NVE Corp (NVEC) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NVE Corporation conference call on the third quarter results. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. (Operator instructions). As a reminder, this call is being recorded.

At this time, I would now like to turn the conference over to the host, the President and CEO, Mr. Daniel Baker. Sir, you may begin.

Thank you, and good afternoon and welcome to our conference call for the quarter ended December 31, 2010, the third quarter of fiscal year 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 nine months, I'll highlight some business items and highlights of calendar 2010, and then we'll open the call to questions.

We filed our press release with the quarterly results and our quarterly report on Form 10-Q 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 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 relating 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 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 record product sales 26% higher than last year. The record product sales drove a 20% increase in total revenue and a 22% increase in net income to $0.70 per diluted share. Now, I'll turn the call over to Curt to cover details of our financial results.

Thanks, Dan, and good afternoon. As Dan mentioned, total revenue for the quarter increased 20% to $7.96 million. The increase was due to a 26% increase in product sales, which more than offset a 4% decrease in contract R&D revenue. Product sales were $6.69 million, driven by strong sales into industrial markets. Record product sales were despite our history of the December quarter, our third fiscal quarter being the weakest quarter of the fiscal year. Until last year, our product sales had been less in the third quarter than the second quarter every year since fiscal 2005.

There was a sequential increase last year and a 4% sequential increase this year. The departure from seasonal weakness is encouraging and may be due to increased sales to existing customers. New customers are improving economic environments, overcoming adverse seasonal patterns, such as distributor ordering or customer shut-downs late in the calendar year.

The slight decrease in quarterly contract R&D revenue from $1. million to $1.28 million was due to the completion of certain contracts and contract activities. Dan will talk more about contract activities in a few minutes.

Gross margin increased to 69% of revenue compared to 68% in the prior-year quarter, due to a more profitable revenue mix with a higher portion of product sales. Total expenses increased to 21% for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010, due to a 16% increase in selling, general and administrative expense and a 31% increase in research and development expense. The increase in selling, general and administrative expense was due to an increase in performance-based compensation and commissions and the timing of professional services. The increase in research and development expense was due to increased product development activities.

Operating income, which is gross profit less expenses, increased 22% compared to the third quarter of fiscal 2010 to $4.35 million, and operating margin was 57%. Interest income increased 24% to $512,000 for the quarter, due to an increase in interest-bearing marketable securities. Income before taxes, which is operating income plus interest income, for the quarter increased 22% compared to the third quarter of fiscal 2010 to $5.05 million, and pre-tax margin was 63%. Taxes were 33% of income before taxes for the quarter, the same as last year. Net income for the third quarter increased 22% to $3.38 million, or $0.70 per diluted share compared to $0.57 last year, and net margin was 42%.

For the first nine months of the fiscal year, total revenue increased 15% to $23 million. Diluted net income per share increased to $2 for the first nine months of this fiscal year compared to $1.73 for the same period last year. Operating cash flow strengthened our balance sheet, primarily due to $8.95 million of cash flow from operations. Cash plus marketable securities was $58.3 million as of December 31, an increase of $8.77 million in nine months. The $2.89 million increase in short-term marketable securities in the first nine months of fiscal 2011 was due to marketable securities previously classified as long-term approaching maturity. We expect short-term securities to increase over the next several quarters as more securities approach maturity. Accounts receivable decreased $750,000 due to the timing of payments by our customers. Purchases of fixed assets stood at approximately $502,000 through three quarters of the fiscal year, primarily for production equipment to expand our capacity.

Now I'll turn it over to Dan for his perspective on our business. Dan?

Thanks, Curt. I'll cover customer and distribution agreements, R&D and some highlights for 2010. We were pleased to have recently extended our supply agreement with Phonak AG. The agreement applies to Phonak and the entire Sonova Group, which specializes in hearing and wireless systems and is a worldwide leader. The Phonak amendment is pursuant to a letter of intent we discussed previously. The amendment extends our supply agreement through -- extends the term through March 31, 2015, expands NVE products under the scope of the agreement and provides for minimum purchases by Phonak. We filed the amendments and the agreement with the SEC, and they are available on the SEC's website or via our website. Risks related to the expiration of the agreement were updated in the 10-Q filed today.

In the past quarter we strengthened our distribution in Asia. CS Component Ltd. has joined in NVE's world-class distribution network, and will provide sales, marketing and application support for our IsoLoop Isolators in Korea. NVE's award-winning products are available in more than 75 countries and our distributors speak countless languages, including Korean.

We had previously reported shipping tested spintronic compass samples to a customer in the September quarter. We shipped additional samples in the most recent quarter and look forward to customer feedback. As we've said, our goal is to offer best-in-class accuracy as well as low power consumption and small size.

