NVE Corp (NVEC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NVE conference call on fourth quarter and fiscal year. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, today's call is now being recorded.

At this time, I would now like to turn the conference over to your host, Mr. Daniel Baker.

Thank you, and good afternoon. And welcome to our conference call for the quarter and fiscal year ended March 31, 2010. As always, I'm joined by Curt Reynders, our Chief Financial Officer. This call is being Webcast live and being recorded. A replay will be available through our Website - NVE.com.

After my opening comments, Curt will present a financial review of the quarter and fiscal year, I'll highlight some business items, and then we'll open the call to questions.

We filed our press release with quarterly and annual results plus our annual report on form 10-K with the SEC in the past hour, following the close of market. Both filings are available through our Website.

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 growth and revenue and profits, risks associated with our reliance on several large customers, risks associated with competitive threats, uncertainties related to research and development contract funding, risks related to developing marketable products, uncertainties relating to the revenue potential of new products, and uncertainties related to economic environments, as well as the risk factors listed from time to time in our filings with the SEC, including our recently filed annual report on form 10-K. The Company undertakes no obligation to update forward-looking statements we may make.

We're pleased to report strong growth and record revenue, product sales, and net income for both the fourth quarter and fiscal year. Specifically for the quarter, total revenue increased 19% to $8.18 million. And net income increased 16% to $0.74 per diluted share. For the fiscal year, revenue increased 20% to $28.1 million. And net income increased 23% to $2.47 per diluted share.

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

Thanks, Dan. And good afternoon. I'll cover quarterly income statement, fiscal year income statement, the balance sheet, and the past five years' results.

As always, we provide more information for the fiscal yearend reviews then for quarterly reviews.

Starting with the quarterly results, as Dan mentioned, total revenue for the quarter increased 19% to $8.18 million. Product sales increased 17% to a record $6.66 million. This increase was despite a comparison to an extraordinary quarter a year ago. Quarterly product sales may have been helped by a recovering industrial market, tight inventories in the industry, and long lead times from some of our competitors.

Quarterly contract R&D revenue was the highest it has been in the past five years, increasing 27% to $1.52 million, due to new contracts and increased activity on certain contracts. Total expenses increased 8% to $918,000 for the quarter. Selling, general, and administrative expense increased 10%, compared to the fourth quarter of fiscal 2009, primarily due to increased commissions and the timing of professional services. Research and development expense increased 6%, compared to the fourth quarter of fiscal 2009, due to new projects and additional personnel.

Gross margin remained very strong, although it decreased to 71% of revenue, compared to an extraordinary 74% last year, due to a higher percentage of total revenue from contract research and development, which, generally, is less profitable than product sales.

With good margins on increased revenue, operating income increased 16% to $4.93 million in the quarter. And operating margin was 60% of revenue.

Interest income increased 32% to $440,000 for the quarter, due to an increase in interest-bearing marketable securities. Income before taxes for the quarter increased 17%, compared to the fourth quarter of fiscal 2009, to $5.37 million. And pretax margin was 66%.

The provision for income taxes was a higher percentage than in the prior-year quarter - 33% of income before taxes, compared to 32% last year, primarily because more of our income was subject to higher federal and state effective tax rates.

Net income for the fourth quarter increased 16% to $3.6 million, or $0.74 per diluted share, compared to $0.65 last year. And net margin was 44%.

For the full fiscal year, our growth accelerated despite a challenging economy. Total revenue increased 20% to $28.1 million for the year, compared to a 14% revenue increase for the prior year. Most of the $4.7-million revenue increase was from product sales. In percentage terms, product sales increased 15% and contract R&D increased 50%, compared with last fiscal year.

Within product sales, strong sales into medical device markets more than offset weakness in industrial markets. The 50% increase in contract R&D was due to several new contracts and increased activity on certain contracts.

International sales accounted for approximately 49% of our revenue in fiscal 2010, up from 47% in fiscal 2009. There's more about geographic areas in our 10-K.

Fiscal 2010 revenues increased in all three geographic areas we report - 15% in the US, 14% in Europe, and 79% in Asia. Highlights from Asia include a new distributor in China, Shanghai Channel, and a number of customer visits.

Net income increased 23% for the year to $12 million. And comprehensive income, calculated as net income plus the unrealized after-tax net gain for marketable securities, was $13.4 million. Diluted net income per share increased to $2.47 for the fiscal year, compared to $2.04 last year.

