those risks and uncertainties.
In addition, our presentation today will also refer to certain non-GAAP financial measures. A reconciliation of these measures the most directly comparable GAAP measure is presented in our earnings call highlight release available in the Investors section of akoustis.com.
I would now like to turn the call over to Jeff Shealy, Founder and CEO of Akoustis.

Jeffrey Shealy

Thank you, Ken, and welcome, everyone, to our FY24 fiscal third quarter conference call. Revenue in the March quarter increased 7% sequentially to $7.5 million, filter related revenue was up 13% quarter-over-quarter and was the third highest quarter in the history of the company. During the March quarter, we had two customers that each made up greater than 10% of our reported revenue. XBAW-related sales accounted for the top four customers and 6 out of the top 10 customers. Our top 10 customers made up 64% of revenue. Our top 25 customers made up 78% of revenue.
In terms of regional sales, 3 out of our top 10 customers were Asia-based. From a regional standpoint, 48% of our sales come from Asia, followed by 39% of sales coming from North America and 13% of our sales coming from Europe.
Finally, our top two customers were Asia-based customers and collectively made up 36% of sales. During the March quarter, we unexpectedly experienced a major Wi-Fi 6E program abruptly sunset with one of our carrier customers. We had previously secured a design win with this carrier customer for Wi-Fi 7 and have already received production orders for this platform beginning in the September quarter. Overall, we are tracking nine design wins in Wi-Fi 7 AP platforms, and we see a growing trend to ramp major Wi-Fi 7 programs for enterprise and carrier customers in the second half of 2024. We remain bullish in Wi-Fi 7 and are currently in the early stages of production ramp with multiple tri-band and quad-band programs.
As a result, we are guiding the June quarter revenue to be flat to down 5% given the Wi-Fi 6E sunset an imminent transition to Wi-Fi 7, a company continues to focus on expense and cost savings to significantly reduce cash burn moving forward. For the March quarter, cash burn was down 31% sequentially. Ken will detail our ongoing activities and impact on reducing our cash burn during his upcoming comments.
I would now like to take a moment to discuss updates involving the company's activity related to the chips and science Act of 2022. Regarding CHIPS Act funding, there are two detailed updates to share with investors. As of the end of the March quarter, we are members of six microelectronics any comments, hubs funded by the Department of Defense. Membership to these hubs is critical as it allows access to be part of the hub proposal team for new government research programs.
We currently have two active research programs under one hub membership and we are waiting on the decision with the first proposal potentially worth several million dollars annually. Beginning in the second half of calendar 2024. Furthermore, we are currently pursuing several new memberships with additional ME hub centers, and we'll detail our efforts and progress moving forward.
Second, the CHIPS Act of 2022 includes a provision for a 25% refundable investment tax credit or CHIPS ITC on investments in facilities that manufacture semiconductors that were placed in service after December 31, 2022. We currently estimate the amount of the refundable tax credit applicable to Akoustis to be between $2.8 million and $4 million over the next 9 to 12-months.
Next, I would like to discuss several updates in our primary target markets beginning with slide 5. Our first milestone for the March quarter was to ramp XBAW filter production for two programs at a Wi-Fi 7 Tier-1 enterprise class OEM. We successfully commenced preproduction deliveries at two ODMs for our customer during the quarter.
One of the two programs included our first single crystal filter for enterprise Wi-Fi as it solves a difficult co-existence requirement while providing higher power handling for our customer solution. Our second milestone was to ramp XBAW filter production for Wi-Fi 7 with a new Tier-1 enterprise class OEM. While we did not commence ramp, we have received initial purchase orders in support of the program and expect the program to ramp in the September quarter.
Our third milestone was to secure a design win for our Wi-Fi 7 solution with a Tier-1 network enterprise class OEM. We completed this milestone and announced two design wins in our press release earlier this month on May 1. Looking ahead, in the June quarter, we expect to ramp XBAW filter production for Wi-Fi 7 with a Tier-1 enterprise class OEM. We also plan to secure multiple design wins with a Tier-1 carrier for Wi-Fi 6E and 7 and finally, we expect to release at least seven new XBAW filters into production targeting Wi-Fi 7 tri-band and quad-band architectures.
Next, I would like to discuss our recent developments in the 5G mobile market. During the March quarter, we expected to deliver the second of three Wi-Fi filters to our Tier-2 5G mobile RF front end module maker customers. We have a foundry contract with this customer for a total of three filters. We now have shipped the first two filters. The third filter is still under customer design control and has not yet been released to the foundry.
Finally, we continue our engagement with our fifth mobile partner, offering our export process and foundry for their module and discrete product needs. We have shipped this partner multiple export dye for engineering evaluation for a future Wi-Fi 7 multiplexer application for the mobile market. Our anticipated milestone for the June quarter includes securing a purchase agreement with a new Tier-1 Asia partner focused on mobile and other market segments.
I will now discuss our progress in our network infrastructure business. During the March quarter we successfully achieved approved supplier status with two Tier-1 infrastructure customers. Second, we successfully completed in our redevelopment and delivered filters for the 5G in 104, 7 gigahertz band for massive MIMO architectures to a Tier-1 network infrastructure customer.
During the quarter, we experienced softness in XBAW filter shipments to our 5G network infrastructure customers. However, we expect flat growth of shipments for the remainder of calendar 2024 due to slow deployments of 5G small cell infrastructure hardware. For the June quarter, we expect to secure development order for band in 104 filter targeting massive MIMO with a Tier-1 customer.
Finally, before handing the call off to Ken, I would like to provide an update on our defense and other markets business. As previously mentioned, our biggest success in the defense and other market segment was the introduction of our new XP3F technology, which incorporates a new revolutionary and patented multi-layer nano material that incorporates our single crystal piezo electric material. This new nano-material was developed with funding from the Defense Advanced Research Projects Agency or DARPA to scale the XBAW technology to frequencies up to 20 gigahertz.
During the March quarter, we continued work on our multi million Phase 2 contract option, which extends our current DARPA COFFEE program and the funding through December 2024. As a result, during the March quarter, one of our top five customers were in our defense and other business category.
In addition, we delivered our new XBAW PDK to two defense customers for ongoing foundry engagements to facilitate their upcoming filter designs. Furthermore, we completed the design and sampled new 2.4 gigahertz Wi-Fi CPE, Automotive XBAW filters to two non automotive customers, in our contract business. Our proposal on a new multimillion dollar program with the Office of Naval Research or ONR to fund RF filter multiplexers incorporating our XBAW and P3F single crystal nano-materials technology has been accepted for award, and we are in the process of finalizing the contract with our customer, so that we can begin performing in summer 2024.
For the June quarter, in the defense and other market segment, we are expecting to secure our new government contract focused on advanced XP3F filter architectures beyond 20 gigahertz. Further, we expect to secure a [C-V2X] design win with a Tier-1 automotive customer focusing on the European market. And we expect to release at least two new XBAW filters into production targeting [C-V2X] and timing applications.
And now I would like to hand the call over to Ken to go through our financial highlights.

