NVE Corp (NVEC) 2008 Q1 法說會逐字稿

Good day and welcome, everyone, to the NVE conference call on first-quarter results. Today's conference is being recorded.

At this time, I would like to turn the call over to President and Chief Executive Officer, Mr. Daniel Baker. Please go ahead, sir.

Thank you and good afternoon. This is Dan Baker. Welcome to our quarterly conference call. With me on the call, as usual, is Curt Reynders, our CFO. This call is being webcast live and being recorded. A replay will be available through nve.com. Our press release with quarterly results and our quarterly report on Form 10-Q were both filed this afternoon and are available through our website. As always, both filings contain unaudited financials.

On our call this afternoon, Curt will present a financial review of the quarter, I'll give a business review, and then we will 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 continued revenue growth and profitability, risks associated with our reliance on several large customers, uncertainties related to the awarding of future government contracts, risks related to MRAM commercialization, uncertainties in the possible issuance of allowed patents, risks in the enforcement of our patents, risks of a successful appeal of the judgment dismissing our securities action, 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 as updated and our quarterly report on Form 10-Q.

We're pleased with our results for the quarter. Earnings were $0.33 per diluted share. Record net income was driven by a 40% increase in product sales and 69% gross profit margin.

Before I turn the call over to Curt, I wanted to take this opportunity to congratulate him on recently being named one of the hardest-working small company CFOs by the Minneapolis/St. Paul Business Journal. Also Pat Hollister, our audit committee chair, was on the list for large company CFOs. In addition, two of our other three outside directors, Terry Glarner and Jim Hartman, were on the Business Journal's recent list of hardest-working Board members. Terry was number one on the list in 2003, the year we went on to the NASDAQ. As a matter of good corporate practice, each of our directors stands for reelection every year, and we have always felt fortunate to have a hard-working management team and Board.

So congratulations, Curt, and now we will let you get to work discussing the details of our financial results.

Thanks, Dan, and good afternoon. As Dan said, we're pleased with our financial results for the quarter. Total revenue for the first quarter was $4.71 million, driven by a 40% increase in product sales, which more than offset the decrease in contract R&D revenue. Contract R&D revenue decreased 24%, compared to the prior-year quarter, due to a decline in government contract revenue. Contract R&D increased 18% sequentially, compared to the quarter ended March 31st. We consider that a positive, but our long-term vision, as we have said before, is to move toward a future of products and licensing as our principal revenue sources.

Gross margin increased to a record 69% of revenue from 62% in the prior-year quarter, due to increased product margins and a more profitable revenue mix, consisting of a higher percentage of product sales.

Research and development expense decreased 4% to $508,000 for the first quarter of fiscal 2008, compared to $531,000 for the first quarter of fiscal 2007. The decrease was due to the completion of certain R&D projects. SG&A expense increased 39%, primarily due to increased legal expenses and increased expenses relating to our fiscal year-end audit, including our first audit under Sarbanes-Oxley Act, Section 404.

Operating income increased 69% to $2.19 million, and operating margin increased to 47% from 36%. Quarterly interest income more than doubled to $225,000, due to the increase in our portfolio of marketable securities and an increase in interest rates. Driven by record revenues, gross margins and operating margins, income before taxes increased to 51% of revenue, and net income to 34% of revenue.

The provision for income taxes continued to be primarily non-cash, although we paid more cash for taxes in the past quarter than in the prior-year quarter. Our profits in the past quarter nearly exhausted our tax credits and deductions, so we expect to begin paying higher cash taxes in the balance of the fiscal year.

Net income increased 78% to $0.33 per diluted share, compared to $0.19 last year. Our business model continued to generate cash. Net cash provided by operating activities was $1.88 million in the quarter, and cash plus short and long-term marketable securities increased to $19.8 million as of June 30th.

Capital expenditures were $225,000 in the first quarter of fiscal 2008, compared to $57,000 in the first quarter of fiscal 2007 and $322,000 for all of fiscal 2007. Expenditures in the past quarter were primarily to increase our production capacity. We have said that we expect capital expenditures to increase in fiscal 2008 compared to fiscal 2007, as we increase our product manufacturing capacity and add capabilities to make smaller products.

