NVE Corp (NVEC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NVE conference call on second quarter results. (Operator instructions). And, as a reminder, this conference call is being recorded.

And, now, your host for today's conference, President and CEO, Dan Baker. Please begin, sir.

Good afternoon, and welcome to our conference call for the quarter ended September 30, 2010, the second quarter of fiscal 2011. 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 first half, I'll highlight some business items, and then we'll open the call to questions.

We filed our press release with quarterly results and our quarterly report on Form 10-Q with the SEC in the past hour, following the close of the 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 in continued growth in revenue and profits, uncertainties related to agreements with large customers, uncertainties related to research and development contract funding, risks related to developing marketable products, uncertainties related to the revenue potential of new products, and uncertainties relating to economic environments, as well as the risk factors listed from time to time in our filings with the SEC, including our most recent annual report on Form 10-K, as updated in our quarterly reports on Form 10-Q, including our quarterly report on Form 10-Q filed this afternoon. The Company undertakes no obligation to update forward-looking statements we may make.

We're pleased to report strong product sales and earnings growth for the quarter. Product sales increased 24%. Total revenue increased 20%. And net income increased 19% to $0.66 per diluted share, including a reduction of $0.01 due to stock-based compensation related to options.

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

Thanks, Dan, and good afternoon.

As Dan mentioned, total revenue for the quarter increased 20% to $7.81 million. The increase was due to a 24% increase in product sales and a 5% increase in contract R&D revenue. Product sales were $6.41 million, driven by strong sales into industrial markets, despite signs during the quarter of a slowing in the global economic recovery. The increase in quarterly contract R&D revenue to $1.4 million was due to new contracts and increased activity on certain contracts. Dan will talk more about contracts in a few minutes.

Gross margin remained very strong, at 67% of revenue. Margin decreased slightly from 69% last year due to a less favorable product mix with the particularly strong sales into industrial markets.

Total expenses increased 3% for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010, primarily due to a 6% increase in research and development expense.

Operating income, which is gross profit less expenses, increased 18% compared to the second quarter of fiscal 2010 to $4.26 million. And operating margin was 55%.

In our last call, I mentioned that NVE was included in a list of the top five companies ranked by operating margin in the semiconductors industry on the Website of "Investor's Business Daily." Just recently, we moved up to the top of the list.

Interest income increased 27% to just under $500,000 for the quarter due to an increase in interest-bearing marketable securities.

Income before taxes for the quarter increased 19% compared to the second quarter of fiscal 2010 to $4.76 million, and pretax margin was 61%.

Net income for the second quarter increased 19% to $3.21 million, or $0.66 per diluted share, compared to $0.55 last year, and net margin was 41%.

Earnings per share, both the most recent quarter and the prior-year quarter, were reduced $0.01 by noncash, stock-based compensation expenses. We are prudent and frugal with stock-based compensation. Virtually all of our stock-based compensation in the past several years is automatic grants to our directors, and our dilution has been minimal.

September 30 was the halfway point in our 2011 fiscal year. For the first half of the fiscal year, total revenue increased 13% to $15.1 million. Diluted net income per share increased to $1.30 for the first six months of this fiscal year, compared to $1.16 for the same period last year.

Cash flow strengthened our balance sheet. Operating cash flow for the first half of the fiscal year was $5.71 million. As of September 30, cash plus marketable securities was $55.9 million, an increase of $6.36 million in six months. The increase in cash plus marketable securities was due to operating cash flow and an increase in the value of our marketable securities due to market price changes. A $923,000 increase in short-term marketable securities in the first six months of fiscal 2011 was due to marketable securities previously classified as long-term approaching maturity. We expect short-term securities to increase in the remaining quarters of the fiscal year as more securities approach maturity.

The primary objective of our investment activities is to preserve principle while at the same time maximizing after-tax yields without significantly increasing risk. To achieve this objective, we maintain a diversified portfolio of marketable securities, and we have a ladder of maturities from short term to five years.

