NVE Corp (NVEC) 2012 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 results. At this time, all lines 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, today's conference call is being recorded. I would now like to turn the conference over to your host, Daniel Baker, President and CEO. Please begin.

Good afternoon and welcome to our conference call for the quarter and fiscal year ended March 31, 2012. 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 cover business items and we'll open the call to questions. We filed our press release with quarterly 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 profitability, uncertainties relating to future revenue and growth, risks related to developing marketable products, uncertainties relating to the revenue potential of new products, risks related to loss of supply from our packaging vendors, risks in the enforcement of our patents, litigation risks, as well as the risk factors listed from time to time in our filings with the SEC including our annual report on Form 10-K filed this afternoon. The Company undertakes no obligation to update forward-looking statements we may make.

We are please to report record product sales for the quarter and solid earnings for the quarter and fiscal year despite significant challenges the past year. For the quarter, product sales increased 7% for their highest level ever and net income was $0.63 per diluted share. For the fiscal year, net income was $2.34 per share. Now, I'll turn the call over to Curt for details.

Thanks, Dan. I'll cover quarterly results, fiscal-year results, and the balance sheet. Starting with quarterly results, fourth-quarter product sales increased 7% despite comparisons to an extraordinary quarter last year. Driven by increased sales in medical device markets, product sales reached a record $7.18 million.

As previously reported, flooding in Thailand shut down one of our packaging vendors in October 2011. That impacted our ability to deliver products, especially for industrial markets and had ripple effects on our supply chain. That vendor was able to resume operations in the past quarter.

Products for medical markets were less affected by the disruptions. We have also qualified alternate packagers for virtually all of our parts. So, we believe the unusual supply-chain challenges are behind us.

Total revenue, which includes product sales and contract R&D for the fourth quarter of fiscal 2012 decreased 7% from the prior year quarter due to a 70% decrease in contract, research, and development.

Sequential quarter total revenue increased 24% and product sales increased 33% for the quarter. Gross margins increased to 70% of revenue compared to 65% in the immediately prior quarter. Data for each quarter of the past two fiscal years are in the 10-K filed today.

The contract R&D decrease was due to the completion of certain contracts and contract activities and a challenging environment for government contracts. Tight defense budgets appear to have disproportionately affected anti-tamper programs, which have been a large part of our contract R&D revenue.

We're working on R&D contract opportunities for the near to medium term, but our long-term strategy, as we've said before, has been to reduce our dependence on contract R&D toward a future of product sales and licensing as our principle revenue sources.

Gross margin increased to 70% of revenue for the fourth quarter of fiscal 2012 compared to 68% last year due to a more favorable revenue mix. Specifically, 94% of revenues for the quarter were from product sales with the balance from contract R&D. Gross margin is generally higher on product sales than contract R&D.

Total expenses increased 64% for most recent quarter compared to the prior year quarter primarily due to a 170% increase in R&D expenditures. Legal expense related to patent infringement lawsuit did not significantly impact SG&A. Legal proceedings are covered in our 10-K. The increase in R&D expense was due to increased Company-funded product development activities as we redeployed resources from contract R&D. We believe the investment in R&D will pay off in future revenues and profits.

Interest income increased 11% for the quarter due to an increase in interest-bearing marketable securities. Income before taxes for the quarter was $4.51 million and pre-tax margin was 59%. Net income for the fourth quarter was $3.1 million or $0.63 per diluted share compared to $0.75 last year. And net margin was 41%.

For the fiscal year, total revenue decreased 8% to $28.6 million primarily due to decreased contract R&D revenue. Product sales decreased 3% for the fiscal year due to decreased year-over-year sales in our second and third fiscal quarters the second half of calendar 2011. In the second half of calendar 2011, we faced challenges related to economic conditions, a process change, and the effects of flooding in Thailand. The other two quarters of the fiscal year, the first and fourth fiscal quarters, had record product sales.

Contract R&D decreased 34% for fiscal 2012 due to the completion of certain contracts, and contract activities, and the continuation of a challenging budget environment for government contracts. Our research and development expense increased 105%, more than doubling for fiscal 2012 due to increased product development activities and a decrease in contract research and development activities, which caused resources to be reallocated to expensed research and development.