Kenneth Boller

Thank you, Jeff. For the third quarter ended March 31, 2024, the company reported revenue of $7.5 million, which represents a 7% increase over the prior quarter and at December 31, 2023. On a GAAP basis, operating loss was $22.6 million for the March quarter, driven by revenue of $7.5 million, offset by labor costs of $6.7 million, goodwill impairment charge of $8.1 million depreciation and amortization of $3.3 million and other operational costs totaling $12 million.
As a result, GAAP net loss per share was $0.26. On a non-GAAP basis, operating loss was $12.5 million. Non-GAAP net loss per share was $0.14. CapEx spending for Q3 was $0.3 million and cash used in operating activities was $7.8 million, representing a 31% reduction over the December quarter. As a result of our expense reduction efforts, we are guiding the June quarter revenue to be flat to down 5% as a result of the sunset of the current Wi-Fi 6E program and a transition from Wi-Fi 6E to Wi-Fi 7. As mentioned earlier, we remain bullish in Wi-Fi 7 and are in the early stages of a production ramp.
On the expense front, we continue to undertake aggressive expense reduction and cost-saving measures as well as pursuing the investment tax credits or ITCs, all of which we estimate will reduce our operating cash flow burn rate by an additional 30% sequentially in the June quarter. Given the top-line projections, the current timing of the chips, ITC refunds and the full impact of recent cost savings, we expect to be operating cash flow breakeven within the next nine-months.
I would now like to hand the call back over to Jeff.

