NVE Corp (NVEC) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NVE second-quarter 2016 earnings results conference call. (Operator Instructions). As a reminder, this call may be recorded.

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

Good afternoon and welcome to our conference call for the quarter ended September 30, 2015, the second quarter of fiscal 2016.

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, Curt will present a financial review of the quarter, I will cover business and governance items, and we will open the call to questions.

We issued our press release and filed our quarterly report on Form 10-Q in the past hour, following the close of market. Links to documents are available through the SEC's website, our website, and on Twitter at NVECorporation.

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 future revenue, risks related to our reliance on several large customers for a significant percentage of revenue, uncertainties related to future dividends and stock repurchases, 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, 2015. The Company undertakes no obligation to update forward-looking statements we may make.

We are pleased to report solid results for the past quarter, despite an expected decrease in product sales -- a large increase in contract R&D revenue, $1 per share dividend, and the repurchase of more than 1 million shares -- $1 million of our stock. I will turn it over to Curt to cover details of our financial results.

Thanks, Dan.

The second quarter of fiscal 2016 total revenue decreased 12%, due to a 21% decrease in product sales, partially offset by a 449% increase in contract R&D revenue. The decrease in product sales was due to decreased purchase volume by existing customers and a more aggressive pricing strategy in certain competitive markets. We had suggested in our previous call and 10-Q that we expected a $1 million to $2 million sequential decrease in product sales, and the $1.3 million decrease was at the low end of that range.

We hope the more aggressive pricing strategy in certain markets will pay off in higher sales long term. The large increase in R&D revenue was due to new contracts.

Gross profit margin remained a strong 77% of revenue for the second quarter of fiscal 2016, compared to 81% for the second quarter of fiscal 2015, despite a less profitable revenue mix.

Total expenses decreased 18% for the second quarter of fiscal 2016, compared to the second quarter of fiscal 2015, due to a 16% decrease in SG&A expense and a 20% decrease in R&D expense. The decrease in SG&A was primarily due to decreases in performance-based and stock-based compensation. The decrease in R&D expense was due to an increase in contract R&D, which caused us to reallocate resources away from expense research and development. We currently expect research and development expense to increase in the third and fourth quarters from the second quarter, due to planned additional product development, primarily related to Internet of Things and node sensors.

Interest income decreased 17% for the second quarter, due to a decrease in interest-bearing marketable securities. As marketable securities mature, we have used the proceeds to help fund cash dividends and share repurchases.

Net income for the second quarter was $3.31 million, or $0.68 per diluted share, compared to $3.88 million, or $0.80 per share, for the prior-year quarter. We were able to partially offset decreased product sales and interest income with increased contract R&D and decreased expenses.

For the first six months of fiscal 2016, total revenue decreased 7% to $15.6 million from $16.7 million for the first six months of the prior year. The decrease was due to a 14% decrease in product sales, partially offset by a 452% increase in contract R&D.

Gross profit margin decreased to 77% of revenue for the first six months, compared to 81% for the first six months of fiscal 2015, due to a less profitable revenue mix.

Net income decreased 10% to $7.11 million, or $1.46 per share, for the first half of this fiscal year, compared to $7.91 million, or $1.63 per share, last fiscal year.

Cash and cash equivalents were $12.7 million at September 30, compared to $9.44 million at March 31, 2015. The increase was primarily due to $7.84 million in operating cash flow and $6.25 million in bond maturities, less $9.73 million of dividends and $1.85 million of stock repurchases.

As of September 30, we had $84 million in marketable securities, down from $91 million at March 31, 2015. The decrease in marketable securities helped fund dividends and share repurchases.

Fixed asset purchases were $147,000 for the first half of the year and $28,000 for the prior-year period. The purchases were primarily for equipment to test our smallest products.

Free cash flow, which is net cash provided by operating activities, less fixed-asset purchases, was $7.69 million in the first half. We returned considerably more than our free cash flow, $11.6 million, to our shareholders in the form of cash dividends and stock repurchases.

We believe our stock is a good investment and repurchases reduced our shares outstanding and increased our return on equity. In the past quarter, we also announced that our Board authorized up to $5 million of additional repurchases. Details of our repurchases and our repurchase programs are in our SEC filings, including our recently filed 10-Q.

We continue to aggressively return cash to shareholders. This afternoon, we announced that our Board declared a quarterly dividend of $1 per share, or an aggregate of approximately $4.84 million, payable on or about November 30 to shareholders of record as of November 2.

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

Thanks, Curt.

