NVE Corporation
Q4 2016 Earnings Call Transcript

Published: 4 May 2017

[Operator:]

[abrupt start] Quarter and Fiscal Year Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Mr. Baker, President and CEO.

[Daniel Baker:]

Good afternoon and welcome to our conference call for the quarter and fiscal year ended March 31st, 2017. 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 and year, I’ll cover the business and governance items, and we'll open the call to questions. We issued our press release and filed our Annual Report on Form 10-K in the past hour following the close of the market. Links to documents are available through the SEC’s website or our 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 our reliance on several large customers for a significant percentage of revenue, uncertainties related to the economic environments and the industries we serve, uncertainties related to future contract, research and development revenue, as well as the risk factors listed from time-to-time in our filings with the SEC including our just filed Annual Report. The company undertakes no obligation to update forward-looking statements we may make. We're pleased to report solid results for the past quarter and fiscal year for the quarter, 23% increase in product sales which drove a 12% increase in total revenue and a 16% increase in net income. For the complete fiscal year, product sales increased 7%, total revenue increased 2% and earnings per share was up 6%. Curt will cover the details of our financial results and other highlights from our just filed Annual Report. Curt?

[Curt Reynders:]

Thanks Dan. As Dab said fourth quarter total revenue increased to 12% year-over-year from the fourth quarter of last year due to a 23% increase in product sales, partially offset by a 49% decrease in contract R&D revenue. The product sales increase was due to new customers and increased sales to existing customers and was our third consecutive year-over-year increase. The contract R&D decrease was due to completion of certain contracts. Even though revenues increased, costs and expenses decreased. Gross margin increased to 79% of revenue for the fourth quarter of fiscal 2017 compared to 76% last year and expenses decreased 1%. Interest income decreased 17% for the fourth quarter due to a decrease in interest-bearing marketable securities. Income before taxes increased 19% to $4.46 million for the quarter compared to $3.75 million for the prior year quarter. Pretax margin for the quarter was 65%. After-taxes net income for the fourth quarter increased 16% to $3.03 million or $0.62 per diluted share compared to $2.6 million or $0.54 last year. Net margin for the quarter was 44%. For the fiscal year, total revenue increased 2%, driven by a 7% increase in product sales, partially offset by a 35% decrease in contract R&D. With year-over-year revenue increases in the last three quarters of the fiscal year which more than offset a decrease in the first quarter. For the year, we report revenues in four regions, the U.S., Europe, Middle East and Africa or EMEA, Asia-Pacific and the rest of the world, which is North and South America other than the U.S. In the past year, Asia-Pacific was very strong with a 35% revenue increase. This appears to be at least partly because of our more aggressive pricing strategy. United States increased 10% and 11% for the rest of the world. These increases more than offset weakness in EMEA, which was down 16% for the year. EMEA may undergo a cyclical recovery, but in any case, we're working with our distributors in the region to launch new products and target new markets. Gross profit margin for the year increased to 79% compared to 76% last year due to a more profitable revenue mix. We were able to hold total expenses about the same in the fiscal year with a 17% decrease in SG&A expense more than offsetting a 9% increase in R&D. R&D expense was 12% of revenue in the most recent fiscal year, up from 11% the prior year. The increase in R&D expense in the year was due to new projects including Internet of Things or IoT endnotes smart sensors, which are an important element of our growth strategy. In addition to R&D expense, at fiscal year-end, we report customer and company-sponsored R&D spending. The total customer-sponsored and company-sponsored R&D activities was $4.83 million in the past fiscal year, which was more than 17% of revenue. The decrease in SG&A was primarily due to decreased sales commissions. The decrease was despite a revenue increase. This was because we've adjusted our commission plans and much of the growth was in regions and product lines where we don't pay commissions. Interest income decreased 13% for the year as we used some of the proceeds from maturating securities to help fund dividends rather than reinvesting in interest-bearing securities. Net income for the year increased 5% to $12.9 million or $2.68 per diluted share compared to $12.3 million or $2.53 per share last year. Income per share increased 6%, in part because stock repurchases in the prior year decreased weighted average shares outstanding. Cash provided by operating activities was $12.4 million in the year. Fixed asset purchases were $520,000 for the year, which was significantly more than either the prior two years. Investments were primarily to speed product development, increase production capacity to support future growth, improve our production efficiency, and provide redundancy for reliable production. We continue to have best-in-class performance metrics for fiscal 2017 compared to fiscal 2016, gross margin increased from 76% to 79%, operating margin increased from 59% to 62%, and net margin increased from 44% to 46%. According to Standard & Poor's compustat, NVE's gross margin is in the 98 percentile of the semiconductors and semiconductor equipment industry and operating margin is in the 100 percentile. Recent rankings by the Minneapolis-St. Paul Business Journal ranked NVE first in Return on Revenue among Minnesota's largest public companies. For the fiscal year, we paid $4 per share or $19.3 million in dividends. Additionally, we announced today that our Board declared $ per share quarterly dividend to be paid May 31st. Despite providing one of the industry's highest dividend yields, we continue to have a strong balance sheet. As of March 31st, we had $84.6 million in cash plus marketable securities. As we've discussed before, our capital allocation strategy has included an aggressive dividend payout ratio to return a portion of our balance sheet and enhance shareholder value. We reported the five-year performance of our stock in our just filed 10-K. Total shareholder return with appreciation and dividends was 82% for five years more than double the return of an index we report the SmallTimes Index of Companies Involved in Micro-and Nanotech. Our total shareholder return was 55% in the past fiscal year, driven by a large increase in our stock price and significant dividends. Our stock also hit two all-time highs in the past quarter. Now, I'll turn the call back over to Dan for his perspective on our business. Dan?