Looking forward, we have seen signs that certain medical customers may adjust their inventories in the September and December quarters, which could tend to reduce our year-over-year growth in those quarters. These sorts of inventory adjustments are not uncommon in the medical industry, and the feedback we are getting from customers is quite positive in our medical as well as industrial markets.

We're pleased with our quarter, and we're pleased with our long-term progress. In the past quarter, we filed our annual report on Form 10-K. One of the required elements of that report is to provide financial data for the past five years. From fiscal 2003 to fiscal 2007, our product sales increased 476%. Product sales have increased to 88% of revenue from 26%. Gross profit margin increased to 65% from 37%. Earnings per share increased to $1 in fiscal 2007 from $0.15 in fiscal 2003.

On a couple of other subjects, we updated legal proceedings in the 10-Q filed today relating to lawsuits dating to February 2006. The US District Court has dismissed with prejudice the consolidated shareholder class-action lawsuit against us and certain of our current and former executive officers and directors. Dismissed with prejudice means the same claims cannot be brought against us again. The dismissal supports our long-standing position that the lawsuits were wholly without merit.

We're planning our annual shareholders' meeting for early September, and there should be a formal meeting notice mailed in the next two weeks. We plan to file a voluntary notice on access rules that went into effect July 1st. The new rules allow companies to furnish proxy materials to shareholders through a model, with a goal of saving paper and reducing mailing expenses. Our materials -- a proxy statement, a letter to shareholders and our 10-K -- will be available on our website when you get the notice. In addition to electing directors, our Board is planning to submit our auditors for ratification this year for good corporate practice.

Now I'll turn it back to Dan for a business review.

Thanks, Curt. Throughout our history, new inventions and intellectual property have driven NVE's growth. Since our last call in early May, we were granted three patents. Those grants bring our US patent total to 44, and some of our patents have dozens of claims. 24 of our patents relate directly to MRAM. Two new patents relate to spintronic magnetizable beat detectors and proposed laboratory-on-a-chip systems. Spintronic bead detectors use magnetic perturbations from nano-beads to detect and quantify the presence of very low levels of biological or chemical materials. Laboratory-on-a-chip systems are envisioned as ultra-miniature systems that would provide medical test results in minutes rather than hours or days.

In the past several years, we have received a number of patents related to next-generation MRAM technology such as vertical MRAM, magneto-thermal MRAM and spin-momentum MRAM. These next-generation technologies may have the potential to increase MRAM density, increase speed and reduce power, all of which could enable broader MRAM use in the future. We have further strengthened our MRAM patent portfolio with a third new patent issued since our last call. The patent is titled Thermomagnetically Assisted Spin-momentum Transfer Switching Memory, which relates to magneto-thermal and spin-momentum transfer MRAM inventions.

In addition to the issued patents, we were notified of the allowance of a magneto-thermal MRAM patent in the past quarter. A notice of allowance is a written notification that a patent application has cleared a Patent Office review and is nearing issuance. The allowed MRAM patent is titled Magnetic Memory Layers Thermal Pulse Transitions and covers inventions by doctors Jim Daughton and Art Pohm. As I mentioned earlier, we believe magneto-thermal technology has the potential to increase MRAM density. Links to the three new patents, the allowed patents, our other issued US patents and our published patent applications are in the About NVE section of our website.

Turning to our products, our spintronic sensors and couplers can provide the eyes and nerves of electronic systems. Our core product market has been the industrial, scientific and medical or ISM market. We believe our products' competitive advantages include miniaturization, speed and precision. We sell products through a worldwide distributor network, our own online store and some of our parts under the Avago brand, through their distribution. A formal agreement with Agilent Technology governed our sales to Avago until the agreement expired in June. Avago has continued to order our products after the agreement expired, and we currently expect our relationship to continue, with or without a formal agreement.

While we emphasize catalog Internet distributors, we also look for effective opportunities to sell our products face to face. We participated in the SENSOR + TEST trade show in Germany in May, which is billed as one of the largest sensor exhibitions in the world. It was in cooperation with our German distributor, [Highline Sensortech].

In summary, we had a strong quarter, driven by record product sales. As Curt summarized, we have made remarkable progress the past five years. We continue to be optimistic about our prospects in fiscal 2008 and beyond, and we look forward to a bright future for spintronics and for NVE.

