NVE Corp (NVEC) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NVE conference call and first 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 follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Dan Baker. Please go ahead.

Good afternoon, and welcome to our conference call for the quarter ended June 30, 2012, which was the first quarter of fiscal 2013. 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 the website, nve.com.

After my opening comments, Curt will present a financial review of the quarter,I will cover business items, and we will open the call to questions. In the past hour, following the close of market, we filed our press release with quarterly results and our quarterly report on Form 10-Q with the SEC. The filings are available through our website or the SEC's 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 profitability, uncertainties relating to future revenue and growth, risks related to developing marketable products, uncertainties relating to the revenue potential of new products, risks of losses on our marketable securities, risks in the enforcement of our patents, litigation risks as well as risk factors listed from time to time in our filings with the SEC, including our annual report on Form 10-K for the year ended March 31, 2012, as updated on the quarterly report on Form 10-Q filed this afternoon. The Company undertakes no obligation to update forward-looking statements we may make.

We are pleased to report strong earnings for the quarter and our highest first quarter product sales ever. Product sales were $7.03 million, a slight increase over a record quarter a year ago. We had record gross, pretax and net margins. Gross margin was a record 76%, and net income was $0.69 per diluted share.

Now I will turn the call over to Curt for a details of our financial results.

Thanks, Dan.

Total revenue for the first quarter of fiscal 2013 decreased 9% to $7.46 million due to a 64% decrease in contract research and development revenue, partially offset by a slight increase in product sales.

Product sales increased 0.1% from a record quarter a year-ago to $7.03 million dollars. The increase was due to increased sales into medical device markets, partially offset by decreased sales into industrial markets. Industrial markets may have been impacted by a sluggish global economy. Growth in the medical device markets may have been tempered by softness of pacemakers and ICDs.

The large percentage decrease in contract R&D was due to the completion of certain contracts and contract activities and a challenging government funding environment. Contract R&D was 6% of total revenue and is not a major part of our growth vision.

Gross margin increased to a record 76% of revenue compared to 68% last year due to a more favorable revenue mix and more efficient product manufacturing. The more favorable revenue mix was a higher percentage of revenue from product sales compared to contract R&D and a more favorable product mix. The more efficient product manufacturing included manufacturing processes deployed late in the calendar year, which we he discussed in previous calls.

Total expenses increased 10% for the first quarter of fiscal 2013 compared to the prior year quarter due to a 39% increase in R&D expenditures, partially offset by a 13% decrease in selling, general and administrative expense. The decrease in selling, general and administrative expense was due to a decrease in legal expenses. The increase in research and development expense was due to increased product development activities. We believe the investment in R&D will pay off in future revenues. Dan will highlight R&D in a few minutes.

Income before taxes for the quarter was $5 million. Net income for the first quarter was $3.38 million or $0.69 per diluted share, compared to $0.70 last year. Pretax and net margins were records. Pretax margin was 67% and net margin was 45%. NVE ranked third in return on revenue or net margin in the Star Tribune's list of "the 100 largest companies in Minnesota" published in the past quarter.

Operating cash flow was $4.1 million for the quarter, which strengthened our balance sheet. As of June 30, cash plus marketable securities was $77.1 million, an increase of $3.52 million in the quarter. Despite widely publicized bond downgrades in the past quarter, our bond portfolio has performed well. We had a net unrealized gain on our marketable securities of $1.57 million as of June 30, which is the difference between the fair market value of our portfolio and its adjusted cost. There are details in our recently filed 10-Q.

Income taxes payable increased $1.4 million because we had no estimated income tax payments due in the most recent quarter. There are two payments due in the quarter ending September 30. Purchases of fixed assets were $445,000 for the quarter, compared to $199,000 for the prior year quarter. Capital investments were primarily for production equipment, as we continued to expand and upgrade our production capabilities to support potential new products and growth. We are planning additional facilities investments this quarter and in the remainder of the fiscal year.

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

Thanks, Curt. I will cover biosensors, consumer electronics, private label couplers and governance.

