NVE Corporation (NVEC) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the NVE Conference Call on Fourth Quarter and Fiscal Year Results. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I will now like to hand the conference over to your speaker today, Daniel Baker. Thank you. Please go ahead, sir.

Good afternoon, and welcome to our conference call for the quarter and fiscal year ended March 31, 2020. As always, I’m joined by Curt Reynders, our Chief Financial Officer. This call is being recorded and webcast live. 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 business and new products, and then 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 those documents are available through the SEC’s website, our website and our Twitter time line. 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 the COVID-19 pandemic, uncertainties related to future stock repurchases and dividend payments as well as the risk factors listed from time to time in our filings with the SEC, including our just filed annual report on Form 10-K. Actual results could differ materially from the information provided, and we undertake no obligation to update forward-looking statements we may make. For the fourth quarter, we’re pleased to report an 18% increase in net income, driven by an 11% increase in product sales. For the fiscal year, we reported record net income and cash flow. NVE has been operating effectively through the COVID-19 pandemic thanks to the dedication and resourcefulness of our employees, suppliers and distributors. There have been some material shortages in order push-outs, which we’ll discuss, but they’ve been manageable so far. Minnesota has been under a stay-at-home order since late March until at least May 18. But NVE has continued to operate because it’s in critical sectors as defined in the order, including health care, infrastructure, national defense and other critical manufacturing. As an NVE employee and shareholder, I especially appreciate the efforts of our distributors in hard hit areas such as China and Northern Italy, who kept working on our behalf despite hardships. Tough times show what we’re made of. And we’re seeing the dedication and resourcefulness of NVE employees. Manufacturing employees formed a door knob squad, working during breaks to wipe down common areas. Purchasing people, who usually buy integrated circuit masks turned their attention to face masks and other supplies to keep our employees safe and our manufacturing running. Our website staff posted employee notifications and important information, while still finding time to upgrade our main website. Now Curt will cover the details of our financial results. Curt?

Thanks, Dan. Total revenue for the quarter ended March 31, 2020, increased 10% compared to last year due to an 11% increase in product sales, partially offset by a 14% decrease in contract R&D revenue. The decrease in contract R&D revenue was due to completion of certain contracts. We believe the COVID-19 pandemic had a slight negative impact on our results of operations in the past quarter due to deteriorating business conditions, especially late in the quarter. The pandemic is having a significant impact on our business this quarter, the quarter ending June 30. COVID-19 is also having an impact on medical devices. Starkey Hearing here in Eden Prairie furloughed 10% of its workforce, that’s 600 employees, due to a hearing industry slowdown. Non-urgent and elective procedures have been postponed to free up beds for COVID-19 patients. For example, the American College of Cardiology has recommended postponing many pacemaker and ICD procedures. Some of our important customers have delayed orders due to the impact of COVID-19. However, based on input from these customers, we could recover at least some of the lost business when the effects of the pandemic subside, hopefully, late 2020. With this background, we currently expect total revenue and net income to decrease significantly in the first fiscal quarter of fiscal 2021, the June quarter. In subsequent quarters, total revenue and net income could continue to decrease compared to the prior year quarters due to the effects of the COVID-19 pandemic on general economic conditions, market condition and industries we and our customers serve.

Curt, you cut out at about, with this background, after you talked about late 2020 for the pandemic to subside.

