NVE Corp (NVEC) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your NVE conference call on first quarter results. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session and instructions will follow at that time. (Operator Instructions) I would now like to introduce your host for today's conference, Dan Baker, President and CEO. Please go ahead, sir.

Thank you and good afternoon. Welcome to our conference call for the quarter ended June 30, 2013, which was the first quarter of fiscal 2014. 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, I'll cover business items, and we'll 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 other such factors as uncertainties related to the economic environments in the industries we serve, uncertainties related to future revenue and growth, uncertainties related to interruptions in the government funding process, uncertainties related to future R&D contracts, risks related to eligibility for small business awards, risks related to developing marketable products, uncertainties relating to the revenue potential of new products, 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 for the year ended March 31, 2013. The Company undertakes no obligation to update forward-looking statements we may make.

We reported strong earnings for the quarter. Net income was $0.53 per diluted share and gross margin was a record 78%. I'll turn the call over to Curt for details.

Thanks, Dan. Total revenue for the first quarter of fiscal 2014 decreased 17% due to decreases in product sales and contract R&D revenue. Product sales decreased 15% from a record first quarter a year ago to $5.97 million. The decrease was due to decreased sales to existing customers and we haven't lost any significant customers, but some bought less. One particular large customer had lower purchases that appear to be related to reducing their inventories. Their purchases are already increasing this quarter. Sales decreased into both medical device and industrial markets. Product sales continue to be hampered by fragile markets although the environment seems to be improving, which bodes well for the future. We are well positioned to coming out of the industry downturn with new products, efficient production, and capacity.

The large percentage decrease in contract R&D was due to the successful completion of the majority of activities on a large contract and a challenging short-term government funding environment. We have a combination of government and non-government contracts and many of our non-government contracts rely indirectly on defense or other government funding so the challenging funding environment affected non-government contract sources. The contract environment seems to be improving however. Dan will talk about a National Science Foundation Grant that began July 1 and we have several other contract prospects for coming quarters.

Gross margin increased to a record 78% of revenue compared to 76% last year due to a more favorable revenue mix and more efficient product manufacturing. The increased margins were despite higher depreciation expense from our capital investments the past year. The more favorable revenue mix was a higher percentage of revenue from product sales and a more favorable product sales mix. Total expenses increased 24% for the first quarter of fiscal 2014 compared to the prior year quarter primarily due to a 40% increase in R&D expenditures. The increase in R&D expense was due to increased product development activities and a decrease in contract R&D, which caused resources to be reallocated to expensed R&D. We believe the investment in R&D will pay off in future revenues. Dan will highlight R&D in a few minutes.

Despite the unusually large investment in R&D, operating margin was 53%. Interest income for the first quarter decreased 6% due to lower interest rates. Net income for the first quarter was $2.57 million or $0.53 per diluted share compared to $0.69 last year. Net margin was 42%. NVE ranked second in return on revenue or net margin in the Star Tribune's measure of the 100 largest Minnesota headquartered publicly held companies. The list was published the past quarter. Our operations continued to generate strong cash flow, $3.62 million for the quarter. As of June 30, cash plus marketable securities was a record $87.5 million. There were no fixed asset purchases for the quarter compared to $445,000 in fixed asset purchases for the prior year quarter. This was unusual for us, but additional investments weren't necessary after the major upgrade of our production capabilities completed in the March quarter.

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

Thanks, Curt. I'll cover research, product development, distribution, and governance starting with contract R&D. In the past quarter we won a National Science Foundation Grant to develop biosensors for enhanced food safety. The one-year $224,000 grant titled Real Time Detection for Salmonella was ordered under NSF's Small Business Technology Transfer Research program. The STTR program funds cooperative projects involving businesses and research institutions. The University of Minnesota and the University of Florida will co-operate with NVE on the project. The principal investigator is Dr. Maria Torija, part of our world class research team. The project kicked off early this month.

The goal of the effort will be to develop sensors with faster detection of food borne pathogens than current techniques while retaining the required sensitivity. We talked before about food safety applications for our biosensor technology and this grant will help establish feasibility. The proposed sensor would be extensible to biomarkers other than salmonella and could also be envisioned as a critical point of care sensor in the medical industry. There's a link to the award abstract in the news section of our website. We were especially pleased to win this grant in a challenging government funding environment. NSF grants are selective and prestigious and NVE has won more than a dozen over the years.

