NVE Corporation (NVEC) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the NVE Corporation Conference Call and Fourth Quarter and Fiscal Year Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today Dan Baker, President and Chief Executive Officer. You may begin.

Good afternoon, and welcome to our conference call for the quarter and fiscal year ended March 31, 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 and the year, I’ll cover business items, and we’ll open the call to questions. We issued our press release and filed our annual report on Form 10-K in the past hour following the close of market. Links to documents are available through the SEC’s Website, our Website, and our twitter timeline. 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, risks and uncertainties related to the economic environments and the industries we serve, risks and uncertainties related to future sales and revenue, uncertainties related to the impact of federal tax reform, as well as the risk factors listed from time-to-time in our filings with the SEC, including our just filed 10-K. The Company undertakes no obligation to update forward-looking statements we may make. We're pleased to report that a 19% increase in product sales drove a 15% increase in total revenue and a 28% increase in net income for the quarter. For the fiscal year, net income increased 7% to $2.87 per share and operating cash flow increased 22% to our highest ever. Curt will cover the details of our financial results. Curt?

Thanks Dan. As Dan mentioned, fourth quarter total revenue increased 15% to $7.9 million compared to $6.85 million in the year ago quarter. The increase was due to a 19% increase in product sales, partially offset by a 35% decrease in contract R&D. The strong product sales for the quarter were due in part to increases in anti-tamper sensor sales for defense applications. Those of you who followed us for a while know our technology is well-suited for anti-tamper and cyber security. It remains a niche market for us, and it can be cyclical but has good long-term growth potential. The decrease in R&D revenue was due to the completion of certain contracts. Dan will talk about contracts in a few minutes. Gross margin increased to 81% of revenue compared to 79% last year due to a more profitable revenue mix. Expenses decreased 3% for the fourth quarter due to a 10% increase in SG&A partially offset by an 8% decrease in R&D expense. The increase in SG&A was due to increased performance based compensation with the strong quarter and increased patent expenses. Research and development expense was due to the completion of certain projects and project phases. Increases in sales and gross margins along with the decreased expenses drove a 26% increase in operating income for the quarter and operating margin was more than 65%. Interest income increased 4% for the quarter, due to an increase in the average interest rates on our securities. The increase in interest income was despite a decrease in our marketable securities as we use a portion of maturing securities to fund the dividends. Income before taxes increased 24% to $5.55 million from $4.46 million in the prior year quarter and pretax margin was over 70%. Our effective tax rate decreased to approximately 30% compared to 32% in the prior year quarter. The decrease was due to the blended effect of a decrease in the federal tax rate with the enactment of the Tax Reform Act. After-tax net income for the most recent quarter increased 28% to $3.88 million or $0.80 per diluted share compared to $3.03 million or $0.62 last year. Net margin for the quarter increased to 49% compared to 44% last year. For the full fiscal year, total revenue increased 5% to $29.9 million from $28.3 million in the prior year. The increase was due to a 4% increase in product sales and a 19% increase in contract R&D. We report revenue by geographic region in our 10-K, about half our revenue was international in the past year. U.S. and Asia-Pacific revenue each increased to 10%, while EMA, Europe, the Middle East and Africa increased 5%. Dan will discuss a positive change in our European product distribution. Gross margin remained at 79% for the year. Expenses in fiscal 2018 increased 7% due to an 11% increase in R&D, partially offset by 2% decrease in SG&A. Innovation is critical for growth and we invest heavily in R&D. We report customer and company-sponsored R&D in our 10-K. In addition to company-sponsored R&D, we spent $1.27 million on customer sponsored R&D in fiscal 2018 for total R&D investment of $4.84 million or 16% of total revenue. Interest income decreased to 6% for the fiscal year with the decrease in our marketable securities as we use a portion of maturing securities to fund dividends. As I noted in my quarterly summary, increased interest rates on recent bond purchases are beginning to offset portfolio reductions. Income before taxes increased 5% to $20 million from $19.1 million the prior year. For the fiscal year, our tax rate was approximately 30% compared to 32% in the prior year, primarily due to a decrease in the federal tax rate partially offset by the effect of the new rate on deferred tax assets. Net income for the fiscal year increased 7% to $13.9 million or $2.87 per diluted share compared to $12.9 million or $2.68 per share last year. Net margin increased to 47% from 46%. We continue to have best-in-class performance metrics. According to Standard & Poor’s Compu stat, NVE’s gross margin is in the 99th percentile of the semi conductors and semiconductor equipment industry, and operating and net margins are in the 100th percentile. As Dan said, operating cash flow increased 22% to a record $15.2 million for fiscal 2018. Fixed asset purchases were the highest they’ve been in several years to $605,000 compared to $520,000 last year and $287,000 in fiscal 2016. Most of the investments were to improve production efficiency or increase capacity to support growth. In addition to prior year comparisons, we report three years of financials in our 10-K. Product sales, total revenue and earnings have all increased for two consecutive years. The Tax Reform Act enacted in December reduced federal corporate tax rate starting this calendar year. We currently expect effective rate to decrease significantly to approximately 22% in the new fiscal year that began April 1st. Strategically, we hope the lower rates will help us compete more fairly with foreign competitors that would help us grow, innovate and justify new investments. We paid $4 per share in dividends in the past year, which brought the total cash return to shareholders in the past five years in the form of dividends and stock repurchases to more than $70 million. 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 May 31st to shareholders of record as of May 14th. Now I’ll turn it over to Dan to cover the business. Dan?

