NVE Corporation (NVEC) Q4 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the NVE Conference Call on Fourth Quarter and Fiscal Year Results Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Dan Baker, President and CEO. Please go ahead.

Good afternoon and welcome to our conference call for the quarter and fiscal year ended March 31, 2019. 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 fiscal year, I'll cover R&D and product development and we'll open the call up 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 risks and uncertainties related to future sales and revenue, risks related to changes in tariffs and other trade barriers, 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 record earnings of $2.99 per diluted share for fiscal 2019 despite an 11% increase in R&D expense, which enabled smart sensor development and strategic product launches in the past year. I'll cover product development in a few minutes, but first, Curt will cover the details of our financial results. Curt?

Thanks, Dan. Total revenue for the fourth quarter of fiscal 2019 decreased 29%, compared to an especially strong quarter last year. The decrease was due to decreases in both product sales and contract R&D. The decrease in product sales was primarily due to an expected decrease in custom anti-tamper product sales, which we discussed in our January call, and a decrease in products for medical devices. Anti-tamper and medical market timing can fluctuate. We have some visibility into improved anti-tamper sales this quarter. We currently believe anti-tamper sales will pick up this quarter, the quarter ending June 30. Gross margin decreased to 77% from 81%, due to revenue mix. Total expenses decreased 2% for the fourth quarter from the prior year, due to a 34% decrease in SG&A, partially offset by a 12% increase in R&D. Dan will discuss R&D in a few minutes. Interest income for the fourth quarter increased 14%, due to an increase in the average interest rates on our marketable securities, partially offset by a decrease in our securities as we used some of our maturing securities to fund dividends. Our effective tax rate was 18%, compared to 30% in the prior year quarter. The decreased tax rate was due to the full effects of tax reform in the past year. After-tax net income for the quarter was $2.86 million or $0.59 per diluted share, compared to $3.88 million or $0.80 last year. For the fiscal year, total revenue decreased 11%, due to a 7% decrease in product sales and a 54% decrease in contract R&D. The decrease in product sales for the year was primarily due to a decrease in custom anti-tamper product sales, and the decrease in contract R&D was due to the completion of certain contracts. As of March 31, we had $355,000 of contract research and development backlog we believe to be firm. We expect that backlog to be filled this fiscal year. Gross margin increased to 80% for the year from 79% for the prior year, due to a more profitable revenue mix. Expenses in fiscal 2019 increased 4%, due to an 11% increase in R&D, partially offset by a 15% decrease in SG&A. R&D expense was 16% of revenue, which is a substantial investment in our future. In addition to company-sponsored R&D, which is an expense item, we have customer-sponsored R&D activities included in cost of sales. The high level of R&D activity has yielded new products with more on the way. Interest income increased 15%, due to an increase in the average interest rates on our marketable securities, partially offset by a decrease in our securities. Our fiscal year tax rate decreased to 18% from 30% in the prior year, due to the impact of tax reform. As Dan said, net income for the fiscal year increased 4% to a record $14.5 million or $2.99 per diluted share, compared to $13.9 million or $2.87 per share last year. Net margin increased to 55% from 47%. Comprehensive income, which includes unrealized gains and losses, increased 18% to $15.4 million, compared to $13 million last year as the strong bond market increased the value of many of our marketable securities. Fixed asset purchases were a modest $68,000 in the most recent year, compared to $605,000 last year. We paid $4 per share in dividends in the past year, which brought the total since we started paying dividends in 2015 to more than $87 million. In addition, we announced today that our Board declared another quarterly dividend of $1 per share payable May 31 to shareholders of record as of May 13. That will bring our total dividends to over $90 million. Now, I'll turn it over to Dan to cover the business. Dan?