In our quarterly report for the quarter ended June 30, we reported a significant unrealized loss on securities issued by BP Capital Markets, and we stated that we expected to recover our cost basis. The impact of the Macondo oil spill on BP's financial profile was cited as a reason for a downgrade of securities issued by BP. As of September 30, however, we have recovered that unrealized loss and actually had an unrealized gain on the BP bonds.

Comprehensive income, which includes net income as well as unrealized gain or loss from marketable securities, was $3.88 million for the quarter. The unrealized gain for marketable securities for the quarter was primarily due to market conditions and the recovery in the value of our BP bonds.

Cash paid during the quarter for income taxes was $3.27 million. Cash paid for income taxes has been higher in the second fiscal quarter than other quarters because there are two estimated tax payments due - one in July and one in September.

Purchases of fixed assets stood at approximately $204,000 for the fiscal year so far.

We have about $300,000 in new equipment scheduled to be deployed this quarter as we expand capacity.

In the past quarter, we completed a new production test area. We expect costs related to that phase of expansion to be covered by a $214,000 tenant-improvement allowance that was part of the extension to our building lease we signed in 2007. We expect, however, that a possible expansion of our production clean room space could exceed the tenant-improvement allowance by $500,000 to $1 million. Clean room expansion will depend on circumstances, and we do not have a specific schedule. We expect to account for any costs not covered by the tenant-improvement allowance to be amortized as leasehold improvements over the remaining lease, which is through December 31, 2015. Dan will provide some details on our expansion, as well as his perspective on our business.

Thanks, Curt. I'll cover our expansion, new products, customer and distribution agreements, R&D, and our annual meeting.

As Curt said, in the past quarter, we completed and moved into a new production test area. Production test is an important determinant of our production capacity. It's where we test 100% of our sensors and couplers to ensure they're fit for the most demanding applications. The expansion represents about a 40% increase in production space and was converted from under-utilized office and tech space. The production test area and the R&D lab we discussed on our last call both have state-of-the-art, static-dissipative floors that are lower maintenance and more effective than what we had before. We are also increasing services, such as electricity, air conditioning, compressed air, vacuum, and chilled water to support more equipment. We received a new piece of production test equipment in the past quarter, and, as Curt mentioned, we have several more pieces of equipment due this quarter.

In 2010, we've introduced several new spintronic couplers, targeted at what's called controller area networks, commonly abbreviated C-A-N, or CAN. CAN is a standardized network used in cars, as well as industrial control systems. In the past quarter, we introduced our latest CAN product, an isolated CAN transceiver less than half the size of the version we introduced earlier in the year. As we've discussed before, we see near-term applications for the new CAN parts and industrial control systems. Longer term, we see a potential market in cars; especially, hybrid and electric vehicles, which have a greater need for networks than conventional cars.

Part of our long-term growth strategy is to expand into larger markets, such as automotive electronics. Specifically, hybrid and electric cars need to monitor a large number of battery cells. And, because battery voltages are expected to be several hundred volts rather than the 12 volts in most cars now, isolation is needed to transmit signals from the batteries to the controls. Our couplers are smaller than other devices, and that's even more of an advantage with our new CAN transceiver, which combines spintronic coupling with CAN network protocol functions in a single 0.15-inch by 0.4-inch package. Eight of them would fit on a first-class postage stamp. There's more information on our new CAN products on our Websites - NVE.com, IsoLoop.com, and CANtransceivers.com.

Turning to customer and distribution agreements, we were pleased to extend our agreement with St. Jude Medical in the past quarter. The St. Jude amendment extends our supplier partnering agreement through 2011. We believe we've earned St. Jude's continuing business in one of the most demanding applications imaginable, life-support medical devices, by providing excellent products, superb reliability, and a track record for dependability as a supplier. We have filed our St. Jude agreements and amendments with the SEC, and they're available on the SEC's Website or via our Website. Risks related to the expiration of that agreement were updated in the 10-Q filed today.

