NVE Corp (NVEC) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NVE conference call on second-quarter results. (Operator Instructions) As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Dan Baker, President and CEO.

Good afternoon, and welcome to our conference call for the quarter ended September 30, 2014, second quarter of fiscal 2015. As always, I am 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, Kurt will present a financial review of the quarter, I will cover business governance 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 others, such factors as uncertainties related to the economic environments in the industries we serve, uncertainties relating to future revenue, uncertainties related to future in R&D contracts, risks related to developing marketable products, uncertainties relating to the revenue potential of new products, risks related to material weaknesses in our internal controls, 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 year ended March 31, 2014. The Company undertakes no obligation to update forward-looking statements we may make.

We're pleased to report a 20% increase in net income to $0.80 per diluted share, driven by a 13% increase in total revenue and increased gross, operating and net margins. I'll let Curt cover the details of our financial results.

Thanks, Dan. As Dan said, for the second quarter of fiscal 2015, total revenue increased 13%. The increase was due to a 12% increase in product sales and a 119% increase in contract R&D revenue.

The increase in product sales was from then-record product sales the prior year and was due to increased purchased volume by existing customers, favorable order timing and new customers.

The increase in contract R&D revenue was due to a new contract. Despite a challenging environment for government funding, we have some promising contrast opportunities, and we hope to gradually increase contract R&D revenue in coming quarters.

We have some visibility of inventory adjustments by medical device customers in the current quarter which will negatively impact revenue in the December quarter. This is not unusual, as our customers often adjust inventories late in the calendar year. The semiconductor industry correction may also be contributing to inventory adjustments this year.

Last year, revenue decreased 11% sequentially from the September quarter to the December quarter, and we could see a roughly similar percentage impact this year. Gross profit margin increased to 81% of revenue for the second quarter of fiscal 2015 compared to 79% for the second quarter of fiscal 2014 due to a more favorable product sales mix.

Total expenses decreased 8% for the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014 due to a 5% decrease in SG&A expense and a 10% decrease in R&D expense. The decrease in SG&A expense was due to decreased legal expenses. The decrease in R&D expense was due to the completion of certain product development activities.

Income from operations increased 23%, and our operating margin was 63% compared to 58% in the prior-year quarter.

Our non-operating income consisted of interest income which increased 8% for the second quarter due to an increase in interest-bearing marketable securities partially offset by a decrease in interest rates earned on reinvested funds.

Income before taxes for the quarter increased 21% to $5.81 million compared to $4.78 million in the prior-year quarter, and pre-tax margin was 70% compared to 65%.

Net income for the second quarter of fiscal 2015 increased 20% to $3.88 million, or $0.80 per diluted share, compared to $3.23 million, or $0.66 per share, for the prior-year quarter. Net margin increased to 47% from 44%.

September 30 was the halfway point in our fiscal year. For the first half of fiscal 2015, total revenue increased 24% to $16.7 million from $13.5 million for the first six months of the prior year. The increase was due to a 25% increase in product sales partially offset by a 5% decrease in contract R&D.

Gross profit margin increased to 81% of revenue for the first six months compared to 79% for the first six months of fiscal 2014 due to a more favorable product sales mix. Net income increased 37% to $7.91 million, or $1.63 per share for the first half of this fiscal year compared to $5.8 million, or $1.19 per share last fiscal year. The increase in net income for the first half was due to increased product sales, increased gross profit margin, decreased expenses and increased interest income.

Operating cash flow just over $7 million for the first half of the fiscal year compared to just under $6 million for the prior-year period. Fixed-asset purchases were $28,000 for the first half of the fiscal year compared to none for the prior-year period.

Equipment purchases the past two fiscal years have been lower than our historical levels after we completed a production upgrade in 2013.

As of September 30, cash plus marketable securities was $102.5 million, an increase of $6.81 million in the first half of the fiscal year.

Our financial performance and strong balance sheet have increased shareholder value, and in the past quarter our stock hit all-time-high intraday and closing prices. With this strong balance sheet and our long history of strong cash generation, our Board of Directors has been exploring ways to return cash to our shareholders. We hope to discuss the specifics of a capital allocation plan on our next quarterly conference call.

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

Thanks, Curt. I'll cover R&D contracts, patents, product development and governance. As we have discussed before, our growth strategy is new and improved products in the near term and game-changing extensions for the long term. Contract R&D supports long-term growth with new ideas for spintronics.

In the past quarter, we completed the Missile Defense Agency Small Business Innovation Research Phase I contract titled Spintronics Based Physical Uncloneable Functions. A physical uncloneable function, P-U-F or PUF, is a function that's embodied in a physical structure and is easy to evaluate but hard to predict and replicate. Possible commercial applications include high-speed encryption and security for consumer electronics. There's a link to an abstract approved by the MDA for public release from the in the news page of our website.