Thanks, Curt. I'll cover R&D, strategic new products, and trade shows. Innovative research is key to our future, and our researchers presented two papers at the joint MMM/Intermag conference last quarter, including a paper relating to our industry-leading Tunneling Magnetoresistance or TMR technology. The paper was titled Characterization of Magnesium Oxide-based Magnetic Tunnel Junctions with Super Paramagnetic-free Layers. Our Internet of Things strategy centers on smart sensors. The new sensors are smart because unlike our legacy sensors, they include analog-to-digital conversion, digital factory calibration and digital interfaces in the IC. These features provide simple smart connectivity to the Internet of Things. Our spintronic technology such as TMR elements is ideal for smart sensors because of its inherent precision, small size and low power. We have several customers evaluating the new parts, some with significant volume potential. Customer reaction has been quite positive, and we already have several customer-driven product enhancements. With the new smart sensors, we're stepping up our promotional efforts. This quarter, we'll be exhibiting and presenting a paper at Sensors Expo in San Jose, which is billed as the industry's largest event dedicated to sensors, conductivity and systems. Our distributors have also been promoting the products and getting strong interest. The products were featured at a major trade show in Tokyo in April and will be on display at a show in England next week. Turning to contract R&D. In the past quarter, we were awarded a contract to burn in and test our couplers for the Europa Clipper mission. The mission is to look for conditions for life on one of Jupiter's moons. We've made good progress on the testing, and the parts have held up well under extreme conditions. The Europa Clipper contract was for slightly more than $100,000, so it's not huge revenue, but it demonstrates the extraordinary reliability of our parts and could help our military, aerospace, and space businesses. Fiscal 2019 was a productive year for R&D. We expanded our line of smart sensors for the industrial Internet of Things, including products billed as the world's only smart tunneling magnetoresistance angle and magnetometer sensors. We launched a line of low-power tunneling magnetoresistance couplers. We continued to develop small, precise, reliable and efficient components for medical devices. We completed our Department of Agriculture biosensor grant, and we earned a Letter of Conformance in accordance with the automotive certification scheme for IATF 16949. We also celebrated NVE's 30-year anniversary in the past quarter. We've come a long way since starting in Dr. Jim Daughton's home, and our vision is to continue to lead a spintronic technology revolution. Now I'd like to open the call for questions. Chris?

Thank you. [Operator Instructions] And our first question comes from the line of Jeff Bernstein with Cowen.

Hi Dan.

Hi Jeff.

Could you just talk a little bit about what is going on in the medical device end market and any thoughts about rebound there? Or is there any kind of change in your position with your big customer?

Certainly. So, one of the customers that we've disclosed is Abbott, formerly St. Jude Medical, and there have been short-term challenges. For example, Abbott reported an 8.5% decrease in cardiac rhythm management revenue for the first calendar quarter. They said CRM is an area of disappointment and focus. But the long-term demographics remain favorable for CRM as the population ages. Our technology has a strong benefit proposition in CRM, and we're gaining traction in the broader neurostimulator market. So, we feel it's an excellent market, although it's been challenging of late.

Got you. Okay. And then your – one of your other named customers is Sonova in the – of the hearing aid market. And I guess there's some – in 2020, FDA is going to allow over-the-counter sales of hearing aids. I guess in advance of that, you're already having some other companies like Sound World and Eargo and a number of others that are selling hearing enhancement hardware that they can't call hearing aids that are over-the-counter. Where are you in terms of design wins? What's kind of the time frame for OTC or for some of the hearing enhancement hardware that's already starting to get sold?

Well, it's obviously a market that we're watching closely. And the market, that is, as you say, is going through some significant changes. The exact timing isn't precisely been disclosed by the FDA, but we certainly are looking at it as a near-term opportunity. And an expansion of the hearing aid market such as over-the-counter or private label hearing aids or personal sound amplification products could help us if it expands the market, and we can provide components for those hearing aids. And proponents of lower cost and over-the-counter hearing aids point out that many people who need hearing aids don't have them because of the expense or dispensing inconvenience. So, these new categories could expand the market. And you had recently cited a recent Businessweek article that talked about the potential for hearing aids as wearable technology even for people whose ears are fine. So, they could be doing things like fitness tracking and translations in real time. So, in that article, Starkey's President was quoted as saying that in the next 5 to 7 years, hearing aids are going to be like Jarvis from Iron Man. So, I think the phrase was, the ear is the new wrist, meaning a lot of information could be transmitted there and that could mean a real change in the hearing aid paradigm and a significant expansion of the market. So, we're looking at those opportunities. We're looking at the challenges, the technical challenges that go with those types of products. So, for example, some of those are rechargeable, whereas most conventional hearing aids are – use disposable battery. So, the voltages are different. Our team is looking into that to try to continue to maintain our extraordinarily low power consumption, but allow for the broader voltage range that comes with rechargeable batteries. And there are other technology challenges that we're working on. And so far, the team has been very successful with products. And we're working with specific customers who are in that next-generation hearing aid market.

