NVE Corporation (NVEC) Q3 2022 Earnings Report, Transcript and Summary

00:07 Thank you for standing by, and welcome to the NVE Corporation Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. 00:31 I would now like to hand the conference over to your host, President and CEO, Dan Baker. Please go ahead.

00:39 Good afternoon, and welcome to our conference call for the quarter and nine months ended December 31, 2021. This call is being webcast live and being recorded. A replay will be available through our website nve.com. 00:53 We issued our press release with third quarter results and filed our quarterly report on Form 10-Q in the past hour following the close of market. We also filed the current report on Form 8-K announcing our new CFO, Joe Schmitz who is on the call. Joe is a seasoned executive who joined us this week to help fulfill our mission of leading spintronic revolution. Joe, welcome to the call.

01:17 Thanks, Dan.

01:20 Also on today's call is our Vice President of Advanced Technology, Pete Eames. We’ll hear from Pete in a few minutes. Since Joe is new, I'll present the financials as well as the business review today, Pete will cover new products and R&D, and then we'll open the call to questions. 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, uncertainties related to future stock repurchases and dividend payments, our dependence on critical suppliers and packaging vendors, risks related to renewals of agreements with certain customers and risks related to the COVID-19 pandemic 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 year ended March 31, 2021, as updated in subsequent filings. 02:19 Links to the documents we filed this afternoon are available through the SEC's website, our website and our Twitter timeline. Actual results could differ materially from the information provided, and we undertake no obligation to update forward-looking statements we may make. 02:36 We're pleased to report solid earnings despite supply chain disruptions that delayed product shipments. More importantly, we ended the quarter well positioned with work in process product inventories. 02:50 I'll cover some details of the financials. Total revenue for the most recent quarter decreased 4% to $6.29 million from $6.53 million in the prior-year quarter. The decrease was due to a 7% decrease in product sales, partially offset by an 86% increase in contract R&D. Net income for the third quarter of fiscal 2022 decreased 12% to $3.47 million, or $0.72 per diluted share, compared to $3.93 million, or $0.81 for the prior-year quarter. 03:29 We believe the impact of the COVID-19 pandemic and customer demand was significantly less in the quarter and nine months ended December 31, 2021, compared to the prior year periods. We believe the impact on – of the pandemic on our supply chain, however, was significantly more in the most recent quarter and nine months than in the prior year periods. 03:56 Gross profit margin decreased to 78% in the third quarter of fiscal 2022 from 84% in the third quarter of fiscal 2021, primarily due to product mix and increased product costs. Like most companies in the semiconductor industry, many of our cost increase, including foundry wafers, chemicals, packaging costs and labor. 04:23 In response to increased costs, we canceled some discounts and increased some prices in the past quarter. More price increases became effective at the start of the calendar year. In the past quarter, we quoted 16-week lead times on most of our parts. Therefore, if we hit our goals, of course, many of the parts where we quoted 16 weeks will be shipped this quarter. 16-week lead times are much longer than before the pandemic or even a few months ago. But according to the most recent monthly market update by one of our distributors, the lead time for parts from one of our traditional semiconductor competitors is 52 to 80 weeks or above. 05:07 Expenses for the quarter decreased 14% from the prior year due to a 15% decrease in R&D and a 13% decrease in SG&A. The decrease in R&D expense was primarily due to staffing changes and the completion of certain product development activities. The decrease in SG&A was primarily due to staffing changes. 5:32 Interest income for the third quarter of fiscal 2022 decreased 22% due a decrease in our available for sale securities and a decrease in the average interest rates on those securities. Net income for the quarter was $3.47 million or $0.72 per diluted share compared to $3.93 million or $0.81 last year. 05:56 We continue to generate strong profitability. Operating margin was 64%, pre-tax margin was 69% and net margin was 55%. For the first nine months of fiscal 2022, total revenue increased 31% to $20.3 million from $15.5 million in the prior year. Product sales increased 31% and contract R&D increased 17%. 6:26 Net income for the first nine months increased 25% from the prior year period to $10.7 million or $2.21 per diluted share, from $8.56 million, or $1.77 per share, for the first nine months of fiscal 2021. 06:47 Capital expenditures were $58,000 in the first nine months of the fiscal year. We expect that number to increase significantly this quarter, the fourth quarter since we plan to deploy several new test handlers to increase our production test capacity and alleviate potential bottlenecks. We repurpose part of the building to make room for the new equipment. 07:11 We paid $1 per share dividend in the past quarter and today, we announced that our Board of Directors declared another quarterly dividend of $1 per share payable February 28th to shareholders of record as of January 31. 07:27 Turning to the past quarter's business highlights. Some analysts have said global semiconductor shortages could last several more years. That would pose both medium-term opportunities and threats. We took advantage of some of the opportunities by winning business because we have shorter lead times than traditional semiconductors, and we can keep that business by demonstrating we’re a reliable supplier with excellent product performance in quality. 07:55 We've addressed the threats posed by the shortages by increasing work in process inventory. We are investing in additional production and test equipment. We expanded our production space. We have invested in tooling and materials for alternate packaging vendors, and we have invested in tooling for onshore foundry wafers. With these steps, as I discussed in the financial review, although lead times are longer than they have been, they are much better than industry averages. 08:27 We're proud to supply products to some of the world's most demanding customers, including Abbott's Pacesetter subsidiary. Abbott as a leading supplier of implantable medical devices. I'm pleased to report that we have reached a tentative agreement to extend our supplier partnering contract with Abbott. The extension will run through the end of 2022 and will include a price increase in the face of our increased materials and manufacturing costs. 08:58 We'll follow the amendment on our current report on Form 8-K after it's fully executed. There's still some in-person trade shows and conferences. Our Taiwan Distributor Caltech International exhibited Taipei International Industrial Automation exhibition in December. Caltech reported turnout was lighter than before the pandemic, but they still had some leads. 09:24 The joint MMM Intermag Conference, a major conference for magnetic since spintronics was last week. Highlights of our participation are on our website and Twitter timeline. We provided several types of our giant Magnetoresistance and Tunneling Magnetoresistance sensors to student entrance at the conference so they could learn how to use them. 09:47 The students came up with some corporate applications including a magnetic flute and a beer level sensor. There links to videos on our Twitter timeline. Now, I'd like to turn the call over to Peter Eames, our Vice President of Advanced Technology to cover new products and product development. 10:06 Pete has been on these calls before, he's been within the, since 2003 and he has been in this current position since 2017. Pete has a PhD in experimental condensed matter physics from the University of Minnesota. Pete?