[Daniel Baker:]

Thanks Curt. I'll cover new products, contracts, partnerships, and fiscal year highlights. As we've said before, our long-term product strategy focuses on bold new technology such as biosensors. There are two class [ph] of our near-term growth strategy. First, new and improved products, particularly smaller and lower power devices for the Internet of Things; and second, more aggressive pricing to open new markets. We recently introduced three new and improved products; first, a Low-Field Angle Sensor, its high sensitivity means the part can operate with inexpensive magnets and wide mechanical tolerances, which reduces the cost of deployment and opens new applications, applications include motor controls and Internet of Things and nodes. Like most of our Angle Sensors, the new part is extremely low power and can run on a button cell or harvested energy. The second recent new product is a new Spintronic Magnetometer Sensor build as the world's smallest high-performance integrated circuit analog sensor. It's ideal for current sensing motor controls to improve efficiency. The third new product is the world's smallest high performance isolated network transceiver. It's 10 times faster than our previous products in the so-called the quarter-size outline package or QSOP form factor. The QSOP is one-fourth the size or less of a conventional isolated network transceiver. The new devices are targeted at high-end Industrial Internet of Things or IIoT. As we discussed on several of these calls, our pricing strategy is more nuance than simply cutting prices on existing products. Our strategy is to listen to price-sensitive customers and design products with specifications that meet their needs, that way we add business and broaden our benefit proposition rather just cannibalizing existing business. An example of lower-priced product introduced the past quarter is a new coupler called I/O3022 [ph]. That part is a cost-effective transceiver for a popular network standard called RS-422. We have industrial Internet of Things prospects that need lower-cost to allow a large number of nodes but don't require the speed of our top-of-the-line products. There's more information on the new products we discussed on our website. Turning to long-term development, we continue to work on our Department of Agriculture project 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. We're on track for our next major project milestone which is prototype components scheduled for August. We’re working on several system components in parallel to get to market as quickly as possible. We made good progress in several areas in the past quarter including demonstrating some of the critical microfluidic elements. We presented a paper on salmonella detection at the International Magnetics Conference which is a major international conference last week in Ireland. There links to the abstract on the about newspapers and presentations page of our website and on our Twitter timeline. We also presented a paper on automotive applications at the conference. Both of the papers were invited which is an honor for researchers and recognition of the importance of our research. NVE has some tremendous strength in technology and product development. But like most smaller companies, we face challenges distributing our products to a broad market. One way of addressing that challenge is with private brand partnerships with larger companies. NVE can provide innovative products and the partner can provide distribution, sales support and brand awareness. We publicly disclose such a partnership with Broadcom formerly known as Avago Agilent and Hewlett-Packard. And in the past quarter, we successfully qualify parts under a new private brand supply agreement. Our new partner has broad distribution channels including into the automotive market. They also have extremely high quality standards and we’re proud that our parts were qualified to those standards. The new partnership hasn't generated significant revenue yet and they are risks with any new business arrangement but we’re optimistic about the potential. To sum up, fiscal 2017 was a successful year for NVE. In addition to the recent highlights we covered, highlights of the fiscal year included the USDA grant to advance our biosensor technology, a new type of sensor rotation sensors for energy and resource management, angle sensors that use even less energy and less magnetic field and significant progress on smart sensor interfaces for Internet of Things and nodes. Now, I’d like to open the call for questions. Alex?

