NVE Corporation
Q4 2014 Earnings Call Transcript

Published: 8 May 2014

[Operator:]

Good day, ladies and gentlemen and welcome to the NVE conference call on fourth quarter and fiscal year results. [Operator instructions.] I’d like to turn the conference over to your host, Mr. Daniel Baker, president and CEO. Sir, you may begin.

[Dan Baker:]

Good afternoon and welcome to our conference call for the quarter and fiscal year ended March 31, 2014. 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 review financials for the quarter and fiscal year. I’ll cover business items, and we’ll take questions. We filed our press release with quarter and fiscal year results with the SEC prior to the start of this call. The release and filings are available through our website. The SEC allows 75 days after the end of a fiscal year to file a 10-K. We’ve often been able to file the day of the press release, but that wasn’t practical this year, because we have new auditors. 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 and growth, uncertainties related to future R&D contracts, risks related to developing marketable products, uncertainties relating to the revenue potential of new products, as well as the risk factors listed from time to time in our filings with the SEC. The company undertakes no obligation to update forward-looking statements we may make. We’re pleased to report solid earnings for the quarter and fiscal year. For the quarter, net income was $0.53 per diluted share. For the fiscal year, product sales increased 4%, gross margins increased to a record 78%, and net income was $2.29 per diluted share. Now, I’ll turn the call over to Curt for details of our financial results.

[Curt Reynders:]

Thanks, Dan. I’ll cover quarterly results, fiscal year results, and the balance sheet. Fourth quarter total revenue decreased 17% to $5.98 million, due to a 9% decrease in product sales and an 85% decrease in contract research and development revenue. Contract R&D revenue decreased due to the completion of certain contracts and contract activities in the past year. It has been a challenging environment for government funding, but contract R&D revenue increased about $100,000 sequentially, as we began a new contract in the fourth fiscal quarter. We are optimistic about future contract R&D revenue. The decrease in product sales was due to decreased sales in the medical device market. This appears to be related to order timing and indications are for improved sales in the medical device market in coming quarters. Gross margin increased to 77% of revenue for the fourth quarter of fiscal 2014, compared to 74% last year, due to a more favorable revenue mix. Total expenses increased 2% for the fourth quarter of fiscal 2014 compared to the fourth quarter of fiscal 2013. A 9% increase in research and development expenses was partially offset by a 9% decrease in selling, general, and administrative expense. The increase in R&D expense was due to increased product development efforts. The decrease in SG&A was primarily due to less commissions with lower product sales. Interest income decreased 5% for the quarter, due to lower interest rates. The provision for income taxes was about the same rate as the prior year quarter, 32.9% of income before taxes compared to 32.8% last year. Net income for the fourth quarter was $2.56 million, or $0.53 per diluted share, compared to $3.11 million or $0.64 last year. Our margins continue to be among the best in the industry. Operating margin was 55% of revenue for the quarter and pretax margin was 64% and net margin was 43%. Despite ups and downs in the industries we serve, this was our 48th consecutive profitable quarter. That’s every quarter for 12 straight years. For the fiscal year, total revenue decreased 4% to $25.9 million, compared to $27 million for the prior fiscal year. Product sales increased 4% for the fiscal year to $25.5 million, compared to $24.4 million for the prior fiscal year. Our geographic revenue mix moved slightly towards more international revenue. Foreign revenues were 57% of our total, compared to 56% in the prior year. Contract R&D decreased 84% for fiscal 2014, due to the completion of certain contracts and contract activities and a challenging budget environment for government contracts, including federal budget delays and sequestration. Gross profit margin for the year increased to 78%, the highest in our history, compared to 74% last year. The increase was due to more favorable revenue and product sales mixes and more efficient product manufacturing. Total expenses increased 21% for fiscal 2014, compared to fiscal 2013, due to a 39% increase in research and development expense to $3.59 million. SG&A was flat for the year. The increase in R&D expense was due to increased product development activities and a decrease in contract research and development activities, which caused resources to be reallocated to expensed R&D activities. In addition to R&D expense, we report customer and company sponsored R&D spending at fiscal year-end. The total of customer and company sponsored R&D activities was $3.93 million in the past fiscal year or 15% of revenue. Over the past three fiscal years, the total is $13.4 million, which is a significant investment in our technology. Dan will talk about some of the results of our R&D investments. Interest income decreased 10% for the year because of lower interest rates. The provision for income taxes was about the same as last year, 32.6%. Net income for fiscal 2014 was $11.1 million, or $2.29 per diluted share, compared to $11.8 million or $2.43 per share for fiscal 2013. For the year, operating margin was 55% of revenue. Pretax margin was 64% and net margin was 43%. As we have throughout our recent history, we continue to significantly outperform our industry on key metrics. According to Standard & Poors Compustat, NVE’s gross margin is in the 99th percentile of the semiconductors and semiconductor equipment industry and operating and net margins are in the 100th percentile. Turning to our balance sheet, we ended the fiscal year with our balance sheet stronger than ever. As of March 31, cash plus marketable securities was $95.6 million, an increase of $10.4 million in the past year. We also returned cash to shareholders by repurchasing $1.26 million of our common stock. The stronger balance sheet and stock repurchases were possible primarily because of $12.4 million of operating cash flow, what we formerly called net cash provided by operating activities in the past fiscal year. Purchases of fixed assets were $161,000 for the fiscal year compared to $1.82 million for the prior fiscal year. The prior fiscal year investments were primarily related to a major expansion. With the completion of the expansion, purchases of fixed assets were historically low the past year. This year, they could increase to the historical range. Shareholders’ equity, which is our assets minus liabilities, increased to $103.7 million, our highest ever. This added another digit to our balance sheet columns and is evidence of how much NVE has increased shareholder value over the years. When Dan and I joined NVE in 2001, shareholders’ equity was about $2 million. Our annual report will summarize financials for the past five years. Some highlights

