NVE Corp (NVEC) 2008 Q3 法說會逐字稿

Good day and welcome, everyone, to the NVE conference call third quarter conference results. Today's program is being recorded, and at this time for opening remarks, I'd like to turn the program over to the President and Chief Executive Officer, Mr. Daniel Baker. Please go ahead, sir.

Good afternoon. This is Dan Baker. Welcome to our quarterly conference call. With me on the call is Curt Reynders, our CFO. This call is being webcast live and being recorded. A replay will be able through NVE.com. Our press release with quarterly results and our quarterly report on Form 10-Q were both filed with the SEC in the past hour and are available through our website. As always, both filings contain unaudited financials. After my opening comments, Curt will present a financial review of the quarter, I'll give a business review, 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 continued revenue growth and continued profitability; risks associated with our reliance on several major customers; uncertainties related to the awarding of future government contracts; 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 and updated in our subsequent quarterly reports on Form 10-Q. The Company undertakes no obligation to update forward-looking statements we may make.

I'm pleased to report a very strong quarter. Net income increased 62% to $0.36 per diluted share on a revenue increase of 23% to $4.77 million. Strong cash flow helped increase our cash flow short- and long-term marketable securities to over $23 million, and we expanded our distribution.

Now I'll turn the call over to Curt to discuss details of our financial results.

Thanks, Dan, and good afternoon. As Dan said, we had a very strong quarter, by far our best third quarter ever. We report revenue in two categories--product sales, which is generally spintronic devices we make and sell; and contract R&D revenue, which consists mostly of U.S. government contracts.

Total revenue for the third quarter increased 23% to $4.77 million. Product sales increased 25% compared to the prior year quarter, and contract R&D revenue increased 12%. This marked our twelfth consecutive quarter of year-over-year increases in product sales, demonstrating the value and potential of our products. Strong product sales across most of our lines, particularly couplers, more than offset expected inventory adjustments by certain medical customers. We don't currently expect to see significant customer inventory adjustments in the March quarter.

Despite the increase in contract R&D revenue in the most recent quarter, as we have noted before, government budgets appear to be particularly tight in the current government fiscal year. As we have said for several years, our vision is to rely less on contract R&D as we move toward a future of commercial products and licensing.

Gross margin in the quarter increased to 65% of revenue from 64% in the prior year quarter, due primarily to a more favorable mix consisting of a higher percentage of product sales. Research and development expense decreased 36% compared to the third quarter of fiscal 2007. The decrease was due to the completion of certain R&D projects in the past year. R&D expense increased 11% sequentially compared to the September quarter. Dan will discuss some of the new products that have resulted from our successful R&D efforts.

Operating income increased 56% to $2.26 million in the quarter due to increased product sales and increased operating margins. Net interest and other income increased 105% to $323,000 for the third quarter of fiscal 2008. The increase was primarily due to an increase in interest-bearing marketable securities and other income.

Other income for the third quarter of fiscal 2008 consisted primarily of a net gain on sales of federally taxable marketable securities. The proceeds of such sales were reinvested in federally tax-exempt bonds as part of a strategy to reduce taxes since we began paying higher cash income taxes in fiscal 2008. In addition to producing a net gain, those bond swaps will reduce our taxes. Although this will decrease our interest rate as a percentage of our investments, we expect our after-tax interest rate will increase for the swapped securities.

Quarterly profitability metrics continue to be very strong. Operating margin increased to 48% of revenue, pre-tax margin to 54%, and net margin to 36% for the quarter. Each of these profitability metrics was the highest in our history. Income this fiscal year exhausted our tax credits and net operating loss deductions, so we paid significantly more cash for taxes in the past quarter than in the prior year quarter. Our effective tax rate decreased 0.5 percentage point to 34.2% of pre-tax income for the third quarter of fiscal 2008, compared to 34.7% for the prior year quarter. The decrease was primarily due to the strategy I mentioned a few minutes ago of moving our investment mix toward federally tax-exempt bonds.