We said before we have a customer planning to use the custom spintronic biosensor in a new medical diagnostic instrument. The customer continued to purchase preproduction parts in the most recent quarter, and we believe they are continuing to optimize their design and pursuing regulatory approvals. We don't have a production schedule from our customer, but we continue to plan for volume production, and we continue to believe this could be the start of an important new market for us.

As evidenced by our record gross margins, we are well positioned to take on large price sensitive markets such as private label, automotive and consumer electronics. We continue to develop and market next generation solid state compassing technology for consumer electronics. In the past quarter, we fabricated prototypes with the promise of even better precision than the previous prototypes and samples.

Also in the past quarter, we introduced a new isolated Control Area Network transceiver, combining our spintronic coupler technology with conventional semiconductors provided by a large semiconductor company. Controller Area Network, or CAN, is a bus used for applications such as automotive system interconnects, vehicle diagnostics, and industrial control systems. NVE offers what we bill as the world's smallest isolated CAN transceivers. The new parts have 10% less power consumption compared to older offering for that market. That could mean less battery drain in a car or a simplified power supply design.

We've had interest in the parts, which we began marketing under your brand. More importantly we see the potential to sell these or similar parts to the company that makes the semiconductor transceivers we are using. That company is evaluating the parts now and so far the feedback has been quite positive. We see such private label partnerships as a means to significantly expand our addressable market and reach markets such as automotive electronics that can take a long time for a small company to penetrate on its own. The private label business model makes sense for our partners that find it is cheaper to buy or license our technology rather than try and develop new technology themselves.

Finally, turning to governance. Our annual meeting scheduled for August 9 here in Eden Prairie. The materials -- our proxy statement, letter to shareholders, and annual report on Form 10-K -- have been filed with the SEC, sent to shareholders, and are available from the investors section of our website. We are pleased to be part of a select group of public companies with a perfect governance score from ISS. The Board reviews our governance practices on a an ongoing basis to ensure they promote shareholder value.

As a result of this ongoing review, during the last fiscal year the Board adopted a hedging policy that prohibits Directors or executive officers from hedging against declines in the market value of our stock. There are details in the proxy statement. For good corporate practice, our entire Board of Directors stands for election every year.

We are fortunate to have an exceptionally experienced, successful and hard-working board. Our Chairman, Terry Glarner, for example, has made the Minneapolis-St. Paul Business Journal's list of hardest working board directors for six consecutive years, including the most recent list published last month. He ranked first in total committee activity and first in average tenure.

Our annual meetings are generally well attended, and we look forward to seeing many of you there. As some of you know, each year we pick a meeting theme. This year our theme is the Olympics, and so we plan to overuse some sports cliches.

Now I would like to open the call for questions. Patrick?

Thank you. (Operator Instructions). Our first question comes from Steven Crowley from Craig-Hallum Capital. Your line is open.

Good afternoon, gentlemen,and kudos on the really strong margin performance in the quarter.

Thanks, Steve.

In terms of some of the things that played into the top line, you mentioned that the beneficial product mix was consistent with what that has meant historically, meaning stronger medical product sales. Can you give us any color as to whether or not the relatively good performance in medical was due to existing customers or had a sizeable element of new customer volumes?

This is Dan. It was -- there was a change in the mix towards newer products. Some of those are with existing customers. However, our goal is to continue to provide the absolute best for our customers as they expand and increase the performance of their offerings. So often those are higher value, higher revenue and higher margin.

And also we mentioned that it was -- Curt mentioned that it was a challenging market -- a soft market for pacemakers around ICDs. So other markets, medical markets took up the slack and more than offset that. So we were certainly pleased with that. And in the long run, pacemakers and ICDs we believe will grow. The demographics are favorable, and they are excellent products, and we have a strong benefit proposition.

Now, over the quarters and years you've mentioned about other target markets in medical, and you have had some obvious success in hearing aids. You have talked about other neuromodulation or neurostimulation markets. Are those some of the ponds we are talking about where you have had success, or are there other ponds or neighborhoods that you haven't yet talked about that are delivering some of the growth?