Okay. With this background, we currently expect total revenue and net income to decrease significantly in the first fiscal quarter of fiscal 2021, the June quarter. In subsequent quarters, total revenue and net income could continue to decrease compared to the prior year quarters due to the effects of the COVID-19 pandemic on general economic conditions, market conditions and industries we and our customers serve and supply disruptions affecting our ability to produce certain products. But in the long run, there could be pent-up demand and one trade journal noted that emerging technologies, such as the Internet of Things will more than likely be fundamental to an overall global recovery by the technology sector. We provide sensors for the Internet of Things. Returning to the quarter ended March 31, gross margin increased to 81% from 77% due to a more profitable revenue mix. Expenses increased 3% for the fourth quarter from the prior year due to a 17% increase in the SG&A. The increase was due to increased sales activities and staffing changes. Interest income for the fourth quarter decreased 7% due to a decrease in the average interest rates on our marketable securities and money market funds, and the decrease in our securities as we used some of our maturing securities to fund dividends. Our effective tax rate remained at 18% for the quarter. Net income for the quarter was $3.37 million or $0.69 per diluted share, an increase of 18% compared to $2.86 million or $0.59 last year. We believe our stock is a good investment, and we took advantage of a weak stock market in the quarter to repurchase approximately $687,000 of our stock in the past quarter. With $4.84 million dividend payment, we returned a total of more than $5.5 million to shareholders in the quarter. For the fiscal year, total revenue decreased 4% due to a 4% decrease in product sales and a 14% decrease in contract R&D. Calendar year 2019 was a tough year for the semiconductor industry with total revenue decreasing 12% year-over-year according to the Semiconductor Industry Association. Our decrease in product sales for the year was primarily due to a decrease in purchases by existing customers, and the decrease in contract R&D was due to the completion of certain contracts. Gross margin, however, increased to 81% for the year from 80% for the prior year due to a more profitable revenue mix. Expenses in fiscal 2020 decreased 6% due to a 10% decrease in R&D, partially offset by an 8% increase in SG&A. R&D expense was 15% 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 investment yielded a number of new products with more on the way. Dan will discuss new products in a few minutes. Our effective tax rate was 16% for the fiscal year compared to 18% in the prior year. The decreased tax rate was due to the full effects of tax reform. Net income for the full fiscal year increased slightly to $14.53 million or $3 per share compared to $14.51 million or $2.99 per share last [Audio Gap] increased to 57% from 55%. Including a $599,000 net unrealized gain on marketable securities, comprehensive income was $15.1 million as a strong bond market increased the value of many of our marketable securities. Cash flow from operations increased 12% for the year to a record $15.9 million compared to $14.2 million for the prior year. Fixed asset purchases were a modest $52,000 in the past year, but included investments to speed new product qualifications. We paid $4 per share in dividends in the past year, and we’ve paid more than $100 million since 2015. In addition, today, we announced that our Board declared another quarterly dividend of $1 per share payable May 29 to shareholders of record as of May 18. Cash plus marketable securities as of March 31, 2020, was $70.8 million compared to $74.3 million at the end of last fiscal year, as operating cash flow and unrealized gains covered most of our [Audio Gap] that strength puts us in unique position to weather the current pandemic, pay dividends, consider additional stock buybacks and consider strategic acquisitions. Now I’ll turn the call over to Dan to cover the business. Dan?