Net income for the quarter increased 62% to $1.7 million, or $0.36 per diluted share compared to $0.22 last year. This was our twenty-third consecutive profitable quarter and our fourth consecutive quarter of record earnings.

Looking at the first nine months of the fiscal year, we have had solid growth and profitability. Product sales increased more than 25% compared with the prior fiscal year, and total revenue increased 22% to $14.5 million. Gross margin for the first nine months was 66%, operating margin 46%, and pre-tax margin 52%. Diluted net income per share increased to $1.04 for the first nine months of this fiscal year. This compares to $0.67 for the same period last year, and $1.00 per share for all of last fiscal year. Thus we've exceeded our earnings for all of last fiscal year by 4%, with a quarter still to go this fiscal year.

We continue to generate cash. Net operating cash flow was more than $2 million for the quarter and $5.2 million for the first nine months. Cash flow strengthened our balance sheet as cash plus short- and long-term marketable securities increased to $23.1 million as of December 31.

We've taken steps to ensure our production capacity will continue to support our rapid growth. Our capital expenditures were $642,000 for the first nine months of fiscal 2008 compared to $253,000 in the same period last fiscal year, and $322,000 for all of fiscal 2007. Capital expenditures this fiscal year have been primarily for equipment to increase our production capacity.

Also in the past quarter, we extended the lease on our building, which would have expired at the end of this calendar year, for an additional seven years. The lease provides for a tenant improvement allowance of approximately $214,000, which we plan to use primarily to expand and improve our clean room production area to allow for growth.

With that, I'll turn it back to Dan for more perspective on our business.

Thanks, Curt. Before I get to the business review, I want to congratulate our founder, Dr. James M. Daughton, for being named a 2008 co-recipient of the prestigious Daniel E. Noble Award in the past quarter. The award was for "fundamental contributions to the development of magnetoresistant devices for non-volatile, high-density random access memory." Magnetoresistant random access memory is commonly known as MRAM, and MRAM is a spintronic memory. That is, it uses electron spins to store data. MRAM may have the potential to combine many of the best attributes of different types of semiconductor memory.

Jim's extraordinary inventions are at the heart of MVE's technology portfolio. He is inventor or co-inventor on more than 25 of MVE's U.S. patents, including our pioneer MRAM patent, which he co-invented with Professor Arthur Pohm.

The Noble Award is sponsored by the Motorola Foundation and made by the IEEE, which is billed as the world's leading professional association for the advancement of technology. I also want to congratulate Jim's co-recipients, Dr. Stuart Parkin of IBM and Saied Tehrani of Motorola and, later, Freescale.

There is a link to the IEEE website with information on the Noble Award on the Awards and Accolades page of NVE.com. Our company and technology has been recognized with a number of other awards, including two Tibbetts awards, a Tekne award, and two Frost & Sullivan awards.

Now to our products. Our products can provide the eyes and nerves of electronic systems, and they're smaller and more precise than conventional electronics. Our product growth strategy has been new products and broader distribution and longer term to expand into larger markets such as consumer or automotive electronics.

Miniaturization is one of the core benefits of our products. Smaller packages allow electronic systems in less circuit board space--or for medical devices, less body space. In our last conference call, we noted that we had introduced the first in a line of the smallest isolated RS-422 and RS-485 transceivers, called the IsoLoop 3000-3 series. RS-422 and RS-485 are industry standards for popular serial network protocols used for a variety of applications, and our transceivers combine spintronic coupling with network protocol functions in a single package.

The Dash-3 series is in a unique 0.15-inch-wide package, the smallest devices of their type, and half the size of our original transceivers. We previously discussed high-speed versions of the Dash-3 series, the IL-3422-3 and 3485-3 versions. In the past quarter, we introduced low-cost versions, the IL-3122-3, and IL-3185-3, and high fan-out versions, the IL-3222-3 and 3285-3. So we now have six parts in the Dash-3 series. The high fan-out versions allow high-speed, isolated networks with up to 256 nodes, providing an unprecedented number of isolated nodes in a given amount of space.