We have had success in getting into some of the early stages of neurostimulators. These would be non-CRM, noncardiac neurostimulators, which we look at a different market; nonlife support. So that is very encouraging. It probably wasn't a huge contributor to the revenue mix in the most recent quarter, but we see that as an excellent growth potential and many of those markets -- neurostimulator markets are growing -- seem to be growing considerably faster than CRM or other traditional markets that you alluded to such as hearing aids.

And you gave us an update on the biosensor equation, which seems to, if I were to characterize those comments, present a picture of the customer who continues to move down the path to being a full-blown production volume customer. That has been a little bit slower than we might have anticipated a year ago, but it seems like the destination continues to be what you thought in terms of the outcome there?

Yes. And we continue -- as I said in the prepared remarks, we continue to ship preproduction quantities, and there are factors that we have discussed before that are beyond our control, including regulatory approvals. But we believe that for our part the sensors are working very well. The customer continues to use parts, and we presume to test and to get data that they need in order to bring the product to market. So we remain very optimistic with this particular customer and with the technology in general.

Should we think about -- because you do not have an exclusive deal into the IVD market with this one particular customer -- that you are working on other opportunities in the sector, or are does it need to be in serial fashion where you have notable success with one customer, which is likely to lead to the other activities in the sector?

It is really both, Steve. Success in this sector with this particular customer we believe will establish even more our credibility in that market and will help us get more sales and more customers. But we are not waiting for that. We are developing the technology, we are pursuing other customers and related applications. So we see it as something where it is going to be important to get that first production sensor design out there, but there are other early adopters that aren't waiting for that. So we see potential that could accelerate once we start seeing the first products hit the market.

Then a couple of questions here on the industrial side of your business, and then I will hop back in the queue. I don't know that I caught the color on some of the challenges in the industrial marketplace, but was it more driven by geography or certain end markets? And where do you think you are in terms of those challenges, whether that is psychology of the customer, inventory levels of the customer? Just some context for what is going on there would be helpful.

Well, I think the thing that we noted was a sluggish global economy, and that affects consumption of durable goods, which in many cases is where our devices go to automate the factories to make durable goods such as cars and appliances and things like that. And if folks aren't building houses or other things, then ultimately it comes back as weakness in the markets that we serve -- the industrial markets that we serve.

I don't know -- maybe Curt can chime in, but I don't know that we could put our finger on a particular market that has been weak. I think we have seen some weakness in Europe and at least not quite as much strength as we had seen previously in China and other parts of Asia.

That is exactly right. We were -- we did see some weakness in Europe, and the growth that we had seen in China seems to have slowed down.

Fortunately or unfortunately, that doesn't seem to be an NVE specific set of conditions right now.

No, not at all.

And in terms of geographies that you are bringing up new markets outside the US, is there anything to report in terms of other markets that could be sources of strength over the balance of the year versus the two we just talked about?

We see potential, despite the recent weakness, in Asia and China. We are going to be focusing some of our time, and Tim Hazelton, our Vice President of Sales, is going to be focusing some of his time on that market segment along with Europe. As the economy recovers, and we hope it will, we want to be sure that we are well positioned when the economies pick up, when factories start to be built. And we want them to include our technology of course, and that will make for more efficient factories. So those are markets that we see as having some rebound potential.

Great. I'll hop back in the queue with a few more questions. Thanks.

Thanks, Steve.

(Operator Instructions). We have follow-up questions from Steven Crowley from Craig Hallum Capital. Your line is open.

I tried to wait a bit to ping back in, and I think the operator was trying to check the rest of the field, becauseI didn't want to monopolize the Q&A if there are other Qs out there. But weonly get to do this once a quarter, guys, so I'm going to ask a couple more questions.