I think you had, at one point, disclosed that – Starkey Labs as a customer. And they are having, I guess, a big product introduction with this very high-end sort of wearable/hearing aid product, I think, in not very long. Can you say anything about whether you're in that or whether you're in products like that today?

I probably couldn't comment specifically on Starkey. That article that you referred to is going back ways. But hearing aids is a very important market for us, and we have a very strong benefit proposition with our low power, small size, and high reliability. So, we would be expected to be working with hearing aid companies and looking at opportunities for these sorts of next-generation hearing aids.

Got you. Okay. And then can you talk a little bit about the automotive market? You have a partner there in distribution. Any feel for when you'll start to see revenue there? And can you give us any kind of idea of what the ASPs and order of magnitude are in those products so we can kind of figure what volume we need to actually move the needle?

Yes. Those are good questions. And automotive is an excellent growth market for us. The number of sensors in cars, as you know, is expected to – projected to increase rapidly, and our approach are smaller, more precise, more rugged and lower powered than conventional electronics, which are important advantages in the automotive market. So – and we also have the IATF task force conformance now. So, we're looking at two main areas for automotive sensors, and those are current sensing and rotation sensing. And for current sensing, we have raw sensors, which are electronic elements that are read – where the resistance indicates the amount of current. And then we have smart sensors that are made to hook up to computer interfaces. And those products are particularly important in hybrid electric vehicles where power management is critical to the range and the efficiency of those cars. So, our power consumption comes in because we want to be able to measure the power and manage the batteries effectively and manage the loads, like a motors that are draining the battery, but we don't want to use up too much power to do it. So, that's one of the big advantages of our parts. So, we're working on getting those smart sensors and raw sensors qualified in the automotive market. They typically sell for – it depends on the volume, but they're a few dollars down to the $1 or $2 range depending on the sensor or the sensor element. But there are expected to be quite a few of them there in a car. So, we have a lot of opportunities for a number of nodes in cars. And we see it as a significant opportunity for next-generation vehicles with autonomous driving and a longer range. So, some of the challenges that we have are to get those parts qualified, and we're working very aggressively to get those done as quickly as possible. We've introduced several products and we have at least 1 or 2 more in the pipeline that are geared for automotive electronics.

And are the rotation sensing parts a similar ASP? And these are, I guess, the not smart parts that we're talking about?

We have both not smart or what we tend to call raw because the not smart kind of has a negative connotation, but – and then we have smart parts. So, we have both on the angle sensors. We have what's called the ASR002, which is our smart angle sensor, and then we have the AAT family, which are the raw sensor elements, and both of those are on the market. The ASR002 was just introduced this year, and we have some good interest, as I mentioned in the prepared remarks, on those parts. So, the advantage of those is – would be from things like motor control. And to be able to control a motor very precisely – there's lots of motors in cars, of course, they're moving mirrors and windows and cameras and all kinds of things. And making it do that more efficiently and getting the motion -- just enough motion and just enough power to do the job but no wasted power helps extend the range of those vehicles. So, that's another area – those are the two areas, current sensing and angle sensing, where we see a particularly strong market for our products. The other, which is non-sensors, are couplers which are the network interfaces, the backbone of the cars. And those are opportunities for us as well, but the newest products are the sensors.

And the smart sensors, what is the ASP like on smart sensors?

Right. So, those are a bit higher than the current sensors because they have – they're more complicated. I'm not sure I can put an exact number on it. It's in the few dollar range in low volume and then they go down from there depending on the volumes.

Got you. Great. Thanks.

Thanks Jeff.

Thank you. [Operator Instructions] And I'm not showing any further questions on the phone line. I would now like to turn the call back to Mr. Dan Baker, President and CEO, for any further remarks.

Well, thank you, and we were pleased to report a 4% increase in net income and 18% increase in comprehensive income, record earnings and successful smart sensor product launches. We look forward to speaking with you again in early July to discuss fiscal 2020 first quarter results, and we're planning our Annual Shareholders Meeting for early August. Thank you for participating in the call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. And everyone, have a great day.