10:21 Thanks, Dan. I'll cover recent new products and summarize our product development strategy. In the past quarter, we launched our most sensitive sensor ever. The new sensor is a version of our groundbreaking tunneling Magnetoresistance or TMR sensors. High sensitivity means new sensors can detect smaller magnetic fields, which allows more precise position or current sensing from our accurate and efficient electronic controls. A demonstration of our website – demonstration on our website and YouTube channel shows how the new sensors can precisely detect and position a very small magnet of one [Indiscernible] of an inch cylinder and this scale is important for applications requiring precise automation. 11:08 The new product is a result of advancements in our TMR sensor materials by our advanced technology team. We continue researching even higher sensitivity devices to maintain and extend our leadership in this area. Applications of high sensitivity sensors include precise position sensing and biometric monitoring. 11:30 Despite challenges posed by shortages and long lead times, 2021 was a productive year for product development. In addition to the new sensor I just discussed, we introduced several other new products in the past year. The world's first TMR Gear 2 sensors with thousands of a degree resolution for ultraprecise Motion control and robotics. Ultra-low power magnetic switches for medical devices and hearables and more parts, the transmit power as well as data. 12:02 Next, we're working on two near-term advanced smart sensors for the Industrial Internet of Things and Advanced high sensitivity TMR Smart Magnetometer and an advanced single smart angle sensor both we hope to announce these new products soon in this quarter. 12:21 Long term, our R&D strategy and is in advanced materials and sensors for couplers and for sensors for the Internet and the industrial Internet of things and hybrid electric vehicles and MRAM for anti-tamper niches to build our intellectual property. Our primary enabling technology for advanced products is tunneling Magnetoresistance or TMR or real world leaders in TMR, which is an advanced spintronic technology. TMR offers higher sensitivity and lower power than traditional semiconductors or even other spintronic technologies.

13:03 Thanks, Pete. Now, we'd like to open the call for questions. Latif [ph]?

13:29 Thank you. [Operator Instructions] Our first question comes from the line of Jeff Bernstein of Cowen. Your line is open.

13:36 Hey, guys. Nice to talk to you again, Dan, and nice to meet you, Joe and Pete. So a couple of questions for you. One, can you give us any kind of order of magnitude of sort of how much business you think you left on the table in the current quarter because of shipment delays?