We report customer- and Company-sponsored R&D activities at fiscal year end and the total of customer- and Company-sponsored R&D activities was $5.15 million or 18% of revenue, which is significant. Our R&D investments over the years have resulted in significant new products, technologies, and product opportunities.

Net income for fiscal 2012 decreased 15% to $11.4 million or $2.34 per diluted share compared to $13.4 million or $2.76 per diluted share for fiscal 2011. The decrease was primarily due to decreased contract R&D revenue and increased R&D expense.

2011 was challenging for the semiconductor industry due the natural disasters in Japan and Thailand and the overall impact of a sluggish global economy. According to Reuters, average profitability ratios for the past 12 months in the semiconductors industry were well below the 5-year average.

We continued to significantly outperform the semiconductor industry on key metrics. Our operating margin was 50% compared to 3% in the industry according to Reuters data. And our net margin was 40% compared to less than 1% in the industry for the trailing 12 months.

Turning to our balance sheet, we ended the fiscal year with our balance sheet stronger than ever primarily due to a record $12.8 million of operating cash flow, what's formerly called the net cash provided by operating activities. As of March 31, cash plus marketable securities was $73.5 million, an increase of $11.4 million in the year.

We recently completed an addition to our production clean room space which was a key part of our expansion strategy. The new space increases capacity for important operations and provides space for new equipment. Purchases of fixed assets nearly doubled to $1.48 million up from $733,000 for the prior fiscal year primarily for production equipment as we expand capacity. We may spend on the order $1 million for additional production expansion this fiscal year, although we don't have a firm timetable right now.

Shareholders' equity, which is our assets minus liabilities, increased to $81.5 million, the highest in our history. Our asset quality is very good, all tangible assets, and 87% is marketable securities.

In the past five years, as summarized in our 10-K, cash and marketable securities nearly tripled and our stock priced increased 94% versus 16% for the Benchmark NASDAQ Industrial Index and 23% for the Cedrus Pure Nanotechnology Index.

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

Thanks, Curt. I'll discuss the management team, R&D initiatives, and legal proceedings.

Three employees took up new senior management positions in the past fiscal year. Cliff Boler, a seasoned semiconductor executive, recently became Vice President for Process Engineering and he'll have a key role in scaling production. Cory Peterson joined the Company as Fabrication Manager early in the fiscal year and was promoted to Director of Manufacturing recently. And Tim Hazelton, a long-time NVE employee, was promoted to Vice President of Distributor Sales. All three are very talented and their appointments help position us for growth.

As Curt said we've significantly increased our R&D investments over the past year. I'd like to highlight biosensors, private-label couplers, and MRAM. We've said before, we have a customer who is planning to use our custom spintronic biosensor in a new medical diagnostic instrument. Using our technology, the customer has demonstrated significantly increased sensitivity for in vitro diagnostics compared to conventional methods. The customer continued to purchase pre-production parts and we're already working with the customer on sensors to make detection even more sensitive. We don't have a firm production schedule from our customer, but we are planning for volume production and we continue to believe this could be the start of an important new market for us.

We see private-label couplers as a means to significantly expand our marketing reach and target new markets such as automotive electronics. The private-label business model also makes sense for our partners who find it's cheaper to buy or license our technology rather than to try to develop new technology themselves. We've had recent discussions with several interested potential partners. With one potential partner, we recently successfully built custom prototypes using their network transceiver technology combined with our spintronic isolation technology.

Much of our MRAM development is directed at anti-tamper applications, particularly for defense systems. As Curt said, it's a challenging environment for government contracts, especially for anti-tamper technology. In the challenging environment, we're stepping up efforts to market our unique defense-grade anti-tamper technology to the defense aerospace industry. Several of our research staff presented NVE's technology at a recent DOD anti-tamper conference. There was a positive response, although it may take a while for such efforts to generate new contract revenues.