In addition to those samples, in the past quarter we continued work on a research contract from the National Science Foundation with the goal of reducing the size of the sensors with applicability to navigation and consumer electronics. In addition to two axes to determine direction, solid-state compasses generally require a measure of [till], which increases the sensor size by requiring a perpendicular sensor. The goal of our research is further miniaturization with a novel third axis sensor.

We've done a significant amount of research into MRAM for many years. MRAM is spintronic magnetoresistive memory which is fabricated with nanotechnology and which uses electronic spin to store data. As a result of those efforts, just last week we were granted a new patent titled Vortex spin momentum transfer magnetoresistive device. The patent discusses, among other things, nanopillar devices, spin momentum transfer and magnetic tunnel junctions with applicability to magnetic memory devices, or MRAM. The invention was made with government support under contract awarded by the Missile Defense Agency. This is an example of value created by our government contracts, and under federal legislation companies normally may retain the principal worldwide patent rights to any invention developed with US government support.

Our MRAM strategy is to license our technology for large-scale memories rather than to build them ourselves. Our goal is to build innovative small-scale anti-tamper MRAMs ourselves, however, and to use what we learn from their development to strengthen our MRAM technology portfolio, as we did with the new patent.

As we begin calendar 2011, I would like to summarize highlights from a very successful 2010. We had year-over-year increases in revenues and earnings each quarter. We received patents relating to MRAM, file sensors, couplers and magnetic sensors. We introduced world-class products, including several new spintronic couplers for controller area networks and new medical device sensors. We expanded our production space. We expanded distribution in China and Korea, and our stock price increased more than 40%.

Our exceptional growth and innovation was recognized with several prestigious awards and accolades in 2010, including one of America's 100 Best Small Companies for 2010, according to Forbes, a top five semiconductor company, according to The Street; one of the top 100 largest Minnesota-based public companies for the first time, according to the Star Tribune; one of Minnesota's fastest-growing public companies as ranked by the Minneapolis-St. Paul Business Journal, and a product of the month awarded by a German trade magazine for NVE magnetic switches. There are links to more information about this and other recognition on the awards and accolades page of NVE.com.

I would like to open the call for questions. Joe?

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

Congrats on a great quarter. A few questions -- in terms of the contract R&D business, you spent a little time in the prepared comments talking about how that can be quite productive downstream in your product development and your product sales. There's been a little bit of variability in that business line. Year-to-date, it seems to have stabilized in the $1.2 million to $1.4 million range in the last two quarters. What can you tell us about the pipeline for those projects and what kind revenue component we should plan on from that segment of your operations?

We don't have specifics to provide, but as you know, our contract R&D revenue can fluctuate depending on timing and availability of awards, as well as follow-on funding. Follow-on funding is dependent on results and we have had some promising results on certain contracts, which has enabled us to receive additional funding.

Okay, well that sounds encouraging that we shouldn't be expecting a big drop-off in that business to say the least, or how should we think about that revenue component? As this year has progressed, clearly the baton for growth has been passed to the product side of the business, and that seems to be appropriate, but it doesn't sound like there's a slippery slide on the contract R&D side.

Well, as we've said in the past, our vision is to increase the product sales, and not rely as much on contract R&D. We do pursue R&D contracts in strategic areas, and we have seen -- this year, we have seen some additional funding from those efforts.

Now, in terms of your product sales, it had a very good quarter. You pointed out the strength on the industrial side of your business. But, can you tell us a little bit about the performance of the medical side of your business? Was it solid? Was it dampened by any strange factors in the period? How would you characterize it?

We were pleased with our sales into the medical sector, Steve. We were just commenting on our -- when we were commenting on the excellent growth, the year-over-your growth, particularly in a historically weak quarter. I think we've found that the industrial market had recovered pretty well, and that may have been -- that may have been the reason for the reversal of a seasonal pattern. And we are seeing some signs of improvement in the manufacturing economy, which is very encouraging. But I think we were pleased with our results across the board, including our sales into the medical markets.

On the industrial side, besides maybe some encouraging macro trends there, have you seen acceptance of some newer products like the controller area network stuff, or some new applications be a noticeable component of your success in that market?

We have seen some excellent interest in the controller area network products and other new products, such as new sensors in the very small packages that I alluded to when we talked about the calendar 2010 accomplishments, and so we were pleased with that. We are seeing some strength in manufacturing automation, as I alluded to, and we are also seeing some strength in environmental controls, which is a relatively fast-growing area. That would be controls that help save energy, that support alternative energy systems, such as solar and wind power, where efficiency in converting that energy into electricity is becoming more and more important. So those would be the ones that I would highlight.