In addition to RS-422 and RS-485 transceivers, we recently introduced the new PROFIBUS compatible isolated transceiver, the IsoLoop 3685. PROFIBUS is a network standard that is widely used in industrial automation. It's especially popular in Europe.

While our sales strategy is primarily focused on catalog and Internet distributors, we look for specialized face-to-face distributors to represent our products in key territories. We added two such distributors in the past quarter, both based in Silicon Valley--SFO Takumi, Incorporated, and Braemac California, LLC. SFO Takumi is an affiliate of Takumi Shoji, which distributes our couplers in Japan, and Takumi Trading, which distributes our parts in China. We've been impressed with the performance of its sister companies, so we are optimistic about SFO Takumi.

In addition to its headquarters in Silicon Valley, Braemac California has opened several regional offices in North America, including southern California, northern Virginia, and Toronto. Braemac will also shore up our distribution in South America. Until now, our South American distribution was primarily U.S. and British-based catalog Internet distributors.

We believe the major elements of the NVE brand distribution strategy and network is fairly solid now, although we will continue to look for additional opportunities to strengthen our distribution.

In addition to our leadership in the products of today, our researchers are advancing the technologies of tomorrow. At the Conference on Magnetism and Magnetic Materials the past quarter, NVE Ph.D.'s authored or co-authored three papers--one on spin momentum torque dynamics, which has applicability to next-generation MRAM; a paper on biosensor technology; and a paper on low-noise spintronic sensors. The MMM conference is one of the leading forums covering recent developments in fundamental and applied magnetism. To the extent we can, without running afoul of copyrights, we often post links to the abstract or text of our papers in the R&D section of our website.

As we begin calendar 2008, I'd like to summarize highlights from a very productive 2007. We renewed key agreements with St. Jude Medical, Avago Technologies, and our building lease. We expanded distribution, including new distributors in North America, Europe, and Japan. We introduced new world-class products such as the PROFIBUS and Dash-3 couplers. We deployed new equipment to expand our production capacity. We added six U.S. patents, including patents relating to magnetothermal MRAM, spin momentum MRAM, and vertical MRAM, and two patents related to laboratory-on-a-chip technology; and we reported record net income for each quarter of the calendar year.

We continue to believe in the strength of our people, our products, and our technology, and we look forward to a bright future for spintronics and for NVE. Now I'd like to open the call to questions. Melissa?

Thank you. (Operator Instructions.) Our first question will come from Steven Crowley, Craig-Hallum Capital Group.

Good afternoon, gentlemen.

Afternoon, Steve.

Good afternoon, Steve.

Congratulations on a fantastic quarter across the board. A couple questions for you. First of all, I believe I heard clearly that you referenced the inventory correction from certain of your medical customers as being behind you. Two questions related to that. Is it possible at all to quantify what kind of impact it had on you in the December quarter? And in fact did I hear that you don't think there will be a meaningful impact in the March quarter?

Steve, it's really hard for us to quantify the impact. We've got some complicated comparisons. But we think it did depress revenue in Quarter 2 and Quarter 3. And I think the second part of your question related to the March quarter, and we do not currently expect to see customer inventory adjustments in the March quarter.

Excellent. Now, in terms of your progress in the medical arena, is it possible for you to give us some feel for if and how you expanded your customer rosters in key medical areas like the hearing aid business or in the implantable medical business, let's--I guess I'd love to hear the specific names and the order of magnitude. But in terms of, did you add physically to your customer rosters in those segments in calendar 2007?

Steve, this Dan. We, in the past quarter, we believe we've added customers, and we've also, certain of our customers have grown. And we've been concentrating on both life support devices such as CRM--that would be pacemakers and ICDs--and non-life-support devices such as hearing aids. And we see an excellent outlook in both of those areas, and we see longer-term prospects in other areas, such as we've mentioned neurostimulators. But the outlook for CRM looks bright. There are more conditions that can be treated in addition to the conditions that are being treated now--conditions such as atrial fibrillation and congestive heart failure. And the demographics are favorable. As populations age, more people will need devices in markets we serve, like pacemakers, ICDs, and hearing aids. So we're optimistic in, for our prospects in the medical market.