We break down customer- and company-sponsored R&D activities at fiscal yearend. With our increase in customer-sponsored contract R&D in the past fiscal year, we spent a total of approximately $5.22 million on customer- and company-sponsored R&D activities, up 29% from $4.05 million in the prior fiscal year. The total of customer- and company-sponsored R&D activities was 19% of our total revenue, which is significant spending.

Large R&D investments over the years have resulted in significant new products, technologies, and product opportunities. Dan will discuss some of those in a few minutes.

We entered this fiscal year with a solid contract R&D backlog of approximately $1.53 million. And approximately 49% of the backlog was from non-government entities - the highest percentage in many years. We believe our transition to non-government funding from historical government support bodes well for future commercialization and product growth.

Our employee count increased to 52 from 50 during the fiscal year. Despite the increase, our revenue per average employee in fiscal 2010 increased to approximately $554,000 per employee, from $467,000 in fiscal 2009 and $419,000 in fiscal 2008. So, our revenue per average employee has increased 32% in two years. The revenue-per-employee increases were due to the hard work and skill of our employees as well as more efficient equipment.

Gross margin for the year was 70.5% of revenue - strong validation of the uniqueness and value of our products. Gross margin was down slightly from 71.2% of revenue last year, due to the shift in revenue mix toward contract R&D, which, generally, is less profitable than product sales.

Annual operating, pretax, and net margins for fiscal 2010 were the best in our history and among the best in our industry. Operating margin was 58%; pretax margin - 64%; and net margin - 43%

High earnings quality and strong operating cash flow strengthened our balance sheet considerably. As of March 31, cash plus marketable securities stood at $49.5 million, an increase of $15.2 million in the fiscal year. The increase in cash plus marketable securities during the fiscal year was primarily due to $12.5 million in operating cash flow and a $2.2-million net increase in the value of marketable securities, due to market price changes.

Purchases of fixed assets were approximately $306,000 for fiscal 2010. The soft economy helped us purchase capital equipment at favorable prices. Purchases increased capacity for testing TDFN 2.5mm square parts. We bought a new tester for our smallest packages, which are 1.1mm square or less than five one-hundredths of an inch, and equipment to help process die, which are unpackaged wafer pieces that are even smaller than our packaged parts.

We recently began an expansion of our production areas to allow for growth. We currently have about 5,000 square feet of production and test space, including clean room space. The expansion will convert approximately 1,800 square feet of offices and labs to production - about a 33% increase in production space. We currently plan to finish this expansion phase late this quarter or next quarter. We expect most of the expenses associated with this expansion phase to be covered by a tenant improvement allowance of approximately $214,000, which was part of the extension to our building lease that we signed in 2007. This expansion phase will also clear the way for us to expand our clean room space when we need to, although we don't have a specific schedule or budget for that next expansion phase.

10-K reports include a five-year financial summary. Some highlights - Revenue more than doubled in fiscal 2010 compared to 2006. Gross profit margin increased more than 20 percentage points from less than 50% to more than 70% of revenue. Operating income increased more than fivefold. And net margins increased 15% to 43%. And our stock price increased 183% versus 10% for the NASDAQ industrials index.

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

I'll cover products, promotion, and distribution, R&D, patents, and review fiscal 2010.

Starting with products, our mission is to use spintronics to make practical products with real-world advantages. Consistent with [admission] in the past quarter, we introduced several new products targeted at what's called controller area networks, commonly abbreviated C-A-N, or CAN. CAN is a standardized network using cars as well as industrial control systems. In industrial systems, CAN is used as part of what's called DeviceNet to transmit information between factory-automation systems, such as industrial robots. In cars, CAN is used to interface to sensors and other automotive system interconnects. Our couplers' high speed and low signal distortion make them ideal for CAN because they allow faster communication and more subsystems on the bus.

Specifically, our products have significant advantages over competitive parts and signal distortion figures of merit called propagation delay and pulse jitter. Our couplers are also smaller than other devices.

We introduced two new products in the past quarter designed for CAN - First, a line of bidirectional couplers called the IL721. And, second, called the IL41050, is an isolated transceiver that combines spintronic coupling with CAN network protocol functions and a single three-tenths of an inch by four-tenths package. Four of them fit on a first-class postage stamp.

We see near-term applications for the new CAN parts and industrial control systems. And, longer term, we see a potential market in cars, especially hybrid and electric cars, which have a larger need for networks than conventional cars.

