Nve Corp (NVEC) Q3 2020 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by and welcome to the NVE Third Quarter Results Conference Call. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker today, Daniel Baker, President and CEO. Please go ahead, sir.

Thank you. Good afternoon and welcome to our conference call for the quarter ended December 31, 2019. 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, I’ll cover new products and design wins, and then we'll 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 our Twitter timeline. 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 risks and uncertainties related to future sales and revenue, risks related to changes in tariffs and other trade barriers, uncertainties related to the impacts of the Federal Tax Reform Act enacted in 2017 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, 2019. The Company undertakes no obligation to update forward-looking statements we may make. We're pleased to report a 9% increase in net income for the quarter, driven by a 3% increase in revenue and a decrease in expenses. Curt will cover details of our financial results, then I'll cover new products and share two new design examples. Curt?

Thanks, Dan. As Dan said, total revenue for the quarter ended December 31, 2019 increased 3%, compared to the quarter ended December 31, 2018. The increase was due to a 3% increase in product sales and a 9% increase in contract R&D revenue. The growth was despite continued weakness in the semiconductor market and a bit of weakness in our medical device market. Semiconductor industry sales decreased 11% year-to-year in the most recent available month, according to the Semiconductor Industry Association. The increase in our product sales included sales of new smart sensors. The increase in contract R&D revenue was due to timing of progress towards contract completion. We hope to have another quarter of year-over-year revenue and net income growth this quarter, the quarter ending March 31st. Expenses decreased 21% from the prior year, due to a 32% decrease in R&D, partially offset by a 22% increase in SG&A. The decrease in R&D expenses was due to completion of certain product development activities. Dan will discuss ongoing and future product development activities in a few minutes. The increase in SG&A was primarily due to staffing changes. We've added more sales and sales support staff. Interest income for the third quarter decreased 3% due to a decrease in the average interest rates on our marketable securities and money market funds. On the strength of increased revenue and decreased expenses, net income for the quarter increased 9% to $3.73 million or $0.77 per diluted share, compared to $3.42 million or $0.71 per share for the prior year quarter. The $1 per share or $4.85 million dividend this past quarter brought our total dividends paid to more than $100 million since we began quarterly dividends in 2015. Additionally, we announced another quarterly dividend today, payable February 28th to shareholders of record February 3rd. For the first nine months of the fiscal year, total revenue decreased 8% due to a 7% decrease in product sales and a 14% decrease in contract R&D. Net income for the first nine months decreased 4% to $11.2 million or $2.30 per share compared to $11.6 million, or $2.40 per share last fiscal year. Comprehensive income and cash flow increased for the fiscal year-to-date, despite the decrease in net income. Comprehensive income for the first nine months increased 2% to $11.9 million from $11.7 million for the prior year period as an unrealized gain for marketable securities more than offset the decrease in net income. The gain was due to strong bond market conditions. Cash flow from operations increased 7% for the first nine months to $12.5 million. Cash plus marketable securities as of December 31, 2019 was $73.1 million compared to $74.3 million at the end of the last fiscal year, as operating cash flow and unrealized gains in marketable securities nearly covered $14.5 million in dividends paid. Now, I'll turn the call over to Dan to cover the business. Dan?