It's been our practice to provide e-mail alerts to interested parties when we make SEC filings, such as material contracts. You can sign up for those e-mails via the Request Investor Information page of the Investor section of NVE.com. There is also a link to RSS feeds from the SEC.

In the past quarter, we've strengthened our distribution in China, which is becoming an increasingly important market for us. As China's manufacturing grows, our products help make factories more efficient. We recently added a new, authorized distributor in China, (Inaudible) Technology. Also, we've expanded the products that Shanghai Channel distributes in China to include our sensors, as well as couplers. Shanghai Channel has done a good job for us in China. NVE's award-winning products are available in more than 75 countries, and our distributors speak countless languages, including Mandarin, Chinese.

We've focused our research in areas that are strategic to us in terms of future growth and revenue potential. And a good example of that is solid-state compassing. The goal of a spintronic compass is to determine heading using low-field, tunnel-junction sensors to measure the angle of the Earth's magnetic field. We see potential markets in point and search and augmented reality services.

We reached an important milestone in the past quarter by shipping tested, spintronic compass samples to a customer. The samples met our technical goals, and we are looking forward to customer feedback.

In addition to the samples, in the past quarter, we started work on a new research contract from the National Science Foundation, with the goal of reducing the size of sensors with applicability to navigation and consumer electronics. In addition to two axes to determine direction, solid-state compasses generally require the measure of tilt, which increases the sensor's size by requiring a tilted sensor. The goal of the research is to further miniaturize these sensors with a novel, third-access sensor. The project is being led by Dr. Joe Davies.

We were granted two new patents in October, an MRAM patent and a coupler patent. Those are our fifth and sixth patents so far in 2010.

The MRAM patent, granted just last week, is titled Magnetic Memory Layers Thermal Pulse Transitions and relates to magneto-thermal MRAM. Magneto-thermal MRAM uses a combination of magnetic fields and ultra-fast heating from electrical current pulses to reduce the energy required to write data. Magneto-thermal MRAM could allow smaller MRAM cells and lower power consumption. That, in turn, would allow denser MRAM. We believe magneto-thermal technology can also be combined with spin-momentum transfer technology. The new patent further strengthens an already superb MRAM technology portfolio.

The new coupler patent is titled Signal Isolator Linear Receiver. Couplers are also known as signal isolators because they electrically isolate the coupled systems. We make spintronic couplers, which transmit information faster than the fastest optical couplers.

There are links to the new patents from our Website.

We often refer in these calls to information on our Website. In addition to links to our patents and financial reports, there are lists of awards and accolades, fun facts, and papers and presentations. We update our papers and presentations pages with new items. And, in the past quarter, we posted several NVE documents made publicly available by the Defense Technical Information Center. These included papers and presentations in the past ten years on intra-weapon communications, landmine alternative systems, and nondestructive inspection.

Our tenth annual meeting as a public company was held last quarter. We had an excellent turnout for the meeting, with shareholders coming from around the country. We appreciated the chance to meet some of you, and we're gratified to have so many shareholders who share our passion for NVE.

For good corporate practice, each of our directors has stood for election every year, and we submit our auditors for ratification. Under new rules this year, broker non-votes are counted for ratifying auditors but not directors. Therefore, as was typical for public companies this proxy season, there were more votes cast for our auditors than directors. The auditors and each director received more than 99% of the votes cast, so our board of directors was re-elected, and shareholders ratified Ernst & Young as our auditors. Details are contained in a current report we filed with the SEC the day after the meeting.

Now I'd like to open the call for questions. Tyrone?

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

Congrats on another fine performance.

In terms of a couple questions that emanated from your comments and, also, the 10-Q that you filed this afternoon, maybe I'll start with the latter.

The balance sheet featured an increase in inventories in process. And it appears you attempted to address that in the 10-Q by talking about greater raw material purchases to support an increased rate of product sales. I trust that's more of a forward-looking statement, since inventories went up in the quarter. And can you give us a little more color on what's going on there?

