NVE Corporation (NVEC) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the NVE Conference Call on First Quarter Fiscal Results 2018. 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 Mr. Daniel Baker, President and CEO. Sir, you may begin.

Good afternoon, and welcome to our conference call for the quarter ended June 30, 2017, which was the first quarter of fiscal 2018. 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, I’ll cover business and governance items, and we’ll open the call to questions. We issued our press release and filed our Quarterly Report on Form 10-Q in the past hour following the close of market. Links to documents are available through the SEC’s website, our website, nve.com, and on twitter.com/nvecorporation. 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 our reliance on several large customers for a significant percentage of revenue, uncertainties related to the economic environments and the industries we serve, uncertainties related to future contract, research and development revenue, as well as the risk factors listed from time-to-time in our filings with the SEC including our Annual Report on Form 10-K for the fiscal year ended March 31, 2017. The Company undertakes no obligation to update forward-looking statements we may make. We’re pleased to report total revenue increased 13% compared to last year, driven by an 18% increase in product sales and net income increased 5% to $0.68 per share. Now, I’ll ask Curt to cover the details of our financial results.

Thanks, Dan. As Dan said, total revenue for the first quarter of fiscal 2018 increased 13% to 7.61 million from 6.71 million the prior year quarter. The increase was due to an 18% increase in product sales, partially offset by a 15% decrease in contract R&D. The decrease in R&D revenue was due to the completion of certain contracts. The product sales increase was our fourth consecutive year over year increase and was primarily due to new customers and to a lesser extent to order timing in the just completed first quarter. We currently believe second quarter revenue will be somewhat depressed from this high initial level, resulting in less favorable year over year and sequential comparisons this quarter, the second quarter. We currently expect order patterns to recover in the third quarter. Gross margin was 76% of revenue compared to 79% last year due to decreased margins on product sales with a less profitable product sales mix. Total expenses increased 14% for the first quarter of fiscal 2018 compared to the prior year quarter due to a 2% increase in selling, general and administrative expense and a 19% increase in R&D expense. The large increase in R&D expense in the quarter was due to new projects including developing Internet of Things n-node sensors that are key to our growth strategy. Interest income decreased 17% for the first quarter due to a decrease in interest bearing marketable securities and the decrease in the average interest rates on those securities. Income before taxes which is operating income plus interest income increased 6% to $4.87 million and pre-tax margin was 64%. After taxes, net income for the quarter was $3.3 million or $0.68 per diluted share, compared to 3.13 million or $0.65 last year. Net margin for the quarter was 43%, a $55,000 net unrealized gain for marketable securities increased comprehensive income, which is net income plus unrealized gains to $3.35 million for the quarter. Fixed asset purchases were 393,000 in the quarter primarily from more efficient production equipment. We currently expect fixed asset purchases for the fiscal year to be more than the $520,000 we spent last year. Cash provided by operating activities was $5.22 million in the quarter compared to 4.19 million for the prior year quarter. In addition to the dividend paid in the past quarter we announced today that our board declared another quarterly dividend of $1 per share payable August 31st to shareholders of record as of July 31st. Now, I’ll turn it over to Dan to cover the business and governance. Dan.