Also in the past quarter, we continued work under a National Science Foundation grant with the goal of developing sensors for faster detection of food-borne pathogens. We hope to complete the project in the current quarter and to demonstrate detection of salmonella. We're in discussions about commercial deployment with leading companies in the food industry.

Summarizing patents -- as we previously reported, in the past quarter we were granted a new patent titled magnetoresistive-based mixed anisotropy high field sensor. This could have applications in power control, navigation and other areas.

Also in the past quarter, we received a notice of allowance of patent entitled inverted magnetic isolator. A notice of allowance is a written notification that a patent application has been examined by the patent office and is nearing issuance. The patent relates to couplers which are also known as isolators because they are electrically isolate coupled systems. Couplers are an important product line for NVE, and we continue to invest in developing new versions and models.

Specifically in product development, in the past quarter we announced two new coupler lines in response to customer needs: high-voltage couplers and ultra-miniature network transceivers.

The first new products introduced the past quarter were what we call our V-series couplers, with best-in-class, high-voltage performance. They are tested to work at line voltage up to 1,000 volts. Most line voltage is 120 or 220 volts, so 1,000 volts is an impressive figure of merit. V-Series couplers are 100% tested to a jolt-worthy 8,500 peak volts, twice as much as our existing parts. That's the equivalent of more than 5,000 flashlight batteries or a D-cell flashlight over 1,000 feet long. Applications of high-voltage couplers include medical instruments and energy-saving power management.

The second new product line in the past quarter was ultra-miniature network transceivers. Miniaturization is one of our key advantages. Earlier in the year, we introduced spintronic couplers in a format 1/4 the size of conventional devices. These are so-called quarter-sized packages, or QSOPs. The first parts were relatively simple, and the products we just introduced are more complex and include networking functions. Their build is the smallest components of their type by far.

The newest devices support networks such as Controller Area networks. Controller Area Network couplers will be targeted at automotive and other applications. We see automotive electronics as a promising, large potential, long-term market.

We talked about the inherent reliability of our products. And in our most recent customer newsletter, we illustrated that advantage with a great design win. We were notified that NASA identified several of our couplers for inclusion in circuitry of the Europa Clipper.

The Europa Clipper mission is a recently approved venture to a moon of Jupiter that is believed to have one of the highest probabilities of extraterrestrial life in our solar system. The proposed launch is in 2025, and while we don't expect material revenues from the mission, we are proud to be part of such a demanding project.

Environmental and quality requirements are extremely stringent, and our parts of unmatched reliability including an extraordinary 44,000-year extrapolated life.

Moving on to governance, our annual meeting was held last quarter. The theme was NVE's 25th anniversary. So we overused 1980s catchphrases, and the meeting was fantabulous. Before I get to the substance, I know some of you are quite interested in the answers to the 1980s trivia questions from the meetings. So the 1989 Best Picture Oscar went to Rain Man, and the Billboard number one song when NVE was founded in March 1989 was Lost In Your Eyes by Debbie Gibson. We concluded that it was a better year for spintronics than it was for music.

For good corporate practice, our entire Board of Directors stands for election every year. As discussed before, two directors, Jim Hartman and Bob [Iriston], stand for re-election this year. We thanked Jim and Bob at the meeting for their service.

Shareholders elected two exceptionally qualified new directors, Gary Maharaj and Rich Cramp. Gary is President and CEO of SurModics. He also served as President and CEO of Arizant, where he successfully developed the business. Rich has served as CEO of Sonovis Life Technologies, which was acquired by Baxter International in February 2012. President and CEO of ATS Medical, which is now part of Medtronic, and Vice President of Sales and Marketing for St. Jude Medical.

As Curt mentioned, our new Board has been looking at ways to return cash to shareholders, and we'll have more to say about that in January.

We hold annual say-on-pay votes. Our executive officer compensation supports goals of profitable growth and improving long-term shareholder value without being excessive. And shareholders overwhelmingly voted to approve compensation. Details of the shareholder votes were reported on a Form 8-K that we filed with the SEC the day after the meeting.

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

(Operator Instructions) Charles Haff, Craig-Hallum.

Hi, guys. Thanks for taking my questions, and congratulations on a nice quarter.

Thanks, Charles. [Same] to you.

I had a question regarding the QSOP chip sales in the quarter. I understand it's a relatively new product but was wondering if you could give us any color on how the launch is going.

Yes, this is Dan. It's hard to give specific numbers. As you've said, it is early, but we've had an excellent reception to the parts. I personally went to visit some of our distributors just after we announced the QSOP isolated transceivers. And there was a great reaction from our distributors and from prospects who like the idea of having a part that's 1/4 the size. We brought with us some demonstration boards that showed the part. And for engineers who were used to looking at these, it really is very impressive. It's a tiny little chip, 4 millimeters by 5 millimeters, and, as we said, 1/4 the size. So we had some interest from customers, we have some sample requests, we have a number of customers who are looking at data sheets and we are very optimistic about the prospects.