We had a very productive quarter for product development. We sampled three new products; couplers for in-car networks, current sensors for factory automations and automation on automotive applications, and high-field sensors applicable to medical devices. All three have been well received by customers and we're planning production for each of them. Automotive electronics is an especially promising market. As reported in our previous call, this past quarter we built and sampled third generation prototype spintronic Controller Area Network couplers, which was a key milestone towards automotive certification and qualification. As we've said, our marketing partner for this product is a large semiconductor company with a significant presence in the automotive market and expertise in automotive component qualification and certification. It plans to market our third generation parts under its brand. This private label strategy provides a sales channel and credibility to shorten our time to revenue.

Based on our partner's testing, the speed of our part is better than expected. Speed is an important advantage because it allows reliable transmission of more data. In addition, we believe our part has less power consumption than alternatives, which means it doesn't compromise the battery life it's helping to manage. Also, our part is smaller than alternatives such as conventional semiconductor optical couplers. We've previously discussed our spintronic biosensor in a new medical diagnostic instrument. We don't have a specific schedule, but we continue to see great potential. We've been told that business discussions necessary to bring a product to market are underway and because of the importance of our technology for the instrument, we've been told to expect to be a party to those discussions.

Turning to distribution. In the past quarter, we were pleased to extend our agreement with Avago and expand our sensor distribution. Our product sales strategy, which we've discussed on previous calls, is to market NVE branded parts as well as private label parts in certain markets. Our strategy for the NVE brand is customer driven. That means that when a design engineer is looking for the best components, we want to make sure they find NVE. We found it's not effective to try to support a sales force knocking on doors because there are so many potential customers. Catalog Internet distributors like Newark/element14 and Digi-Key get our products into millions of catalogs and on to millions of computer desktops. This distribution strategy provides visibility and brand awareness while avoiding the expense of a large sales force. Although we sacrifice margin selling through distributors compared to direct sales, we believe it allows for a higher growth rate.

We recently executed a fourth amendment to a 2001 supply agreement between us and Agilent Technologies. Agilent and Avago have distributed private label versions of our coupler since 2002 under that agreement. Avago has an excellent reputation in the high performance coupler market, good distribution, and expert customer support. The agreement would have expired last quarter, but the amendment extends the term for three years to 2016. Despite its history in optoelectronics dating back to Hewlett-Packard in the 1950s, Avago management had the foresight to see the value of NVE's competing non-optical spintronic technology and that's an excellent validation of our technology.

We also have a private label strategy for in-car networks like the automotive Control Area Network couplers I talked about a couple of minutes ago. This is a unique vertical market where a direct sales force is important. And in the past quarter, we expanded our sensor distribution with a second broadline distributor in the Americas, Newark/element14. Newark/element14 has done a good job distributing our coupler products for several years and approached us about selling sensors as well. Newark/element14 is a leading distributor of electronic components and engineering solutions, its catalog Internet focus is a good fit with NVE's product marketing strategy. The distribution agreement means two of the leading distributors in North America, Newark/element14 and Digi-Key, are now both distributing both of our product lines.

The agreement with Newark/element14 was in time for our products to be featured in their widely distributed annual sensing catalog. Newark/element14 is part of Premier Farnell. Premier Farnell and Digi-Key are two of the top five electronic distributors in North America according to the Pent Media annual list of the 50 largest distributors. The element14 name incidentally comes from silicon, which has an atomic number of 14. Our products actually rely more on atomic numbers 26 through 28 that are magnetic materials because of their electron spin properties, but we're happy to have them sold by element14.

Finally turning to governance. Our annual meeting has been scheduled for August 8 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 Investor section of our website. We are pleased to be part of a select group of public companies with the lowest governance risk according to ISS RiskMetrics. There has particularly been a good deal of attention on executive compensation. We strive for good compensation practices.