13:58 Yes. It's hard to come up with a number, Jeff, but it was a significant amount of revenue, but the more important thing is that it's been delayed not lost by and large. So, we haven't lost those customers, we haven't lost that business and we've actually picked up quite a bit of business and picked up orders from our competition. So, it was a significant disruption. And we – as I mentioned in the prepared remarks, in the first two quarters of the fiscal year, we had inventory, and so the demand had picked up and we were uniquely positioned. In the most recent quarter, our inventory had been – a lot of our inventory been depleted. And so we were in a position then where the shortages started to bite. But they didn't bite us nearly as hard because of the mitigation steps that our folks talk and the skill and dedication which our employees put into managing some of these shortages that they haven't affected us is severely as many other companies in the semiconductors industry?

15:23 Gotcha. So we can assume that you've built a little visibility as a result of the backup?

15:33 Yes. We have visibility of orders and their challenges in the industry, as you well know, but we're taking them on and committed to growth. We're betting on, we're adding equipment. We're expanding our building because we're expecting to deliver those products that have been delayed.

15:59 Gotcha. And you referenced redesigns for U.S. Packaging, so that's I guess, on your part, redesigning some of your parts to be packaged here as opposed to overseas and cut down on that logistics time and I guess whatever delays there are at packaging facilities overseas, is that the takeaway?

16:21 Exactly. So, we've invested in onshoring, it takes a while, but we're expecting wafers that we used to get from Asia. We're expecting the first wafers on one of our highest volume foundry wafers, the raw materials as early as later this month. So our team got on that fairly early in the semiconductor shortage crunch. And we have more wafers on the drawing board that we're redesigning for onshore foundries.

17:03 Gotcha. Okay. And then we've talked in the past that you had some drop in sort of pin compatible parts that you could compete with some of your peers and often I think with better performance. But has this situation dragged on long enough that people are actually doing some board designs and willing to design in parts that aren't compatible?

17:35 Yes. Some of them are and we spend a fair amount of time supporting those customers to point out the differences and to help them through the design process for redesigning their boards. And also, we picked up significant amount of business of orders for pin-for-pin replacement parts, where there are no board designs required and those redesigns, as you can imagine, can go much faster.

18:08 Gotcha. Okay. That's great. And can you touch on what's been going on with Angst+Pfister and what kind of progress you're making in automotive?

18:22 Yes. So automotive remains a target market for us. And, in particular, you're referencing Angst+Pfister’s so-called BeFAST platform, which is a platform for onboard charging and other power conversion applications, which are fast-growing applications, as you know. So, we continue to work with them and work with some of their end customers on designs, on sampling parts. We are working on even more improved products that will address that market of improving the efficiency, battery charging and other power conversion systems. So, it's an area that we see as an excellent target market, particularly for our couplers, which can be used them to drive high-speed power switches, so-called MOSFETs in order to convert power from the AC voltages that we would have in a charging system or in our homes to the DC that's required to charge – recharge in electric vehicle or convert energy to a more efficient motor.

19:48 Gotcha. And so these are the ones that are like silicon carbide compatible?

19:53 Exactly. So, our couplers provide a bridge between electronics and interface between the control electronics and the switches like the silicon carbide or gallium nitride MOSFETs that are doing these switching of the power, but - because those are at high voltages and require high currents, you can't connect those directly to the controller electronics. So our Spintronic couplers solve that problem of being able to signal the MOSFETs to switch without a direct electrical connection.

20:37 Gotcha. And then I had a question about the – about Abbott or couple of questions about Abbott. So, it sounds like you are extending the current agreement. I think you usually have like five or six-year agreements. Is that just because of how things are moving so quickly in the industry or just expand a little bit on what's going on with Abbott?

21:03 Yes. Well, we've had longer-term extensions with Abbott, or their predecessor companies, St. Jude or Pacesetter, but recently, the extensions have been shorter than one year. So we do expect to negotiate a longer-term agreement with Abbott. Those things, it take a little bit of time. But what we're pleased with is that the agreement – the tentative agreement that I alluded to codifies the price increase and that's important to us in the face of increasing costs.

21:44 Yes. Okay. That's great. And then I noticed these guys have recently fields of a new electrophysiology cardiac mapping platform and it would seem like your sensors would be really appropriate for that kind of a product. Were you able to get in to see them on that design cycle or is that something to potentially go after in the future?

22:12 Right, Jeff. Well, that's an exciting new application at Abbott. I guess we're not really familiar to all of the unit workings on that particular device, but certainly some of our low-field sensors are exciting for applications like that and that's something that we're hopeful, it will be in that – those types of markets in the future.