Jeffrey Shealy

Thank you, Ken. Before closing, I would like to hand the call off to Drew Wright, our Corporate General Counsel, to provide an update on current litigation matters.

Drew Wright

Thank you, Jeff. I'd like to start with an update on all our litigation matters. I will start with the patent litigation in Texas, in which Akoustis is the plaintiff and Qorvo is the defendant involving a patent that Akoustis exclusively licensed from Cornell. Cornell is in the process of joining the case as a co plaintiff since our last earnings call, one of Qorvo's wafer suppliers filed a motion to caution a Akoustis and filed an inter partes review also called in IPR, challenging the validity of the Cornell 360 patent. Qorvo followed up with its own IPR, challenging the Cornell 360 patent. We are still early in case procedures.
More importantly, turning to litigation in Delaware in which Akoustis is the defendant and Qorvo is the plaintiffs. The lawsuit originally began over two years ago and included claims of patent infringement, false advertising, false patent marketing, employee poaching, misappropriation of trade secrets, unfair competition, RICO, and civil conspiracy.
Qorvo's claims are false patent marking and RICO claims were dropped before trial, which is good news. Now, after 2.5 years, the lawsuit has moved to the trial phase which began last week and is expected to finish this week. The lawsuit entered the trial phase with claims of infringement of two patents, false advertising, misappropriation of trade secrets, unfair competition, and civil conspiracy.
Last week, Qorvo presented its fact witnesses and several expert witnesses. Qorvo is expected to present its final expert witness and rested case this morning. This week, the company will have its opportunity to tell its side of the story, the trial's expected to go to the jury before the end of the week and the jury is expected to issue a verdict in the next several days. We are and will continue to vigorously defend against Qorvo claims.
However, the outcome of any trial is unpredictable, in particular the theories used by each party's experts result in very disparate estimates of the damages alleged by Qorvo. We believe the theories used by our experts are better grounded in the facts and the law. However, if the jury adopts the theories of Qorvo's experts, it is possible the jury will issue an eight figure verdict. For that reason, this litigation may have a significant impact on the company, including its value operations and ability to raise money.
With that update, I'd like to hand the call back to Jeff.

Jeffrey Shealy

Thank you, Drew. The market opportunity for our patented high-frequency XBAW and XP3F filters continue to be substantial. We continue to work aggressively to achieve each of our stated objectives, and we will continue to provide updates on our execution against these objectives as we progress, I want to emphasize to investors that management continues to focus on improving our income statements as we navigate our business transition from Wi-Fi 6E to Wi-Fi 7 and expansion into the automotive network, infrastructure and defense markets.
We continue diligently pursuing product cost savings to lower cost of goods and improve our gross margin, we have undertaken necessary steps to reduce our operating cash burn in the coming quarters. We believe this is prudent in the current economic environment. Further I appreciate our employees for their hard work, passion and dedication in working together to position our company for growth in the quarters ahead.
Finally, I also wish to thank our shareholders who continue to support the company. And with that, I would like to open the call for questions from the investment community. Operator, please go ahead with the first question.

Question and Answer Session

Operator

(Operator Instructions) Craig Ellis with B. Riley Securities.

Craig Ellis

Yeah, thanks for taking the question and thanks for all the color this morning, guys. I wanted to start just by digging a little bit deeper into the revenue dynamics in the first half of the year. So understand that there was a program transition from 6 to 7, but what I wanted to clarify is the magnitude of that transition on what we're seeing in the first half, I think I had expected around $19 million of calendar first half revenues. It looks like it's going to be closer to [15]. So beyond the transition to 7 that comes back in the second half. Were there any other variances versus what the company's expected? And then related to that, what is the risk that the transition to 7 that program really kicks off either in the fourth calendar quarter of this year or next year. So it's for you, but maybe a little bit later. I appreciate color on those items guys to get it started.