Some of the highlights of our dos and don'ts from our proxy, but well first the don'ts. We don't overpay. The Compensation Committee believes it would be difficult to achieve performance that would result in CEO compensation comparable to public companies with comparable revenues or market capitalization. We don't unduly dilute our shareholders. Our Named Executive Officers, NEOs as they're called in the proxy, have not been granted stock options in the past three years. We don't have executive perks. Our NEOs have not received any significant benefits or perquisites other than those offered to all employees. We receive no pension benefits, non-qualified deferred compensation, or other post-employment potential payments. We don't have golden parachutes. Like all our employees, our NEOs are employees at will and don't have a changing control or severance agreements.

Our NEOs have skin in the game. Although we aren't required to do so, both of us retain a substantial portion of the options or the shares from the exercise of the options we've been granted. NEO compensation is aligned with performance, particularly net income and growth. The Board adopted a new Compensation Committee charter earlier than required to meet pending NASDAQ requirements and there are details on that in our proxy statement in our website. And for good corporate practice, our entire Board of Directors stands for election every year.

We recently engaged Grant Thornton as our independent registered public accounting firm and our shareholders vote on their ratification at our annual meeting. The firm was highly recommended by other public companies and did a good job on our first quarter review as well as our recently filed fiscal 2013 taxes. 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 have a meeting theme. This year, our theme is cars so we plan to overuse automotive puns.

Now I'd like to open the call for questions. [Nova], we're ready for questions.

Thank you. (Operator Instructions) Steven Crowley, Craig-Hallam Capital.

Good afternoon, gentlemen.

Afternoon, Steve.

I'm really kind of fighting the urge to use a car pun here about reverse and forward direction because we've been kind of stuck in the wrong direction. Maybe you could help us understand the things that you've been adding to your car that can pay off over the relative near term to get us going back in at least first or second gear.

Sure, Steve. And it sounds like you were able to work in a few car puns there, but that's a good question. In the relative near term, we're introducing some best-in-class new products that will open up new markets that we talked about, some of them on this call. We're looking at expanding in the medical device business, we're gaining traction in neurostimulation, and in fact we now have several design wins in various stages of commercialization and that could help fuel our growth. And then in the long term, we're looking at expanding into mass markets such as consumer and automotive electronics and we've been making good progress there. In the near term as you know, we faced a challenging macro environment, that's improving and we faced some specific issues with our customers in the CRM and some of the other markets that we serve, but those are improving as well so we see a very bright future. And Curt mentioned some of the special situations that might have affected us and given us some headwinds this most recent quarter and he mentioned one particular customer and we're already seeing a recovery there. So, there's a lot of reason to be optimistic.

On that situation, it's been a seemingly recurring phenomenon with the takedown of inventory levels. There's obviously been some challenges in the CRM market in trying to right-size inventory against those challenges that a customer is, exactly the challenge they're dealing with. Are you able to get a better sense for whether or not they've met some of their objectives, whether they have that equilibrium, or whether or not this is a process that you're going to be dealing with on a recurring basis from here because it's still not quite in balance?

Well, we've actually heard that it, it being the CRM market, might be returning to normal after pressures the past couple of years and that's very encouraging. As I mentioned, we're also gaining traction in the broader neurostimulation market if one considers CRM a subset of neurostimulation. So we're hopeful that that situation has stabilized and is improving and also that we can broaden our footprint in the medical device market.

Now these high-field sensors that you talked about sampling recently, are those just the products that are targeting this new segment? And maybe you could talk to us about the capabilities that you're bringing or enabling with your products there.

Right. So the idea of those products is to allow for a very wide range of sensitivity over a range of magnetic fields and that can be important if these devices are exposed to say MRIs or other diagnostic tests that use very high magnetic fields. So it's a unique capability of our technology and it will allow us to provide a much better benefit proposition, a broader benefit proposition in the medical device industry. So we are working on several different designs for high-field and what we've called ultra high-field sensors because MRIs keep getting higher and higher fields and the devices in many cases need to keep working, need to be able to sense that field, and need to know what's going on around them. So, we're developing these in response to requests from several customers and as I mentioned, we've sampled some parts in the most recent quarter. The reaction from customers has been positive and we're working on finalizing designs and getting those devices into production.