As we've said before, our long-term growth strategy is to expand into larger markets, such as automotive electronics. Hybrid and electric cars need to monitor a large number of battery cells. Because battery voltages can be several hundred volts, isolation is needed to transmit signals from the batteries to the controls.

This quarter we plan to introduce an even smaller version of the IL41050 isolated transceiver in a 0.15 inch by 0.4 inch package, which is half the size of the product we introduced last quarter. There's more information on our new CAN products on our Websites - NVE.com, IsoLoop.com, and a new gateway, CANtransceivers.com.

Another of our products, one of our industrial sensors that fits on the head of a pin, was named the product of the month for April 2010 by the German trade magazine, Construction and Engineering.

Both the Company and our distributors have aggressively promoted the new products with our customer visits, direct mail, advertising, e-mails, and editorial initiatives.

As Curt said, industry inventories might be tight and we're seeing evidence of shortages; so we've been reaching out to our competitors' customers to point out that not only are our parts better, but we have them in stock.

Turning to product distribution, we look for distributors that are smart and energetic. In the past quarter, we announced a new distributor for our coupler products, Rhopoint Korea. Rhopoint affiliates have done a good job as our distributors in parts of Europe for many years and recently expanded to Korea. Our distributor model allows us to leverage our own staff with many more feet on the street. NVE products are available in more than 75 countries. And the Korea addition reinforces our position as global leader in sensor and couplers.

Our products are being promoted at two important tradeshows in Germany this month. The Power Conversion Intelligent Motion Exhibition is going on now. And we're represented there by our distributor [Highline Power Components]. Later in May, we'll be at the Sensor Test Exhibition, hosted by [Highline Sensor Tech]. Germany is a strong market for industrial control and factory automation. And it's a very good market for us.

As Curt noted, fourth quarter contract R&D revenue was the highest it's been in five years. As we said before, the continuation of many of our contracts is contingent on us meeting project goals. Our R&D staff has done a great job on these projects. We've focused our contract work in areas that are strategic to us in terms of future growth and revenue potential. Two long-term strategic development we've discussed include magnetic compassing sensors and MRAM.

We've talked about a third area, biosensors, before. And, as I mentioned last call, we've completed a biosensor development. And we're supporting a planned introduction of a clinical analyzer in less than two years.

The goal of our solid-state compass development is [to determine] and heading direction by using low-field spintronic tunnel junction sensors to measure the angle of the Earth's magnetic field. Since our last call, we have continued to make progress on prototypes. We continue to be optimistic about the potential; although, it's impossible to predict when we might see sales.

Another long-term, strategic development area is anti-tamper MRAM. MRAM is an integrated circuit memory which is fabricated with nano technology and uses electron spin to store data. MRAM may have the potential to combine many of the best attributes of different types of semiconductor memories.

Anti-tamper technology is in demand for defense, aerospace, and commercial applications. Our anti-tamper technology uses MRAM intellectual property. We've developed, over the years, an expansive technology and specialized know-how we can eventually bring to bear a large-scale MRAM. Therefore, we continue to invest a significant amount of R&D on MRAM and related technology. I mentioned last quarter that we were in the process of adding MRAM to foundry wafers. We've tested wafers and we've demonstrated switching memory bits, although a fair amount of development remains before production.

We continue to strengthen our patent portfolio. In the past quarter, we had one US patent granted and received notice of allowance for another. The patent we were granted is titled superparamagnetic platelets field sensing devices and discusses a novel sensor for magnetic fields. Possible applications referenced in the patent include digital memories and magnetic sensing devices. We also received notice of allowance of a patent titled crosspoint magnetoresistive memory, which relates to MRAM. A notice of allowance is a written notification that a patent application has cleared a patent office review and is nearing issuance.

Like much of our intellectual property, the crosspoint memory invention was made with US government support; in that case, the missile defense agency. This is an example of the value created by our government contracts. And, under federal legislation, companies normally may retain the principle worldwide patent rights to any invention developed with US government support.

The crosspoint magnetoresistive memory patent application was published in the past quarter and is available on the US patent office Website or via our Website. There's also a link to the superparamagnetic platelets patent from our Website. We have a number of pending patents and published applications, and those are also available from our Website.