Steve, we did increase inventories. As we said, our product sales did increase 24% over last year's quarter and 18% for the six-month period. So we're trying to be better prepared to meet the increased levels of product sales, as well as to hopefully prevent some shortages of wafers out there in the industry.

Okay. And is part of the equation also-- You've had a pretty good swath of new products, and we've been talking about some new products. I trust that's a component of the equation also.

Yes. That would be part of the equation. We're trying to gear up for some new product-- products and design wins.

Okay. And, I mean, is there a level of optimism around the forward trajectory or, at least, a continuation of the positive trajectory of product sales embedded in your inventory planning?

Absolutely, we're very optimistic about the-- about our prospects going forward. As Curt alluded to in his prepared comments, we had a particularly strong quarter for industrial control-- in industrial control. And that more than offset-- that was most of what drove the growth.

So the other component of our business, which is sales into medical devices, while it can ebb and flow, in the long run, we're optimistic there. And we were particularly pleased to see a very strong quarter in industrial control and factory automation, despite some uncertainty in the macroeconomic environment concerning the strength of the economic recovery.

And, in terms of that strength in industrial, was it relatively broad based amongst customers and distributors and geographies? Or what kind of flavor can you give us for that?

It was fairly broad based. We won a number of new customers and design wins, as Curt alluded to. Some of them were in manufacturing automation. There were some in aerospace and defense and some in environmental controls. So our strongest markets for the standard products, for the catalog products, are industrial control and factory automation. And we did see-- We did see some strength there, and that's good to see.

And, in terms of Curt's comment about despite some concerns about the pace of industrial growth, I'm not quite sure-- I don't recall quite how he phrased it. But are you encouraged by the landscape you see now in that domain, or are there some things flashing red or yellow signals at you?

Curt alluded to a slowing in the global economic recovery. And I think what we were particularly gratified by is, while we can't control that or even, in many cases, we can't predict it, but we can continue to win designs. We can continue to develop new products. And we can continue to take market share. We believe that that's what was happening in the past quarter and allowed us to deliver extremely strong sales growth into those industrial markets, despite those signs of a slowing economic recovery.

Okay. One more question about the performance in the quarter, and then I'll hop back in the queue and probably come back on some new stuff. You had a bounce back in the contract research and development revenue line, kind of getting back in that, I guess, maybe most common neighborhood that you've been in over the past handful or so of quarters. Is that the likely neighborhood as we look forward? And what kind of visibility do you have for that side of your business?

Steve, as you said there, we got back to a level that we had been at. If you look back for about the last eight quarters or so, we're right around the level we came in at in the second quarter. As we've said in the past there, we don't have a lot of visibility as far as timing of contract wins. But, in the quarter, we did have some very, very encouraging results on some contracts, and we were able to get some follow-on awards, as well as win some new contracts.

Okay. That sounds encouraging as it relates to the relative near term. I understand the point you make about the volatility. But it seems like some of the components that would continue to keep that business in a healthy range seem to be there.

I would say so. I would say it wouldn't be out of the question to be in the same range that we've been in, at least in the near term, that we've been in the last eight quarters.

Great. Thanks for taking my questions. I'll come back with some questions on the new stuff. I'll let somebody else in.

[Steven Keller], Mirage Capital.

Congratulations. Good job on a good quarter. Now, a couple of things. In 2011-- The other day, the "Wall Street Journal" was talking about how companies are going to be looking to really take their businesses to the next level with innovative strategy like e-commerce, selling more lines, (inaudible) more top line revenue and bottom line costs, net profit. Can your company provide some color to (inaudible)? What is your e-conversation going forward for the next couple of years? And how do you plan to take the company there to drive more revenue to your site, drive more people to your company?