As we have said before, our growth strategy is new and improved products in the near term and game-changing extensions for the long term. We will market these products through effective distributors. Contract R&D supports long-term growth with bold new ideas, such as biosensors. So I will cover R&D contracts, product development, and governance.

We continued work on a biosensor contract we were awarded in June by the US Department of Agriculture. The project, titled high-throughput salmonella detector, focuses on detecting live salmonella organisms in industry-relevant large-sample volumes faster, at lower cost, and with comparable accuracy to existing methods. The goal is to dramatically improve food safety and this contract could help us develop commercial systems.

Turning to new products, last year we introduced our V-Series couplers with best-in-class high-voltage performance. In the past quarter, we made a significant upgrade, increasing the key isolation rating by 20% to 6,000 volts, which we are able to bill as the best in class, keeping us on the cutting edge of coupler technology.

We 100% test V-Series couplers at more than 10,000 peak volts, which is remarkable for a device that is small enough that four of them fit on a postage stamp. It is the equivalent of about 6,800 flashlight batteries or a D cell flashlight more than one-quarter mile long. We introduced several of the new grade last quarter and plan to add other part types this quarter. Applications of the high-voltage couplers include medical instruments and Internet of Things power management.

Moving onto governance, our annual meeting was held last quarter. For a good corporate practice, our entire Board of Directors stands for election every year, and each of our directors was overwhelmingly reelected. 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.

And finally, the selection of our auditors was ratified. 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 would like to open the call for questions. Mallory?

(Operator Instructions). Charles Haff, Craig-Hallum.

Thanks for taking my questions and congratulations on a nice bounceback quarter here. A couple of financial questions. Curt, you mentioned that you're expecting R&D to pick up in the third and fourth quarter. Are you talking about in dollar terms or as a percentage of sales?

I can answer that. We have added people and programs and the impact on R&D expense could be in the range of 20% to 25%, compared to the September quarter.

Okay. So if I look at the first-half R&D spend of about $1.2 million, are you thinking the back half of the year is going to be higher than that? I tend to think about R&D in terms of dollars because it is projects and so forth, but maybe you could help us understand in dollar terms if the second half should be higher than the first half.

Right, yes. We are expecting that amount in the first half to increase by 20% to 25%, which would be in the range of $750,000 to, say, $790,000 per quarter.

Okay, that's very helpful. Thank you.

And then in terms of SG&A, that was up considerably in the second quarter versus the first quarter. Kind of a similar question, I guess, there. I realize first quarter was a lot lower and you had some product sales challenges there, but in the back half of the year, should we kind of just add those two quarters together and expect something more, or are some of these variable incentive comps and so forth going to start to kick in in the back half of the year? How should we think about that?

I would say it would be similar to the most recent quarter, the third quarter.

Okay.

For both (multiple speakers) for both the third and fourth quarter.

Okay, great. And then, operating cash flow was lower this quarter, even after adjusting for the $1.5 million income tax payable that you had last quarter. Should we expect operating cash flow to be similar in the back half of the year versus the first half, or lower? How should we kind of think about that?

I would say it is probably going to be a little bit lower than the first half. We are going to have additional R&D expenses. And as we mentioned before, we are expecting product sales will be lower in the third and fourth quarter than they were in the first quarter.

Okay. In those R&D projects and so forth, there is CapEx there or is that mostly just expense?

That would be pretty much all expense.

Okay. And then, Dan, maybe a question for you. Last quarter, you had some challenges on the inventory side and then on the pricing side. It sounds like you have kind of hit the pricing side in the prepared remarks, but wondering if you could kind of talk about the inventory side and if your visibility has improved or kind of what you are thinking in terms of inventory as it impacted this quarter.

Right. So we continued to -- as you know, we faced a number of headwinds, and that was one of them, but we folded that into the numbers that we talked about at the prior call and that Curt reiterated.

So, the third quarter, the third fiscal quarter, which is the fourth calendar quarter, is typically a quarter where we face some inventory adjustments by our customers as they approach the end of the calendar year, but that is all folded into our thinking and the sorts of things that Curt was talking about a couple of minutes ago.

We certainly hope to grow from here, starting in the coming fiscal year. And we've got great products and we are offering a better value than ever. So we are very optimistic about the future and we think that the strategy that we have put in place is working pretty well.

Okay. And when you say you expect to grow in the coming fiscal year, are you talking about fiscal 2017 there?

Yes.

Okay. And did you get any sense for inventory levels for the second fiscal quarter here in fiscal 2016? Were you able to do any scrubbing of that to get a sense for where inventory levels shook out in the second quarter versus the previous quarter?