Now I would like to open the call for questions.

(OPERATOR INSTRUCTIONS). Steve Crowley, Craig-Hallum Capital.

Obviously, an exceptional gross profit margin performance. You have highlighted it for good reason. Just my logical follow-on question is, was there anything anomalous in the first quarter to allow you to hit that 69% gross profit margin?

Well, there really wasn't anything anomalous. We work on gross margins very hard, as you know. We continually strive to reduce our product costs and, where possible, to maximize our selling prices. So it's a continuation of that effort. The mix helped somewhat, but in general we strive to continually work to be more efficient and increase our revenue per employee and reduce our costs per part.

Was the improvement more a function of improved pricing or better manufacturing efficiencies?

It really had more to do with manufacturing efficiencies that we've been working on for some time, as well as a little bit also had to do with the products, the mix of products that we sold during the quarter.

In your comments, Curt, you certainly mentioned the potential for some of your medical customers to take down some inventories, I think you said over the next couple of quarters. I trust that's in one of your major segments, either CRM or hearing aids or both. What kind of color can you give us on the situation, what might be driving it and the extent of the challenge you might face?

Well, I think it's just something that's not uncommon in the medical industry. As I said, we have been getting excellent feedback from our customers, our medical customers as well as our industrial customers with our products. But sometimes, they just make inventory adjustments based on their desired levels.

Did you see anything resembling a similar phenomenon last year, or is this a more unique situation to 2008, the way it looks?

We do see these things happen from time to time, but I can't be specific on which quarters we may have seen that in the past.

Did you experience any effects from this already in the quarter you just reported, the June quarter?

No, I think it's all looking forward into the September and December quarters.

Do you sense from any of your customers that this is a result of end market challenges that they are experiencing? Or is this just an adjustment to get things back in line?

I think it looks like it's more of adjustments that happen from time to time, and that specific customers end up wanting to balance their inventories. Sometimes the regulatory environments can change, and that might have something to do with it. But we don't really have a lot of visibility into that, as you probably know.

The medical business is just an excellent business for us. We provide products that we believe have tremendous advantages in terms of miniaturization and the liability, and sometimes what goes with that is a certain amount of dependence on large customers and their inventory. But I think the important thing to keep in mind here is that the core message that we're getting from our customers is quite positive. So it isn't that they -- it isn't anything to do with us or our products or their products. It's just one of those things that sometimes happens in the medical industry.

I think, obviously, looking at one of your disclosed large customers who reported earnings earlier this morning and financial results, they experienced a rather nice uptick in their CRM business, with sharp growth on the ICD side of the equation. One would think that's generally a good context for you.

It generally is. We have other medical customers, as you probably know. Sometimes even if things are in uptick, they may still need to adjust inventories. Perhaps they weren't as big in uptake as they had planned internally, and sometimes things like that happen. The inventory levels tend to be fairly high in the medical industry, because they generally don't want to run out of parts.

In terms of factors that could help you overall deal with maybe a little bit of a headwind in that particular area, are there some areas that you would highlight over the next couple of quarters that could really help you counteract that headwind?

Well, there are. It's obviously hard to predict, but we have seen very strong interest in our industrial products. We were optimistic about a continued relationship with Avago, and we are always pursuing new markets and new customers. So we hope to identify new customers and new areas for growth, and we see the underlying trends as very positive, a very positive reaction to our products and our customers' products, the customers' products that use our devices.

So, as I said in the formal comments, we really are very optimistic. We continue to be optimistic about our prospects in fiscal 2008.

(OPERATOR INSTRUCTIONS). Nick Tishchenko, Global Crown Capital.

A few questions, if I may. The first one is about your new products. In late June, there was an announcement about your patents related to lab-on-the-chip. Could you please elaborate a little bit on this subject? I believe you had product development in mind when you did this research and development. How far we are from commercialization?

Yes, as you mentioned, we got actually two new patents related to magnetizable bead detectors, which are key components on laboratory-on-a-chip systems. We believe that it's a remarkable technology. It could allow replacing a room full of equipment with a handheld device that could look for a large number of biological indicators. So that could be used to detect -- well, hopefully, this would never happen, but detect biological warfare agents or in a clinical setting, to look for a large number of possible diseases and to sort through that very quickly.