In terms of that pool of medical device customers that you have and where that is now versus maybe two years ago or even a year ago and where you think it might be a year or two down the road. Can you help us get a sense for how the size of that group is changing, maybe order of magnitude difference? I'd love to hear a number, but I doubt you're going to give us that. But maybe just a sense for what's happening within that universe of customer in terms of its size or variety or whatever you can help us with a picture.

Sure. Well, I think what we can say is that we now have several design wins in various stages of commercialization in the neurostimulation market so they're at various stages. Sometimes the regulatory cycles can be somewhat unpredictable and so it's hard for us to predict when they will reach commercialization. But we have a track record of success of having devices that meet the stringent requirements for these applications, for getting regulatory approvals, for meeting the unique manufacturing standards that go with being in a medical device. So it's not just one sort of speculative prospect, it's several and they're design wins so we can't predict timing and it's hard to predict quantities, but we believe that this is a very good business. We have a strong benefit proposition, it's a business that's growing faster. The broad neurostimulator market is growing faster in general than CRM, which has declined recently or at the very least plateaued. So we see this as a way to jump-start growth not only by gaining new customers, but by gaining a foothold in a market that's growing much faster than our traditional CRM market.

And is it safe to infer from your commentary that it's more than one customer, it's at least a few customers in that domain or is that a dangerous assumption?

No, that's a fair assumption. We said it was several.

Okay. And in terms of the industrial side of your business or the non-medical side of your business, obviously you've had some challenges there too that are macro oriented. Talk to us about whether there's been some inventory correction there that you think you've been dealing with and what's driving some improvement that you seem to imply in that backdrop also. Is it more applications, more customers, or just the tide starting to rise in that space?

Well, reason for optimism is all of those, but in particular the market. The macro economy is improving and that means that we're buying more durable goods and factories are starting to crank up again and that means the need for more automation. It was a particularly challenging year for industrial electronics last calendar year. The semiconductor industry as a whole contracted and the sub-segment of industrial electronics contracted even more than that. So, we're seeing a reversal of that. The semiconductor industry appears to be growing and the prospects seem to be for an improvement in the second half of the calendar year and also industrial electronics seems to be improving even more. So we're seeing that with our customers and we believe that that will give us a little bit of wind at our back. Also, of course, as we talked about, we have new products and new prospects so we hope to grow that way as well.

Alright, one more from me and then I'll hop back in the queue. In terms of your large global semiconductor company that's become a partner and seems to be developing as a partner, I just want to make sure I understand the progression that's been taking place there. I know there's been some discussion on these calls about early on them helping introduce you to some industrial opportunities, but certainly moving towards the more tightly bundled opportunity of a private label relationship with them. Walk through how that working relationship has progressed, what you've been able to do so far if anything to aid your business to date, and then what's the next step is and when?

So what we've been doing in the relative near term is we've been selling products into the industrial market as you alluded to that use the silicon, the network transceiver housekeeping electronics from this Company. So they've been very cooperative in providing those in a form that we can use them so we buy those, we combine them with our spintronic technology, and we make a complete spintronic coupler, and we sell those into industrial markets. They've been very helpful, as you alluded to, in providing introductions into the industrial market, which is not the focus of their own brand and where we have a good reputation and a strong presence. They provided us favorable pricing on the silicon features that they provide and that they've provided us very good feedback on the design and cooperative arrangement and coming up with the best possible product to meet our customers' needs.

In the past quarter, what I alluded to it in the prepared remarks is that we provided samples of a third generation part that would be applicable to in-car networks so those have to meet particular standards and requirements and then the particular mix of specifications is a little bit different. As I mentioned, power consumption is very important because of course everything in the car is going to be running off of the battery and you don't want to deplete the battery any more than is necessary. So there, they've tested the parts and as I mentioned, the tests were very encouraging. One of the key metrics is speed and that's measured in a variety of ways, but the speed was better than expected so we were able to tighten the preliminary data sheet. And then the goal is to get those parts qualified to be purchased by automotive manufacturers to go into sub-assemblies to manage the battery systems in cars and we don't have a specific time frame on that. Our goal is to get it done as quickly as possible and we certainly want to have this in place when we start seeing the next generation of hybrid electric vehicles, which are not that far away.