Thanks, Curt. I’ll cover new products, trade shows, R&D contracts and governance. As we said before, our long-term product strategy focuses on bold new technology such as biosensors. Our near-term growth strategy is for new and improved products particularly smaller, lower power and more rugged. In the past quarter, we introduced two new products highlighting those advantages, a low power network transceiver and an MRI tolerance sensor. The new network transceiver bodes best-in-class power consumption and is targeted at medical devices and the Internet of Things. We believe the new parts are the first of their type to use tunneling magnetoresistance or TMR, spintronic technology for power efficiency without sacrificing speed. The new IL2985 draws less than one-third the supply current of our standard giant magnetoresistance or GMR products, which are already fairly low power. There is a demonstration of the low power transceiver on our YouTube channel, youtube.com/nvecorporation and on our Twitter timeline. The MRI tower and sensors are designed to operate normally over and extremely wide range of applied field such, as those found in MRI imaging. MRI tolerance and safety is increasingly important for medical devices. In addition to medical devices, other applications include more efficient motor controls. The inside of motors, there is a harsh environment with large magnetic fields. To promote our products to a wide audience, we participated in several large trade shows in the past quarter incorporation with our distributors. Power Conversion and Intelligent Motion in Europe and the SENSOR+TEST Measurement fair both in Germany and the Embedded Systems Expo in Japan. We had several new products for the shows and reports from the shows were positive. As we said before, contract R&D supports our long-term growth strategy with bold new ideas such as biosensors. In contract R&D, we continue to work on our Department of Agriculture project to detect salmonella in industry relevant large samples. The goal is to dramatically improve food safety and the objective is to build and test prototype commercial systems. We’re pleased to complete the first of four major milestones, design completion. Milestone 2 is prototype component scheduled for next month. We are on track for that although we still have some work to do. Milestone 3 is a fully assembled prototype with the user interface. And finally, milestone 4 by August 2018 includes completing live pathogen testing to establish sensor sensitivity. We made good progress in several areas for milestone 2 prototype components include the biosensors, magnetic nanoparticles, aptamers, microfluidic/nanofluidic cartridges and control electronics. We’re working on all of these areas in parallel to get to market as quickly as possible. Finally and I’ll cover some governance items. Our annual meeting has been scheduled for August 3rd here in Eden Prairie. The materials are Proxy Statement, Letter to Shareholders and Annual Report on Form 10-K have been filed with the SEC and are available from the investor section of our website. We’re pleased to note that after reviewing our recent 10-K and proxy statement institutional shareholder services has again assigned NVE, the best possible governance score of one indicating the top 10% of public companies. There are four times on the formally agenda for the meeting. First to elect directors; second, advisory approval of the compensation of our named executive officers or NEOs; third, an advisory vote on the frequency of votes on executive compensation; and finally to ratify the selection of our independent registered public accounting firm. For a good corporate practice, our entire Board of Director stands for election every year, and we’re fortunate that and exceptionally experience and accomplish Board. The second Annual Meeting agenda item is approval of officer compensation and the third is a shareholder vote on the frequency of those approvals. Some compensation highlights from our proxy, we don’t over pay, we don’t unduly dilute our shareholders and there are no executive perks or golden parachutes. The last formal item of business at the Annual Meeting would be to ratify the selection of our independent registered public accounting firm for the fiscal year. Grant Thornton audited our pass four years financials and we recommend our shareholders ratify their selection. Two new items in our proxy are our new executive officers and peer companies and relative performance. The two new executive officers are both extremely talented. Pete Eames was promoted to Vice-President of Advanced Technology in the past fiscal year. Pete is a brilliant researcher and is now leading R&D. He joined NVE after completing his PhD in Experimental Condensed Matter Physics in 2003. Tim Heseltine rejoined NVE in January as Vice President of Sales. His first tour of duty was for 18 years in various sales and engineering capacities from 1996 to 2014. Tim knows our customers and products extremely well. He is an electrical engineer and former marine, and we’re delighted he decided to return to lead our sales growth. In accordance with good corporate practice, our Compensation Committee revived performance relative to peer group of companies and assessing performance. Inclusion criteria included comparability of business profile served markets, revenue, number of employees and market capitalization. NVE’s return on equity was near the median of the peer group and our pretax net margin was more than twice that of any company in the peer group. Our Annual Meetings are generally well attended and we look forward to seeing many of you there. We have themes for our Annual Meetings. Last year’s meeting was during the Rio Olympics. So, we had an Olympic theme. This year, the theme is food safety, food and cooking. We will cover our food safety biosensors, food powered sensors, and most importantly we plan to use bad cooking related puns at every opportunity. Now, I would like to open the call for questions. Brian?

Thank you. [Operator Instructions] And our first question comes from the line of Charles Haff from Craig Hallum Capital. Your line is now open.

Hi, Dan this is Lucas Baranowski on for Charles Haff here at Craig Hallum. Just was hoping, you can maybe give us some updates on some of the other R&D projects that you have the works? Specifically, you mentioned in the past a project so that would allow hearing aids to be linked to smartphones, and I believe you were in phase two of that with the NIH. Do you have any updates you could provide us with there?