As discussed in our previous call in the past fiscal quarter, we filed a patent infringement lawsuit against Everspin Technologies for infringement of our '411, '053, and '921 patents related to MRAM. Everspin later filed an infringement suit against us in the same court alleging certain NVE products infringe on two Motorola patents. After study, we believe their suit is wholly without merit. We continue to plan to pursue damages for Everspin's infringement of our MRAM-related patented including a reasonable royalty plus interest and we are seeking triple damages for willful infringement. There are details in the legal proceedings section of our 10-K.

Now I'd like to open the call for questions. [Sean]?

Thank you. (Operator Instructions) Steve Crowley, Craig-Hallum.

It's good to see the bounce back in product sales. Actually it was a heck of a bounce and it sounds like from your prepared commentary, a big part of that bounce was in medical. Can you give us a sense for whether that was some of your historical bread and butter medical products or whether it had a meaningful component of some of the newer things that you're doing with various customers?

It was primarily our existing customers and they might have faced some challenging conditions, particularly in the second half of the calendar year. We're seeing some encouraging signs from new customers. Some early sales, some pre-production, and early production sales, but those are -- those were a relatively small part of the growth. We obviously hope that longer term that they can drive continued growth and reduce our dependence on some of our historic customers.

You mentioned on the biosensor front that you continue to move toward full production with your customer. You also mentioned working on product enhancements to even drive the performance higher. Is that enhancement critical to moving to the next phase or is that just the logical stuff you'd have as part of a long-term relationship and long-term product road map?

We believe that the product that we have shipped before, which is the lower sensitivity, very high sensitivity, but not as high as what we're working on, is -- would give them a marketable product. We're continuing to always work on better and more sensitive products in the case of biosensors.

Exactly what their marketing plans are, we're really not sure. Whether they want to introduce only the more sensitive product or whether they would introduce them both, we really don't have a firm idea of that and I don't know if they have exact plans yet. But we'll be discussing that and hopefully getting some more clarity on it. But what we've found is that with the existing product, the product that we've already shipped, that they've been able to demonstrate, according to their reports, a significant improvement over conventional technologies. So, we think that that's very gratifying and encouraging. I think we've known that, but it's great to see them with some evidence of that in their particular market.

Now, in terms of the gating factors for them to go into full production on the product that has your biosensor in it, are we down to the final details of a product launch or is it much more vague than that?

We believe that, based on what they've said, that we're relatively close and we're planning for volume production. Now, a lot of things can happen, and they're beyond our control, and in some cases, beyond our customer's control. So -- but we're encouraged by the data that we have so far, by the technical reports on the detection sensitivity that they've been able to get using our technology, and as you know, in the medical diagnostic industry, there sometimes are unknowns. But we believe certainly from a technical standpoint, that we're production ready.

The numbers of pre-production units that you've been supplying them with, is that likely indicative of them producing evaluation units for early customers, and distributors, and the like or is this really likely for their own evaluation?

It's our assumption that it's probably more than their own evaluation just because of the numbers involved. We certainly would not consider it production or full production. It's possible though that they've produced small volumes of products for customer evaluation or for field trials.

It's more than a number than we would expect for laboratory trials. It's more than a number that we would expect for laboratory testing, or bench testing, or that type of early stage testing. When we say pre-production, it's volumes of units that would be -- that would support some trials, not full production, but more than would be required laboratory or bench testing.

That's very helpful color. Now, on the other side of your products business, the industrial side that goes into numerous industrial scientific measurement applications, what can you tell us about the performance of that business? Maybe contrast it to the December quarter and what kind of outlook do we have for that business and the inventory situation at distribution?

Well, Steve, our backlog continues to be good in the industrial area. As you know, we had some challenges last -- second and third quarter of last fiscal year related to our process change and that affected shipments of certain types of our couplers, which were delayed. But our processes have ultimately increased our efficiency. Also, the flooding in Thailand primarily affected our industrial customers. It had a very minimal effect on any of our medical related customers. So, those are factors that we believe are behind us.

Did you see a big delta in that business on the industrial side in the March quarter relative to the December quarter or is that potentially still in front of us as you fully move behind those factors? And then, maybe some of the inventory correction that was taking place on a broader scale in the electronics industry is no longer taking place or help me understand the landscape for what you have going on in the industrial side.