Excellent. One final question and then I'll hop in the queue and let somebody else ask questions. You highlighted the fact that you've made a significant investment in expanding your production capacity, and for you guys, a significant dollar investment. Can you give us any sense for what kind of increment that capacity might be? Does it, you know, over time allow you, you know, 20% more capacity, 30%, 40%? Is there some feel you can give us for the significance of that investment?

That's a difficult question to quantify, Steve, because what we try to do is remove potential bottlenecks that we see out in the future. So in general, the issue that we're addressing might not be so much overall capacity, but particular operations that are important to us. And in particular, we've talked in the past about expanding our capacity for the very small parts, the dye-based parts, micro-small outline packages and what are TDFM packages. Those are the very smallest parts that we make, and miniaturization is an advantage, a big advantage for us.

In addition to that, as we mentioned, we've renewed our lease, and we plant to expand our production capacity in particular areas. So that's part of the plan. We don't have a specific goal for the square footage or capacity yet, but we're going to be looking at that and looking at how we make sure that we're not capacity constrained for our goals and our plans for the future.

Great. Well, it looks like a pretty significant commitment, and it seems like it's geared towards a larger multi-year plan for where you're moving your business. Is that a safe assumption for me?

Yes. We make capital investments with an expectation that they're going to pay off, generally over a period of years, and we have some equipment now that we've had for many years. So we view this as a long-term investment. We're making this investment because we want to enable future growth.

And the significant increment to clean room capacity that you referenced as part of your leasehold improvement deal, does that connotate medical versus some of your ISM business, or should I not read that into the equation?

Our clean room is used for both types of products, or both market segments, for both industrial products and medical products. So it probably wouldn't be a distinction there.

Okay. Well, I'll hop back in queue, and I do have a couple of other questions, but I'll let others go now. Thanks.

Thanks, Steve.

And our next question will come from Avinash Kant, Broadpoint Capital.

Hello, Dan and Curt.

Good afternoon.

Afternoon.

A few questions. Could you give us, if I'm looking at your product sales over the past four quarters, of course, on a year-over-year basis, you have seen a significant increase. But if I look at it on a quarterly basis, your product sales have been pretty much flat, between $4.2 million to $4.3 million. And now that you think the inventory issues that your medical device customers are pretty much over, should we expect to see an upside to that?

Avinash, I think we've been pretty pleased with our growth. Like most companies, we compare to prior year periods, because there may be some seasonality. Except for the seasonally weak December quarter, we've seen sequential revenue increases every quarter for at least the last three years. For the past five years, as summarized in our last 10-K, product sales are up fivefold, which is a 55% compound annual growth rate.

Yes, I understand. But if I'm looking at from what you had in the March quarter in 02 2007, and between the March quarter of 2008, you've not seen much variation there.

You're talking about the December quarter?

Yes. For example, if you look at the past four quarters, including this one, your product revenues have been $4.2 million to $4.3 million. And I'm thinking that now that the inventory issues are past, you should expect to see an upside to that.

That's hard to quantify. We've got complicated comparisons with our inventory adjustments, and, but we, like I said, we do compare to the prior year, and we have seen increases over the prior year periods over at least three years.

Yes, absolutely. I agree with that. Now, another question is that if you could give us some idea about the breakdown of your products, if you can break it down, maybe, by either industrial or medical segment? Or by direct sales or, and distribution?

This is Dan. We don't, we don't do detailed breakouts like that, but I can try to give some color to it. We divide our products into industrial, scientific, and medical, which is our traditional market, and by medical there, we mean medical instrumentation. And then medical device products, which are the sorts of products that we might sell into hearing aids or ERM and ICD devices. So those products tend to be custom products. They're sold directly to the manufacturers, to the medical devices. The ISM products would typically be sold through distribution, and those would be typically catalog products. There's some customization, but those are generally catalog products.

So when we talked about the quarter and the great increase in sales and the great quarter that we saw, we highlighted in particular couplers as a strength, and then we talked about that we've seen some depressed revenues in the second and third fiscal quarters relating to the inventory adjustments which were in the medical segment by certain medical customers.