Thanks, Curt. I’ll cover new products, R&D, distribution and the fiscal 2018 highlights. R&D was focused on expanding our product lines especially for the Internet of Things. In the past quarter, we began sampling a new series of tunneling magnetoresistance or TMR couplers the IO-01 series. These devices are lower power than our legacy giant like mega resistance or GMR couplers, the new devices are designed as gateways to the Internet-of-Things, where lower power allows parts to be battery powered for a long time. Turning to contract R&D. We made good progress on our Department of Agriculture biosensor grant, and we have components ready for prototypes including biosensors, magnetic nanoparticles, aptamers, microfluidic manifolds and cartridges. We are focusing our efforts in this quarter on the biosensors and controlled electronics and we remain optimistic will meet the main overall milestone of live pathogen testing on schedule in August. We completed a research contract for the U.S. Navy, Naval Sea Systems Command for circulating technology for full integration at the Monolithic Microwave Integrated Circuit level with useful results. The goal was to enable the next generation of microwave isolators and circulators. Our project team led by the principal investigator Dr. Joe Davis and including a team from Oregon State University summarized the results in a paper presented at the INTERMAG conference last week in Singapore. There is a link to the paper abstract in the papers of presentation section of our website and on our twitter timeline. Perhaps, in part because of tweets like that one, our Twitter account was recently called Minnesota's nerdiest corporate twitter account by Kathy Grayson of Minneapolis St. Paul Business Journal. We took that a compliment of course. In addition to military applications for our new circulator technology, there are potential commercial applications such as 5G cellular infrastructure and automotive telemetry. The rugged reliability of our technology makes it ideal for automotive, industrial and other demanding applications. A great example of that is, as we’ve discussed previously, our components have been selected for the Europa Clipper mission. In the past quarter, the mission moved to what they called planned Phase B. NASA’s is scheduled to complete Phase B with preliminary designs in September. We sold a small number of parts for the mission in the past quarter. The Europa Clipper is a [mission to a ruling] of Jupiter to look for water and signs of life. The mission has rigorous requirements for a very harsh environment with cold and radiation. There is not huge revenue potential and it will take a while, but it validates the ruggedness and the reliability of our products and technology. The mission launch is planned for the 2020s and then it will take several years to get to Europa. NVE brand distribution is primarily catalog internet distributors in the U.S. and specialized distributors outside the U.S. One of most successful and important distributors outside the U.S. has been German based IAS line. Effective April 1, IAS line combined its activities with Pevatron through the Swiss Angst+Pfister Group. They say, the combination makes them even more powerful partners into a sense of technology and power electronics market. IAS Line said the Pevatron sales team will more than double its sales power. We’ve been helping train the new sales team on our products and we’re optimistic about the new organization. In fiscal 2018, we worked on technology to help save lives, improve safety and explore other worlds, specifically we continue to develop small, precise reliable, efficient components for advanced life saving medical devices. We advanced our food safety technology and we designed ultra rugged components suitable for space. Other highlights of the past year, we extended our products for the industrial internet of things including products build as the world’s smallest analog sensor, the world’s most sensitive magnetic switch as well as high field sensors plus new angle, rotation and current sensors. We completed an hourly contract on a Spin-Torque Microwave Diode and a Navy contract for a miniature circulator. We met key milestones on our department of agriculture biosensor grant. We launched a new partnership with one of the world’s largest semiconductor companies to expand our distribution and reach larger markets. Our quality management system was certified to the rigorous new ISO-9001 2015 standard which will help us reach automotive and other new markets. And we continued preparations for the Europa fly-by mission. R&D investments have uniquely positioned NVE with products and technology. Our vision for the coming year is to accelerate our growth as we lead a technology revolution. And now I’d like to open the call for questions. Sonia?