Thanks, Curt. I’ll cover the business and new products. Despite some challenges posed by the COVID-19 pandemic, we continue to innovate, and we look forward to helping automate infrastructure as the world starts returning to normal. We pride ourselves on being selected as a supplier to some of the world’s best and most demanding companies. And in the past quarter, we executed an amendment to extend our supply agreement with Sonova AG through March 31, 2025. Sonova develops, manufacturers and sell hearing systems using our magnetic sensors. Our first supply agreement was 10 years ago when it was known as Phonak, and there’ve been several extensions. We look forward to continuing our long-standing relationship. Also in the past quarter, we executed an amendment to extend our building lease, which would have expired at the end of the year. The amendment extends our lease until March 31, 2026. Those of you who visited, know it’s not an opulent space, but it’s efficient and cost-effective. And now we can plan our infrastructure knowing we’ll be here for at least six more years. We filed our Sonova supply agreements and our lease amendment with the SEC, and links are available through the SEC’s website and our website. It was a productive quarter for new products with three new launches. We expanded our line of general-purpose smart angle sensors with the new ASR012 and the ASR022. Both are based on the same Tunneling Magnetoresistance sensor elements and digital processing core, as our previously introduced ASR002 but with different interfaces for different markets. With our flexible smart sensor architecture, our development team was able to design and sample the new parts within just weeks of the customer requests. The ASR012 uses an interface called Inter-Integrated Circuit, or I²C. I²C is a popular serial computer bus and was requested by a prospective customer that makes connected exercise machines. The ASR022 uses what’s called an ABZ interface and was requested by a company that automates machine tools. We also introduced ultra-high common mode transient immunity isolators called the IL6xxCMTI series. Common mode transient immunity, commonly abbreviated CMTI, is an important figure of merit and power switching devices. High CMTI allows efficient control of devices such as motors. CMTI is usually expressed in kilovolts per microsecond. The new parts have a remarkable specification of 200 kilovolts per microsecond, which is 10 times better than our standard versions. In addition to a component market for power supply modules and motor controls, one of our private label partners is exploring integrating our technology into power factor control modules. Power factor controls improve the efficiency of electrical distribution to motors. And by one estimate, motors account for 45% of global power consumption. U.S. ENERGY STAR Guidelines and European Union Standards encourage power factor control. There are links to product announcements for the past quarter’s new products on the press releases page of our – of the news section of our website, and there are also demonstrations in the video section and on our YouTube channel. With the expansion of our spintronic magnetic switch product lines, we also did a video demonstration of a chessboard with 64 GMR magnetic switches to show how a number of sensors can send consolidated data to a computer using local or what’s called edge computing in the Internet of Things. This shows how you can track the movement of chess pieces, which is also applicable to robots and factories. One of our goals with new products or any of our products is to allow our customers to design them as quickly as possible to help support that ease of use. In the past quarter, we contracted with a company called SnapEDA to offer a wide range of electronic design automation files commonly called EDA files. We also redesigned our website to make downloads more accessible and for easier navigation throughout the website. The website also has a bold new look and is more mobile friendly. There are links to the new EDA files from SnapEDA’s website and DigiKey’s website. DigiKey is one of our major distributors. And there is a short video demonstration of the EDA files on our website, YouTube channel and Twitter time line. So fiscal 2020 was a productive year for R&D. We already talked about the new smart angle sensors and ultra-high CMTI isolators. Other successes the past year include new smart GMR and TMR magnetometers, three new types of ultra-low power TMR magnetic switches for medical devices and battery-powered systems, high-speed automotive network couplers using the CAN FD network protocol, new couplers for the industrial Internet of Things that use an emerging lower-voltage data bus. And we qualified our couplers for the Europa Clipper mission to one of Jupiter’s moons, demonstrating the remarkable ruggedness and reliability of our technology. With a number of new products, we were looking forward to two big trade shows in June, Sensor + Test in Germany, which was built as the industry’s largest event dedicated to sensors, connectivity and systems; and Sensors Expo in San Jose. Unfortunately, Sensor + Test was canceled and Sensors Expo appears likely to be postponed or canceled due to the pandemic. So instead of the shows, we’re working with our distributors for promotional opportunities and to upgrade their websites with evaluation kits and product demonstrations. Another impact of COVID-19 is that we are planning to have our annual meeting via webcast and telephone similar to these quarterly conference calls. We’ve been holding the meetings in early August, and it seems likely there will still be restrictions on nonessential travel and gatherings of more than 10 people. Virtual annual meetings are permitted under Minnesota statutes and our Board amended our bylaws to allow such meetings. We filed the amended bylaws with our 10-K this afternoon. We expect to file our proxy statement in late June with details about the meeting. So we’re sorry, we won’t be able to meet some of you in person as we have for many years. But of course, our first obligation is the safety of our shareholders and other attendees. Now I’d like to open the call for questions. Sedarius?

[Operator Instructions] Your first question comes from the line of Jeff Bernstein with Cowen.

Hey, Dan and Curt. How are you, guys?