Well, that's a very good question. And I think, as we've talked about on past calls, we have a distribution strategy that emphasizes-- particularly in the US, it emphasizes catalog internet distributors, companies such as Digi-Key and Newark Electronics. And both of them rely very heavily on e-commerce. And our parts show up very well on those sites because they provide engines to search for the parts that you need-- that the engineer needs based on the specification. So, for example, if you search by speed, we're going to show up at the top of the list or if you search by package density or some of the other parameters that engineers care about. And we found that to be a very successful business model and one that we've transitioned to heavily, particularly in the United States. And it's a more cost-effective way to reach our customers and our prospects than to try to have feet on the street, if you will. So that's an important part of our business model.

Our Website allows customers to order online. It has application centers so that they can search for the part that they need based on the application that they have. And we have the site organized so that it's very easy for customers to find the part that they need, to order it online, and to have a completely seamless experience between the design process, the selection process, and the ordering process.

Is that the kind of thing you were getting at?

Yes. I know, obviously-- How are you driving people--? If I were to do a search and I'm looking for specific types of centers, how am I able to find you in a more effective way, rather than having been routed to some other site so I can buy your products, which are the top in the business?

Right. Well, we try to partner with distributors who are leaders in that. And Digi-Key, in particular, stands out as one of the leading sources for design engineers to select and purchase parts. They have-- They send out, I'm guessing, millions of catalogs, and their Website is on many, many hundreds of thousands, at least, engineers' desktops. So they drive a lot of business. We call that-- We're calling that customer pull. So, when the customer needs a coupler and they go to one of our distribution partners, which is what they commonly do-- they're used to buying parts there-- our parts are going to show up very well. Our parts are going to show up well in terms of their specifications. And it's a very easy process to buy. It's a minimum number of clicks, either on their Websites or our own Website. And they drive a lot of traffic to their Website with catalogs, with advertising, with e-mail newsletters, with video and design guides. And they're really very, very innovative in terms of making their site and, by inference, our sub-sites, as the go-to place, the one-stop shopping for engineers looking for our types of parts.

And this past quarter, have you broken down how much revenue came directly from not necessarily Digi-Key but maybe from the NVE.com Web store? Do you guys break that down and say, okay, we're driving this much traffic; we need to improve on this, or what have you?

We don't break that down, but we do look at it. We look at who's ordering from our Website. We'll follow up with them in terms of how was their experience, what were they looking for, suggestions for improvement for our Website. We receive reports and analytics from Digi-Key and other distributors. We can monitor our Website hits. We have an e-mail newsletter that drives traffic to our Website, and we can track the effectiveness of that. So we can look at what messages resonated with our prospects and our customers and perhaps which ones didn't. And so we're always fine-tuning the message and trying to make sure that our collaterals, our distributors' collaterals, and our Website are relevant and really very convincing to our customers.

A couple weeks ago, I was reading another article talking about mobile and social media. Are you guys doing any types of apps on iPhone or android? Like myself, I could download an app, and that would take me directly to your site and I could order remotely.

You know, we're relying on our distributors for that, and they have been looking at that. I don't think you could probably download an NVE app. That hasn't been-- The feedback that we've gotten from our customers is that's not usually the way that they're ordering. But we're always looking out for new things. And, when we adapted this-- adopted this catalog internet model, it wasn't nearly as ubiquitous as it is now. So we try to be leaders, and we try to make use of the fact that our products are truly innovative and try to reach the types of prospects that we have, which are innovative engineers and designers.

And, with that, we probably ought to move on to another question, if we can.

All right. Thank you very much.

David Wu, GC Research.

I was-- I've got two questions. The first one, really, is the inventory. Last quarter, we had a situation where we have some inventory adjustments. I assume that, looking at the product sales numbers this quarter, that that process is well behind us. Is that correct?

Well, David, it seems to be a mixed bag. Customers and distributors-- they've been wrestling with the economic uncertainties. Medical device customers may have had a reduction in inventories in the past quarter, but we think that could bode well in the future. And despite near-term volatility we may have seen, we're very excited about product sales in the future. And, consistently, we've had increases in product sales.

