NVE Corp (NVEC) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NVE conference call and second-quarter results. At this time all participants are in a listen-only mode. Following the prepared remarks we will host a question-and-answer session and our instructions will follow at that time. (Operator Instructions). As a reminder to our audience listening, this conference is being recorded.

It is now my pleasure to hand the presentation over to Daniel Baker, President and CEO. Sir, the floor is yours.

Thank you and good afternoon. Welcome to our conference for the quarter ended September 30, 2016, which was the second quarter of fiscal 2017. 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, MVE.com.

After my opening comments, Curt will present a financial review of the quarter and six months. I will cover business and governance 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. Link to documents are available through the SEC's website, our website, NVE.com, and on twitter.com/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 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 fiscal year ended March 31, 2016. The Company undertakes no obligation to update forward-looking statements we may make.

We are pleased to report a solid increase in product sales for the quarter and our third consecutive sequential quarterly increases in product sales, total revenue and net income. We also were awarded an important government biosensor development grant.

Now I will ask Curt to cover the details of our financial results.

Thanks, Dan. As Dan said, product sales for the second quarter of fiscal 2017 increased 6% compared to the prior year quarter and 16% sequentially compared to the immediately prior quarter. Total revenue increased 9% sequentially and increased slightly year-over-year despite a significant decrease in contract research and development revenue. This was our third consecutive sequential increase in total revenue.

Contract R&D revenue decreased 42% year-over-year due to the completion of certain contracts. Dan will discuss new contracts in a few minutes.

Gross margin was 76% of revenue compared to 77% last year due to a less profitable product sales mix. Total expenses decreased 4% for the second-quarter of fiscal 2017 compared to the prior year quarter due to a 34% decrease in selling, general and administrative expense partially offset by a 22% increase in R&D expense. The decrease in SG&A was primarily due to decreased sales commissions. The large increase in R&D expense in the quarter was due to new projects including developing Internet of Things and node sensors that are key to our growth strategy.

Interest income decreased 8% for the second quarter due to a decrease in the average interest rates on our marketable securities. Net income for the second quarter was $3.31 million or $0.68 per diluted share, the same as last year although net income per share increased slightly because stock repurchases reduced the number of shares outstanding. Net income increased 6% sequentially and net margin was 45%.

For the first six months of fiscal 2017, total revenue decreased 10% to $14 million. The decrease was due to a product sales decrease in the first fiscal quarter relative to the prior year.

Gross profit margin increased to 78% of revenue for the first half of fiscal 2017 compared to 77% for the first six months of fiscal 2016 due to increased gross profit margins on contract research and development revenue.

Net income for the first six months of fiscal 2017 decreased 10% to $6.44 million or $1.33 per share co6mpared to $7.11 million or $1.46 per share last fiscal year.

We had modest fixed asset purchases in the quarter to bring our purchases to $153,000 for the first half of the year. The purchases were primarily for equipment to support production and new product development. We currently expect fixed asset purchases for the fiscal year to be roughly in the same range as the $287,000 we spent last year but our capital expenditures can vary significantly depending on our needs, equipment purchasing opportunities and other factors.

Free cash flow which is net cash provided by operating activities less fixed asset purchases was $1.32 million in the quarter. Free cash flow tends to be less in the second fiscal quarter than other quarters because we have two estimated tax payments.

Lastly, our Board declared another quarterly dividend of $1.00 per share or approximately $4.84 million payable on or about November 30 to shareholders of record as of October 31.

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

Thanks, Curt. I will cover new products, contracts and governance.

Our near-term growth strategy centers on products for the Internet of Things. Historically, our products have had analog outputs. One of our strategic thrusts is digital output sensors to meet the needs of the Internet of Things. In the past quarter, we introduced a new type of sensor ADT-Series Rotation sensors. These sensors are ultra-low-power digital output sensors that indicate rotation.

Our tunneling magnetoresistive resistance, or TMR technology, enables low-power and miniaturization and these sensors can operate a long time on small batteries or harvested power. Applications include connecting motors, knobs and dials to the Internet of Things for smart energy management and improved human interfaces.

There is a demonstration of the new products on our YouTube channel. There are demonstrations of our new products on our YouTube channel at NVE.com and YouTube.com/NVECorporation. On our last call we talked about being recommended to receive a biosensor grant from the Department of Agriculture and being selected for a spintronic contract by the Army. In the past quarter, we were awarded the USDA grant and began working on the project.