Yes, we really didn't see anything unusual. We don't always know, but I think the challenges that we faced were primarily on pricing, which we have talked about. There were several other headwinds and we're trying not to itemize every little thing, but I think we didn't have anything unusual or unexpected happen in the quarter. Is that what you were getting at?

Yes, that is what I was trying to find out, if this was kind of a normalized level or if there were some one-timers that were in those product sales.

No, there wasn't anything unusual in the second quarter related to inventory adjustments.

Okay. Great. And my last question is on the contract R&D side, so very nice growth there, even sequentially. Any thoughts on contract R&D? I mean, this is a big step up. Were there one-timers that hit this quarter, or should we just straight line the second quarter to the first quarter and just keep going throughout the remaining quarters of this fiscal year? I'm sure you probably don't want us to do that, but how should we kind of think about this big sequential increase here.

Contract revenue can bounce around, based on a number of factors, but we do have a strong pipeline of possible contracts. We expect to continue to show a significant year-over-year increase in contract R&D revenue.

Okay. Any more detail beyond that? I mean, you have already kind of made that increase, even just in the first half of this year, so it is not much of a stretch to say you are going to increase versus fiscal 2015. Any other granularity you can give us on that or does it just bounce around too much that you don't really want to get into specifics there?

Yes, it does bounce around quite a bit, but we do expect it to continue to be significantly higher than last year.

Okay. Sounds good. Thanks, guys.

Jon Preizler, RH Capital.

Thanks. Good questions by Charles. I just wanted to follow up on contract. Are there new programs in there or are these all existing programs that have started to ramp? How would you characterize that mix in contract?

Contract R&D revenue?

Yes.

Yes. We have received some new contracts. Over the last nine months, we have received new contracts, so that has helped to fuel the growth there in contract R&D revenue. (multiple speakers)

And are these new programs, then, or are these follow-ons?

We have new programs. They are primarily new programs. They are concentrated in anti-tamper and biosensors, which are strategic areas for us.

So our R&D group has done a great job of showing the unique things that we can do and we are finding a more favorable contract environment. And there is a need for the sorts of technology that we provide.

I know in prior calls you talked a little bit about hybrid electric vehicles. Is there any update on that progress? Are you seeing any design-in wins or anything in that -- opportunity in that segment?

Well, we continue to see it as a very promising segment, and particularly for controller area network transceivers, which can be used for battery management systems.

And we are looking at -- we have had several customer contacts, new customer contacts, and we are looking at possibilities there. We have a partnership in place that we are still active in that has excellent potential. And we are looking at the potential for new products that might improve our benefit proposition. We already have a very strong benefit proposition there and we are looking at different things, like different pinouts, relatively small changes that we think could be important. So that continues to be a very active area of product development for us.

You guys mentioned some lower pricing, but I think that helped drive some volume or keep volume. Is that only in the healthcare market or is that in other end markets as well for you guys?

It's in several market segments, and we are looking at price-sensitive markets, price-sensitive market areas, and looking at how we can make a more convincing benefit proposition.

So, for example, in the control area networks that I mentioned a minute ago that can be used in automotive, we are looking at functions that they need for that and some functions they don't need. So we are looking at how can we change our products, not just lower the pricing, but how we can give our customers the features they need, just the features they need, and provide that perhaps for a lower price. So that is part of what we are looking at. But it cuts across several market segments and there's certain markets that are more competitive, more price sensitive, and those are the ones that primarily we are looking at.

You guys mentioned some higher R&D in the second half. I was wondering. Is that in one segment or another, or is that because there's a program ramping or new product launches that are coming quickly? I was wondering what the (multiple speakers)

Yes, there are several things. There is a combination of products that are in the near term and longer term, and it is a combination, as Curt mentioned, of people. We have added new people, some very talented folks in our engineering departments, development departments.

And then, also, we are looking at particularly programs to provide, as Curt mentioned in our prepared remarks, end node sensors for the Internet of Things. So these would be interfaces that interface our unique sensors to a smart network, the Internet of Things. And those are areas that we think are very promising, and in particular things like for energy and resource management, like angle sensors and current sensors. So we are going to be working on those kind of interfaces. That involves semiconductors and developing silicon, which is relatively expensive, but we believe that this will help us serve a very large and very fast-growing market in energy management and the Internet of Things.

I appreciate you answering all of the questions and I look forward to listening to you on the next call. Thank you very much.

[Jeff Bernstein], [Cohen Prime Advisors].