Yes, well, sequentially, we had a 33% increase in product sales, which that included the industrial side. We think that the sluggish economy is hopefully coming to an end and improving a little bit. But we did see growth in the -- in our fourth quarter in industrial as well as medical markets.

And then, in terms of the contract R&D business, that has really moved to a much, much lower number or level, I should say. I hope it's not a level. I hope it's a number and not a level, but that's really the question as to whether or not that $400,000 and change is an anomalously low number for you guys as a function of some of the government funding difficulties and the granting process of dollars that I think was hung up and has subsequently been resolved. Do you think that number can go back noticeably higher or maybe not to where it had been running? How should we think about that portion of your mix?

Well, it is a historically low number for us, but we, in the long term or at least the medium term, I think we see some opportunities and we mentioned some of them in the prepared remarks. In the short term, we do see continued challenges in the government funding environment. And it's difficult to predict the timing of awards. They relate to budgets, particularly DOD budgets, DOD priorities, which can change and beyond our control. But we have seen a pretty challenging environment for contract funding and particularly for our particular interest in contract R&D funding from the government which relates to anti-tamper.

So, that's an area that's been -- appears to have been disproportionally hit by budget constraints at the federal level. Whether that will change or not is really difficult to predict. So, when we move the people that we moved onto Company-sponsored, our own R&D sponsored programs onto the expense lines, if you will, we do so because they can do some good there, that we've got some great opportunities for R&D, and we want them to finish those programs of course.

So, we view this as in the timeframe of where we're looking at these programs and when we put them on these internal programs, we're assuming that they're going to get them finished. Because otherwise, we've just spent time and money and we wouldn't have gotten the results. So, we're looking at this as something that's probably going to be with us at least in the near term. We're hoping that it won't be quite as low as it was this quarter, but it's really hard for us to predict.

That's helpful. I want to ask you about private label, but I don't want to monopolize your call. So, I'm going to let some other people get in and I'll come back.

Daniel Baker; Thanks, Steve.

(Operator instructions) John Jung, Trailhead Asset Management.

I wonder if you could give us a little information about where your medical product is with regard -- this new medical product with regard to the FDA. Is there an FDA requirement for approval before this starts shipping in volume?

You were kind of cutting out, John, but I think the question that I heard was related to our diagnostic customer and whether there was an FDA approval in that cycle. What we've said before is that there -- they may not necessarily be a US introduction at first. So, it probably needs regulatory approval. It may not be the FDA, but that is one of the uncertainties that comes into play with a new type of diagnostic instrument like this is that there's agency requirements, regulatory requirements, and therefore, sometimes the timing can be a little bit hard to pin down. But it's our assumption that it needs -- it would need regulatory approval.

So, are you aware whether it has approval in countries outside of the US? Does it have Canadian approval or TUV in Germany? Any of the European approvals?

We're not in a position to say which approvals it would be getting. It's our assumption that the -- that it may not have all of the approvals required yet. And that might be pacing some of the timing, but that's something that we can't get too specific on.

Okay, thank you.

Dean [Friedlander], Individual Investor.

Has the company budgeted any dollars for the ongoing legal expenditures that will be coming through with the Everspin lawsuit and the countersuit?

We have incorporated that into our planning process. It's hard to know the exact number because it depends on factors beyond our control and it depends, to a certain extent, on the courts and on what the other party might do. I can say that it hasn't had a significant impact on our results for the quarter or the year. We try to minimize all of our expenses and with any expenses or investments that we make, we want to make sure that the potential rewards justify the costs and risks. And we believe they do in this case.

Have there been any discussions with Everspin about a settlement?

It is unusual for negotiations to go on in these types of cases. There haven't been any formal responses to the suits, but we wouldn't have filed suit if we weren't prepared to follow through with the legal process.

Moving aside for a second, on the biosensors, I believe it's been two quarters now that the company anticipated shipping quantity of the biosensors. Is there any more clarity going into the current quarter that the shipment will finally happen?

Well, we can't say for sure. It's hard to predict, but we can say that we believe our biosensor customer is a credible, global company that has the resources and the wherewithal to approve and market a new type of medical diagnostic instrument. So, we believe we have a great technology. We believe that we've demonstrated higher detection sensitivity, better detection sensitivity than conventional technology, and we believe that this could be a very important new market for us. But it's difficult to predict exact timing on that.