There was a good deal of interest in the USDA Project on our last call so we will use this opportunity to cover specific goals, schedules and commercialization plans in some detail.

The USDA Project is to detect salmonella in industry relevant large samples. The goal is to dramatically improve food safety and the objective is to build and test prototype commercial systems. The grant is for approximately $600,000 through August 2018. We are proud to win the USDA grant. It is a rigorous review process and lends credibility to our technology. While the grant provides funding, our primary goal is to develop a commercial product, not to make money on the development.

We have deployed talent from other areas of the Company and added new staff. Our Maria Torija, a PhD scientist, is the principal investigator. The primary goal is a yes or no indication of salmonella in less than 20 minutes in 100 milliliter samples. Our proposal compared our technology to existing pathogen detection including ELISA and qPCR. We are projecting advantages in speed which allows producers to catch contamination before food product gets downstream, sensitivity to allow detection of infinitesimal concentrations that could grow and become dangerous, and multiplexing to identify multiple pathogens in a single sample.

We will be building a complex system including next-generation biosensors of course, magnetic nanoparticles, aptamers, which functionalized the nanoparticles to detect bacteria, microfluidic manifolds and cartridges, control electronics and a graphical user interface.

The schedule has many tasks in parallel to wring every day possible out of time to market. There are four major milestones. Milestone one is the design. Milestone two is prototype component scheduled by August 2017. Milestone three is a fully assembled prototype. And finally milestone four by August 2018, includes live pathogen testing to establish sensor sensitivity.

We will collaborate with the University of Florida on magnetic nanoparticles and particle coatings and with the University of Minnesota for aptamers and live pathogen testing. We also expect to use subcontractors with expertise in areas such as microfluidics.

Our commercialization plan initially targets packaged produce such as packaged salads, carrots, spinach, broccoli and kale. This is a significant and fast-growing segment and is an ideal initial target market because fresh produce is highly susceptible to contamination. These foods generally cannot be frozen, cooked, pasteurized or otherwise treated to kill pathogens and they are usually used uncooked or perhaps unwashed. Packaged produce is also an ideal target market because the large producers are geographically concentrated in the salad bowl region near Salinas, California. Once we have prototypes, our plan is to open an office in the region to spearhead sales.

The proposal included a letter of support from a major packaged produce supplier we hope will become our first customer.

We also continue to promote the technology in technical forums. For example earlier this month NVE researchers gave a poster presentation on salmonella detection at the Biomedical Engineering Society annual meeting and we will present a paper November 1 at the conference on magnetism and magnetic materials. There are links to the abstract on the R&D papers and presentations page of our website and on our Twitter timeline.

The Army contract has been selected for award and the Army has said they plan to make the award this quarter. The award would be for approximately $150,000. The project would be to develop a monolithic spin torque microwave diode spectrograph. In addition to defense, the technology could also lead to faster couplers for Internet of Things applications such as remote video. Spin torque also has the potential to improve the efficiency of spintronic memory often called MRAM.

We are also close to completing another government project, a US National Institutes of Health small business innovation research grant titled Advanced Magnetic Pickup Hearing Aids. The grant was for approximately $149,000. Our winning proposal was for advanced magnetic field pickups with the potential to wirelessly link hearing aids with handheld electronic devices allowing highly personalized and environmentally specific sound filtering and amplification in the software or apps. Our principal investigator is Dr. Cathy Nordman.

NIH's SVIR grants are for small businesses that create innovative technologies to improve health and NVE is a leader in hearing aid sensors. There are links to the salmonella and hearing aid project summaries from the In The News page of our website and on our Twitter timeline.

Moving onto governance, our annual meeting was held last quarter for 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.

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. Brian?

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

Thanks for taking my questions. Congratulations on a good quarter. Had a question for you first, Curt, on the two estimated tax payments that you mentioned that impacted free cash flow this quarter. What were the amounts of those two tax payments?

Those payments were a little over $3 million, $3,045,000 to be exact.

Okay. And that is combined?

Yes, that is the total.

Okay. And do you recall what they were last year? Do you have that available?

Yes. Last year, for the first six months income tax payments was $3,240,000.