You mentioned private label and new channels of access for your products to the marketplace in the industrial sector. It sounds like you have a bit of a template with the product form factor with some of your newer NVE labeled products. What I want to ask is you mentioned the opportunity for partners, not singular. And is that the way you are thinking about casting your net from here, versus putting it in the hands of one major player, potentially putting it in a couple, oris that yet to be determined?

No, we do see it is as a channel for multiple partnerships. I don't think we would want to create just a bunch of conflict by having multiple partners that are addressing the same market. So the particular one that we talked about in the prepared remarks would help us reach markets. We cited automotive electronics, which is a significant market, particularly for hybrid electric vehicles as those start to become more -- a larger share of the vehicle mix. And so we see potential there, and we see potential for private label partnerships in other vertical markets that are difficult for small companies to penetrate.

This one -- this relationship, this partnership is particularly far along because we introduced a product under our brand, what is called a Controller Area Network transceiver recently, and we have products that -- production products that the company is now evaluating. So this one is farther along than other discussions, but we see this as a -- as you pointed out -- a template and business model that can help significantly expand our addressable markets and reach markets that are tough for us or time consuming for us to reach otherwise.

And with the efficiencies that we put in place with the good work that our manufacturing engineering, process engineering groups have been able to do, we have the cost structure that allows us to add this layer of distribution and still have a win-win for the private label partner, who has got to make money on it for us to make a fair profit, and still provide a competitively priced product with better functionality than conventional semiconductors.

Makes sense. Now, in terms of the gross margin improvement, that was pretty striking in the quarter, both year-over-year and sequentially. You attributed that to both mix and those efficiency improvements. Any sense for was it half mix and half efficiency improvement, or what kind of flavor can you give us for that?

Well, it is hard to quantify, but I would say process improvements was the majority of the increase that we were able to show there.

Good. And given that you have an existing product that would very much resemble a private label product by this partner, the evaluation that they are undergoing certainly wouldn't be about feasibility and whether or not you can deliver. What kind of things are they looking at in the evaluation process to proceed or not proceed?

Well, one of the bigger challenges there is qualification for particularly the automotive market, where we are looking at an extremely harsh environment in terms of electrical noise and in terms of temperature ranges and other problems that cars present for electronics. So that is a lot of what we are looking at. We are looking at speed over wide ranges of temperature. We are looking at data transmission over simulated harsh conditions, with noise and things like that. And so far the products are performing very well. Actually, in some parameters, better than we had designed for and better than we had hoped.

There is still a number of steps that we need to look at in terms of the qualification, and then automotive companies have a number of requirements that are unrelated to the product -- the formal product itself that are related to failure analysis and internal structures and redundancy and being a reliable supplier. We are addressing those in parallel. Many of them we have already addressed. We sell products, as you know, to some of the most demanding customers in the world. So we believe we are well positioned for that, but still there are things that need to be put in place. So those are the sorts of things that we are looking at now.

And the significant capacity expansion and manufacturing enhancements that you have put in place or are still putting in place, are those a function of needing to show customers like the one we are speaking of here that you have the capacity and capability to produce a bunch of products? Or do you need to be able to produce a bunch of products at the flip of a switch over the next three quarters if they decide to do that?

It is some of both. When we are talking about things like the automotive, we are taking a longer view of it. It sometimes can take some time to qualify the products, but we want to be well positioned, so some of it is capacity of having the capacity for these very high volume markets and making sure that we can address any issues that our prospective customers might have.

Another is redundancy, making sure that we have -- in sort of a simplistic way, it is having two of everything, but having a very robust process that can survive equipment downtime, that can survive process deviations and other things so that we can be an extremely reliable supplier. So some of it is adding equipment for that reason too, to be sure that we can be world-class in terms of our reliability and dependability. So some of it is having redundancy, alternate processes, having some of the tracking and infrastructure that we need to ensure that we have a process that is extremely rigorous and extremely repeatable.

In terms of capital expenditures, there was a pretty significant number, and I guess it has been running at a more significant number over the last three quarters. Should we look at first quarter being kind of a run rate for CapEx, or is that a high water mark for a little while?