So, they have not provided you with any more clarity on shipping times?

We don't have any specific timeframes for production. We have been shipping some pre-production units. And as I mentioned, we have also been shipping some even higher sensitivity sensor modules.

Just let me ask you one more question. Concerning the fixed equipment purchases which came in about $1.5 million, how much added capacity will this provide for the company?

It's hard to quantify that. It's quite a bit because what often happens is that we have a number of processes in making one of our components. And so, like anything else, some of those we have quite a bit of capacity. Some of them, we're closer to being equipment limited. So, if we remove those potential bottlenecks very early and well before we need them, it can have a significant impact on our potential volumes.

So, when we look at our planning process, we take into account some of the new things that we've talked about, some of the potential markets that we have, the growth that we see possible, and we make sure that we've got adequate capacity. While the capital expenditures for the fiscal year were relatively high for us historically, they're relatively small as a portion of our revenues, or a portion of our earnings, or a portion of our cash flow compared to conventional semiconductors. And that's because of the uniqueness of our technology, the efficiency of our process, and our engineers have done a great job over the years of increasing our efficiency and our capacity per piece of equipment and per person.

With $1.5 million spent and revenue, although sequentially it has been up this past quarter, but stagnant over the past year, I assume that the company is making or has made this capital expenditure in anticipation of a great bump in product sales. Is that correct?

We have made the investment because we think we may need it. We believe that it's appropriate to increase our capacity. I think as we saw in the fourth quarter, our product sales were up significantly. Sequentially, approximately 33% sequentially and were up significantly year-over-year as well. As we said in answer to an earlier question, that was primarily due to existing customers. We have some tremendous potential as well. So, we want to be sure we have the capacity for that.

Okay, thank you.

Thank you.

Our next question is a follow up from Steve Crowley from Craig-Hallum.

Thank you. Coming back on your discussion of private label, you mentioned discussions with a number of potential partners, some logical integrations with those partners' functionality. Maybe you can help me feel the way that I should feel about you talking about multiple partners. Obviously many partners is better than one, but one really eager, active partner is wonderful. The impression that you gave in the discussion earlier was that you had a fair number of interested parties but maybe not that wonderfully interested right here and now arrangement. Is that a misread of the equation? Can you have both of those equations? Help me understand what's going on.

Well, I think it's both. What we mentioned was with one potential partner, we're actually building prototypes and we successfully built custom prototypes using their network transceiver technology combined with our spintronic coupler technology. So, this is the company that makes network ICs. These are ICs that convert industry networks -- industry standard networks into the ones and zeros that can be sent over a cable.

And then, our technology provides the interface between the two ends of this network and cable. So, it's a great partnership, a great combination that allows us to leverage someone else's established transceiver technology with our unique isolation technology.

So, probably the near-term potential there is for us to introduce a product using their transceiver and our isolation technology under our brand and longer term to qualify it under their brand for their own market and their distribution. It's a larger company than us. So therefore, it would open up a larger market for us, expand our marketing reach, and allow us to reach new markets that're tough for a small company to get into such as automotive electronics.

So, while, as you might expect, when we have several interested potential partners, there's a variety of levels of interest, but with this -- at least with this one potential partner, we're far enough along to have prototypes that demonstrate the potential and actual part that we could potentially sample to customers and introduce at least in the relative near term under our brand.

The application you described makes me think of industrial process control, factory floor automation, and communication. Is that the right neighborhood for me to think about as one of the early frontiers for that product?

Exactly. And then, longer term, we're looking at the potential for automotive applications, in-car electronics, automotive electronics. That's a fairly demanding application that requires a fair amount of qualification and also requires a relationship with the automotive companies or automotive suppliers, which is something that isn't really our strength. So, qualifying for automotive electronics would be our medium to long-term goal.

As you can imagine, we're in Minnesota here. Our cars are subject to all kinds of extremes of temperature and all kinds of very rugged conditions. We believe that our parts are well suited for that. They're extremely rugged. They withstand temperature swings, voltage swings, and all kinds of transients and things like that. So, we think it's -- we've got a significant technical advantage over conventional technology.