As we begin fiscal 2011 I'd like to summarize highlights from a very successful fiscal 2010 -record revenues, product sales, and earnings in a year when many semiconductor component companies reported significant declines.

We received patents relating to couplers, field sensors, and biosensors. We introduced world-class products, including new CAN couplers and more parts that fit on the head of a pin. We expanded distribution in central Europe, eastern Europe, China, and Korea. And our stock price increased more than 50%.

We were recognized with several prestigious awards and accolades for the past fiscal year. For example, our performance earned NVE a place on Forbes' two most recent lists of the 200 best small companies in America. Our growth qualified us for the latest Fortune small business list of America's 100 fastest-growing, small, public companies. Our return on revenue ranked first among the 100 largest public companies in Minnesota according to a Star Tribune list published last month. And our product innovation earned one of Medical Product Manufacturing News' top products of 2009.

There are links to these and other awards on the awards and accolades page of NVE.com.

Now I'd like to open the call to questions.

(Operator instructions). Steven Crowley, Craig-Hallum Capital.

First of all, congratulations on a great quarter. In terms of some follow-on questions, you gave us a lot of commentary in the prepared comments, but to delve a little deeper, the new CAN products sound very interesting. It sounds like the immediate target is the industrial control markets slice. But these things-- These pieces and parts are very apropos for what's going on in autoland. What do you have to do with setting up distribution and distribution partners to effectively go after that new market of auto?

Well, that's a good question, Steve, because it is a different distribution model than we have now. Auto companies generally don't buy through distributors. So we're looking at either next-tier suppliers that would be suppliers who have a relationship with automotive companies, and we've been successful with those types of partnerships in the past-- And the other things that we need to do is to demonstrate reliability and certifications that are specific to the automotive industry. So, the automotive industry has wider temperature ranges. We believe our products are well suited for that because they're very, very durable and withstand very high temperatures just by their nature.

So we're going to be doing some testing, some qualification, certifications - those types of efforts in order to demonstrate the reliability of the products in the harsh automotive environment. We're going to be working on distribution and distribution partnerships. And, in the meantime, we see a near-term market for the CAN parts in industrial control systems, and that will allow us to get some-- hopefully get some potential sales in the relative short term to build some volume and to demonstrate the reliability of those parts.

In terms of a follow-on on those products, in terms of the opportunity for you in the industrial control space, is it displacing other products that you've been selling into that space, or it's just an incremental opportunity?

Well, we have been selling some of our legacy IsoLoop products into that market. So, primarily, it would be bidirectional isolators because CAN bus is a bidirectional network. So one needs to have an isolated signal going one way to transmit data and then the opposite direction to receive data. So we have a part that's used in that market. The new part-- One of the new parts that I mentioned, the IL721, has a more convenient layout for circuit boards that are commonly used in industrial control. So we believe that that will help us in that market.

And, then, what customers had to do-- What engineers had to do with those products was to use someone else's transceiver, a non-isolated transceiver. So our parts might have been used in combination with someone else's transceiver. This allows us to capture more value and to reduce the parts count on the circuit board.

So there might be some small amount of cannibalization, I suppose, of products that we're already selling in that market. But we think that the opportunities far outweigh any cannibalization that we might have. These are going to be higher value-added products. The 41050, anyway is a higher value-added product than the isolators - the bidirectional isolators like the IL712, the older product.

It would appear-- Or it sounds like, if you're including an isolated transceiver, then your bill of materials is going to be much higher, given that content. So you'll gladly cannibalize a legacy part.

Yes; exactly, because we're selling the transceiver functions. And then, for our customers, it reduces the chip count because the entire package fits-- As I said, it fits easily on a postage stamp. And they don't have to deal with several parts - a number of components to make up an isolated CAN system.

And then a couple questions as to landscape items that probably affected you. I'm trying to get a feel for how you navigated the straits. There certainly has been some noise and dislocation amongst the various players in cardiac rhythm management with some product issues by one of the majors. Do you think that had any pronounced impact on your performance in the March quarter or has any real ramifications for you here in the June quarter?

That really is hard to say. There is some uncertainty surrounding the CRM market. But, long term, the demographics are favorable. As people get older, we tend to need more pacemakers and ICDs and hearing aids, for that matter. So, looking at it long term, we see it as an excellent market. Short term, as you know, there are perturbations. Some of them help us; some may not. But we see it-- We certainly see it as an excellent market.