I would say it would be -- we are looking at doing some things this fiscal year, as I had mentioned, soI would think that may be a run rate on that order of magnitude for the remainder of the fiscal year.

And then in your discussion in the prepared comments about contract R&D, you have continued to make it clear and it has been consistent -- a consistent message from you guys that growth in that category is not your focus relative to growth in the product sales, which are really the future of the Company. But I guess we have had two quarters now in the same neighborhood for contract R&D, and how should we view the prospects for that revenue component over the balance of the year? Does it stick around here for a little while and go up? Or has something happened with your backlog of contract R&D that should lead us to be more optimistic or more pessimistic?

I think I would characterize it as -- it is still a very challenging environment, but I think looking out -- we have got a lot of irons in the fire and looking out maybe a couple of quarters we would be a little more optimistic.

And -- all right, that would serve a purpose in terms of planting some additional seeds for downstream products, but also maybe as a bit of a reduction to your R&D run rate? Is that the correct way for us to think about it?

That is generally the way it has worked in the past. When we do have contracts we tend to move resources to fulfill those contracts, and otherwise we are working on some internal research and development activities.

And just a final question or two from me. Relates to your efforts around MRAM, anti-tamper MRAM in terms of productionisation, and anything else that presents an opportunity for you to monetize your significant IP portfolio around MRAM?

We continue to see significant opportunities there. Initially they are for high value targets, high value assets that we want to protect, such as military hardware, but we are seeing it become a little bit more widespread. We have a portfolio of products in anti-tamper and in MRAM to offer for various applications, depending on the particular need and the level of security required. And it is an area that as we have discussed before we see some eventual high volume consumer-related applications.

So we see it as a very promising market. It is not a significant revenue contributor right now, but it is the focus of significant portion of our R&D efforts and we see it as very promising. And that could be what some of these contracts that we are becoming a little bit more optimistic about might be in that area.

Great. Thanks again for taking my questions, and we'll talk to you soon.

Thanks, Steve.

Thanks, Steve.

(Operator Instructions). Our next question comes from Gene Friedlander from -- he's a private investor. Please go ahead.

Hi, Dan; hi, Curt. Congratulations on a successful quarter margin-wise.

Thank you.

My question relates to the Everspin lawsuit. It is noted that legal fees went down or actually were almost nonexistent for the quarter. But I noted on the 10-Q that on May 16 Everspin requested a reexamination of the 6349053 patent. Is that a patent that is a main dispute that you have with them? And of main importance?

It is one of -- there are three patents under suit. And that is one of them.

Okay. Well, the other two aren't asked to be reexamined, just this one?

Right. They could be requested at a future date, but you this is one that has been requested, and exams are almost always granted by the patent office when they are requested. So this is one where the reexamination was granted by the patent office.

Okay. Could we assume that because they requested this particular patent to be reexamined that it is of key importance to them and to the suit?

That is really hard to say. That is a better question for them. I wouldn't be able to speculate on what they -- what their motivation was.

Okay. And just one other question. I know that you answered Mr. Crowley's question about capital investment. Last quarter you stated that it looked like the balance of the year there would be a $1 million capital expenditure going forward. So it would be $400,000 plus that was spent this past quarter. Should we anticipate no more than $600,000 being spent for the balance of the year?

No, I think right now we are looking at probably that same run rate, around $400,000, per quarter for the remainder of the fiscal year.

But for the balance of the year do you think it will be more than the run rate that was just experienced this past quarter?

The I would say it would be in that range.

Okay. Okay. Best of luck for the balance of the year.

Thank you.

Thanks, Gene.

You're welcome.

And we show no further questions in queue.

Well, if there are no other questions, thank you. Thank you, Steve and Gene. We were pleased to report strong earnings, record margins and increased product sales for the quarter. We look forward to seeing some of you at our annual meeting in a few weeks, and we plan to speak with you again in October to report our second quarter results. Thank you again for participating in the call.

Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.