There's a market need. With increasing electronic content in cars and particularly for hybrid electric vehicles which are going to need a lot of electronics to monitor batteries and monitor the electrical system. So, that, we feel, is an excellent medium- to long-term market for this type of product.

Okay. I was going to follow up on the hybrid electric vehicle opportunity. So, this kind of partnership is a necessary component of your plans to supply that market, not just necessary to supply sensors for more standard gas-powered vehicles. I guess that's a different way of saying can you get at the hybrid electronic vehicle opportunity without that partnership being established?

We could address that market ourselves without a partnership, but we believe that a partner that, first of all, can lend technology such as transceiver technology that has already been developed and isn't something that we technically -- that we typically develop. And then also, that has a marketing channel into the automotive market and that has a history and an infrastructure to do some of the testing and the approvals that're required to qualify components for the automotive market will help us reach the market sooner. And more effectively penetrate the market.

So, we believe that this partnership like what we've described will make sense by allowing us to address the market faster with a better qualified product and with the customer relationships that other companies have in the automotive industry that hasn't been part of our historical market.

Great. Now, in terms of one of the other programs that you've talked about over the last two years, could you give us a bit of a status update on the electronic compass program and where that sits on your end, and view of the market, and partner potential there?

Certainly. Well, we continue to see spintronic compassing as a very promising application. It's hard to give a timeframe, but we have advantages, as we've talked about before, in precision and size over conventional technology. And so, we believe that there may be a market need for that higher precision and smaller size. It might be early for that. It might be that the need for that has not developed because of applications, or software, or other things. But we continue to see a large potential market and we believe that we have significant advantages over conventional technology.

In terms of new applications, programs, opportunities that have materialized for you over the course of fiscal 2012 that you're going to be pursuing. Is there anything that you can tell us about new stuff that's started to percolate?

Well, we're always working on new stuff and we have several products and several technology developments that are in various stages. Some of them are incremental that aren't game changers in that sense in that they're not into new markets or into different markets than we currently serve, but we also have technology that we believe that if it pans out could be quite significant. So, there's a range of things that we're working on.

We've been devoting a significantly increased effort to R&D as we've talked about as is showing up in our financials. And a lot of those things are moving their way through the development process. Some of them are moving along quite well. Some of them are moving better than we had anticipated. So, we might be looking at some product introductions in the relative near term and we hope to be updating our shareholders and our customers on those as soon as we can.

Well, we look forward to that. Just one more from me. On the anti-tamper MRAM front, you mentioned some of the challenges with your anti-tamper programs within the government. But there seem to be a plethora of commercial electronics applications for that technology. I think about some of the credit card and financial fraud that's taking place on a broad scale and I'm wondering if you've spotted any nice holes to run through with that technology and whether that's a five-year process or something that could be sooner than that.

We do see consumer applications and high-volume applications for anti-tamper technology certainly. They tend to be longer term and they tend not to result in contract R&D revenue. So, when we're talking about contract R&D revenue, typically, that's for military/aerospace types of applications. But we -- in addition to contract R&D, it's our goal to increase the sales of those types of products. There've been some modest sales so far, but we can see that growing and we can see that moving toward higher volume, lower cost applications. As the volumes increase, our costs go down.

Right now, these are relatively expensive products that are probably -- well, they're not ready for the types of consumer applications, the extremely price sensitive consumer applications that you alluded to, things like credit cards, yet. But we believe that that's the long-term track. And in many cases, our government contracts have commercialization plans where we've talked about potential consumer applications and high-volume applications for these products in the longer term. And we continue to pursue that and continue to work to drive the cost down, the volumes up, and the manufacturability up so that we can address those markets.

Thanks so much for taking my questions guys.

Thanks, Steve.

I'm not showing any other questions in the queue at this time, gentlemen.

Well, thank you. We are pleased to report record product sales for the quarter, strong sequential-quarter growth, solid earnings for the quarter and fiscal year, and record operating cash flow for the fiscal year. We look forward to our next call in July to report results for the first quarter of fiscal 2013. Thank you again for participating in the call.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference You may now disconnect. Good day.