We’re well, Jeff. How are you?

Okay, good. Staying healthy.

That’s good. Things getting better in New York?

I think so, slowly, but surely, I’m a little nervous about whether people are going to maintain their discipline here. And I’m not sure everybody gets the exponential math. So we’ll just have to see. I’m curious about how you guys are doing kind of running the sales and marketing side of the business virtually?

Yes, that’s a great question. And I think our team has been very creative and our distributors as well about shifting very quickly and effectively to virtual platform. So I mentioned the redo of our website. That’s a project that had started before the pandemic, but turned out to be prescient because our website is much more effective now. Engineers can download the information that they need. They don’t have to call us, email us or have us visit and explain it. We have more demonstration videos, as I mentioned in the prepared remarks, on our website. And we have a YouTube channel that I know you’re familiar with, where we have a number of our product demonstrations. And our team has been busy doing a lot of those demonstrations. We just posted several in the past week that I mentioned in the prepared remarks. And then finally, we’re doing webcast. So we were just preparing for one just before this call with our distributor in Germany, where we’re getting together some of their customers, we’re talking about our new products, some of the products that I talked about in my remarks. And they’re – we were just saying how – they really are well attended and effective. So the world seems to be adapting. And engineers are interested in our products. It’s a different type of marketing. Of course, we’re not doing the type of travel and face-to-face visits that we would like to do and getting in front of our customers and seeing their plants. But we’ve been – I think we’ve been able to be effective, and our team has transitioned very well.

And I was curious, you talked about the couple of products that were the result of customer design – customer request. And can you just go into that a little bit more. Most of the products that you’re designing are not custom. They’re very generally applicable, right? But how does that interaction generally go? Is this the case more often that somebody comes to you and says, we like this general part, but we want to tweak? Or how does that work?

Yes, that’s a great question. It comes up because there are so many interfaces to the Internet of Things and to our sensors. So we tend to pick the ones that we think are going to be the most popular, the most flexible. And so for example, I mentioned not to get too much into the alphabet soup, but the existing product that we had is called the ASR002, which uses an interface called SPI, which is a common interface. But then we had a customer, I mentioned it in the prepared remarks, who makes exercise machines, and those are more and more connected to the Internet of Things. And that was a market that we weren’t that familiar with. And they use, what’s called, I²C or Inter-Integrated Circuit. And it’s – I didn’t get a good answer that there’s some important technical reason for it. It’s just conventional in that market. And because of the flexible architecture that we use with our smart sensors, where they use a common sensor element and then a digital core, we can adapt that digital core to different interfaces using software. So we’re not redesigning the IC, and we’re not going through the long fabrication cycles that are inherent in semiconductors. So that’s how our team was able to turn that product around in really a matter of weeks from when the customer-requested that type of interface. So when we look at doing those sorts of custom things, we’re looking at several considerations. Is the customer large enough to justify an investment of our valuable engineering resources? In this case, we believe it is. And then is – are there other markets for this? Are there other applications? And we believe there are in this case as well. And then the second product were people who are using older legacy encoders, what are called optical encoders, and they wanted to drop in replacement to use our technology, which is much more flexible and immune to dust and contamination as opposed to the optical couplers they were replacing. And again, that wasn’t a market that we had initially identified, but I think we had enough interest. In this case, it was several customers, and the lead customer who’s one in the machine tool industry, which uses those older couplers.

So this is leveraging the smart interface that you announced just a year or two ago, is that right?

Yes, exactly so, a smart sensor technology. They use a common platform.

Yes, okay. Terrific. Can you talk a little bit about the uncloneable reference business and the military business overall? I know that’s kind of lumpy. It has kind of waned a little bit at one point, and then I think it’s been a little stronger. Obviously, it’s nice to have that kind of business in a COVID-19, kind of, situation. Can you just give us a little color on what’s going on there?

Yes. Curt, do you want to take that question?