Okay. Okay. And then, Dan, I wanted to ask you about R&D. So you had a nice pickup here in R&D in terms of the quarter and year-over-year growth. Can you just outline what your average projects typically run in terms of costs for each of those projects just to kind of help us understand? Do you measure the number of projects that you have now versus the number of projects you had a year ago? Any additional color to help us kind of understand the R&D and what is going on here?

Sure. So we track the projects very closely. We track schedules, we track budgets and results and we have a list. We probably have what maybe six to nine significant projects going on now and they vary in duration and scope. Some of them are incremental improvements, new and improved products. For example, we talked about a project last quarter that was an ultralow power, the one that we demonstrated with the blueberries which was using a different range of tunnel junctions. That project came from conception where the customers were asking for it to product realization within one quarter which was a great result and great turnaround time by our development team.

So that would be a short project. And then long projects can be as you know many years. So we have a range of them but all of them are tracked and we track them, depending on the project, we track them at least weekly to check the progress to look for ways that we can speed up the projects and to make sure that we are on track for hitting the goals and that they're going to be successful when they reach the market. But they are going to address the market need that we identified.

Okay. That is very helpful. Some companies I deal with they throw out a metric or measure they call it vitality index, the amount of revenues that the company is recording from projects that were launched over the last couple of years. Do you have a vitality index type of metric or one that you measure kind of measuring the amount of revenues that you are currently realizing from projects that were recently completed? Or any thoughts that you have if you don't have a specific metric in terms of the bang for your buck if you will that you are getting from your R&D pipeline?

Right, so that is a great question. We do measure, we track our projects and we justify our projects based on the shareholder value added. So that takes into account the contribution margin, the additional profits that we are going to reach from those projects against the expenses and taking into account the time value of the money.

We found that tracking projects as you noted that many companies do track what percentage of their revenues are from newer products and we don't track that directly because our products are so unique and in many cases so far ahead of their time that they have very long product cycles. So we continue to sell products that we introduced in the year 2000 or before. And so we are trying to make sure that our products have very long lives and that they have substantial advantages over incumbent technologies that can be sustained over a long period of time. So that is different than many companies where their products are inherently susceptible to being obsoleted by their competitors' products or by new technology, things like memories where commodity memories where the density will double every year or two and so that product that once introduced will be obsolete in a relatively short period of time.

Our products are much higher value than that and have a much more unique technology content so we look for other metrics to see how we are doing.

We track customer design wins. I wouldn't be able to cite specific metrics for you but we do track that. We track things like indirect metrics like hits on social media or on our website and the design win cycle of new products to see if we are meeting our customer needs and if the products are being successful in the marketplace.

Okay, that is great. I'll look forward to chatting with you a little more off-line on that one.

And then turning to this quarter's performance, it was really a nice uptick from the previous quarter and kind of the trends you have been seeing over the past couple of quarters. Was there anything anomalous within product sales this quarter that you would attribute the strong performance to or is this a number that you feel is sustainable for awhile? Or how should we view this $6.8 million number in product sales this quarter?

Yes, we hope to continue the sequential growth in product sales. In contract R&D we are looking roughly same range as we had in the second quarter. No guarantees of course but we have had some new customers and we feel that for the remainder of the fiscal year, we are expecting that product sales will be -- will have a sequential increase.

Okay, that is great. And then I know you kind of embarked a couple of quarters ago on a new pricing strategy. Do you feel that some of these customer wins that you got this quarter were attributed to that new pricing strategy or do you feel that you would have got those wins either way or any thoughts that you have on the pricing strategy impacts to the results this quarter?

We are pleased with the way the pricing strategy is working and we have had some specific design wins that we wouldn't have had, that we don't believe we would have had with the old pricing. And in particular, we were looking at price-sensitive markets in Asia, China in particular where we got some significant design wins or at least design wins that have excellent potential. And we also had some success with some high-volume contract manufacturing designs where those can tend to be price sensitive and in particular some of the areas where our relatively new distributor, America II, specializes in that area and we have supported that where it makes sense with more aggressive pricing. And they have done a great job and we have seen some wins there and we believe there is potential for more.

Okay, great. And then just a couple more here for me. In terms of the end markets, can you characterize kind of how you thought the semiconductor customer's purchasing patterns were this quarter and maybe on the medical side, any trends that you saw there this quarter from those two segments?