[Dan Baker:]

Thanks, Curt. I’ll cover R&D contracts, intellectual property, product development, distribution and governance, then review some of our accomplishments in the past fiscal year. As we’ve discussed before, our growth strategy is new and improved products in the near term and game-changing extensions for the long term. We have significantly increased our R&D expenses the past three fiscal years to build a foundation for a bright future. Contract R&D supports long term growth with bold new ideas such as biosensors. We’re on schedule to successfully complete a one-year National Science Foundation project grant titled “Real Time Detection for Salmonella.” The project is to develop biosensors for enhanced food safety in cooperation with the University of Minnesota and the University of Florida. The goal of the project is to develop sensors for faster detection of food-borne pathogens compared to existing techniques while retaining sensitivity. In the past quarter, we made good progress in each of the three key areas of that project, spintronic sensors, nanobeads with aptamers, and microfluidics. We’re in discussions about commercial deployment with leading companies in the food industry, and we’re also considering applying for a Phase II NSF grant to help commercialize the technology. As Curt mentioned, despite a challenging government funding environment, we have a new contract in the past quarter. We began work on a Missile Defense Agency small business innovation research phase one contract titled “Spintronics-based Physical Unclonable Functions.” The contract is for six months, with an estimated completion of July 31, 2014. The contract is for approximately $125,000. A physical unclonable function, or PUF, is a function that’s embodied in a physical structure and is easy to evaluate, but hard to predict and replicate. The proposal is for spin PUFs based on existing and future spintronic devices. Possible applications include commercial high speed encryption and internet security. A committee of government scientists, engineers, and technical managers recommended our proposal as a promising approach for the MDA. Our principal investigator is Dr. Joe Davies, who is a recognized expert on anti-tamper technologies. There’s a link to an abstract approved by the MDA for public release from the “In the News” page of our website. In the past quarter, we continued work under a cooperative research and development agreement with the U.S. Navy Surface Warfare Center Crane division for assessment of anti-tamper sensor technologies. Although the agreement does not provide revenue for us, it demonstrates our anti-tamper capabilities and lays the groundwork for future Department of Defense related contracts. Turning to patents and intellectual property, in the past quarter, we received a notice of allowance of a patent titled, “Magneto-resistive based mix anisotropy high field sensor.” A notice of allowance is a written notification that a patent application has been examined by the patent office and is nearing issuance. The application was also recently published, and there’s a link to our published applications from our website. This is a clever invention by Dr. Joe Davies that could have applications in consumer compassing, medical devices, and other areas. Our 6744086 patent was reissued yesterday as RE44878. The patent is titled “Current switched magneto-resistive memory cell,” and the patent concerns spin momentum magnetic memory cells. We consider it one of our particularly important patents. Spin momentum memory, also called spin transfer or spin transfer torque, is a type of MRAM that uses spin currents rather than magnetic fields. This could significantly reduce MRAM write currents, especially with small lithographic feature sizes. We believe this is one of our particularly important patents, and the reissue adds claims and improves the patent. There are links to the allowed and reissued patents from our website, nve.com. In early April, we settled litigation with Everspin Technologies, an MRAM manufacturer. Each party agreed to dismiss its lawsuits filed in 2012 and not assert the patents in either suit against the other party in the future. So the patents Everspin asserted against us cannot be asserted in the future. The agreement is limited to the patents asserted in the 2012 lawsuits. We have many other more recent MRAM patents such as the reissued patent I just mentioned and others related to spin momentum, cross-point, and magneto-thermal next-generation MRAM. Turning to product development, we developed two improved products in response to customer demand

[Operator:]

[Operator instructions.] And I am seeing no questions from the phone line.

[Dan Baker:]

Okay. Well, if there are no questions, we can wrap up the call. We are pleased to report solid earnings, product sales growth, and record gross margins for the year and several new products. We look forward to reporting first quarter results in July and to our annual meeting in August. Thank you for participating in the call.