In the meantime, the strength in the auto industry and manufacturing has some chance to benefit your business in the traditional factory automation applications or is that too much of a stretch?

No, that's absolutely true. The requirements are different for being in a car than being in a car factory. Power consumption in a car factory is not as critical as it is in a car, the temperature requirements are not as extreme, and other things that are fairly self evident. So we have an excellent product offering in the industrial market, we've had some very encouraging design wins in that space. Right now Control Area Networks are a relatively small portion of our sales, but we see excellent potential for growth there and those don't require any additional qualifications or certifications other than what we have now.

Okay. Thanks for taking the questions.

(Operator Instructions) And one moment, sir, while we wait for callers to queue. Jon Jung, Trailhead Asset Management.

Thank you. Dan, I do want to reassure the Board that we're very pleased with the governance at the Company and it's remarkable in today's environment that you've been very careful about husbanding the options and the resources. But I think the piece that we look at and have owned the stock for three or four years is the frugality may have been taken a bit too far. From our standpoint, you've continued to generate an enormous cash balance and shareholders simply are not benefiting from that because the growth of the business just simply has stalled and dropped as Steve says into reverse. So I think that when we look at the amount of money that you spend on sales and marketing, it's a very small amount of money and we simply don't understand what these cash balances' purpose is in continuing to grow them to where it's now approaching $90 million, $15, $20 a share and we don't see the benefit to the Company of continuing to generate big cash balances when there's simply no growth going on here. And what your executive group does in regards to adding sales and marketing expertise and capabilities is not ever a topic that we hear much about so I couldn't tell you who your sales and marketing executives are. We don't hear them focused or discussions about their efforts and their skill sets, but we're frustrated and we simply can't add shares in your Company to new accounts when it's not demonstrating any growth so we're sort of stuck here and I don't know what else to do. We've described this issue on calls and we don't see much happening, I guess that's our concern.

Well, I appreciate the comment. Maybe I could address a couple of things. We did spend a fair amount of time in the prepared remarks talking about our distribution strategy and how we do it and where it gets paid for. So the short answer to that is that while it doesn't show up in the expense line, it shows up in we're spending margins in order to gain distribution such as the new distribution that we talked about from Newark and distribution from Digi-Key. As we also noted, our R&D is at a historically high level, approximately 16% of revenue, that's our direct expense; then we have additional expenditures that are customer sponsored. So we spend a relatively high amount and probably recently if not the highest, among the highest we've spent in recent years and that has resulted in a number of new products.

As far as our sales efforts, we have talked from time to time about our sales effort. Our Vice President of Sales is Tim Hazelton who's a very capable very talented individual. He's here now, but he will be heading out to a trip in Asia and he'll be spending a great deal over the next few months on the road talking to customers, talking to new customers, and talking about our new products. He will also be meeting with some of our distributors in Europe and Asia and bringing them up to speed so that they can update their customers. So we are able to leverage our sales force into a lot of feet on the street with an excellent distribution network and we have an excellent R&D group, we're spending more than ever on that. As far as capital allocation --.

You've been through this a number of times and if I were on your Board, I'd be asking you how do you demonstrate that you have a terrific distribution system. It's got to be with improved sales and you're not getting that, it's simply illusory. You talk about having given up margin to get distribution and yet your margin is approaching 80% and you're not getting the distribution, at least you're not getting sales out of your distribution so the distribution cannot be described as successful when you look at the last five years of revenue. It simply isn't working in terms of getting new additional sales. We're listening to a broken record from you and that's not pleasant as shareholders.

So you generate good stuff from a governance standpoint and yet you continue to say you're getting great distribution and higher growth rates, that's a quote I just wrote it down, higher growth rates out of your distribution system. Higher than what? Your growth rate's negative and I have a frustration that says if I were sitting on your Board, I'd be asking Tim Hazelton, can we spend more money and get some growth out of your Company and these great products? And if he says no, spending more money isn't going to get us any more sales, that's a head scratcher. You simply nod. I don't see you investing in sales and distribution so by not buying your stock, we're selling it effectively.