And, just from a broad viewpoint, if healthcare reform or other initiatives make more medical devices available to people, that's a good trend, and that's a good trend for us.

So far, have those variations--? In the March quarter, were you able to walk through some of the landscape items and navigate them well-- qualitatively even? How would you respond to that?

Well, what we-- I guess what Curt said in the prepared remarks was that strong sales into the medical device markets more than offset weakness in the industrial market. So we had a strong quarter and fiscal year for medical devices. And so, in that sense, we were fortunate to have some diversification into the medical business. It was a challenging industrial market. I think we-- Considering the conditions, we're pleased with our results in the industrial market, as well as the medical market. But we highlighted the medical market as a strength.

I would think, given the timing of your fiscal year, the biggest challenges in the industrial marketplace, I assume, would have been earlier in the year with things starting to recover in build as the year progressed. Is that the right picture for us to have?

Yes. That's probably true. It's hard to pin it down with too much precision because these are kind of broad trends. But the industrial market started to recover, by some accounts, early in the calendar year in early 2010, and that's challenging for us but also provided us with some great opportunities. As Curt mentioned, we might have benefited from industry shortages in inventory. As the industry recovers, it takes most companies a while to build capacity and to fulfill that demand. And we tend to maintain relatively high inventories compared to other companies in the semiconductor industry so that we're better positioned to meet demand when it picks up. And we highlighted that with some of our promotional collaterals, pointing out that we have great parts, first and foremost, but, also, that we have good lead times and parts in stock. So the recovery of the industry provided us some excellent opportunities in this quarter-- in the most recent quarter.

Final question from me during this round, and then I'll hop out and let some other folks ask. In terms of the industrial markets that are most important to you, as I look at the landscape, it seems like you have quite a bit of exposure to maybe some later-cycle stuff, some more heavily-- heavy industrial, heavy factory-floor stuff that maybe hasn't been as much of a participant during the earlier innings of industrial/economic recovery. I guess I'm just asking for a little bit of an acid test on that statement.

Well, that may be true. What others in the semiconductor industry point out is that, at least in this recovery, consumer electronics, which would be things like handsets and computers, laptops, cameras, things like that, tend to lead industrial or durable goods. And we're more in the durable goods or what you described as "heavy" things. White goods, semiconductor manufacturing equipment, automotive manufacturing are examples of where our products tend to be used. So that tends to recover later than consumer electronics, or, at least, it has in this cycle. But I think, by most accounts, that segment of the industry is also recovering pretty nicely.

Thanks very much for taking my questions, and I'll hop back in the queue.

David Wu, GC Research.

I actually have only two questions. Number one, regarding the lead times, can you give us a general feel for what your lead times are and, also, your manufacturing cycle time? That's really the first question.

And I have a follow-on on the MRAM part of the story. Can you give us an idea about lead times that you're quoting? And how's your manufacturing cycle time?

As far as lead times on our catalog products, which would be products that are standard products that we would sell through our Website or distributors would sell through theirs, our goal is to have as many parts as possible in stock. So the lead times, then, would be immediate delivery-- Well, depending on the time of day the order is placed, we would try to ship those the same day. Our distributors also have a very good track record of having parts in stock and immediate delivery. Digi-Key prides themselves on having a very high percentage of the parts that they carry in stock for immediate delivery, and they do an excellent job of getting them out the same day or within a day. So lead times, of course, for higher volumes or for certain other parts can vary.

You asked about the production cycle time. What we try to do is keep adequate inventories of raw materials such as foundry wafers or other wafers so that we can quickly turn parts into-- turn wafers into packaged parts. So there are a number of times in that cycle. But we endeavor to try to reduce it as much as possible with work-in-process, raw materials inventories. Sometimes we can have wafers that can go into various types of products-- what we call here "archive wafers," and that allows us some flexibility to respond to demand relatively quickly. The packaging cycle-- If we have wafers done, the time that it takes us to get those parts packaged - typically in Asia - get them back here, get them tested is usually around a month.

I see. So, basically, you have wafers on hand. The only thing is those are kept in WIP, and packaging/test, round trip, is one month.

That's right. And we don't always have wafers in that state. We try to have mostly parts and finished goods. But, just to give you some idea of the cycle time, that would be the cycle time.

Okay.

So, the second part of your question?

Oh. No, no. That's the first question.

Okay.