Interesting -- now, in terms of the response you've had to the electronic compass products that you are sampling, what kind of color can you give us there as to whether or not it has been a response on the clear path to initial production volume orders or whether it's a pack of numerous companies who are just nibbling on the idea? How can you help us understand what's going on out there with the test drive of your sampler products?

Well, we have a particular customer that we shipped these samples to both in the September quarter and in the most recent quarter that I alluded to in our prepared remarks, and they are company that specializes in modules for the cell phone and handset markets, so we see that as a promising market. We see additional markets for precise navigation, and we are looking at evaluating, along with our customer, our prospects there. But as we said, our goal is to leapfrog available technology with size, power and particularly precision, or the angular accuracy of the compass. And we continue to see that as a very promising area, and we are very pleased with the performance of the device and, based on the feedback from our customer, we continue to be very pleased with how that is going and with the quality of the product that our R&D team has designed.

My final question in this tranche -- I'll get in the queue and maybe come back -- I noticed in the balance sheet detail that there was a noticeable increase in raw material purchases within inventory. Are those kinds of purchases more geared towards new products or just higher volumes anticipated than existing products? And maybe talk a little bit about what goes in your process, your thought process for doing that?

Steve, it's really both new products as well as some of our legacy products. The increase in raw materials is partly due to purchase timing, as well as to support our increased product sales, and also we have been able to take advantage of some volume discounts.

(Operator instructions) Steven Crowley, Craig-Hallum.

Well, I didn't expect to be with you that quick, but I didn't want to miss out because there are some other things I wanted to ask about. You mentioned that the professional services component of your expense mix was up a bit this quarter, and I'm wondering what that correlates with, what kind of activities at the Company did you utilize those professional services for?

Basically, Steve, it can relate to timing of some of our audit fees, as well as some of our legal fees related to patents. We find that they can vary just depending on the timing of the service.

Okay, and those don't sound like they are outside marketing or outside research and development fees; they are more on the legal admin side?

Correct.

Okay, in terms of some of the other initiatives, Dan, that you talked about on recent calls, you mentioned continuing plans to begin manufacturing lower-density MRAM parts for anti-tamper data security. Where do you sit on that curve in terms of starting up manufacturing and being to market with some parts?

Well, we are pleased with our progress there. We've reported previously that we've made prototypes of devices that have working MRAM bits, and we are continuing development. We've had some limited shipments. I'm not sure I would classify them as production, but more as prototypes or pre-production devices. These would be relatively limited volumes and in specialized niche applications initially. But we see them as -- as I mentioned in the prepared remarks, we see them as providing a vehicle to develop MRAM technology, and we believe we have excellent technology that's continuing to develop, and also as a potential bridge to some large-volume, possible bridge to large volume anti-temper applications, such as to prevent identity theft or improve the security of credit cards and smart cards. So we're a ways from those types of production, but we've made some very good headway on some of the high value-added niche applications that we've talked about in security and protecting high-value-added, high-value targets.

And it also seems like you've established an ability -- I don't know if proven is too strong -- but established an ability to actually manufacture these parts. So for us outsiders looking in, it seems like if there was a technological risk in terms of your ability to manufacture, it seems like that's lessened with the progress that you've made. Is that a fair inference?

Yes, I would agree with that. I think there are or have been technical challenges in making MRAM. We've overcome many of them and they are amazing devices to watch them work, to actually see a bit switch, and then you remove the power and the data remains there. You can power it back up and read the data. So they are truly remarkable devices that rely on very small, very precise dimensions in the countable number of atoms or atomic layer range. So we've developed processes to make those devices consistently and to control the critical parameters in their manufacture, and so we believe that we are very well positioned there.

And in terms of one of the other applications or one of the new products and new applications that you talked about, there is an application in the in vitro diagnostic world. Are there any updates or changes in that opportunity and/or its potential timing with that next-generation IVD system?

We continue to prepare for production planned for later this year, late 2011, and we believe we've developed excellent biosensor technology. You are referring to a particular design win that we've talked about before. But we continue to develop that type of technology. We see other markets, but in that particular opportunity we continue to prepare for planned production late this year.

Right, and then one final question from me, since we don't get to talk to you about this stuff very often. I asked about controller area networks earlier. It seemed like you had received a pretty good response from customers. If I recalled the game plan there, the initial application is often times on the factory floor and the factory automation. But the longer-term vision is in some of those factories making automobiles for those parts to work their way into the vehicles. What can you tell us about how your thinking has evolved in terms of the role they can play in either conventional or hybrid or electric vehicles, and how -- if you're making progress on that front?