[Operator:]

[Operator Instructions] Your first question comes from the line of Charles Haff of Craig Hallum. Your line is open.

[Charles Haff:]

Hi, guys. Can you hear me, okay?

[Daniel Baker:]

Absolutely. Good afternoon, Charles.

[Charles Haff:]

Hi. I had a first question on your last comment there about the private label and the new partner in the automotive market, when you think about the private-label business and the resources that you're putting forward they are being asked to put forward would you envisioned that the private-label business could be a material part of your future here a couple years from now any help you could give us on kind of quantifying that based on the resources that you're putting there today?

[Curt Reynders:]

Yes, Charles. I think long-term; we see that as it potential having a material impact on our revenues. In the near-term over the next fiscal year, we expect a modest revenue, but as we ramped up with what you see as excellent potential there.

[Charles Haff:]

And as you think about the private-label business what do you think the financial profile how does it differ from the financial profile that you have today there are gross margin or operating margin whichever kind of metric you want to think about?

[Daniel Baker:]

Charles. This is Dan. So what we look at is the private brand partner has to sell through their distribution channels, so they need additional discounts in order to make a fair profit for everybody, but for us it means less customer facing cost. We don't have to support the product sales, we don't have to do the presales support, the post-sales support to the extent that we would if the part were sold under our brand. So we feel that it can be a solid profitability for us, but perhaps not the same kind of gross margins that we can get on products that we sell ourselves, but also their lower expenses associated with it. But more importantly, what we see is an opportunity to open up broad new markets long-term as Curt mentioned that would be very difficult for us to get into by ourselves under our own brand because of the of the large costs involved in getting into certain markets such as the automotive market. So this company has much of those structures, those structures already in place, there incremental costs in order to sell into for example the automotive vertical are much lower than ours would be. So we looked at it as a win-win for us, for the partner and of course for the ultimate customers.

[Charles Haff:]

Yes, let apply strategic sensors just trying to understand maybe more of the operating margin when you strip out the selling expense, do you think that the operating margins on those private-label automotive customers will be similar to the operating margin that you have today or they will be a little less because you're getting more volume level?

[Daniel Baker:]

They will be a little bit less because of volume -- our gross profit will actually go down, we won’t see the same level of 79% gross margins [indiscernible]

[Charles Haff:]

Okay. Thank you. And then I was wondering if you had any update on the project with the National Institutes of Health and Hearing Aid Program, the wireless hearing aids to our smart phones? I think you mentioned on the last call, the feasibility study went well, what kind of the progress have you made there since the feasibility study?

[Daniel Baker:]

So, we’re continuing to work on those types of sensors that are very low field sensors that can detect fields from magnetic communication modes and we see some excellent potential for that not just in the hearing aid market itself, but in a myriad of markets and applications that require extremely sensitive devices. So, we see it as a research program, but it built some technology and demonstrated feasibility, noise figures and sensitivity levels that we've shared with perspective customers. So we see some potential for business there, but also we were pleased with how it provided a platform technology for us that we can extend in a number of directions.

[Charles Haff:]

And so do you have any milestones that you expect to be communicating with us in the future on that or most of that internal at this point?

[Daniel Baker:]

We will share milestones or accomplishments if we can, the government contract was as you noted successfully completed the feasibility study with the National Institutes of Health. So there isn't much to report there, if the report becomes a public we can share of that. It will be mostly a technical type of report. And then of course, if there are products that results were customers, we would like to be able to share that as well.

[Charles Haff:]

Okay. Thank you. And then in terms of product sales for this quarter, your results came in a little bit lower than we were expecting, you mention the pricing strategy in Asia and the flexible pricing strategy, how much factor do you think price had in this quarterly results? Were you pleased with were your pricing discussions came out or did you see more pressure on pricing this quarter?

[Daniel Baker:]

I think, we were pleased with the quarter overall. We expect the product sales will increase this current quarter year-over-year of course that was compared to a relatively weak quarter a year ago and perhaps even an increase sequentially against a relatively strong quarter we just reported.

[Charles Haff:]

Okay. And I know that some of your contract R&D ends up converting to product sales, do you have a sense for how much of a leading indicator contract R&D on next year's product sales, is it is a pretty tight relationship or is it is a very loose relationship there ?

