NVE Corporation (NVEC) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the NVE Conference Call on Fourth Quarter Fiscal 2015 Results. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I would now like to introduce your host for today’s conference, Dan Baker, President and CEO. Sir, you may begin.

Thanks. Good afternoon, and welcome to our conference call for the quarter and fiscal year ended March 31, 2015. As always, I’m joined by Curt Reynders, our Chief Financial Officer. This call is being webcast live and being recorded. A replay will be available through our website, nve.com. After my opening comments, Curt will present a financial review of the quarter and fiscal year-to-date; I’ll cover business items and we’ll take questions. We issued our press release with audited financial results and filed our quarterly report on Form 10-K in the past hour following the close of market. Links to documents are available through our website and the SEC’s Website and on Twitter at NVE Corporation. Comments we may make that relate to future plans, events, financial results, or performance are forward-looking statements that are subject to certain risks and uncertainties, including among others, such factors as uncertainties related to the future revenue, risks related to our reliance on several large customers for a significant percentage of revenue, uncertainties related to future dividends and stock repurchases, as well as the risk factors listed from time-to-time in SEC filings including our just filed annual report on Form 10-K. The company undertakes no obligation to update forward-looking statements we may make. We’re pleased to report a strong quarter to complete a record fiscal year. For the quarter, total revenue increased 27%, product sales increased 29% and net income increased 43% to $0.75 per diluted share. For the fiscal year, net income increased 29% to $2.95 per diluted share driven by 17% increase in product sales and a 63% increase in contract R&D. And operating cash flow was a record $14.9 million. We also announced a quarterly dividend of $1 a share payable this month. Now I’ll turn the call over to Curt for details of our financial results.