Dan, we're frustrated, we're not hearing the right stuff here. We're simply not hearing the right things with regard to you're saying things that are simply aren't true. Higher growth rates are not coming out of your distribution system. So I fail to understand your comments, I'm sorry. I like your honesty, I like the fact that you're very, very frugal, but I think in this particular case you are way too frugal. I don't think you're investing the money necessary to get increased sales. That's just my general feeling from having listened to the calls for several years here. So you're running the business stand, but it isn't working and that's our frustration. So I'm sorry, I wish I had something else to ask you, but it's an ongoing broken record and we're not hearing it. So thanks very much for listening to us anyhow.

Well, I appreciate your candor, Jon. Maybe I can try and add one more thing and that is that there's more to it than the expense line. So we spend margins on distributors and we spend margins to get into larger markets and we've made a number of proposals and we have leads that are progressing that are for high volume, lower margin business. So we're spending the money where we think it will get us a return, which is on distribution and on sacrificing margins in order to get into larger markets and I share --.

Let me just to ask a question then. Do you have product specialists that work in Tim's area that go out and help these sales people because I know you have distributors who have catalogs with thousands and thousands of parts in them and they can't possibly know. They're order takers, they don't know the products because there's vast numbers of products in their catalog. So your distributors, sales people; do you have product specialists that go out from Tim's area to try to train, promote, and go to customers to try to help them understand how to sell your product and the differentiation that it brings to the market?

Yes, absolutely. We do that face to face, we do that through marketing collaterals, through evaluation kits which we give away, we do it through reference designs, we do it through frequent telephone support and we're on the phone with distributors virtually every day. And we all spend time on the road talking to customers learning what they want, explaining our benefit proposition, and our face to face distributors are very good at that. They have their own customer support people, they know our products very well. That's different than distributors like Digi-Key and Newark, which are primarily catalog Internet and are generally not providing a lot of face to face support. So we have some customers who like to buy that way, who know what they want and will buy through catalog Internet distributors; and then we have some customers and particularly in certain verticals where face to face is the way to go. And in that case, we invest in face to face distribution; we invest expense, we invest margins, and we invest our most valuable resource, our people's talent and time.

Do you have enough of those people that Tim can for instance send out to the field to make calls and make presentations?

We think we do. We think we can leverage our distributors' expertise. We call on people throughout the Company. We're not so rigorously structured that if we have a question that somebody say in test engineering can answer or somebody in design engineering can answer that those people are available and we'll get answers for our customers. We provide them excellent support, we provide them fast support, we provide them expert answers. And I think one of the benefits that we provide is that we're specialized compared to broadline large semiconductor companies, we know our stuff, our people are smart, and we get back to our customers very promptly with excellent answers. So, I think that's one of our strengths. I share your frustration that it's not showing up on our topline. We believe it will, but I understand what you're saying, we'd like it to be sooner.

Okay. Well, as I say, you guys are absolutely A+ Number One on our portfolio in terms of governance. You've done a yeoman's job here of the proper treatment of your shareholders and I have great admiration for what you've done there. But it is the case of we simply are in a position where our business is to find companies that are growing their markets and growing their products and we're on a stall speed with this one so we simply can't add it. We don't add it to new portfolios so that's not helpful. I'd like to be able to say that that's not the case. So anyhow, we are frustrated by that and it's ongoing. So best of luck to you guys and as I say, it's not that I know you're not for lack of trying. But you've got $87 million sitting there and I would not be a proponent of buying back a lot of shares with the share count you've got out there now, but it strikes me you've got $87 million that doesn't seem to be useful.

Right. Well, we also see advantages to having a strong balance sheet, but you're right.

You're beyond that.

Well, a very strong balance sheet, but we also see it is valuable to spend it under certain circumstances whether it's acquisitions, whether it's other strategic opportunities. We have a buyback program and we certainly believe that we have adequate resources to support all of those. We probably ought to move on to other questions though. Nova, are there any other questions? Thanks, Jon.

Thank you. Steven Crowley, Craig-Hallum Capital.