Yes. The medical device customers' inventory adjustments were very visible in your prior quarter product sales. I was assuming, since the product sales numbers are what they were, at $6.4 million, that that sort of headwind is gone. Right?

I think the growth may have been despite that. And so that's why we're saying it bodes well for the future, because, if they were adjusting inventories in the most recent quarter, in the September quarter, then it bodes well for future quarters. And, despite that possibility, as you point out, we had a very strong quarter for product sales.

I assume it came-- You mentioned about factory automation and industrial controls. Right?

Yes. We highlighted that as an area of particular strength for the past quarter.

So inventory reduction, I don't think, lasts very long these days. I assume that whatever adjustments that were made by the medical customers are pretty much done by the end of the September quarter.

Well, that's certainly the hope. It's a number of customers. And, as Curt said, it's a mixed bag, so it's hard to predict precisely. And then external factors can come in. And our customers are trying to predict the future. So it also-- Their ability to predict the future also determines their inventory levels. So it is complicated to predict. But we do believe that the possible inventory reductions bode well for the future because, as you say, once they're behind us, then we can return to the core ordering level that's closer to the usage level.

Okay. I assume that-- Without a major hiccup out there, one should assume that industrial overall product sales should grow in the coming quarter from that cessation of inventory reduction.

Well, that's always the goal. And, as Curt said, it bodes well for the future. We try to resist making predictions of the future because things can happen and because it's hard to predict what's going to happen with the macroeconomic environment.

I was wondering. With this new expansion of testing capacity, it's a fairly significant step-up in your total production space. And I was thinking. What kind of customers are you planning on filling that space or having that increased production capacity to serve? Do you see equal growth among the various end markets, or one or two end markets stand out for future growth?

Well, we've talked about some of the longer-term future growth markets, including consumer electronics, automotive electronics. We've talked on past calls about the potential for biosensors. Right now, in the near term, it's for our existing and our recently introduced new products, such as couplers and sensors. So almost all of our products, our couplers and sensors, go through that test. Sometimes they go through the test area more than once, if they're tested at the wafer level and then again at the package level. So it's a very important area for us.

And I would guess that virtually all of our revenue, except for contract research and development, would go through-- goes through that function. So we're working to make the capacity higher-- to increase the capacity, to improve the efficiency, and always to improve the quality of our products and improve our testing capability to make sure that our products can continue to be the absolute best available.

I see. Great. Thank you.

Patrick Kirksey, Perimeter Capital.

Just a couple of quick questions. The last gentlemen asked a little bit about the inventory issues with healthcare and the previous quarter, the June quarter. And it sounds like that continued in the September quarter. You also saw a pretty-- not a big, but a step-down in your gross margins from the June quarter to the September quarter, and you talked about that being driven by mix. I'm just curious. Is that driven by a mix between healthcare or medical devices and industrial, or are you also seeing kind of a negative mix shift just in your industrial space?

That's primarily driven by the stronger sales into industrial markets, which we tend to have a lower gross margin on than sales into medical sensor markets.

Okay. So you're not getting a sense that some of the newer products that you're shipping out in the industrial markets are lower margin than some of your existing industrial products.

No; not at all.

Okay. Excellent. Last question. Any update on any new products in the biosensor area or in the maybe government anti-tamper product area?

Right. In terms of the biosensors, as we said before, we have some excellent biosensor technology, and we were pleased to report a design win. We're preparing for planned production late next year. And we continue to work on the development of the technology.

In terms of anti-tamper, we've reported before that we have anti-tamper MRAMs, which are spintronic memories that we've successfully made prototypes. Our goal is to make those memories in house. These are relatively small memories compared to mainstream applications that we're more familiar with, such as computers and phones. But we see that as an excellent application of anti-tamper technology, and it continues to be a major thrust for us. So, hopefully, we'll have more to say about that in future quarters. But I'm glad you asked that because both of those are important to our future. The anti-tamper MRAM allows us to develop new technology that's applicable to mainstream memory technology. And, in fact, you saw some evidence of the strengthening of our portfolio with a new MRAM patent that we got just last week.