Thank you. [Operator instructions] Our first question comes from Jeff Bernstein of Cowen. Your line is now open.

Hey guys, thanks for taking some questions. Can you talk a little bit about the medical devices space and rhythm management and I think you were starting to see a recovery there last quarter and just give us a little more color?

Certainly, well good afternoon Jeff. So CRM as you know as you mentioned has been under pressure for example Abbott reported little or no cardiac rhythm management organic growth in their report for the first calendar quarter. But that compares to a significant decrease in 2017. And they said that last year U.S. CRM sales were impacted by competitive dynamics in the MRI category. But they've reported FDA approval for MRI conditional labeling for their Assurity MRI in the [Ellipse] [ph] ICD this year and said - this calendar year and said that FDA labeling approval for its ICD significantly enhances its competitive position in the category. So that’s the specifics relating to Abbott and long-term the demographics are favorable for CRM as you know as the population ages. Our technology has a strong benefit proposition in CRM and we're gaining traction in the broader neurostimulator market.

Great. And then I wanted to ask about the auto market, you had partnered with a major semi vendor. I think you had six products that they were going to be taking to market for you. I think you were also looking for IATF-1649 certification. Can you just give us an update on auto?

Certainly, so automotive sensor content is expected to increase particularly with hybrid electric vehicles and self driving cars, so our advantages in the automotive market or lower power for more efficiency and the higher isolation, longer barrier life and reliability. We introduced one of the products that I mentioned in the prepared remarks was a new current sensor in the past year, the AAL024 which is important category for electric vehicles and we're also designing what we call smart current sensors which are very useful in electric vehicles and will make a more seamless easier to use interface for computer and controller systems in cars. And our new private brand partnership that you mentioned will give us credibility and broader exposure in the automotive market. You also asked about IATF or International Automotive Task Force certification and we are working towards that. We've been working on new procedures, policies to conform with the automotive standards. It's a rigorous process but it will build our credibility and our goal is to have a conformance this year, this calendar year.

Got you. Okay. So, are you making sales yet into automotive?

Modest sales, but we're looking and this is a very large market and we're looking at categories particularly battery management systems for hybrid electric vehicles where we think that there's a much larger market than we're currently serving. The sales that we have now we believe are mostly related to some of our existing parts and in some cases to controller area net transceivers. But right now it's modest, but we consider it a significant growth opportunity.

Got you. Okay. And then the -- you said in the introduction that you had some revenue contribution this quarter from the anti-tamper PUFs I guess which I wasn't sure if they had actually been commercial prior, so can you give us an update on that?