Thanks, Dan. I’ll cover quarterly results, fiscal year results, the balance sheet and our quarterly dividend. As Dan said, fourth quarter total revenue increased 27% to $7.57 million from $5.98 million due to a 29% increase in product sales partially offset by an 81% decrease in contract R&D revenue. Product sales increased 28% sequentially from the immediately prior quarter as we appear to have recovered from calendar year-end inventory adjustments by medical device customers which affected revenue in the December quarter. Contract R&D for the quarter decreased to $23,000 from $125,000 last year despite a good deal of contract activity because of the timing of revenue recognition milestones. We expect the work we did in the past quarter to result in contract revenue this quarter. Gross margin increased to a record 82% of revenue for the fourth quarter of fiscal 2015 compared to 77% last year due to more favorable revenue and product sales mixes. Total expenses decreased 6% for the fourth quarter of fiscal 2015 compared to the prior year quarter due a 15% decrease in R&D expense partially offset by 9% increase in selling, general and administrative expense. The increase in SG&A was primarily due to increased sales commissions and performance based compensation. The decrease in R&D expense was due to the completion of certain product development activities and an increase in contract R&D activities which caused resources to be reallocated from expensed R&D. With the large increase in revenue, increased gross margin and decreased expenses, income from operations increased 51% to $4.96 million and our operating margin was a record 65% compared to 55% in the prior year quarter. Interest income decreased 5% for the quarter due to a decrease in marketable securities related to our dividend payment. We expect interest income to continue to decrease in the future because we plan to use proceeds for maturing marketable securities to help fund cash dividends rather than reinvesting the proceeds in fixed income securities as we have done in the past. Income before taxes which is operating income plus interest income was $5.47 million for the quarter compared to $3.82 million in the prior year quarter and pre-tax margin was a record 72% compared to 64% last year. After taxes, net income for the fourth quarter was $3.66 million or $0.75 per diluted share compared to $2.56 million or $0.53 last year. Net margins for the quarter increased to 48% from 43%. For the fiscal year, total revenue increased 18% to $30.6 million compared to $25.9 million for the prior fiscal year. Product sales increased 17% for the fiscal year to $29.9 million compared to $25.5 million for the prior year. Contract R&D revenue increased 63% for fiscal 2015 to $690,000 compared to $423,000 last year due to new contracts. Revenue increased in all the geographic regions we report. European revenue increased 25%, Asian revenue increased 28% and the U.S. revenue was up 7%. The geographic revenue mix moved towards more international revenue. Foreign revenues were 61% of our total compared to 57% in the prior year. Gross profit margin for the year increased to 80%, the best in our history compared to 78% last year. Total expenses decreased 9% for fiscal 2015 compared to fiscal 2014 due to a 16% decrease in research and development expense partially offset by a 3% increase in SG&A expense. The increase in SG&A was primarily due to increased sales commissions and performance based compensation. The decrease in research and development expense was due to the completion of certain product development activities and an increase in contract R&D activity which caused resourced to be reallocated from expensed R&D. As of March 31, 2015, we had $2.2 million of contract R&D backlog we believe to be firm compared to $165,358 as of March 31, 2014. We expect the firm backlog as of March 31, 2015 to be filled this fiscal year so this bodes well for contract R&D this year. Our product sales are made primarily under standard purchase orders which are generally cancelable. Therefore product order backlog is not included in firm backlog. As noted in our 10-K, there can be no assurance that backlog will be resolved in future revenue. In addition to R&D expense, we report customer and company sponsored R&D spending at fiscal yearend. The total of customer and company sponsored R&D activities was $3.59 million in the past fiscal year or 12% of revenue. Income from operations for the past year increased 34% to $19.3 million and our operating margin was 63% compared to 55% in the prior year. Interest income increased 3% for the year despite the decrease in the quarter due to increases in the first three quarters. As I said before, we expect interest income to decrease in the future as we fund dividends. Net income for fiscal 2015 was $14.4 million or $2.95 per diluted share compared to $11.1 million or $2.29 per share for fiscal 2014. As we had throughout our recent history, we continue to significantly outperform our industry on margins. According to Standard & Poor’s compustat, NVE’s gross and operating margins are in the 100th percentile of the semiconductors and semiconductor equipment industry. Operating cash flow or net cash provided by operating activities was a record $14.9 million for the fiscal year. Fixed asset purchases were $185,000 for the fiscal year compared to $161,000 for the prior year. CapEx has been historically low over the past two years after we completed a major expansion. Cash and cash equivalents were $9.44 million at March 31, 2015 compared to $1.26 million at March 31, 2014. The increase in cash was primarily due to $14.9 million in net cash provided by operating activities during the year and $12.2 million in proceeds from maturities and marketable securities partially offset by the $10 million dividend and $9 million in purchases of marketable securities. All of the security purchases were in the first half of the fiscal year. The $10 million dividend was paid in late February on the schedule we laid out in our previous call. At March 31, we had $91 million in marketable securities down from $94.4 million at March 31, 2014. The decrease in marketable securities in fiscal 2015 helped fund our dividend. We’re pleased to announce our board declared our second quarterly dividend of $1 per share or an aggregate of approximately $4.86 million payable on or about May 29 to shareholders of record as of May 18. As we discussed on our last call, our strategy was to pay quarterly dividends in excess of our free cash flow in order to return a portion of our balance sheet to enhance shareholder value. Free cash flow is operating cash flow less purchases of fixed assets. In the past quarter, our free cash flow was $3.95 million and our dividend will be approximately $4.86 million. Finally, we reported the five-year performance of our stock in our 10-K. Total shareholder return for our stock with appreciation and dividends was 57% compared to 44% for the small-times index of companies involved in micro and nanotech. Also our stock price hit several all-time highs in the past fiscal year. Now, I’ll turn it over to Dan for his perspective on our business. Dan?