As far as the progress that it's made, a lot of the underlying research was driven by the Department of Defense, and so to that extent we're really not in a position to talk too much about when it might be deployed or where. It does have commercial and clinical applications. What we're doing is one part of it, a very important part of it, which is the sensing system relating to the bead detectors. But there's also biological systems and microfluidic systems that need to be developed, and other companies are working on those. We believe that we are very well-positioned to provide a key component or key components to laboratory-on-a-chip systems, but it's hard for us to predict, because some of the development is outside of our control. But it's something that I think, inside and outside of the military, a number of people see this as very important technology, as you can imagine why.

I have a couple of more questions. The next question relates to inventory adjustments. I am trying to understand whether it a disclaimer or you see signs of this happening already in communicating with your customers.

Well, we said it, so we weren't trying to just make it a disclaimer. However, our customers don't always know what they're going to do. Sometimes they surprise us one way or the other, and obviously there's a possibility that other things could swamp or overcome any effect from it.

So we're trying to give the best information that we have, based on feedback from our customers. But it isn't always perfect information, and it's hard for us to predict customers' orders.

I understand. So it's a kind of uncertainty. The reason why I'm talking about this is very simple. Last year, we had experienced the same kind of experience when you made a disclaimer about possible inventory buildup. It never materialized, but it hurt the stock. What I'm trying to assess right now -- I know how cautious you are about this kind of things, and I know that you want to say something that you can deliver and not over-promise.

But let me reiterate my question. Do you see the trend change in ordering pattern from your customers already?

As Curt mentioned, we did not identify a change in orders for the quarter. We see a change in expected orders in the future, but it's a prediction; it's an estimate.

Okay, this is the best answer I could hope for. Two more questions, very short. The first one -- with the changes that is happening with your taxes, what kind of tax rate we should expect for the next quarter and for the year 2008? This would be it from me.

I think what we said -- in our May conference call, we said we expected a tax provision in the 32% to 36% range in fiscal 2008, and I think we were close to the middle of that range; we were around 34.4%, I believe, for the quarter. We are still expecting the same rate of tax provision, in the 32% to 36% range, for the fiscal year 2008.

(OPERATOR INSTRUCTIONS). Steve Crowley, Craig-Hallum Capital.

Gentlemen, about a year ago, you were able to highlight some press out of one of your hearing aid customers, Starkey, that was enthralled enough with your product and technology to be pretty front and center about its benefits and the fact that they thought they had about a year lead on the rest of the industry, in terms of embracing the kind of capabilities your product provided. Given that it's about a year later, I'm curious if your experience adding other customers or cultivating other customers in this area would validate their point of view?

Well, it was very nice of them to mention us by name and to allow us to mention them as a customer because otherwise, as you know, we tend to treat customer relationships as confidential. So that gets us into a little bit of a difficulty because, while they were courteous enough to allow us to name them, other customers may not. I'd just say, in general, that we've made efforts particularly, we've said, in the non-life-support medical business, which would be -- of course, Starkey would be an example of that -- to gain some additional customers and market share because of the advantages of our products in that market, that they are smaller, more reliable and more precise than competing products or technologies, and we have an excellent reference in Starkey about being public there.

I guess what I'd say is we're pleased with the way our efforts are going, and our people have done an excellent job of getting the word out and getting our products in front of customers who can use them. In the non-life-support medical business, the regulatory cycles are much shorter than they are in Class III medical devices, things such as ICDs and pacemakers. So we can move faster in those markets, all other things being equal.

Is this one of the areas that could potentially provide an offset over the balance of -- over the middle part of this year to some inventory correction, if it in fact takes place, in another segment of medical?

Well, it's certainly possible. We're very pleased with how things are going in the medical market, and we've had an excellent reaction from customers. We believe that our parts provide -- allow them to make -- in the case of a hearing aid, it allows hearing aids to be smaller and therefore less obtrusive, and that's important. It allows them to detect low signals from something like a cellphone, a modern cellphone, which has very low stray magnetic fields, and our devices can pick that up and allow somebody who has got a hearing aid to use a modern cellphone very seamlessly. So it has got some great benefits, and we are very bullish about the benefits that our product provides and our prospects in that market.