So those are the ways that we break down our products. But because of the policies and rules that relate to segmentation, we don't give exact numbers.

So, but could you give us some qualitative idea which one was better and more, and which was less?

Well, we mentioned, for the improvements and the growth year over year in the most recent quarter, we mentioned couplers as the strength.

Okay. Now, if I'm looking at the gross margin, then, you had a (inaudible) versus September quarter. Then that means you were down some. But your gross margin went up. Now, I, in the past, I think we have talked about the medical device customers. They might tend to be a bit better, and that may have had some inventory situation in the current quarter, then I'm having a hard time understanding where did that gross margin improvement come from?

Avinash, our gross margins have been north of 60% for the last seven quarters. In the most recent quarter, the December quarter, our margin was 65% as compared to 63% in the September quarter. That's primarily due to the revenue mix. We had a higher percentage of product sales as compared to contract research and development, which tends to be a lower margin business.

Yes, but what I'm looking at, the difference is very minimal. You had 86% of your revenue in the products in your last quarter, 89% in this quarter. So that's not too high to warrant a 2% gross margin difference.

Yes, there are a lot of factors that can move the margins around. The product mix within line, and so it's--we're continually working to improve our yields and to improve our margins. Sometimes those numbers fluctuate, but we're certainly pleased with the margins that we got. And as Curt said, there's a fairly big difference in margins between product sales and contract R&D.

Okay. No, no, I'm just trying to get a handle on this one. I clearly look at this quarter--this has been an amazing quarter--but I'm just trying to understand how the various pieces are moving and how the margins and as far as the revenue dollars are related. If you can get any idea--.

Right. Well, the reason we--.

That would be very helpful, but we are not getting much here.

Right. Well, the reason that we break down revenue between product sales and contract R&D is because they're different types of businesses, and contract R&D generally tends to be lower margin. It's business that we think is important because it builds intellectual property for the future, and many of the products that we're selling now were developed with the help of research and development contracts. So we do it for other reasons, for strategic reasons, rather than as a revenue or a profit source. And it's not nearly as scalable as product sales. So we break that out separately because there's differences in the margins, and there's differences in the growth rates. And as we've said for several years, our goal is to look towards the future, a vision of product sales and licensing, as our primary revenue sources.

And one more question. If you could give us some idea in terms of capacity utilization. What kind of capacity utilization are you running at, at this point?

You know, that's a good question, but it's a difficult number to quantify. We, because we serve the medical market and because our margins tend to be very high, we often have, we have the luxury of being able to have excess capacity, whereas the company in the commodities/semiconductor business and the DRAM business, for example, would want to run at very close to their maximum capacity, because otherwise it would impact their margins by spreading fixed costs over fewer parts.

What we're concerned about is being an ultra-reliable supplier--that's very important to us and to our customers--and making sure that we have the capacity to continue our rapid growth. So we don't have a number, and it depends on the mix and so forth, but I daresay that we don't have the kinds of capacity utilization numbers that traditional semiconductor companies might have, nor do we think that it's a particularly good metric for judging ourselves.

Yes. No, no, I was trying to figure out that if you're expanding capacity at this point, you must be running at a high level of utilization, and that may have given us some idea in terms of what to expect in terms of revenue going forward.

Well, our utilization is higher in some operations than others, but we're not capacity constrained, and we don't have an immediate problem with capacity.

And one final question. If you could give us some idea about what should be a good model for tax base going forward?

Curt, do you want to handle that on taxes?

Yes, yes. Our current tax rate was 34.2% in the December quarter. That was down a little bit from the September quarter. We were at 34.5%. We continue to expect that tax rate to be in the range of 32% to 36%. Our tax rate on interest income is, will tend to be lower. It will be lower in the March quarter than the December quarter, so we'll have a full quarter of the change in our investment mix towards tax-free. But our operating income is taxable, so if our operating income increases, the tax rate would tend to increase. The exact rate is difficult to predict. It depends on unknowns such as interest rates, bond market conditions, our R&D expenditures, and whether the federal R&D tax credit is extended.