It was a variety of technologies. PUFs is a little bit longer term. We try not to be too specific about what exactly we're selling because it could be self-defeating to get too specific, but we have a variety of anti-tamper technologies, some of it is for what's called volume protection which means physical intrusion or somewhat removes a circuit board to try to reverse engineer it or open the box that’s supposed to be secure. We have technology to detect that and then we have technology to detect counterfeited or replaced integrated circuits or to guard data streams. So it's a variety of things and just everything – lot of things came together for a very strong quarter in that area. As Curt mentioned it can be a little bit lumpy, so it's not the sort of steady business that that we get from some of the commercial devices, but it's excellent technology as you well know and we see long-term growth opportunities in both the high end military aerospace markets, but also for migrating this technology into commercial applications and securing all the things that we rely on, rely on every day in terms of cyber security. So long term we consider it very important.

Great. Thanks for the clarification. And I'll get back in the queue and let someone else to ask questions.

Thanks, Jeff.

Thank you. [Operator Instructions] And we do have a follow-up from Jeff Bernstein of Cowen. Your line is now open.

Okay. I had a couple of more. Can you just differentiate; you talked about navy contract on the isolator I guess. And then I know you had an army contract. And can you just differentiate those two?

Right. So both are in the same general category, but the Army contract was for a spin torque microwave diode which is a device that can be used for ultrahigh frequency microwave communications in particular I believe we said we just trying to think what we've can say publicly, but it can be used for radar for certain types of radar. The Navy contract was for a circulator which is a device that can route or combine very high frequency signals. So the general category that we're looking at is extremely high frequencies. And as you know as bandwidth starts to become more and more crowded, we tend to move towards higher and higher frequency with the assumption that the technology will keep up, and one of the technologies will help keep up is our technology spintronics, because it can run at very high frequencies. And so both of those projects involved microwave range, communications and signal processing which as I mentioned in the prepared remarks is important not just for the military but also 5G data for cell phone network, cellular networks is moving towards higher and higher frequency bands and telemetry for cars is also moving to some of those bands and possibly the same ones as 5G. So there is a need for just sort of it seems like an unquenchable need for faster and faster devices.

Got you. And then I wanted to ask about the hearing aid business?

Yes. So the hearing aid business has been an important and strong business for us for many years it’s been as I mentioned in response to your prior question like CRM, it's been a challenging market in the near term because of the landscape for healthcare and some other factors that are beyond our control. But we continue to invest in that market. We have a strong benefit proposition in terms of ultra low power which extends battery life. We continue to work on lower and lower power in smaller and smaller devices and there is just a tremendous need and appetite for that to make hearing aids smaller, more power efficient last longer with the battery charge the batteries or charge and to be smaller and less obtrusive in and fit deeper into the year. So those are things that we can help facilitate. The other advantage it has over life support medical devices is that the product cycles can be shorter. Its demanding application but it probably there's nothing is demanding as something like life support medical devices to it can take a long time to get devices qualified. So that's one of the advantages of non-life support medical markets like hearing aids.

Got you. Okay. And then lastly just wondering been reading some things about [spintronics and qubits], are you guys doing anything there? Have you filed any IP there?

We were fascinated by spintronics and Quantum Electronics. We do long term research in some amazing areas. And typically though our goal is commercialization and eventual revenue generation and everything we do so things like that are probably a little bit too far off for us to put a large amount of resources in.

Got you, okay. Thanks very much.

Thank you, Jeff.

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

Thank you, Sonia and thank you everyone for listening in and participating. We were pleased to report a 19% increase in product sales for the quarter. Record cash flow for the year and important development milestones. So we look forward to speaking with you again in July to discuss first quarter fiscal 2019 results. Thank you again for participating in the call.

Ladies and gentlemen, this does conclude today’s program. You may all disconnect. Everyone have a great day.