Moving on to the second one, which is the-- A number of promising technologies - memory technologies - have been talked about as replacement for DRAMs and flash memory down the road. And I was wondering if the MRAM-- What has to happen for it to emerge as the frontrunner on the replacement of this current, I guess, dynamic memory and the flash memory?

Right. Well, for MRAM to seriously compete with mainstream semiconductor memories, such as flash or DRAM, the density would have to go up considerably. There seems to be some progress on that front. There are-- Production and prototypes are getting bigger. There are reports on MRAM programs by several major companies at industry conferences. So, certainly, work is progressing.

One of the promising technologies or sub-technologies of MRAM, is spin momentum, or spin transfer MRAM, and we have technology in that area. We have several patents in that area. But that allows for higher-density sales by reducing the power density in each cell. So the cells are more thermally stable. They can be smaller. They require lower read current. And that allows them to scale up more. So the scaling seems to be the thing that would allow for MRAM to become more in the mainstream use.

In the meantime, though, we continue to work on developing smaller MRAMs that we think we can build ourselves for specialized applications such as anti-tamper, which I mentioned. And not only does that give us technology that we think we can make and hope to be able to sell, but it also builds the technology and builds our intellectual property portfolio. And that could be applicable to these larger, mainstream memories down the road.

I saw a company down in San Jose. I think it's Everspin. Well, it's not San Jose, but it's in Phoenix - Chandler, Arizona-- making 16-megabit MRAM for some battery replacement applications. Would that be something that you folks could also do?

Well, Everspin is a spinoff of Freescale, which was a spinoff of Motorola. And Motorola was a-- is a licensee of ours. So that's an example, though, of the MRAMs getting bigger. The 16-megabit device that you mentioned that they announced-- that compares to 4 megabits, which was their previous largest device. So we believe that they share our view of a bright future for MRAM, and it's encouraging that they've announced a much larger device.

Okay. All right. I guess I'll leave it at, because there are a number of other technologies that are in development in the horse race (inaudible) replace mainstream memory technology. Right?

There are. It's a huge market. And that attracts a lot of research and a lot of development. We think MRAM has unique advantages and unique potential, and we're continuing to develop it. And we believe that it's demonstrated-- the feasibility has been demonstrated. The scalability appears possible. And it has unique advantages compared to some of the other technologies in terms of being able to be manufactured in existing semiconductor-type fabs, in terms of the scalability.

And, as I mentioned, spin momentum MRAM allows smaller cells without-- with less concern about thermal stability. And it has inherent non-volatility and inherently unlimited read-and-write potential, or endurance. So those are key advantages. And we're working hard to develop the technology in applications for today and applications for tomorrow.

If I were to think about it-- Should I think about it in the next two to three years, if you (inaudible), which would be succeeding technologies?

Well, that would be a better question for them as to what their expectations are. But a number of companies, as I mentioned, have programs in MRAM. I presume they're doing so because they see it as good potential, either for mainstream applications or for significant smaller-scale memories. And so I would assume that they're aware of it. And large memory companies are aware of the technology and, depending on the company, may have a program underway of some kind.

Okay. Fine. Thank you.

Dick Smith, (Inaudible).

First, I'd just like to start off with a comment about the Company of your size to generate over $30 million in free cash flow over the last three years is really exceptional. And to further emphasize that, the Company's cash and marketable securities represent over 84% of total assets today. And I'm sure the board is considering some future distribution of these monies to its shareholders. However, as a reminder, income taxes on any future distribution paid after calendar year 2010 will more than double and, in some cases triple, because of the expiration of the qualified dividend.

On another subject in the same area - basically, in capital management - I wanted to ask Curt, first of all - Have we exercised any purchasing of the treasury stock?

We have not. Through the end of March, we have not bought back any stock.

Okay.

So the program still is in place.

And another question on that also, Curt. And just as a technical question - voting rights on treasury stock. When treasury stock is purchased, does the management maintain the voting rights of the treasury stock, or is that shared by each individual shareholder?

The treasury stock basically goes away. I'm probably butchering an elegant accounting concept. But the treasury stock is retired by the Company. So, if we were to buy back stock, it would decrease the total shares outstanding, the weighted average shares and, therefore would be accretive to earnings per share for the same (inaudible) earnings.

Right.

But there's no voting rights. That stock basically is retired or disappears.