Yes. Yes. As you say that, that business can be kind of a lumpy, but we still have a lot of interest out there. We’ve got orders coming in. And we expect it to continue to grow.

Got you. Okay. That’s great. And I believe at one point in the crisis here, your Italian distributor was shut down. Are they actually back open again?

They are. They’re working from home, which is required, but they’ve been very dedicated. As you know, Northern Italy was one of the most hard hit areas in the world, and that’s our new distributor Dimac, we talked about before, a distributor and manufacturer’s rep. And we certainly wish them the very best, and they seem to be, knock on wood, all healthy and able to work. And I know they’re looking forward to being able to get back into the office and get back in front of customers.

Great. And I noticed in the K, which is conveniently short, thank you, that you have a new over 10% customer in fiscal 2020, who was below 10% before. Is that a brand new customer? Can you give us just a general industry – what industry they’re in?

Yes. I think we’re probably bound by confidentiality in that case, Jeff, I’m sorry.

Okay. And can you talk a little bit about what you’re seeing? You mentioned, obviously, in terms of the current order picture that one of your customers in the hearing aid market is being impacted. But on the design side, what are you seeing there? There’s obviously the new very high-end hearing aid platforms, which several guys seem to be out with now. And then you’ve got this FDA OTC hearing aid situation, which I guess is delayed again. But by August, there’s a deadline for the FDA to bless over-the-counter hearing aid. So have you been seeing design activity ahead of that?

We have on both fronts, Jeff. So you’re very well informed on the next-generation hearing aids, the advanced hearing aids. We’ve begun offering sensors that are compatible with the rechargeable batteries that are often used in wearables rather than the disposable batteries that are generally used in traditional hearing aids. So the metaphor is that the ear is going to be the new wrist, and we’ll have these hearing appliances that’ll give us information, that’ll give us feedback. And I think the analogy that I think you picked up on was Jarvis from Iron Man. So we do have activities, and we have a design win in that space. I think we’ve talked about it before of a company that’s doing a next-generation hearing aid, and we have interest from several others. So that’s an exciting area for us to get into those advanced hearing aids and wearable technology. And then at the other end of the spectrum and expansion of the hearing aid market, such as over-the-counter or private label hearing aids, could certainly help us if it expands the market, and we can provide components for those hearing aids. Now there’s obviously been a near-term slowdown. People are postponing things like that for obvious reasons. But in the long run, people who need hearing aids, after the world starts returning to normal are still going to need them. So we see that as an excellent opportunity 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 cost and dispensing inconvenience. And the dispensing inconvenience is, of course, being highlighted in the wake of the pandemic. So those new categories that allow people to get hearing aids easier seem like they could expand the market, and that seems like it would be even more important in a post pandemic environment.

Great. Great. And then can you talk a little bit about automotive? Obviously, you’ve been working there. There’s a lot of design activity going on, and you’re starting to see some of the, kind of, very high-tech things like gallium nitride power circuits and things like that, getting design wins. Are you guys seeing any design wins yet for sensors in automotive?

We’re seeing interest. We can’t report any design wins or major design wins right now. It’s a little bit of a longer-term process. But as you know, we’re investing in that. We’re into that. We have a – we are in conformance now with the industry standard, the IATF 16949 standard. So that opens some doors for us. We’re working with a company that makes battery management systems for hybrid electric vehicles to get our parts qualified. So we’re hoping that we might be able to report a design win there. We can’t yet. The qualification is very rigorous. In addition to the environmental standards that you would expect for a car, particularly cars that might end up here in Minnesota, there’s also requirements for electrical stress. And our parts are very rugged, and we have to prove it. So we think we have a competitive advantage there. Unlike conventional vehicles, gasoline vehicle that use 12 volt batteries, these use batteries that there are several hundred volts. They can have surges that are extremely high voltage. And so there’s a demand for extremely rugged components and we fit that market. And we demonstrated that ruggedness in some of the most demanding markets in the world, things like life support medical, missions to Jupiter. So we think we positioned. We have a private label partnership with a company with strong automotive sales channels. And we have parts that are more precise, lower power and more rugged than conventional electronics.