We continue to see an excellent opportunity in hybrid electric vehicles. There aren't a lot of hybrid electric vehicles being built right now, but there is a lot of interest in that and some exciting new vehicles that have been recently introduced. And so we see that as an excellent growth area, and we continue to see interest particularly in the battery management systems of hybrid electric vehicles. Managing those battery systems is key to improving the efficiency and the range of the vehicle, and that's a key to their success. So our devices allow the battery systems to communicate with the central control system without having a direct electrical connection. And because hybrid electric vehicle batteries might be several hundred volts, it's really not possible to have a direct connection without destroying the central control system. So we continue to see interest in hybrid electric vehicles, and in this particular subset, which is the battery management system and the communications between the battery monitoring systems and the central control system to improve their efficiency. So we're working on that. We are working on trying to address that market, to address the market needs, to address the certifications and qualifications that are required for the automotive market. And, as you correctly pointed out, that's a longer-term market for us. But we continue to work on that and to position ourselves for when hybrid electric vehicles become more mainstream.

And is your approach to market pretty analogous to what you're trying to do in wireless, to try and find a tier 1 or a high-level supplier to that marketplace and win them over as a sponsoring customer that brings the functionality to the end customer?

Yes, exactly. We see that as an excellent strategy in the automotive market, as well as the handset market that you alluded to. It's very difficult for companies to qualify as a supplier to the automotive markets, and we believe that an excellent path would be to partner with a company that's already qualified and that has experience with dealing with the automotive market that can help us with the certifications and the testing and the qualifications that will be required for mass production. And so we are exploring relationships with that, like that, and hopefully, we'll have something more to report on that somewhere down the road.

Great, we look forward to it, thanks again for taking my question.

Greg Greenberg, Wells Fargo Advisors.

Just a few questions, two issues -- one, I wanted to see if there was any update to your relationship with EverSpin with regards to intellectual property licenses or legal. And then, sort of on a related as far as capital allocation, it's always been my understanding that we're building a war chest of cash to defend our intellectual property. So a little bit of sort of what's enough, and whenever we hit that number, what do we do with all of these great profits that you guys are generating and continue to grow to benefit shareholders?

Okay, good questions. First, with regard to EverSpin, EverSpin is a company that's making and selling commercial MRAM, and they're a spinoff of Freescale, which was a spinoff of Motorola, so we have a long historical relationship. Motorola was an early investor in NVE, and we had research contracts and intellectual property agreements with Motorola. So we believe that they share our vision for a very bright future for MRAM.

And, probably, if you were alluding to the relationship or intellectual property, it probably isn't appropriate to comment on the specifics, other than we believe that they share our vision for the bright future for MRAM. They recently have talked about the potential for spin momentum transfer MRAM, and we've talked about that for awhile. We believe we have excellent technology in that field. That's a type of MRAM that has the promise of reducing the cell size and increasing the efficiency, decreasing the power of MRAM, which could help make MRAM, large-scale MRAM, successful in the long term.

In terms of our balance sheet, we continue to strengthen our balance sheet, which we believe is helpful in defending our intellectual property against potential infringers. We don't have a specific target or anything like that for what the balance sheet needs to be. We believe that a strong balance sheet is important for us to be successful in the intellectual property segment of our business. We have a program, a stock buyback program, that we've announced previously, and so under certain circumstances we could buy back stock, and that would be one use of the cash that's on our balance sheet, the cash and marketable securities on our balance sheet.

To date, have any shares been purchased under that program?

Not to date.

Okay, thank you.

Jon Jung, Trailhead Assets.

I just wanted to comment you had a great quarter. We appreciate the efforts. Do you have anything you can tell us about customer concentration in the quarter and the nine months?

As far as customer concentration, we do sell worldwide. Last fiscal year we reported that about 49% of our sales were international. So we're reaching all over the world. As far as specifics for the quarter, we don't have any specifics to report at this time.

So no customers that were over 10%?

We report 10% customers in the 10-K, the annual report, which is where they're reported, and we don't update those quarterly because they are not part of the 10-Q requirement. We have talked about some important customers. I mentioned Phonak AG. We talked about other important customers. We don't say -- because of confidentiality, we don't say what percentage they are or whether that's going up or down. But we are pleased to have customers who are leaders in their field, leaders in their industry and very demanding customers. I think it's a great validation of the technology and the quality of the products that our employees make.

Thank you.

I am showing no further questions on the phones.

Well, in that case I can sum up. We were pleased to report record product sales for the quarter, and we look forward to our next call, which is tentatively in early May, to report results for the full fiscal year. Thank you for participating in this call.

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