Yes, well, hearing aids is an excellent target market for us and in particular we’ve been focusing on non-life support medical devices such as hearing aids, which allow us to reach the market sooner. And we can provide a number of capacities. You mentioned one of them, which is the capability to interface to things like smartphones or to the embedded networks, the wireless networks that museums and other public places have to allow hearing impaired people to listen in to things that are broadcast over speakers. So, those remain a focus. We devote a significant amount of effort to developing new hearing aid, peripherals, and we hope to see some of those reaching market relatively soon. The particular one that you mentioned which involves changes to hearing aids and way they’re used is a longer term project, but we also have some projects that look to make hearing aids more efficient, more effective and easier to use and less intrusive for the people who need them.

And then, you’ve also talked about spin torque diodes and MRAM opportunity and the contract with the Army. Do you have any news for us there?

We’ve made good progress on a research contract with the Army to demonstrate the feasibility of a spin-torque microwave diode spectrograph. That’s a longer term project. But we are very close to hopefully demonstrating the feasibility of this particular spintronic structure. And in addition to military applications, one of the exciting things about microwave spintronics is that it could help enable next generation network such as 5G cell phones and data which is a very large potential market. So, we see this as an excellent long-term research thrust. And it’s amazing, the things that our folks have been able to do, the speeds of these devices can run at and the way that they can do things that are not practical with conventional semiconductors.

And then, just one more here. You talked about the automotive opportunity on your last conference call and you had an agreement in place there. Do you have any new milestones to report?

Yes, we made some progress there. As you mentioned, our new private brand partnership will give us credibility and broader exposure in the automotive market. We have significant advantages in that market, particularly for electric vehicles, lower power for more efficiency. And I mentioned a product in the prepared remarks that has significantly lower power, and that means that these devices are draining the battery less and allowing longer range for electric vehicles, which is extremely important. We have higher isolation and longer barrier life for reliability, which is important in that market as well. So, the other thing that we are working on and we don’t have any specific updates other than we have made very good progress, which is to gain IATF 16949 certification, which is the gold standard for automotive quality systems. So, our hope is to have that in the next couple of quarters, within the next two quarters, which would give us a lot of credibility and open some doors for us in the automotive market.

And then, based upon your comments there, is it safe to say that the new low-power network transceiver that you talked about, I mean when you say that has some applications for IoT, you’re also including automotive in that, is that correct? This is something that could go into cars?

It certainly could. The particular product that we introduced -- the part number that I cited was the IL2985 is a network that is used more in industrial networks than automotive networks. But we make couplers for the automotive networks, and the technology is certainly applicable there. And lower power is of course very important in that market. So, yes, that’s one of the reasons we’re developing this technology is to improve the power efficiency of hybrid electric vehicles.

[Operator Instructions] Our next question comes from the line of Thomas Cochran - Lake Road Partners. Your line is now open.

I wanted to check on one thing that might be coming up. As you finish up on your work with the food sensors in the middle of next year, I’m wondering before you have that completely locked up, you’ll begin looking at the use of the same detectors for detecting explosives like the ones we find in Afghanistan and Iraq, and maybe even old land mines, are you going to start on that before, or are you going to wait until August of 2018?

Well, there’re a number of extensions that we’re looking for, as you know Tom, for this technology. And one of the ones that we are looking at is medical diagnostics to detect pathogenic bacteria that can cause human infections. We have worked on, as I think you probably know, explosive detection and unexploded ordinance projects. Those are more magnetic sensors typically than biosensors. We’ve also worked on biosensors that we detect biological warfare agents. So, we do work closely with certain agencies and with the Department of Defense. We continue to maintain a significant amount of business, contract R&D with the Department of Defense. So, there’re possibilities there, but the most logical -- one of the more logical extensions of this technology would be towards medical diagnostics.

Our next question comes from the line of Jeff Bernstein from Cowen. Your line is now open.