Sorry about that, I had the mute on. In terms of one of the product lines that you mentioned sampling during the quarter, the middle one; not the high-field sensors, not the couplers for in-car networks; but the product line for factory automation applications I think is what you referenced. What was that product and can you walk us through the progression there also?

Okay. I think the middle one was current sensors, right, so current sensors for factory automation and automotive applications and that represents an expansion of our sensor product line. Most of our sensors now are used to sense position either proximity sensors where for example a robot position is in the correct position or not, rotary sensors, angle sensors. And this is a sensing current, which is becoming more and more important in terms of factory automation in order to maximize energy consumption, to improve energy consumption, and to improve efficiency and so this is a new area for us. We've had current sensors before, but they were relatively low current range in the range of tens of milliamps, which is not really usable for motors which have currents in the range of many amps or several amps.

So that is a new product that we sampled at a trade show in May in Germany in co-operation with HY-LINE Sensor-Tech now called IS-LINE, which is one of our major distributors in Europe and the reaction was very good to the part. We're working on a design optimization and we hope to have that ready for production relatively soon and we already have some customers who are interested in it, some with relatively high volumes that are looking at the advantages of that part. It's very small and it's very precise. It has an air curve that one can barely see and so we think it's a major step forward, our customers do as well. And that's one of the efforts that we've worked on with the R&D investment that we've been making.

Do you have any sense for how big a market segment current sensors are, is it at $20 million? I have no idea how big that space is. What does your market intelligence tell you?

I'd be reluctant to quote a number because it would be a secondary number, but it's a very large market. What we are attempting to do is target a particular submarket of that. Our first product will be probably 0 amps to 5 amps, which will cover fractional horsepower motors and then we hope to expand beyond that with higher current and lower current and different package types and configurations. So, our goal is to gain a foothold and a reputation. There are some relatively high volume applications within that market and we've been talking to some specific customers, but the potential is pretty large. It's a fairly diverse market, but a pretty, pretty big market.

As you look at the potential sales contribution from this product line at some level that you would call maturity, is it an area that should be downstream a couple million dollars of sales for NVE if you're successful or bigger than that or is that too ambitious to think that if you're successful at a reasonable level of maturity, it could be that?

Well, the usual caveats apply is that we really don't know how many will sell. But certainly, we see it as much larger than the sort of low millions that you describe and our goal is to execute well there that we have the opportunity as we've discussed at length, that we have excellent margins. And so for high volumes, we can give up some of those margins if necessary to provide a really convincing benefit proposition to our customers compared to things like transformers or devices smaller and we think it could open up a significant market. As you know, it's not our practice to try to predict that, but that's the feedback we're getting.

In terms of when that product line could start to contribute to revenue, is it late this fiscal year? Is that even realistic? When does the starting gun go off for you to start to collect revenues with that product line?

Well, the starting gun has gone off, but we're primarily in sampling and it's not really enough volume to move the needle, but the next milestone would be production devices. These were samples that we provided, they met most of the specifications that our customers needed. There are a couple of things that we needed to improve and we've already made the design changes necessary for that. So, we hope to have parts this quarter that are fully spec compliant. There are no guarantees, there's always risks, and then we'd be starting up perhaps limited production as early as this quarter and certainly we would hope this calendar year. And then volumes depend on customer uptake and those are things that are difficult to predict. But what we can control is listening to our customers, making products that meet their requirements, and getting them done as quickly as humanly possible. And our engineers, our subcontractors, our packagers are all doing a great job getting that product built as quickly as possible.

And then with biosensors, you've been balled up in a situation, if I can call it that, with transition and change at the first big intended customer for your novel biosensor. It seems like the fog may be clearing and there's a map towards introduction of that product and you're hoping to get that map over the next quarter, I mean you intimated that you'll be in discussions and those planning discussions will be taking place, I'm inferring that's relatively soon. But you've also tried to do some other things to kick start the financial progress with that investment, which mean other potential customers in food safety applications. How far away from meaningful commercial revenue given all of those things you have going on might we be for the biosensor?