Thanks Curt. I’ll cover patents, product development, governance and I’ll review accomplishments for the past fiscal year. On patents, we received notices of allowances for two patents in the past quarter a notice of allowance is a written notification that a patent application is nearing issuance. The first allowance was for a patent titled, spin-dependent tunneling devices with magnetization states based on stress conditions. We also received an issue notification for this patent. Spin-dependent tunneling or SDT is a spintronic effect that produces a large change in resistance through a normally insulating layer. This allows spin to be sensed as electrical resistance for interface to conventional electronics. SDT devices use structures as thin as a few atomic layers. Most of our products use another spintronic effect, giant magneto resistance or GMR that we’re developing more products with SDT. Also in the past quarter, we received a notice of allowance of a patent titled thin-film structure magnetize-able beat detector. The patent relates to a system for detecting the presence of selected molecular species which could be used in biosensors. The patent was allowed after a favorable ruling by the board of patent appeals and interferences of the U.S. Patent and Trade Mark Office. The ruling was in response to an appeal we filed 2011 of a patent examiner’s rejection of the patent. The application has had a long journey since it was filed in 2008, we believe in the patent’s merit and we were pleased, the board of appeal supported our position. The patent will strengthen the value of our biosensor intellectual property portfolio. We typically issue information bulletins when patents are granted. You can subscribe to these e-mail alerts from our investor events webpage or you can follow us on Twitter at NVE Corporation. Turning to new products in the past quarter, we rounded out our V-series coupler product line with the 5-channel, 5-kilovolt isolation parts called the IL-260V and IL-261V. We have also rounded out our V-series high isolation voltage Micro-Small Outline Package or MSOP coupler product line. The 3 mm MSOP parts are built as the world’s smallest isolators. Until now, they were only available with 1 kilovolt isolation ratings but the high voltage versions are rated at a remarkable 2.5 kilovolts. We sometimes summarize our product advantages with the 4 Bs boxes or miniaturization of medical and other devices, bits or more precise than competing semiconductors bullet-proof meaning rugged and inherently reliable and batteries are low power. The V-series couplers extend the first and third Bs, boxes and bullet-proof by providing the smallest parts and the highest voltage withstand capability. Turning to governance, last year’s annual report that slows the material weakness in our system of internal control. After our remediation steps the past fiscal year, there were no material weaknesses identified in connection with our fiscal 2015 internal control evaluation. Also in keeping with best governance practices, in the past year, we moved to the new 2013 KOSO [ph] framework in evaluating our internal control over financial reporting replacing the older 1992 framework. Fiscal 2015 was a productive year for product development. New products the past year included high voltage couplers for smart grid and medical instrument applications, high voltage Micro-Small Outline Package couplers and quarter sized data couplers and network couplers. We were also granted a new coupler patent in the past fiscal year and the patent related to anti-tamer systems. These are in addition to the two allowances I described a few minutes ago. Now, let’s open the call for questions. Kath?

[Operator Instructions]. And our first question comes from the line of Thomas Caffrey of Lake Road Partners. Your line is open. Please go ahead.

Hello Dan and congratulations on an outstanding quarter. This is great news and it will be wonderful to achieve that dividend too. But you fellows at NVEC get the highest return on sales of any company in America and this has been going on for years and years, quarter-after-quarter, which always to me suggested there must be other people who would appreciate other customers who are willing to pay for what you got. But even the increase in revenues you just reported came really from a recovery in some of your present customers. Can you tell us a little about what is going on in new directions for the company?

Yes, absolutely. Thanks Tom and thanks for the kind words. So, we have a number of efforts to broaden our benefit proposition to new customers and particularly in fast growing areas. I touched on a couple of them, medical instruments and power management systems, so, just to give a little bit of color on power management systems. So, there is a lot of focus on how we can internet a variety of inanimate objects, the so called internet of things, vision that could result in billions of sensors being deployed over the next few years and decades as we build a smarter infrastructure. So, our sensors can help with that by sensing things like motor currents to help them run more efficiently and our couplers can help with that by providing the nerves to connect to a variety of inanimate objects. So, we’ve been working to reach-out to potential customers in this area to help our distributors to be more effective in this area. We developed demonstrators that helped show our benefits, we recently introduced to demonstrator that shows how our customers can make an extremely efficient power supply using our couplers to provide the feedback and to provide the nerves of these types of systems. So, those are some area that we’re looking at. And we see some extremely bright prospects. And our distributors are motivated and very excited. So I hope that you’ll find our devices helping to manage our energy grid in the next few years.

Okay. Thanks Dan. I look forward to the next quarter.

Thanks Tom.

[Operator Instructions]. And I’m showing no further questions at this time. I’d like to turn the call back over to Dan Baker for any closing remarks.

Well, thank you. If there are no other questions, we can wrap up. We were pleased to report record product sales, net income and cash flow for fiscal 2015, a productive year for product development and significant cash dividends. We look forward to reporting our first quarter results in July and through our Annual Meeting in August. Thank you for participating in the call.