Perfect. Thanks so much, Curt, and a great quarter.

Thank you.

And we'll go now to David Bayer, Northland Securities.

Congratulations on a seasonally very strong quarter for you. I think both Steve and Avinash were trying to address some things that I think most investors are trying to understand a little bit more, too. If the inventory levels have adjusted now at that important medical customer, then it would appear to me in analyzing the company, you have a shot at getting margins closer to where you were in the June quarter. And so I'm just wondering, you know, what would cause me to temper thinking that gross margins could be, say, 67-ish or 68% going forward now that we've seen that adjustment. That's the first question. I have some others, but I thought I'd start with that.

Good afternoon, David. Well, there are a number of--obviously, we hope to get our margins as high as possible, and we continue to work to improve our efficiency of our factory, to design our products for more efficient manufacturing, and to maintain a very productive workforce. That said, there are risks to margins, which I think is what you were getting at. You know, the risks aren't always negative. They might be a large industrial customer, where the price might be a little lower, but it would be good, it would be good business for us. So we allow ourselves the flexibility to look at things like that. And then margins vary quite a bit across the line. And as we've talked about in detail in answer to other questions, the margins tend to be lower for contract R&D. But we feel that it's worth having contract R&D for other reasons other than just the profits and the revenue that it brings in. So if we find contracts that we think make sense and are strategic to us and can result in technology that we think is good for the company, we'll look seriously at that business, even though the margins might be quite a bit lower than, say, in the medical industry.

Okay, fair enough. You highlighted some of the RS-422 and the PROFIBUS products. Are those, the ones you highlighted, new, or just ones that you are getting more momentum, or can you help us understand a little bit about that dynamic?

The ones that I mentioned were new products. But we mentioned in the prior quarter, in our call in October, we mentioned the first in the line, which was a high-speed version of the Dash-3 series. So I mentioned four other product versions that are new that were introduced in the past quarter. And those were the high fan-out version and the low-cost version. So those are new. Those just became available in the most recent quarter. They're available on our website, and some of our distributors have them and are promoting them. But they would be used for complex industrial-scientific networks, and these are remarkably small parts. You may recall our existing parts are 0.3 inch wide, which is pretty amazing, but these are 0.15 inches wide. So they're half the size. So when one has a number of channels, a number of nodes for a complicated network, this provides an advantage.

As we figure out modeling the company going forward, besides the gross margin question, which I understand you're letting us do our best analysis there--and I understand where you're coming from--maybe you can help a little bit by picking through, as you expand the physical plant and staff your R&D and what-have-you, should we be thinking about maybe absolute increases in R&D and SG&A, in the couple hundred thousand, over the space of a year kind of a range, or just--can you help us think about that? And also help us think a little bit about interest rates going forward on your investments now that you're changing that profile a bit?

So the first part of the question was relating to the trends in R&D and G&A expenditures, as I understood it. So, and as you know, like a growing number of companies, the public companies, we don't give specific guidance going forward. In general, we would see R&D in dollars tending to grow. But in a company our size, completing one or two projects or reassigning a relatively small number of people can make a fairly big difference in R&D.

So I think part of what you've seen in the year-over-year comparison is high R&D. Perhaps a year ago, when we were working on some new products, some of which we talked about today, and some of which we've talked about before--products like the IL600 coupler series and some other products--and a lot of companies model their R&D expenditures as a percentage of revenue.

We have the luxury also of having funded R&D, contract R&D. So we have a relatively, if you combine the two, we have a relatively high R&D budget, but we only report a portion of that as expense. So R&D, I guess, we would expect to grow at least roughly in line with revenue, with some fluctuations.

And G&A, I think we would try to--G&A includes SG&A, so it's our sales expense. We have an indirect sales channel, which is relatively cost effective, because we sell through distribution, so we don't have a large sales force. We're able to get in front of many, many customers and get on countless desktops through our catalog Internet distribution network. So I would imagine that G&A probably would not grow as fast. So one could see a scenario where that might trend down as a percentage of revenue.