I see. Okay. Yes. I just wanted to verify that because I would certainly like to see the Company-- I was just worried about an unfriendly takeover and whether or not, if the Company accumulated treasury stock, that they could use the voting rights in order to ward off something like that. But I'd certainly like to see the Company invest a little bit more in themselves in the treasury stock to increase the return on our investment portfolio here, because we have a ton of cash that we're sitting on right now.

Only question I really have concerning operations is the spacing of government contracts. And how much latitude do you have with the government in spacing these contracts over a period of time?

You're talking in terms of whether we can move contracts in or out once we receive them? Is that what you mean?

Well, assuming that it's NVEC's long-term strategy to eventually phase out government contracts, how much--? As I say, how much latitude do you have working with the government in saying-- Well, they give you a contract, and you say - Well, can we make it over three years rather than two years? Do you have that decision to make in order to space that government contract?

I think I understand the question. Well, first of all, to your premise, it's not our goal to phase out of government contracts. I think, over the years, we have emphasized more product sales because it's more scalable, because it provides us a better return on our investments. But-- And perhaps we've been more selective in government contracts. We want our government contracts to support areas that are strategic to us that provide us with potential to either build technology, sell products, or both.

We do have some flexibility on the timing of contracts. It's an iterative process, as you might expect. If the government or any other customer needs something in a particular timeframe because of some other program constraints, then we're going to try to do our best within the bounds of reasonableness to meet their requirement. On the other hand, if it's an unreasonable requirement or we're not confident that we can execute it successfully, then we'll try to work with them or any other customer to say - Let's see what we can do to either reduce the scope of the program so that we can meet the schedule constraints or allow ourselves enough time to successfully execute.

So government contracts often come with those kinds of constraints, where they're needed for some other, larger program. And then we try to hit that. And, if we don't feel that we can, at some point, we have to say we can't bid this because we're not confident we can meet your timeframe.

Right. Okay. That makes a lot of sense. Essentially, just the capital management area-- As far as operations are concerned, you gentlemen have done just an outstanding job. Coming from the turn of the century of earning $0.01 and, today, earning $2.47, diluted, is just exceptional. It's really good.

And the only area, as I say, that I really have questions-- because (inaudible) is in capital management and the fact that we haven't exercised any-- buying any treasury stock as of yet. And I think we ought to think about that and investing in our own future.

And, of course, the other thing is the substantial amount of cash and marketable securities we have. Could you give me any color on that, Dan, as going down on the future, because, if I had to make an extrapolation in the future, over the next three years, we could end up with $100 million in cash and marketable securities. Now, that's fantastic, but, yet, is that really in the best interest of the shareholder as far as whether the shareholder might be able to earn more on that money than actually NVEC Corp could investing in short-term debt obligations?

Well, let me take a crack at that, and then maybe we could move on to other questions because we're starting to run out of time.

Absolutely.

Thanks for your comments. And we're certainly proud of our progress and improving our profitability. I think it's a credit to the value of our products and to the skill and the hard work of our employees. And we made-- As Curt mentioned in his summary, we've made some great progress in the past five years, and, hopefully, even better days ahead.

As far as the capital management, we-- At the board level, we continuously look at opportunities to improve long-term shareholder value. We have a stock buyback program, as we alluded to, that remains in force. And we're continuing-- We continuously look at possible ways to improve shareholder value.

We also want to be sure that we have a very strong balance sheet to defend our intellectual property and for other possible contingencies or purposes. So we believe that it's good to have a strong balance sheet, but we also believe in prudent capital management.

So, Joe, can we move on to other questions?

[Ken Versalis, Overweiss Asset Management].

You guys certainly did a very nice job growing product revenue some 15% in fiscal 2010 in a difficult environment. Can you talk in general terms about the business trends that you're seeing now relative to last year?

And, given the general economic recovery, can we assume that you also should see an acceleration in product revenue growth in fiscal '11?

Well, in terms of the overall trends, we're seeing an improvement in the macroeconomic environment, particularly as it relates to industrial markets. And there are some obvious examples of that. There's a much brighter picture for semiconductor capital equipment, for example, and other areas. So those are positive trends for us.

As far as getting too much more specific, we generally try not to look forward or predict the future. What we try to do is allow for growth and success. We-- Curt mentioned our plans to expand our factory and expand our production areas. We maintain inventories so that, as markets recover, we can fulfill increased demand. And we continually develop new products in much larger markets, markets such as consumer electronics, automotive, which I mentioned with regard to CAN products, and other areas that we mentioned-- biosensors as well.