22:31 Gotcha. And then Pete, while we have your expertise here, I'm just wondering, I keep reading about various quantum computing kinds of architectures and I'm wondering if any your parts are potentially – potential to be used either in [Indiscernible] in some of the error correction, monitoring kinds of applications and these different kinds of architectures.

22:59 Right, right. Well, that's a real exciting and it's something that we have looked at closely in the past from the Spintronics perspective. I think longer term, there is some opportunities there for us, but in the short term, I think we're focused on some other areas like TMR Materials and high field sensing.

23:19 Gotcha. Okay. And then I wanted to ask about I guess the FDA comment period on over the counter hearing aids, regulation is coming to an end here. Has that kept design activity from happening or are you deep into that or sort of give us an update on the hearing aid market?

23:44 Yeah. Well, in particular for hearable, it's a real exciting time, and there's a lot of changes coming in that market. You're referring to a couple of popular press articles, particularly the Wall Street Journal was published on the availability of devices in the hearable market. That's something that we're really optimistic about. We see opportunities there. We think we're well positioned for those types of devices and something where we're seeing a lot of growth and hopefully an opportunity to talk a lot more in the future about.

24:22 Okay. That's great. And then lastly, Dan, it would seem like these electric vertical take-off and landing vehicles would similarly to EVs, the target market for you guys. How are you looking to try and access the guys designing those products?

24:43 Yes. Exactly so. So that would be a next generation beyond hybrid electric vehicles so called flying cars, which is very exciting area. And there's even more of a premium on efficiency of batteries and power conversion and those types of systems because of the extremely high cost of weight. So, we are looking at those markets also as of course a bit longer term than hybrid electric vehicles. But for power conversion and a lot of the systems we think will be an evolution of the systems that are coming onboard, and we talked about and answer to one of your previous questions about power conversion for hybrid electric and autonomous vehicles.

25:35 And so, is that a direct sales effort that's going on there and you guys just have to knock on doors?

25:43 It's more targeted than that. We are looking at providing a system like the Angst+Pfister [Indiscernible] system. We're providing a key element of the system, but we think the best approach is to be part of the reference designs for power conversion modules and to get him with – in the early stages with the module manufacturers and there's, as I alluded to and one of your other questions, there has been some progress there.

26:14 Gotcha. That's great. Thanks so much.

26:18 Thanks, Jeff.

26:21 Thank you. Our next question comes from Alex Woodward from Bridge City Capital. Your line is open.

26:28 Hi Dan. First time question here, but a long time listener, so.

26:37 Thanks, Alex. Welcome to the call.

26:40 Thank you. You mentioned that the lead times right now are 16 weeks and they're longer than they used to be pre-pandemic lower lead times?

26:49 Well, we endeavor to have most of our parts in stock. So we would ship the same day depending on the time of day. So, we still have parts that are in stock. That's not the usual case for a large order for a large production order and our lead times vary, but I was getting the 16 weeks as sort of a representative number. So and even as I mentioned even in the first two quarters of this year when we had inventory, in many cases, we were shipping out of stock directly from stock rather. So, therefore, we could ship the same day. And lead times were shorter, as I mentioned in the prepared remarks, lead times were shorter even a few months ago, but we're still in much better situated than many conventional semiconductor companies.

27:53 So, I guess my real question is what are your cycle times from like wafer to finish product? How long does it take?

28:00 Yeah, That's a good question. And so it's quite a bit longer than it used to be. So, we used to say approximately three-month cycle time, and now we're talking about closer to four to five month cycle time. We've worked very hard to improve our internal cycle times and despite some challenges and material shortages, we're pretty pleased with where we are for internal cycle times. And the biggest challenge is the packaging vendors. So as some of you know, we make wafers and then the products are sent to Asia, like most semiconductor company we sent wafers to Asia where they're packaged into the plastic packages, the ubiquitous semiconductor packages that are [Indiscernible] into circuit boards for the electronics that we use and that's been a significant bottleneck throughout the industry. 29:11 We're better situated than most companies because we have been able to keep up with our wafer production. We've been able to diversify our suppliers on that front. And we've been working on very aggressively when problems come up shortages of certain materials, our engineering team has been very good at finding alternate materials at redesigning our parts, the way we make our parts so that they can be packaged or packaged using alternate materials. So, we continue to be better situated than the industry even though that kind of disruption has an impact on us.

30:01 Okay. So when you're shipping products to Asia, you've got the freight transport issues, costs are going up there and you also got the port congestion. So is that where a lot of the one to two months incremental time is taking place?