And I think that was, was that your, was that your question?

Yes. With regards to those two items, I think that gave us a general sense of your thinking, and that was very helpful. And then if you could give us a general sense of what impact the interest rate changes might, how you think about how that plays out, at least somewhat? That would be helpful, too.

Yes, David. I think that's a pretty difficult question in this environment. Some of our higher-rated investments can get called, interest rates are tending to go down. We're investing now in municipal bonds, which an after-tax yield makes sense for us, so I guess it would be like predicting which way interest rates are going to go. But I would say in general, I think it's going to be down. We've seen increases, but we won't see those kinds of increases going forward, I don't believe.

No, I think that that's sensible for us to think about moderating somewhat there, but as you, as you correctly point out, there's a tax rate advantage.

Right.

You're at 34%, 34.2% this quarter for taxes, and a little higher than that previously. I'm sort of guesstimating that I should be thinking in the 33% range going forward?

I think we've said it would be, yes, in the 32% to 36% range. And as I mentioned, there's a lot of factors that go into that--our investment mix, the amount of operating income we have, what we're able to do with research and development credits. So it's pretty hard to quantify that going forward.

Okay. Acknowledged. I'll get back in the queue, as it were. Thank you very much.

Dave, you're welcome.

And we go now to Steven Crowley, Craig-Hallum Capital Group.

Yes. A couple of bigger picture questions, gentlemen. I'm wondering if you can provide us with some updates on really two areas--emerging applications for your spintronic-based components, either entirely new, very early-stage apps that seem to be developing, or maybe applications that are gathering some momentum as they gain maturity, but that you haven't talked about? That would be one area. Why don't we tackle that, and then I'll come back with part two of my question.

Okay. Yes, this is Dan. Some of the emerging applications that we've talked about for spintronics are consumer and automotive electronics. And in consumer electronics there are two categories. One is positional sensors, where there are lots of ways that you can turn or indicate motion with consumer devices. And you're seeing more and more of those devices--which are very intuitive--but they rely on sensors to detect what you're trying to tell it. And that's an area, a potential area for our sensors.

And then the other is navigation. Our sensors are sensitive enough that they can detect the earth's magnetic field and can navigate on a very, very small area and tell which way you're pointing something or which direction you are relative to magnetic north. So those are two great applications for, in consumer electronics, that we are, that we see as very promising.

Now, Dan, just to jump in. You know, one of the logical applications for your precise orientation sensors might be some kind of integration with the bigger picture, directional or location sensors, like GPS? Might they be a nice complement to those GPS devices?

Yes, exactly, Steve, because GPS, first of all, is not precise down to inches or feet. And then also, GPS can cut in and out, depending on the terrain or tall buildings or that type of thing. So there's a need for supplemental directional sensing, and our sensors are very good at that.

And then also, in automotive, you have the same sorts of navigation potential, but also there's just a burgeoning amount of positional and rotational sensors in cars. They allow more fuel efficiency, they allow more safety, they allow better brakes, better suspension. And our sensors, we believe, are more precise, smaller, and use less electricity, use less power. And those are all big trends in the automotive as well as consumer markets. So those are things that we see as very promising.

Now, in terms of a GPS, the complementary technology to GPS, how far away are you from having some implementations? It seems so logical, that that seems more near term to me. Are you already there in some products, or are you close to being there in some products?

Well, it's something that we see as a longer-term expansion. But, as you say, we have the technology to do it. The challenges, the technical challenges are to miniaturize it, to make it attractive to, you know, to customize this for the types of devices that can use it, and perhaps integrate it into a single IC. There's been some talk of integrating a GPS, accelerometers, which would tell you how fast you're going, either walking or driving, and compassing sensors, ultra-precise compassing sensors such as the types of things that we could make with spintronics. So there might be an integration task as well. But we see it as enabling a tremendous increase in functionality.

All right. Well, it certainly sounds interesting. Please keep in mind that this audience is interested in future updates as you make progress. There are--are there other folks who are already integrating some of this compassing sensor technology but maybe not as elegantly or as effectively as spintronics might be able to play that role?