Just subjectively, I think we are seeing a challenging market in the semiconductor industry. The semiconductor industry as a whole was down last year and is expected by many analysts to be down again this year, this calendar year and that gives us some headwinds. But there are markets such as the Internet of Things that continue to grow and we have been focusing there.

In the medical market, there are challenges with implantable medical devices, CRM, cardiac rhythm management, which is a market where we have a very strong position as you know has been under pressure in recent years. The long-term demographics are favorable for CRM devices. As the population ages, more of us are going to need things like pacemakers, ICDs and hearing aids. So that is a good business trend even if it is not a good personal trend.

And our technology has a strong benefit proposition in CRM. We are gaining traction also in the broader neurostimulator market and that market has been growing fairly well. There are some exciting new therapies that are coming out in deep brain stimulation and neurological stimulation to treat neurological disorders. So we have seen some areas of strength and we have been focusing on those and focusing our innovation and our new product development strategy in those faster growing markets.

Okay. Thanks for the additional color. I will jump back in queue. Thank you.

(Operator Instructions). Jeff Bernstein, Cowen Prime Advisors.

Thanks for taking the questions. Could we get an update on what is going on in [bricks]? And if you are making any kind of progress in the PUF market?

Right, so on PUFs, PUFs refer to anti-tamper devices for folks who aren't familiar with that. And there we have continued to do some contract research and I mentioned the project that is related to spin torque devices for the U.S. Army that we are hopeful of having approved this quarter that uses technology relating to that. And we continue to work on the broader category of anti-tamper technology to protect sensitive electronics. And that is an area where we have a significant technology advantage over existing technologies. Our technology is inherently nonvolatile and therefore difficult to defeat through changing power or trying to cut the wires if you will.

The first part of your question relating to you said brick -- meaning?

Jeff Bernstein

Power supplies.

Oh, yes. So we sell couplers in particular for switch mode power supplies which are getting smaller and smaller. So they used to called bricks. We are down to small fractions of a brick. And our devices help make those types of switch mode power supplies smaller and smaller by allowing the information to get back from the output to the input to regulate those supplies. And we have several customers that are using those devices and we continue to work on lower power more efficient couplers that are targeted in part for those types of markets to improve the efficiency.

So those are devices that are ubiquitous. They are used for phone chargers, for computer power supplies in chargers and they use a lot of power in the world. And saving even a little bit of that gets multiplied through by many, many devices. So we are working on more efficiency in those markets so that our devices even for power supplies that might be rated in the several amp range and our device are using in the milliamp range but even reducing that amount of power improves the efficiency and can make the world a little bit greener.

So we are working on that. We don't have any specifics to talk about on those products but when we were talking about all of the new products that we have, one of them is an ultralow power coupler that would be ideal for those types of brick power supply fractional brick power supplies and they would be using tunneling elements as opposed to giant magnetoresistance elements to reduce the power consumption and improve the efficiency. Those are the same types of elements that we use in the ultralow power sensors and our goal is to extend that technology to couplers.

Great. And then I know you have had some efforts around electric vehicle drives. Can you talk about that?

Yes. So in particular on hybrid electric vehicles, we have been focusing on battery management systems and the challenge of getting the information from the batteries to the central control systems to manage the battery efficiency better. So just like in gasoline engines where the more sophisticated computers allow more efficient engine management to wring out every bit of fuel efficiency possible. In hybrid electric vehicles, the analogy is to manage the batteries better. And it is a challenge to get that information back to the central control system because those battery systems can be several hundred volts and our couplers allow us to transfer that information very efficiently and without a direct electrical connection which would damage the control electronics.

So we have introduced new products that are geared for that market and that is another excellent market for the low-power technology couplers that I was talking about a minute ago because just like on the bricks in hybrid electric vehicles, one doesn't want the power management system to use any more power itself than is absolutely necessary.

So that is an area that we see as having excellent potential and we see the potential for a very good growth rates. While we are starting from a relatively small base in a hybrid electric vehicles, I think a lot of experts are expecting much more penetration from those types of vehicles in the coming years.

Do you have any design wins at this point there or are you still working with people?