30:16 That's some of it. We have the luxury of, we usually airfreight. So, there have been delays there, but not as bad as what we've been, what you hear about for containers. So we can ship significant amount of, we might ship the wafers that can make tens or hundreds of thousands of dollars’ worth of parts in a relatively small box. So, we can airfreight that and most of the incremental time is just because of the capacity limitations and raw material shortages at the packaging vendors in Asia. That's where the big increase has been. Logistics is part of it, but the bigger challenge is just the capacity limitations at those vendors?

31:10 Okay. And speaking of capacity utilization, your factory in Minnesota, what capacity utilization are you running at?

31:16 Yes, that's a great question, Alex and we don't have a specific number, but we run at a much slower utilization than traditional semiconductors. We add more value and so we have the luxury of having excess capacity, which is another reason why despite shortages, we've been able to manage our internal cycle times fairly well. We do have certain pieces of equipment in certain areas in particularly final test, where we feel that we need more capacity and we've invested in it. As I mentioned in the prepared remarks, it hasn't shown up and our capital looks expenditures yet, because the equipment hasn't been fully deployed. We have one new piece of equipment, for example that's here to increase our capacity in that area. And we have more equipment that we expect in this quarter, the fourth quarter, the quarter ending March 31st. But in answer to your core question, we're not – we don't have a significant overall constraint on capacity like a conventional semiconductor manufacturer who might be making DRAM or something like that. Where they would be running very close to 100% capacity and any disruptions will ripple through and disrupt their shipments very severely.

32:41 Okay. How were you able to build finished goods inventory? In the quarter. It went up almost 190,000 and that's about three quarters of million dollars if I use a representative gross margin. How are you able to do that when it's supply concern? I would have thought that anything you had available customers that have taken?

33:03 Yes, That's a very good point. So the shortages are not spread evenly across the board. We have some products that are in demand that we have had to delay and then we have other products where we have part and inventories, I mentioned and answer to another question and we can ship them straight away. We can ship them the same day. So that's the reason and we've kept building. It's not that we're idling in our production, our production area is busy as ever. So, we're building parts that we can and working on the raw materials and the work in process and shipping as much as we possibly can to the packaging vendors so that they can turn it around even with the longer lead times the longer cycle times.

34:01 So, I got a question for Pete here since he's on the call, and he's been a long time listener just like me. So we have that in comment. But you've – first of all I've got amazing respect for your products and how sensitive they are and how amazing they are and how advanced and probably in front of everybody else in the in the industry you are, but in no way, it almost feels like some of your products are field the dreams. You've built it and we've been waiting for the market to come really long time. How do you determine when you're making the most sensitive GMR sensor in the world, I mean that's great from an academic and maybe science perspective, but where's the real customer demand and how do you determine new products with customers and maybe just some insights there?

34:51 Sure. Thanks, Alex. Of course, the product development for us, there's several variables involved, of course, customer input is this key to our process and lead customers are very important in many of these efforts. For us, high sensitivity translates into new markets and precision and things like motion control and that's a pretty universal requirement in the industrial automation. So when those translate directly into dollars is difficult to predict, especially on new products, but we're optimistic.

35:35 How optimistic are you on some of the advanced products you have in automotive?

35:40 Generally, we're very optimistic. We have advanced products now for transferring power and data. Described some of the new products we've released in the past quarters for those technologies and again, we continue to be optimistic with where we're at in the market and where we're at with lead customers there.

36:06 How would you define new products?

36:09 For us, a new product is, well, it varies from a range of incremental improvements and innovations to complete new developments and inventions. New products for us are new spintronic devices and new applications and new markets?

36:32 So you’ve just defined new products what percentage of revenue are they?

36:39 Yeah, I don't have that number in front of me, Alex. I assume depends on which products you're talking about and how they're accounted for on that.

36:51 Okay. And switching gears, I've got just got one more question, and this is for Joe. Since he is also the first time talker on the call. So, why did you join?

37:03 I am excited to be a part of a team that is helping to create the future. I think some of the challenges we have from a financial perspective. I really enjoy, I would like the opportunity to develop the team and hopefully scale this operation.

37:26 Great. Thank you. That's all for me.

37:31 Thank you. [Operator Instructions] And as there are no further questions in queue at this time, I'd like to turn the call back over to Dan Baker for closing remarks. Sir?

37:56 Thank you. Well, we were pleased to report solid earnings despite the supply chain disruptions. We look forward speaking with you again in early May to discuss fourth quarter and full fiscal year results. Thank you for participating in the call.

38:11 This concludes today's conference call. Thank you for your participation. You may now disconnect.