There may be. I don't think we've seen it in widespread consumer application, and some of the advantages that our technology offers is extreme sensitivity to magnetic fields. So if you imagine that the earth's magnetic field is relatively small--it's half a gauss compared to the field in a refrigerator magnet might be hundreds or even thousands of gauss. So you're talking about a very small field, and then you're talking about relatively small rotational changes. A few degrees are going to be tiny fractions of a gauss. So those are the advantages that our technology offers is a great deal of precision in the position. So there might be some other sensors out there, but they just don't have the precision that we believe that we can achieve with our technology.

And is this in the exploratory stage at just NVE, or are you working with partners in the early stages of feasibility and development?

Well, we generally aim, when we're talking about a large market, we would generally aim to partner with companies that know the end product and know the need. And we don't presume to know that. So that would be a logical, a logical thing to partner with other companies on, plus we provide a part of the technology--we believe an important part of the technology--but it needs to be integrated with, as you point out, it might be integrated with GPS or accelerometers.

Yes. Obviously, I'm intrigued by this. I'm just wondering if you're--this is a great concept. You've proven feasibility yourself, but you're moving from a standing start with partner development or whether or not you've been doing that for a while.

Well, as you say, we like to be able to share as much as we possibly can, so hopefully we'll be able to tell you more.

Okay. The second part of my question, which is a quick question, and hopefully a long, revealing answer from you. In terms of that pesky MRAM stuff that we don't talk about all that much but lurks as a potentially significant wild card for you guys, what can you tell us about the landscape for MRAM, its development, how those landscape items line up for the opportunity for you guys to eventually realize some value, given your intellectual property portfolio there? Just kind of an update on the whole landscape, if you can do that relatively quickly.

Well, I'll try, and that's a great question. I'm glad you asked. NVE has excellent MRAM intellectual property. I think I mentioned in our summary that we've expanded our MRAM intellectual property portfolio in the past year--in the past calendar year--with four U.S. patents, including patents relating to next-generation technologies, magnetothermal MRAM, spin momentum MRAM, and V-MRAM. So I guess one way to look at it is we're already looking at next-generation technologies which can have higher density, lower power per bit, and higher speed.

And MRAM continues to be recognized as a revolutionary technology. I mentioned the Nobel Award, which recognized MRAM technology and our founder, a very prestigious award. The recent Nobel laureate in physics, Albert Fert, and his colleagues wrote in a journal that MRAM is a likely candidate for becoming a universal memory. That's an extraordinary statement. The universal memory concept is an idea that memories that we have now--different types of memory, SRAM, DRAM, Flash, and the like--could possibly be replaced by a single technology or single memory. And that's a very exciting prospect. So our goal is to continue to expand our technology portfolio and to license our MRAM technology, and it remains just an incredibly exciting field and one that we think has a very bright future.

Well, thanks very much.

Thank you. We probably--.

And we have one final question.

All right. We probably have time for one more question.

We will take that question from David Bayer with Northland Securities.

Hi, there. You gave a very helpful product discussion, by the way, but one sort of nuts-and-bolts question. On the balance sheet, it looks like you had great collections in terms of receivables, but what I don't quite understand is what happened with inventories in terms of the sequential increase there? Could you help us understand a little bit about that dynamic?

Yes, we increased our inventory in anticipation of future product sales. We've had some growth there, and we thought we could better meet customer demands with a little bit higher inventory level.

Okay.

And Mr. Bayer, any further questions?

No, I think that I'd rather not go any further than that, just because I think that that speaks for itself. That's helpful. Thank you.

Thank you, sir. And that would conclude our question-and-answer session. At this time, I would like to turn the program back to Mr. Baker for any additional remarks.

Thank you. If there are no other questions, that concludes our call. We are pleased with another strong quarter highlighted by a 62% increase in net income, and we look forward to our next call, which we expect to be in early May. And we'll report results for the full 2008 fiscal year. Thank you again for participating.

Thank you, everyone, for your participation in today's program. And you may disconnect at this time.