And do you expect QSOP chip sales to be material, say, two years from now relative to your business? Or how should I kind of think about the materiality of where QSOP could be?

We would certainly hope so. And particularly if we -- as I mentioned, we targeted automotive applications and particularly hybrid-electric vehicles. And those types of vehicles are surprisingly space-sensitive, where there is going to be a lot of electronics, very high network content in those vehicles in the next generation of hybrid-electric vehicles.

So we feel we have a convincing benefit proposition, and we have markets in industrial control and other applications that are space sensitive, but we have some excellent potential in automotive. And we've talked about this before, but we have a partner that's looking at private labeling control area network transceivers including the QSOPs for automotive. And the QSOP format gives us a significant advantage and gives our customers a significant benefit in the automotive market.

Okay. Thank you for that response. And in terms of your inventory reserve, I noticed from the 10-Q that the inventory reserve decreased by about $40,000 relative to the last quarter. Was there any reason why you are bringing down your inventory reserve? Was that the medical device change that you mentioned in the prepared remarks, or was there something else going on there?

No, Charles. This is Curt. We basically just wrote down some parts that had been showing up in inventory, wrote them off into the reserve.

Okay. And would that be a recurring situation, Curt, or is that -- I don't know how to think about this going forward. Is this kind of a normalized level now, or is it something that should be recurring?

Yes, it's probably something that wouldn't be recurring. It really didn't have an impact on our income statement. It was basically balance sheet type of accounting where we moved out of the asset into the reserve. So that happens from time to time, but most quarters it's not a significant amount.

Okay, great. And then gross margin increased, you mentioned, due to favorable product mix. I'm wondering if you could give some details around the mix there. Or was some of that from the contract R&D, or is that separate when you talk about product mix?

When we're talking about product mix, that is mix between our various products. It doesn't impact contract R&D at all.

And what would be some of those products that would be -- have a higher gross margin mix?

Generally our sensor products would have a little bit higher margin than the coupler product line.

And is that something that you would expect to recur in the next few quarters this fiscal year? (multiple speakers) mix?

Yes, I think the mix will be similar to what we have had the first two quarters of this fiscal year.

Okay, great. Thanks for your time.

Thanks, Charles.

(Operator Instructions) Shune Hogut, private investor.

Congratulations on your quarter. It looks great.

Thank you.

I'm really happy to hear that you're considering distributing some money back to shareholders. I know you said in the next quarter you are going to talk about it a little bit more, but I'm going to ask you some questions anyway.

Are you going to be dipping into your cash hoard to issue a special dividend, or are you considering a regular dividend used from your free cash flow?

This is Dan. The Board hasn't made a final decision, but we have -- well, let me put it in terms of three main goals. One goal is to return a significant amount of cash to shareholders in the relative near term. We do want to maintain a strong enough balance sheet for strategic investments, contingencies. And we also want to minimize the transaction expenses of returning cash so that our capital allocation plan will increase shareholder value.

So we'll have more to say on the next call, and I think it would be a little bit presumptuous of us to talk about the specifics at this point. But we do appreciate your input, and we've gotten some feedback from other shareholders as well. So we feel that this will help improve our shareholder value and meet the needs of a broad range of shareholders.

Have you given any thought to -- I've seen in your older transcripts that you hold cash as a deterrent against potential threats. Have you thought of getting a line of credit against your working capital or something like that and then being able to distribute even more cash than you may have already thought?

We have, and that's part of the mix. We're looking at a number of options for what we would do if we needed to raise cash. The difficulty with that, of course, is if there's an expense involved. Even if one doesn't use a line of credit, there's commitment fee generally.

So we're trying to balance that. We're trying to balance expenses that would hit our bottom line and reduce our shareholder value versus returning a significant amount of cash to our shareholders. So the exact amounts are things that we're still working through, and looking at some of these contingency plans of what would happen if we had opportunities or large strategic investment or contingency. But we are sensitive to returning as much as is reasonable to our shareholders.

Okay great. One last question. Do you think that -- have you considered the opportunity of distributing a regular dividend and then increasing -- getting higher value in the marketplace like trading at a higher multiple of EBITDA or more in line with some of the comps that are out there?

Well, that's certainly one of the considerations is what -- how our shareholders would react. We recognize that when a shareholder is investing in NVE, they're not investing probably for our bond portfolio, and they might have other investments for that money. And that's one of the reasons why we're looking at returning that capital to shareholders.

What the reaction will be, that's difficult for us to predict. But we do feel that if we do things as a Company and as a Board that increased shareholder value in the long term, that the stock price will reflect that.

That's great. I look forward to the dividend announcement or whatever you guys decide is best. Good luck.

Thank you.

At this time, I'm not showing any further questions on the phone lines.

Well, thank you. If there are no other questions, I'll summarize. We were pleased to report a 20% increase in net income for the second quarter, and we look forward to speaking with you again in January to report third-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.