Jeffrey Shealy

Hey Craig, good morning, Jeff speaking here. Thanks for your questions. A little bit on the revenue dynamics on the Wi-Fi 6E as we indicated in the script was with one of our Wi-Fi 7 customers that had is transitioning over. As the Wi-Fi standard was adopted at the beginning of the year. What I said in standard was adopted at the beginning of the year. And some of this customer made the decision abruptly to transition to Wi-Fi 7 in terms of the dynamics associated with that for the first half of the year, the revenue associated with our Wi-Fi 6E program was that approximately $1 million per quarter and that was the shortfall for this quarter in terms of from the Wi-Fi market.
In terms of the other market segments that we had previously been projecting a very strong recovery in infrastructure. So there were really no surprises there in terms of our defense and other businesses, in terms of what we have going on with normal, what we have ongoing on the defense side, other businesses came in really as expected. We were a little light in the quarter on the [TDS] side, foundry services business there were some dynamics there that we came up a little bit light for the quarter. We're tracking that very closely for the current quarter and we're back on track, we feel and are monitoring that weekly but I think really the headline was the one program and [60] and I do want to emphasize we're 1 of the 9 design wins that we have in Wi-Fi 7 with that same customer. So they're just they're transitioning over.
In terms of your final point about, the dynamics and potential push out for Wi-Fi 7, and we've got, as we said in the prepared comments, we've got nine programs and Wi-Fi 7, and we're tracking those very carefully and their diverse across multiple customer bases where we began supporting Wi-Fi 7 in the March quarter. And we're seeing a ramp that is expected sometime in the September quarter, and we'll continue to monitor that and David, if there was any further color to my comments.

David Aichele

I think you will need additional color off Craig, Wi-Fi 6E we talked about a lot of the delays or programs out or getting cancelled last year a lot of had to do the chipsets we're not seeing those issues deal with Wi-Fi 7. As Jeff said, the Wi-Fi 7 was deal, allowing to go through certification beginning of this year and received a lot of activity there to the nine programs this one carrier class that did see a sunset it was impacted their [OEM] as well. And we are already seeing the ramp on the Wi-Fi 7 program at least orders. So we have pretty good visibility on orders all the way up to the end of the year. So that is good news in that we didn't lose the customer altogether was just a sunset of that one program and the ramp of this they want and the timing. So we're bullish obviously coming out of this Q4 quarter that we'll see a lot of activity and likewise in the second half of this year.

Craig Ellis

That's really helpful color. Appreciate that Jeff and Dave, I'll ask my second question to, Ken as we look at our gross margin and expense dynamics. So with flat to down revenues, I would expect that gross margins would be flattish in the quarter and then we get the rise towards double digits in the back half of the calendar year as volume improves and exemplary job on expense management. Any color on just the contour of OpEx lines through the rest of the calendar year. Thank you.

Kenneth Boller

Good morning, Craig. Yeah, so on, I'll comment on a few of those items. One is on the operating expense savings. We've taken a lot of active measures to reduce our spend there, I do anticipate it coming down to the $10 million to $11 million per quarter range 0n OpEx.
On the expense line, we have identified over $20 million in annualized savings on our OpEx. Additionally, on the margin, one of the key items there to remember is that we have 17 items in production and we have spent last quarter that will roughly double in the next year. We have at least 7 to 10 new products coming into production in Q4 of this year. This fiscal year in the June quarter and the products, they all come with a robust cost structure and particularly with the back end inside of the costs for those products.
So we will see improvements come with new products coming online, some of them replacing older products that are more expensive. And I do anticipate that some margin while continuing to increase that was in the single digits, I expect that to get into the double digits here in the next few quarters. And then we evolved, we stated that our operating cash flow breakeven will be in the $11 million to 15 million of revenue per quarter depending on mix and that would come with a roughly 25% margin on those sales as well.

Craig Ellis

Got it, thanks for that color Ken.

Operator

It appears there are no further questions at this time. I would now like to turn the floor back over to Jeff Shealy for closing.

Jeffrey Shealy

Thank you, everyone for your time today, and we look forward to speaking you during our next update call to discuss the current quarter's execution against our milestones as well as our future expectations. Thank you and have a good day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.