We are working with people. We have some design wins on non-automotive things like buses and we have some design wins in the automotive industry but we are still hoping to win those designs under the hood as they say actually in the cars and that is an area of continued focus for us. But we are continuing as we continue our sales efforts we also continue to improve our products to improve the efficiency and strengthen our benefit proposition in an industry that is becoming more and more obsessed with energy efficiency.

And then lastly, it seems like we are seeing more and more spintronic-based technologies out there. Do you guys have anything actively going on right now in terms of protecting some of your IP?

We are very vigorous as you know, Jeff, on protecting our intellectual property. We seek patents, we enforce those patents when necessary. We protect our intellectual property as trade secrets and we do a lot of work to make sure that our intellectual property is protected as trade secrets, patented where appropriate and patented in the countries where it might be important.

So that is an ongoing thrust that we have and I think we are pleased with our intellectual property position in key areas and in various areas of spintronics including memory, couplers, sensors and some of the underlying platform processes that go across different product lines.

Great. Thanks very much.

Charles Haff, Craig Hallum.

Thanks for taking my follow-up question. Dan, I was wondering if we could get an update on commercial partners, how some of the conversations are going on the salmonella and Listeria pathogen detection program. Have you had many discussions there? Anything you can do to help characterize that for us?

Well, we have had discussions and we want to make sure that the program that we are working on with the USDA, the USDA NIFA is going to be industry relevant and that is where we got a lot of the feedback relating to how large the sample sizes should be, the flow rates that we would need, the time frames that we would need. The metrics that I cited in the prepared remarks, 20 minutes for 100 milliliters, the 1 millimeter, the 1 liter -- excuse me -- per minute flow rate that I didn't mention in the prepared remarks but that is part of our targeting specifications. Those were generated with feedback from industry leaders.

And I also mentioned that we do have a letter of support, we had a letter of support in our winning proposal from a leading food producer and we hope that they will become our first customer. But we have had conversations with other prospective customers as well. So this is a program where we need close cooperation with the food producers and we have had that.

That is one of the great things about the USDA grant processes is that they help facilitate those types of contacts and the USDA grant lends credibility to our approach. And we have also as you know had a successful phase one program which demonstrated feasibility on a smaller scale. So all of that builds our credibility in the industry and we continue those industry contacts and we hope that those contacts will become more important as the program proceeds of course.

Okay. And then in terms of investors looking from the outside at this program and what you are doing there, what 0kind of milestones are you looking for or what kind of tangible news are you kind of hoping to share? I don't want you to get too ahead of yourself but I am just wondering is this something that we could be sitting a year from now and be hearing that you have a program launched with a food company or is it going to be kind of beyond that? Any kind of help you can give us to kind of hone in on what we should be focused on here because it is always a little bit hard to kind of put these into context when they are in the early stages?

Yes, I understand and we would like to get this into the market as quickly as possible and we designed the schedule to wring every day possible out of time to market. The main milestone is August 2018 which is live pathogen testing on fully assembled prototypes that would establish that the technology works and that the sensor meets the sensitivity requirements.

We have a number of other intermediate milestones so that it is not that we are going to just be putting it together and then August 2018 we see if it works or not. We will get indications along the way. We have an aggressive schedule. Our goal is to have the prototype components by August 2017 so that is of course less than a year and we have the program very tightly scheduled.

We are also as I mentioned in the prepared remarks, the implication was that we are liable to spend quite a bit more than the grant amount on this project. We are not looking at it as a way to make money on a grant. We are looking at it as a way to facilitate a commercial program so we are willing to make investments in that and we are willing to invest in advance. So for example, we mentioned that we have added staff. Some of those folks are working on tasks that aren't in the critical path yet. But we want to make sure that we are done in plenty of time with things like the electronics of it when the sensors are ready, we are ready to test them.

So we are looking at that saying we are not trying to do this as cheaply as possible, we are looking to do it as fast as possible and to maximize our chances of success in the commercial marketplace.

Okay, great. That is very helpful. Thank you very much.

There are no further questions in the queue so at this time I would like to hand the call back to Daniel Baker, President and CEO, for closing comments and remarks. Sir?

Thank you. We were pleased to report solid year-over-year and sequential increases in product sales and an important government biosensor development grant. We look forward to speaking with you again in January to report this quarter's results. Thanks again for participating in the call.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.