Thanks a lot, gentlemen.

Kevin Sonnett, RK Capital.

Can you talk just a little bit about the timing and perhaps the importance of the new distribution you talked about, the new design win or wins that you mentioned? Did that happen sort of early in the quarter or late in the quarter? I would imagine you guys are continually expanding your distribution and getting design wins, but you sounded on today's call like it was a little bit more significant. So I'm wondering if that's the case and if you could perhaps just compare it to the last 6 or 12 months in terms of new distribution and design wins.

I think we can do it qualitatively. I think we do have a sense that we had a particularly strong quarter for design wins. That's difficult to quantify. And design wins are a mixture. As you might expect, they're a mixture of some pretty large customers and maybe some smaller ones. But I think we see in that that our products are resonating with customers, that we're providing benefits that are valuable to them, that we have an excellent benefit proposition, and that our distribution and our marketing efforts are effective in reaching the folks that need our products. So it's hard to give a quantitative result or quantitative number to say it was a certain number of design wins or a certain increase. But that's certainly-- I think that's my feeling is that it was a particularly good quarter.

And, Dan or Curt, was part of the strength on the industrial side for products driven by those design wins in the quarter? Or is that more of an opportunity as we look out to future quarters and, really, it's the design win but as far as actual production and revenues, we're looking at that later this year or next year?

I think it's a combination. Some of the design wins that we had prior to this quarter we're seeing orders for during the second quarter. And then some of the design wins we got in the second quarter we may not see orders for until the third or fourth quarter.

Okay.

It's hard to give typical timing, Kevin. We sometimes have design wins where they're buying very quickly. And sometimes we get customers that are planning ahead for new revisions of their circuitry or new models, and so then there's a lag there before they actually start buying parts.

Sure. That's helpful. And then, just on-- You addressed this with one of the other questioners as far as the gross margin and whether or not there was a degradation within the segments. Or was it just more industrial versus the med tech side. It sounds like it was-- You didn't see gross margin degradation within industrial. But I'm wondering-- Given the macro environment, understanding that your parts are generally priced at a premium and you're trying not to compete on price, I imagine when an engineer is ordering they are looking at some premium level, and there's not an unlimited premium that they would pay. Are you seeing from the competitive offerings that the prices are falling in their kind of typical pattern in terms of annual pricing declines? Or is there anything noteworthy that you're seeing out there that you're seeing out there in terms of the competitive set of products?

We have seen evidence in some cases, and it can go up and down. So we need to be cautious of some firming in the prices. And that tends to go with reductions in channel inventory. In other words, if parts are scarcer, the prices tend to firm or, at least, decrease less. And I think we've seen some evidence of that, at least in the past-- oh, say the current calendar year, where we've seen a recovery from 2009 into calendar 2010 in the industry. And accompanying that tends to be a firming of pricing or, at least, a reduction in the rate of erosion of pricing. And we have seen in the past-- we've talked about some shortages in the industry by our competitors. So that gives us an opportunity to provide benefits and also provide shorter lead times. So it gives us a chance to reach customers who may have otherwise not had a reason to change from an existing supplier.

You're correct, of course, that we try not to compete on price. We believe we have an excellent value proposition. Our parts reduce board space, which saves our customers money. They often simplify electronics by eliminating parts. That saves them money. And the higher performance can give them better products, which saves them money and allows them to command higher prices. So we try not to compete on price, even when we're in difficult industry conditions. And, when the industry starts to recover, as it has, say, in the calendar year, then it gives us an opportunity to continue to hold our prices and sell our benefits.