So we're looking at what is the next generation of products or the next markets that our technology can be deployed in that open up large markets for us and allow us to fulfill our vision of leading a revolution in spintronics.

Okay. And, then, you mentioned the new R&D contracts and the increased activity on current contracts. And you were running at like a $1.3 million a quarter rate, and then it stepped up to $1.5 million. What kind of R&D contract visibility do you have for 2011? And is $1.5 million a quarter kind of a reasonable run rate going forward based on the contracts you have in hand?

Well, I think we pointed out our firm backlog as of the end of March was about $1.5 million. And I think the increase we've seen over the last couple years in contract R&D really points to some excellent progress and results that our R&D team has had on various contracts.

But, to amplify on Curt's point, that backlog-- We would need to build that backlog or to replace it in order to continue that rate. But, as some of you know who follow us and have been on our calls before, we generally don't give forward guidance. So we don't try to predict what the revenues will be. We've given some of the general trends as to the things that we're looking for and the particular areas that we're doing R&D in. And I've said, just qualitatively, our folks who are doing these R&D projects have just been doing a fantastic job in executing on them. And that means more contracts, and that means follow-ons and continuations and developing an excellent reputation in these markets.

Great. Thank you.

Joe, we probably have time for, perhaps, one more question.

Steven Crowley, Craig-Hallum Capital.

In terms of one of the emerging opportunities that you've emphasized with us over the last couple of quarters and touched on briefly, the solid-state compass opportunity-- I'm wondering what, if anything, has changed in terms of the landscape for your participation in the market. We saw some pretty big numbers out of third-party, independent research talking about a lot of units potentially in that market in 2013. I'm wondering if that opportunity still looks as ripe for you as it may have looked six months ago. And what can you do now to continue to position yourself to capitalize on that?

Well, we continue to be optimistic about the potential, Steve, and we've made good progress, as I mentioned. Our near-term goal is to finish prototypes that meet the requirements that we see for a next-generation compassing sensor in the handset and related markets. So we have demonstrated the feasibility of that. But our goal is to have a prototype that is the right size, that has the right power consumption, and has next-generation precision in terms of the accuracy of the compassing angle. And that's our near-term goal. And we made progress in the past quarter on fabricating the prototypes-- the prototype wafers. And we'll continue. Our plan is to continue to update that as we go forward. But we still see it as a very encouraging market. As you mentioned, independent research has shown that-- has predicted that it's going to be a very large market. And just the trends that we're seeing subjectively in terms of more location-based services, more phones with navigation systems, more applications that are navigation-related or depend on precise navigation-- We see it as an excellent market and one where we have distinctive confidence in terms of precision, power consumption, and size.

And then, in terms of the historical solutions that have served kind of the tip of the iceberg of that market-- has there been anything that's transpired with either improved performance of those solutions or new solutions coming to marketplace that potentially usurp the opportunity before you can get there?

Well, we don't know of anything. We continue to see great potential for our approach - for our spintronics approach. We presume that other people are working on this problem because it's such a large market. But we've demonstrated in the past with government programs and other internal R&D programs the ability to precisely detect the [Earth's field]. So we're talking about a very small change in magnetic field to get the kind of precision that we want to get. And we demonstrated that.

Our goal is to build prototypes. And we feel that, if we can hit these specs and our internal goals, and, so far, we've been pleased, that there's a market there.

And then, in terms of-- Are you pleased with the partner-- the activities by your partner in terms of laying the groundwork so that, as soon as you have a product that meets the specs, you hopefully can gain some traction? And I'll stop there. Thanks for taking my questions.

Well, thanks, Steve. So, we'll conclude with that. And we're pleased to have some excellent partnerships. And, certainly, that's one of them. This is a company that knows the handset market, knows the requirements, has the contacts within that market. So it's an excellent business model. And they've given us excellent feedback, we believe, in terms of what are the product specifications and attributes that are more important to this market? How do they match up with our technology? And we see a very good fit. -- and given us very good feedback along the way as to how to make this a great product - a killer product. And so that's one of the benefits of that kind of partnership.

Joe, that's probably all of our time. And let me just sum up by thanking you for participating in the call, everyone. We were pleased to report strong growth and record revenue and net income for both the fourth quarter and the fiscal year. And we look forward to our next call in July to report results for the first quarter of fiscal 2011. Thank you, again, for participating.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.