Thanks for taking my questions. I had a couple of questions for you. Could you give us any more detail on the product weakness? I guess you guys only break out St. Jude as the significant customer and I guess you have a contract expiring there in January 2016. Has this been around that, or any other color you can give?

And then you also, I guess, have an Avago deal, which I guess is a distribution deal, I'm assuming, expiring in June 2016. Any color around that?

Right. So the issues that we have talked about and the challenges that we face, as I mentioned in the prior question, are across industries.

The St. Jude agreement that you mentioned is still in force, although it will expire at the end of the calendar year, and also the Avago agreement has not yet expired. So it is hard to say whether they will be renewed or not. We have renewed each of them several times and we consider them excellent customers. We provide them great products and our people provide them superb service, we believe.

And as you correctly point out, the Avago agreement is a private-label distribution agreement where we provide products, and it is a great validation of our technology that a company with the reputation and the history that Avago has dating back to their roots as Hewlett-Packard has chosen to use our products as part of their product line. So, we do have some excellent customers and we hope that those relationships will continue.

And then, in terms of the R&D contracts, are those with entities that would be described as commercial, you know, who might be able to actually bring these products to market, or are they more governmental or sort of think tanks or people who are looking at what is possible, rather than what is marketable?

Right. So if I -- I think I understand your question. They are both. Some of them are more R&D contracts and tend to be longer term, but some of them are to develop products in the relatively near term.

As I mentioned, they tend to focus on things like anti-tamper and biosensors, which are two strategic areas for us. But we make and sell anti-tamper sensors. Some of them are based on MRAM technology; some are based on other types of spintronic technology. So they do result in product sales, and that is part of the reason why we believe these contracts are helpful. They help fund R&D, they help advance things like our MRAM technology, and they can result in product sales.

So they are more than just a revenue source for us. They build intellectual property and potential business in the future.

And then, you didn't mention PUFs, and just interested if there has been any kind of progress at all on the cybersecurity front.

So, right, PUFs are physical uncloneable functions and those are a type of anti-tamper component and a type of anti-tamper technology.

In the general category of anti-tamper, that is an area that we are very strong in, particularly for high-value assets, such as military and aerospace systems. So we continue to develop anti-tamper systems and we continue to improve the security of them. Some of that is for these sorts of high-end niches of protecting extremely valuable data and extremely valuable electronic systems, but some of it could be deployed for more everyday electronics and security.

And I think we have all seen examples of where cybersecurity is important. And as you know, that is an area where we have excellent technology. So some of the contracts that we are talking about are going into those types of areas.

And I think in the past we have talked about AC to DC converters in computer-type power supplies. Is there anything, any new developments going on there?

So that is one of our target markets, particularly for our couplers, is that we provide a component that can enable smaller and more efficient power supplies. And that is an excellent target market for us, and our new V-Series couplers that I talked about in the prepared remarks are targeted partly at that market. And also, we have new, very small, micro small outline package couplers that have the highest voltage rating in that package size in the industry.

So we have strong offerings there, and we have customers who are using them in that application now for power supplies and we have prospects who are looking at them and developing products using those couplers.

And in the past, you guys have been successful in defending your IP in advanced memories. There's a lot going on with new memory innovation. Is any of it around things that you have IP relevant to or is it undeterminable at this point, because we have seen a lot of talk about next-generation memories, but we haven't seen a lot of it yet?

Right. We have -- NVE has excellent intellectual property for MRAM, which is magnetoresistive random access memory, which is one of the most promising next-generation technologies.

And as you know, Jeff, there has been quite a bit in the trade press about the importance of next-generation memories to fill large gaps in what is sometimes called the hierarchy of conventional memories, where there are different types of memories for different functions, and there are gaps that can be filled by something like MRAM, which has a unique combination of speed, non-volatility, and endurance.

So, we -- our MRAM strategy has been to continue to develop MRAM for high-value applications, like anti-tamper, and to license our technology for large-scale memory applications. And we continue to see excellent potential and a tremendous need for next-generation memory technologies, such as our spintronic MRAM.

And lastly, you usually give us an update on patents granted. Was there any developments in the quarter?

I don't think we had any patents granted in the quarter, but we are almost continuously working on new things and patents in various stages, so we will update those as they come along and put them on our website and through our email list.

Great. Thanks very much.

Thank you. I am showing no further questions at this time. I would like to turn the call back to Dan Baker for any further remarks.

If there are no other questions, we were pleased to report solid results and significant dividends and share repurchases. We look forward to speaking with you again in January to report third-quarter results. Thank you again 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.