[Daniel Baker:]

It’s a bit more indirect Charles because sometimes the contracts we just talk about the contract for example with NIH that wasn't directly linked to a particular customer. Sometimes we have contracts with potential customers where were being paid for development in another products that result from that contract we have a clear path to selling them. So, I am not sure it would serve as a is a very good indicator our contract R&D is less than it’s been in some quarters, but that gives us an opportunity to devote more of those resources to internal R&D. So, we've been doing that and that allows us develop new products we talked about three of them in the prepared remarks and we’ve got a number of initiatives underway including the Internet of Things interface that I see. So we can use some of that R&D to develop products that have relatively near-term prospects.

[Charles Haff:]

Okay. And then my last question is on the salmonella project so sounds like that's moving along well in and on track for August 2017 for the prototype components to be finished. What happens after that I think that you are still a couple years away from commercialization but can you just kind of remind us of what other milestones will be coming up there?

[Daniel Baker:]

So, after the prototype components milestone which is scheduled for August, we have a fair amount of testing that were going to be doing in vitro testing which would be with -- without salmonella and then eventually testing with live salmonella which we are going to be doing in conjunction with labs at the University of Minnesota which are set up to handle pathogens. So we’re going to be then characterizing the sensitivity of the device, it’s selectivity and other biological parameters and those of the major tasks that we are going to be doing with the prototype components. We also have some system integration work to turn these components into a commercial system with the user interface, with computers and with the flow and plumbing fixturing to handle the high volumes that we need for a viable commercial system.

[Charles Haff:]

And then in terms of the vitro testing, how long would you expect that process to take?

[Daniel Baker:]

Well after the project milestones in August, we have about another year to run which is the variety of tasks including the vitro testing then the live bacteria testing, I don't think we have milestones broken out separately but those are some of the tasks that we have and then the tasks relating to system development and user interface as well.

[Charles Haff:]

And then just a follow-up there, do you expect to have commercial discussions during this time or is it your sense that any commercial partners would want to wait until you have all these steps done before they would start having more discussions with you?

[Daniel Baker:]

No, we can have commercial discussions before were done and we’re having them now and we’ve had them in the past, so having actual prototypes and having data gives us a more powerful benefit proposition for perspective customers, but we've had expressions of interest from potential commercial partners, customers for the devices and they are helping us providing advice and we hope we'll be potential customers for the first systems.

[Charles Haff:]

Okay, great. Thanks for taking my questions.

[Daniel Baker:]

Thank you, Charles.

[Operator:]

Your next question comes from the line of Jeff Bernstein of Cowen Advisors. Your line is open.

[Jeff Bernstein:]

Hi, guys. A couple questions for you. Wanted to see if there was any update on the Switch-Mode Power Supply business that you're trying to develop?

[Daniel Baker:]

Yes, so we continue to develop devices for Switch Mode Power Supplies. We have customers in that market that take advantage of the extremely small size and low power consumption for high efficiency of our devices. So, some of the extensions that we're making or those product lines are higher voltage. So, these allow for more safety and meeting more rigorous safety standards in both commercial systems and things like medical instrumentation, which have very rigorous standards as you can imagine. So, we've been working on extending our line of what's called Reinforced Isolation. These are devices that have isolation voltage is up to 6 kilo-volts, which is an extremely high voltage for very small parts. And then on other fronts we're working on lower power devices so that we're using less of the power that can be transmitted to -- that can be used by the target devices. There are more and more efficiency standards and power efficiency is becoming almost an obsession in that market. So, it's become an obsession of ours and part of our development thrust are to make these devices lower and lower power and then we're making them smaller. So, those are the areas that we're working on making them smaller, more power-efficient, and more rugged for higher isolation voltages.

[Jeff Bernstein:]

And then I guess you doing similar things in the electric vehicle drivetrain area, can you say anything about that?

[Daniel Baker:]

So, in that area we're looking at controller area network, transceivers. That's an area where the private brand partnership that we talked about could be important. This is a partner that has a strong presence in the automotive market and there's a good deal of interest in more networks for hybrid electric vehicles as well as conventional vehicles. And our devices provide a very rugged interface, very low power, which is particularly important for hybrid electric vehicles. You want to manage the power consumption to make vehicles more efficient, but you don't want to use up power by doing that. So, those are -- that's a vertical that's -- that looks very promising for us.

[Jeff Bernstein:]

And then can you give an update on the Spin-Torque Microwave Diode Spectrograph for the Army, I guess, it was?