One more question, on the overall medical space. You have talked about broadening the applications you can talk about, besides the two we've talked about on this call. Maybe something in the neural stim area for a variety of applications that are using neural stim type products. But are there some new areas or applications you can either talk about or that you are real close to being able to talk about with us?

Well, in general, in the medical space you mentioned neural stimulators, and we do see that as a good target market. Neural stimulators are generally Class II medical devices, which are in between life-support Class III medical devices and Class I medical devices. So we've got it surrounded, and we've demonstrated reliability in some of the most demanding applications in the world, in Class III medical devices and life-support medical devices.

In fact, a pacemaker is -- in a sense, it's a neural stimulator; it's a nerve stimulator. It's just stimulating the particular set of nerves. So there are some great applications for neural stimulators for pain management, for psychiatric treatment, for a wide range of applications. We believe that we've demonstrated an excellent benefit proposition in similar applications.

I'm switching gears to the industrial side of the equation, where you seem to be quite pleased and/or optimistic about what's going on there. Are there a couple products and/or applications that lie at the foundation of that optimism that you can talk about or highlight here?

Well, the overall trend is that we provide unsurpassed miniaturization. We can pack more channels of data transmission and more functionality into a small package than, we believe, competing technologies. So some of the products that we've talked about are MSOP products, which are micro small outline products. We have several products now in that form factor, that footprint, which is approximately 3-mm square, which is really remarkable.

So we've extended our advantages in miniaturization. We just started sampling a narrow-body transceiver. By narrow-body, we mean a 0.15-inch wide package compared to our current products, which are 0.3-in. That's a product that's just now starting to see the light of day, but we believe that, again, we are cutting the footprint in half and we're adding the miniaturization.

So the miniaturization is a big advantage, and we're seeing customers take advantage of it by going to smaller products, by looking at smaller products, either replacing our products or, even better, competitive technologies with our smaller and smaller products. So we have smaller products, higher-speed products, and we have broader distribution.

For example, that narrow-body transceiver -- does it enable entirely new applications for those transceivers, or just continue to push the bandwidth that can be down on the industrial floor?

Well, it does both. Sometimes applications are very much space-constrained, and having a smaller part allows functionality that they might not otherwise be able to use. So, for example, it might allow a customer to use an isolated transceiver, which would provide much better noise immunity and much better signal fidelity in an industrial network than an unisolated part. They may not have space to do that with the conventional approach, which would involve a number of components. We have a bulletin where we show our solution, which is basically one chip, compared to the conventional solution, which might be in the range of 20 parts.

So it's a dramatic reduction in space, and that might allow higher functionality than might otherwise be possible. Also, miniaturization is just one of these global trends that industrial control companies, like everyone else, are continually looking to pack more into a smaller space. So it's both a continuous benefit in the continuum of miniaturization and opening up new applications that might not otherwise be possible.

One final question, and maybe more geared to Curt. You mentioned the uptick in CapEx in the quarter and the likely uptick for the year as a whole relative to last year. Do you have any thoughts on what it might come in for the year, whether or not CapEx was, in fact, front-end loaded to this year in that first quarter? Let's start there, and then I have one follow-up and then I'll get out of the way for anybody else who might want to ask a question.

I think what we've said previously is we had a couple of years where we had some pretty minimal CapEx expenses, and we expect this year would be more in line with what we had a couple, two or three years ago, when I think we were in the -- oh, we were probably in the $700,000 or $800,000 range.

This equipment -- I think you gave us a little bit of a hint as to what you were doing with this additional equipment. Is it more to increase production capacity, or is it new product geared?

Actually, it's a little bit of both. We needed newer equipment to handle our smaller parts, and we also had some bottlenecks or some potential bottlenecks that we addressed.

That's all the time we have for questions today. I'd like to conclude today's conference and turn things back over to Daniel Baker for closing remarks.

If there are no other questions, that concludes our call. Thank you for participating. We look forward to our next call and to seeing some of you at our annual meeting in September.

Thank you, everyone, for joining. You may now disconnect.