Great, okay. I’ll get back in the queue. And see if someone else will take a shot. Thanks.

Thanks, Jeff.

[Operator Instructions] And you have a question from the line of Jeff Bernstein with Cowen.

Okay. If there’s no one else, I got a couple more. In the K, you talked about a couple of your MRAM patents that are expiring. And I was just wondering what they applied to? Is that, sort of, put you out of the spin torque business? Or do you still have appreciable IP there? And it does talk about a couple of, I guess, even more advanced MRAM technologies, and maybe you could just talk about those for a minute.

Yes, exactly. And we’re always impressed by the careful read that you make on our 10-K in a relatively short period of time. So yes, we do have some patents that are expiring but we have other patents that are newer. And so we have a laddering of patents that apply to MRAM and other technologies. So the patents that we have – that are expiring, as you might expect, are older patents that apply – they apply to a range of technology, but primarily older MRAM technology and non-spin torque MRAM or conventional MRAM primarily. So we have – as you correctly pointed out, we do have an excellent portfolio of MRAM and other spintronic patents, and some of them have quite a ways go. So we believe that we have an excellent intellectual property position. We have excellent technology. We have trade secrets that are valuable. We are working on development of MRAM. You – in the question you asked earlier, Jeff, that Curt answered, so part of the – part of the applications that we use MRAM for are in some of the anti-tamper technology that we provide to primarily now government and military customers. And MRAM is excellent for that because the data is inherently persistent and very difficult to defeat because it’s based on electronic spin rather than charge. So we are continuing to work on our intellectual property and develop it. We’re not scaled to make large-scale MRAMs that would end up in phones or computers, but the technology is there and could be scaled by somebody who has memory manufacturing capability and those types of scale of plants. So our strategy is to develop our technology and use that technology in anti-tamper applications, relatively small devices, relatively small number of bits and to build our intellectual property with the potential of licensing that for large-scale memories.

Okay. Last question. You guys had done a project, I think, it was for DARPA, it might have been for the Army, on the spin torque magnetic diode spectrograph. And I think there were potential applications in high-speed communications. I’m just wondering where that technology stands now?

Yes. That’s exciting technology. And unfortunately, we were hoping that the Army would make those reports public, and they haven’t or they didn’t. So we completed that in 2018, and it demonstrated the feasibility of a spin torque microwave diode spectrograph. So it has military uses, which are difficult for us to get into, but the technology could lead to an increase in coupler speed and it – perhaps as much as a gigabaud. So that’s 1 billion bits per second considerably faster than our couplers now. We’re in the range of 100 megabauds. So in order of magnitude, higher speed. So some of the commercial applications could be remote video monitoring. Those are very high-speed interfaces. So the interfaces, even the HDMI interfaces to our monitors, as common as those are, are remarkably high-speed because of all of the data that has to go across to build an image and a picture that can animate and change in real-time. So there’s more and more demands for bandwidth. We think the technology could have some applicability in the long-term. The near-term applications are primarily military. And those are modest in terms of revenue potential, but important.

Got you. So you’re not working on anything there from a commercial standpoint at this time?

We don’t have anything imminent from a commercial standpoint, right.

Okay, great. Thanks so much, guys.

Thanks Jeff. Stay safe.

You too, bye.

And there are no other questions at this time. I will like to turn the call back to Daniel Baker with any closing remarks.

Great. Well, thank you. Well, we were pleased to report an 18% increase in net income for the quarter, record earnings and cash flow for the year and three new products in the quarter. We remain well positioned to weather the pandemic. And we look forward to speaking with you again in July to discuss fiscal 2021 first quarter results and hopefully in early August for our annual meeting. Stay safe, everyone and thank you for participating in the call.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.