Just wanted to follow-up on the fixed asset purchases. I think you talked about being ahead of last year’s 525,000 and having spent 393,000 already, so sounds like you’re on track to be well ahead. Can you just go through a little bit more about -- you mentioned some things about efficiency but just flush out what the spending is about, is some of this for pure capacity as well?

A lot of it is for efficiency, some of it is for redundancy, but I think a lot of the equipment that we’re buying now is to help in our efficiency and to be able to get new products to market. And we’re looking at -- we’re probably going to be somewhere between what we had last year and probably lower than a $1 million total for the fiscal year.

Got you, great. And then on MRAM just refresh us, the license agreements that you have on MRAM. Were they paid up in advance or are you actually getting some kind of per unit royalty from any MRAM products that are being produced?

We’re not currently receiving royalties for MRAM but our strategy is to make specialized, high-value MRAM for applications such as anti-tamper cryptokeys and to license that technology for large scale memories to manufacturers that need our intellectual property. So, right now, MRAM isn’t generating a lot of revenue. We make relatively small amounts of devices that go into high value added applications such as anti-tamper cryptokeys. But the business supports R&D and expands our excellent intellectual property portfolio. So, our goal is to license the technology for large scale memories.

Got you. And so, you are actually today shipping cryptokeys that is a production product for you?

Yes. We make specialized, high-value MRAM. It’s not the type of MRAM that you would find in computers or cell phones, it’s much smaller than that, but as you know, that’s a very valuable function. And MRAM is ideal for it because the data is persistent and it’s very difficult to reverse engineer.

And then -- so you talked about licensing MRAM. So, I’m assuming that’s of the spin-torque variety the kind of next generation.

Well, there’s certainly a lot of promise there. We have intellectual property in both, but a lot of the experts see the future in spin-torque or spin momentum MRAM.

Got you. So, you’re actively talking to people about licensing that.

Our goal is to license that technology.

Terrific. And then, can you just -- can you touch on the cardiac rhythm management business and I guess St. Jude under Abbott et cetera?

Sure. Well, CRM has been, as you probably know, under a certain amount of pressure and Abbott is going to report, I believe tomorrow. But in the last quarter, it would have been their Q1, they reported their sales were down 12%. So, it’s challenging for us. But long-term, the demographics are favorable as the population ages and our technology has a strong benefit proposition in cardiac rhythm management. We’re gaining traction also in the broader neurostimulator market. So, it’s an excellent long term market for us but it’s been challenging recently.

Got you. Okay, great. And then any progress report on the, Broadcom relationship?

Well, we talked about on our last call that that’s a relationship that we’ve had for many years. And then we also reported on our last call a new relationship with a different company. And that’s the one that I alluded in reference to another question about automotive that that gets us a channel into the rapidly growing market for automotive electronics, the number of sensors in cars is projected to go rapidly, and our new private label partnership is with the company that has a strong automotive channel.

And does that give you access to the Chinese market at all or how will you approach that market? And then just, I just guess reading more about electrification in heavy truck market and wondering what you might be doing there.

Yes. Those are great questions. So, yes, the partnership does strengthen our distribution in China. We also have our own distributors in China. And we spend the fair amount of time on that; it’s a very large market, as you know. But, one of the challenges for smaller a company is that it typically requires feet on the street, and this will help us with that, with just presence in such a large market. And heavy trucks and other automotive related businesses are also a good market for us, because they use some of the same technology and some of the same products that we’re targeting at the automotive market. But, they are sometimes easier to get into, they’re more innovative in a sense and they have less barriers to entry. So, heavy trucks, buses and trains fall into that general category. And those are markets where we’ve been gaining some traction. They help us gain creditability in a notoriously automotive market. And we’re also seeing,, just like in automotive, we’re seeing more and more electronics and sensors in trucks, buses and trains.

And I’m showing no further questions. And I’d like to turn the call back to you, Mr. Daniel Baker, for any closing remarks.

Well, great. If there are no other questions, we were pleased to report solid growth driven by an 18% increase in product sales. We look forward to seeing some of you at our annual meeting in a couple of weeks and speaking with you again in October to discuss second quarter results. Thank you for participating in the call.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program and you may all disconnect. Everyone, have a great day.