Okay. Great. And, just lastly, Dan, you alluded to the planned production schedule on one of the new product categories. But on compassing in particular, can you give us any qualitative insights into the-- I don't know-- I guess the period where you'd hope to see a ramp for that opportunity? Is that something that's early next year or late next year?

It's tough to predict. It's driven by the applications, and the applications are a little bit-- Well, they're a bit uncertain, and they're beyond our control. But it does seem to be part of a trend in enhanced, location-based services. And we feel we've provided an excellent part to a customer that's in that market. So some of the potential markets-- Well, we talked about them in our prepared remarks - point and search and augmented reality - which can use enhanced or better compasses for pointing. We're continuing to develop more advanced devices because we see this as a process where the sensors are going to continue to get smaller, and performance will get better. And that will drive more applications. It's a very exciting area for us with a lot of potential. But we're dependent on the handset manufacturers and others for developing the applications that will use them. We had feedback saying that a better compass was going to help this, and so that's the reason we've focused on its development. We see it as a necessary component of these next-generation applications.

Okay. Thanks a lot, Dan.

Steven Crowley, Craig-Hallum Capital.

As promised. Just two quick ones, because you've covered a lot of ground. As it relates to the spintronic compass, the more precise compass, we came out of last quarter with you talking about having completed prototype wafers and the final stages of testing and evaluation. Earlier in your prepared comments, Dan, I believe you said you've provided fully tested sample product to a customer for evaluation. Is that the same as a prototype in your vocabulary? Or is a fully tested sample beyond a prototype? Is it an actual part that can win a design in?

Well, we appreciate your careful listening to our comments. But, yes, we do draw a distinction between a sample and a prototype. And, in general, we consider a sample as something that's spec-compliant. It's not production, so we made a small quantity of them. But it's something that's meant to be tested within the limits of what the customer needs. And that's different from a prototype. A prototype demonstrates that the concept works, but it may not work to the specs that we need or over the temperature range or over the voltage range or things like that.

So we do consider it a very important milestone. And there's still work to be done. And we are awaiting customer evaluation to see what their feedback is. But we're hopeful that the next step might be to get it into production.

Great. Congratulations on that progress. It sounds like, given the level of progress and enthusiasm, that the opportunity for that product as you survey the landscape continues to be significant and available, meaning no one's jumped into that slot with similar functionality.

Well, we certainly have seen a lot of interest in compassing and navigation. Markets of that size attract a lot of attention. But we believe that we have better accuracy than is otherwise possible with existing technology. And we believe that we can further miniaturize. We've got a very small solution. That's very important in the handset market. And we believe that we can further miniaturize it, or we may be able to further miniaturize it. An example of that is the NSF contract that I talked about in our prepared remarks, which is, if successful, could reduce the size of the overall sensor. So, yes, we think we-- We believe that we have a better technology that has an important customer benefit, so we are excited about the prospects.

And, in the one other new product that you touched on but not to a great extent, the anti-tamper MRAM, your plans to manufacture that yourselves-- You talked about some design wins in military and aerospace that would be consistent with the initial targeted market for that product. So is it safe to say you've made progress along the timeline there with your plans for anti-tamper MRAM?

Yes. I think that's fair to say. We've continued to develop the technology, to get it closer to production. And we continue to see customer interest and, as you say, in the near term, primarily for military/aerospace applications to protect high-value electronics but, in the longer term, potential consumer applications. And it develops a key technology area for us, and that's magneto-resistive MRAM.

Yes. That seems to be a developing story in terms of some of the potential consumer applications for that technology. But the walking before you run approach is to get it into some of these mil/aerospace markets.

Yes.

Okay. Great. Thanks again for taking my questions.

Thank you, sir. I'm showing no further questions or comments at this time, sir.

Well, very good. Thank you, Tyrone. We might have run a little bit over, but I appreciate everyone's attention to the call. We were pleased to report 24% growth in product sales and strong earnings for the quarter. And we look forward to speaking with you again in January to report our third quarter results.

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