[Daniel Baker:]

Yes, so that's a program that's ongoing and that's a little bit longer term. Spin-Torque Diodes are an amazing piece of technology. They have the potential to be incredibly fast. Some of the speeds that our guys are talking about are just amazing. And that's of use to the military, which is funding this contract -- the development contract, but also in other areas -- in commercial areas and things like 5G networks, which are going to need much faster electronics and also in our isolator technology where we're looking at the potential to have couplers or isolators that could run at video speeds which are in the gigahertz range or even beyond. So, it is a longer term project, but it has some excellent potential for extending the speed of the devices that we make as well as the potential market in the defense -- in defense.

[Jeff Bernstein:]

And can you say anything about the developments in the Physical Unclonable Function area?

[Daniel Baker:]

So, the Physical Clonable Functions area used for anti-tamper and crypto key applications and those have defense applications as you can imagine, but also long-term, they have commercial applications for things that require enhanced security and there are a lot of things like that, credit cards, computer links, and we've all heard about or had experiences with what happens when information gets compromised. So, keeping information secure is a thrust of ours. In the relative near-term, we have military and aerospace applications for the technology and in the longer term, it could be extended to commercial and consumer applications.

[Jeff Bernstein:]

Okay. And then I was just curious you mentioned University of Minnesota, I guess, in the latest SIA roadmap, they talk about Spintronics being one of the important ways forward kind of get around the -- some of the Moore's Law issues. And they IC spin [ph] at the University of Minnesota as a sort of Center of Excellence and just wondering what relationship you guys have with them? And if you are working on any kind of fundamental SIA roadmap-type technologies?

[Daniel Baker:]

So, we have -- I guess I would have say we have informal relationships with IC Spin [ph] and with that part of the University of Minnesota and we have formal relationships with other parts of the University of Minnesota. So, I mentioned areas that we're cooperating with them on the salmonella detection and Department of Agriculture project. So, we're cooperating with a couple of areas of the University of Minnesota on those. So, we do cooperate with educational institutions where it makes sense and there are a number of areas where we do that. We've had several programs -- very constructive programs with Oregon State University and also we have a relationship with the University of Florida -- group at the University of Florida for the biosensor product for work on the aptamers and the nano-beads that are an important part of it. So, our folks are very good at cooperating and seeking out industry experts and I think it's a credit to our researchers that we're very desirable partner to work with. We're well-respected in academic circles. The other area that I point out that he has been productive for us is that we have a number of researchers who come from the University of Minnesota and from other top universities around the country. So, we're one of the companies that I think a lot of researchers in this area will would like to work and were pleased that we've been able to get some of the best and brightest who graduated from some of those programs, either of PhD's or post-Doctoral fellows. And so it's a great asset to have a University of that caliber in our backyard.

[Jeff Bernstein:]

And in terms of the kind of more generally applicable Spintronic Technology for future IC development, is that something that you guys are pursuing in addition to the memory avenue or not really, are you are pretty much focused on parts you guys will eventually make?

[Daniel Baker:]

Well, our goal is -- we do we do some very long-term research as you know, but our goal is to keep an eye on commercialization and commercial applications in everything we do. In some cases, we take a long view, but we're not a University, we're -- our mission is to get technology out of the lab, get it built and get it sold. So, in that sense are our focus sometimes is different than Universities, but there's some overlap. But we have a number of programs underway that are longer term that have some just a fascinating applications for Spintronics, platform technologies or underlying technologies that could feed a number of devices and commercial applications.

[Jeff Bernstein:]

Great. And lastly could you just give us a marked update on the medical area? I think you've been strong in Cardiac Rhythm Management and you talked about I guess some inventory in that channel that's accumulated over time, can you just kind of give us an update on what's going on in that area?

[Daniel Baker:]

So, we talked about and filed a contract over that we have a supply contract with Abbott, formally St. Jude Medical. We have other medical customers and some we can talk about, some we can't. But with respect to you asked specifically about the Cardiac Rhythm Management or CRM and of for Abbott's reported that that's been challenging for them, but they're working on new products they said St. Jude said that the acquisition by Abbott would expand their global reach which would help in the long-term as a supplier partner and long-term the demographics are favorable. Our population is aging, many of us are going to need CRM devices, and they can make a remarkable difference in quality of life. So, we feel it's an excellent market long-term. It's been challenging in the relative short-term.

[Jeff Bernstein:]

Great. Thanks so much.

[Daniel Baker:]

Thank you, Jeff.

[Operator:]

[Operator Instructions]

[Jeff Bernstein:]

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Baker.

[Daniel Baker:]

Well, thank you. We were pleased to report a 23% increase in product sales for the quarter which drove strong earnings growth in the quarter and growth in the fiscal year. We look forward to reporting first quarter results in July and to our Annual Meeting, which is tentatively in early Thank you again for participating in the call.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.