It's like as you said, we've seen some encouraging signs from our customers on the biosensor front albeit a little bit indirectly. We presume that they aren't working on business discussions if there isn't business to be had so we find that encouraging. And as far as the food safety, I think the NSF Grant, which we just started this month, is very encouraging and we're going to be working with commercial entities to deploy that. That's encouraged by the NSF process, it's obviously our primary interest. While we were pleased to get a grant, that's not our primary goal. Our primary goal is to end up with commercial products. So this will allow us to demonstrate the product, to foster a relationship with the customer that can use it. It's a one-year grant so the feasibility if we meet our goal will be demonstrated by them, but there are some steps along the way that will allow us to get a product ready for commercialization and to develop customer relationships. So we see some great opportunities there and we're hopeful that the medical diagnostic instrument is getting closer.

Obviously, what I'm trying to gather is what can start that product revenue line moving forward? Again, you've talked about a number of opportunities, I'm just trying to flesh out more of that because it's been a while since we've seen the payoff from a lot of initiatives at the Company. The contract R&D business has gone, it receded all the way to a couple hundred thousand dollars a quarter. You've gone out of your way to highlight how things may be getting better on that front, but we're really just talking about one $200,000 and something contract. Is that a proxy for a greater pool of activity that should allow that business to normalize at $1.5 million or so a year? Is that the way we should think about that or it's so far down, you're going to let it go off the map because it's not so strategic to you now that it's gone down to this level? How should we think about that?

Well, we certainly are not going to let it go off the map. And I think as we mentioned in our prepared remarks, we are seeing some signs of improvement and we have ongoing discussions about some fairly significant contracts. So Curt, do you have anything to add on that?

Well, as far as timing, I think we had said before that it's probably going to be challenging for a couple of quarters and I think we still see that. But there are some things that are in the works, but I wouldn't expect to see anything probably until our fiscal fourth quarter.

So is this the run rate or does it bounce a bit off here and then jump up more when you get into the meat of that later in the year?

Well, we're hopeful that the things we have in the works, it will jump from this level beginning with our fourth quarter.

Okay. And then on the litigation front, it looks like there was an update to your disclosure in the 10-Q about the proceedings having been stayed until next year. What's your interpretation for us of that? What does it mean to your process in a potential payoff? And thanks for taking the questions, I'll let somebody else jump in here if need be or if desired.

Okay. Well, we probably ought to wrap it up pretty soon, I think we've gone over a little bit. So what happened on the stay, the stay on our case against EverSpin was to be listed at the end of June and it was extended another year. So the reason for that is rather than say why they aren't infringing, they decided to challenge the patents that are already issued and courts generally stay proceedings until patent re-examination challenges run their course. So, that's the situation that we're in. We remain confident of our position and we hope to emerge at the end of that one-year period with a very strong case.

Thanks.

William Driscoll.

Dan, this is just a request for maybe some enhanced disclosures going forward. I have to say I echo the feelings of the gentleman from Trailhead as far as just the lack of growth, but we need to see something that we can point to that we know that NVE is just not dying on the vine. So if there's any way you could give us some disclosures on your products as far as the vintages of them. Are we selling products that were placed with customers or designed in several years ago? I just need something to get a better sense of whether these dollars that you're spending on R&D are getting any return at all. I understand distribution's a cheaper way to go, but I think with your product set, maybe you need to have a little bit more on the sales and marketing side to help support getting these into the right places. So again, just a disclosure in any way either now or going forward in quarters of just what is the age and the vintages of the products that you're currently selling. Thanks.

Thanks, Bill. Maybe just taking a quick crack at answering that. It's a mixture of vintages. Some of our products, we're selling products that we've introduced very recently. I mentioned some of the Controller Area Network transceivers, we recently introduced a line of ultra small network transceivers. The beauty of our products is that they're way ahead of their time and so some of the products that we introduced many years ago are still selling very well because they're still the best in class. But our goal is to constantly improve, make our products better, make them smaller make them more sensitive, make them lower cost, and we continue to do that. But we'll certainly take your comments to heart.

With that, we should probably wrap up. I do want to thank everyone for participating. We were pleased to report strong earnings. We look forward to seeing some of you at our Annual Meeting in a couple of weeks and, of course, we plan to speak to you again in October with second quarter results. Thank you for participating in the call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.