Thanks, Curt. I'll cover new products and design wins. We had a good quarter for new product development, which will drive future growth. Last month, we expanded our smart sensor line with a wider field range smart magnetometer, which is very useful in industrial automation proximity detection. In the September quarter, we announced our first tunneling magnetoresistance or TMR magnetic switches. Our technology makes these switches inherently lower power than conventional semiconductors. To achieve low power semiconductor sensors need to be turned on and off, what's called duty cycling. This reduces their speed, which is a problem for motor and other controls, and duty cycling introduces noise, which is a problem for hearing aids and other audio devices. The parts we introduced in the September quarter run on 1.5-volt batteries such as alkaline or zinc air, and do not require duty cycling. In the past quarter, we introduced TMR magnetic switches that run on 3 to 4 volts, which is ideal for rechargeable devices such as over-the-counter hearing aids and smart audio devices. There's a video on our website and our YouTube channel showing the unique combination of low power and high speed for these new products. In the past quarter, we also announced a high-field TMR magnetic switch, which operates at a field strength of thousands of oersteds compared to our traditional sensors, which operate in the tens of oersteds. This high-field capability allows our sensors to continue to operate when exposed to the large fields of MRI machines, which enables MRI tolerant medical devices. MRI tolerance is important as both medical implants and MRI imaging become more common. TMR technology also uses very little power, which extends the life of battery-powered medical devices. High-field switches are also used in security and industrial applications. We are leaders in TMR development. TMR uses structures called magnetic tunnel junctions and is generally lower power and more precise than our older giant magnetoresistance or GMR based products. An example of our TMR research is in a paper by five of our researchers presented at the annual magnetism and magnetic materials conference in the past quarter that was titled Noise Optimization in Magnetic Tunnel Junctions. We reported on our development of sensors with higher than ever detectivity, which is a key performance figure of merit affecting accuracy. These sensor elements have been deployed in some of our smart sensors and other products we discussed recently. There are links to the paper abstract on our website and our Twitter timeline. In addition to product introductions, we met a significant smart sensor development milestone recently with the release of a new custom integrated circuit design to our foundry, a milestone that’s often called tapeout. This is after an R&D investment of several hundred thousand dollars. Custom ICs are expensive, but this will allow us to make our most accurate smart sensor ever. The IC represents the culmination of a lot of hard work and ingenuity by our engineers, scientists, and contractors. In the past quarter, we completed a NASA contract by successfully qualifying couplers for the Europa Clipper mission to one of Jupiter's moons. We had shipped the couplers to the Jet Propulsion Laboratory in a previous quarter, but we started testing to qualify the production lot. We did environmental stress testing and other tests. NASA did even more rigorous testing, including total ionizing dose radiation testing, to ensure the parts can withstand the harsh deep space environment. Testing of our parts is a high priority of JPL, because our products will be in a number of spacecraft systems. NASA is targeting to have the spacecraft complete and ready for launch as soon as 2023. In the paper published in the past quarter in the internal Nature Astronomy, NASA scientists believe they detected water, which would mean Europa has all of the elements necessary for life. The Europa mission will do a detailed survey and look for landing sites for future missions. Our part of the Europa project was for a bit more than $100,000 and not huge revenues, but it validates the ruggedness of our technology, which is applicable to commercial markets. For example, we've begun selling versions of similar couplers for internet communication satellite constellations, which have been in the news as a way to expand the internet all over the world. These do have decent revenue potential. As we start 2020, we look back on 2019 as a productive year for product development, starting the first working day of 2019 with our announcement of the world's only smart tunneling magnetoresistance angle sensor, other new smart sensor products including a smart TMR magnetometer, two new lines of ultra-low power TMR magnetic switches for medical devices and battery powered systems, the high-field sensors we discussed a few minutes ago, high-speed automotive couplers using the CAN FD network protocol, and new couplers for the industrial Internet of Things that use the lower voltage data bus. We've been pleased with the response to our new products, especially our smart sensors. I'd like to share two application examples. The first example is a smart sensor design win for a sophisticated proximity sensor with a European robotics manufacturer. The design win quickly and is good validation of our smart sensor strategy. We demonstrated the product to the customer in May, and we shipped the first production order of several thousand smart magnetometers in the past quarter. We gave them an evaluation kit, so they were able to quickly evaluate the sensor without having to design a circuit board or write firmware. After testing, they said it was a very good product and selected it for their project contingent on some customizations. With the flexibility of our smart sensor architecture, our team was able to turn those customizations around in just a few months. The first order was for $10,000 to $20,000, and we hope it's the first of many orders for this project and this customer. In addition to revenue, feedback from this customer helped us improve the sensor and improve our development tools. The second application example is for an Internet of Things battery dispenser developed in cooperation with one of our distributors for a major supplier of consumer batteries in Japan. The system uses our smart sensors to detect whether the dispenser is running low on batteries. The system notifies the merchandiser via smartphone, so the batteries can be replenished. This optimizes travel inventory and spoilage. The system has been field tested now and was shown as a smart sensor use case at a trade show in the past quarter. The advantages of our sensor in this application are high sensitivity for wide design latitude and low power since the system not only dispenses batteries but uses batteries for power. Now, I'd like to open the call for questions. Joelle?

And our first question comes from Jeff Bernstein with Cowen. Your line is now open.

Hey. Good evening, guys. So, a quick question for you on a couple of the product announcements. Do you ever have design wins on these products for a particular customer before you announce the general availability of the product?

We often will develop new products with the input from customers. So, maybe not what you would strictly classify as a design win. But in many cases, we're developing a product that the customers requested and the presumption is that if it's a good product, meets their expectations that they'll use it. So, we try to work closely with our customers and those smart sensors fell into that category. But, those two examples that I gave were both from what you would call at a standing start. So, those were customers who learned about the product when we announced it, and we had development kits and data sheets, final data sheets ready to go. So, the development environment was very important to that first customer, the robotics manufacturer that I mentioned.

Yes. So, I was interested particularly in the TMR magnetic switches you mentioned, that 1.5-volt you said. I think that would be appropriate for hearing aids. And I know there's a Phonak hearing aid that's out now and there was a discussion about it, talking about a disposable type battery and then wanting to go to a rechargeable battery. And it sounded like the second TMR magnetic switch you talked about would be appropriate for that. Do you have some wins in the hearing aids already?

We have a fair amount of business in the hearing aid sector. We generally don't talk about new developments. Right. So, we generally don't talk about the specific products because our customers tend to guard that fairly closely. But, as you correctly pointed out, there's interest in rechargeable battery systems, both by traditional hearing aid manufacturers and companies entering the hearing market, sometimes for hearing aids or personal sound amplification devices and sometimes for devices for normal hearing folks, things like translators or navigation systems. So, the higher voltage products that we mentioned as you know are ideal for rechargeable batteries. And there's been a fair amount of interest. We have a design win in that space. We haven't said whom. But, there's a lot of interest in rechargeable battery systems which can go up to 4.2 volts. And then also as you know, the 1.5-volt zinc air battery is still used quite a bit in traditional hearing aids. And that's a different type of challenge because that's not very much voltage to get a sensor to run on a single zinc air battery.

Sure. I understand. I was curious about your previous relationship with Phonak, which has a $6,000 hearing aid that is considered potentially groundbreaking. Starkey is also mentioned to have a product in that category. I know you had some discussions in Minnesota recently. However, there are regulatory changes allowing personal amplification devices that are significantly cheaper. Does this shift create different opportunities for you? I assume the lower price point would lead to higher volume sales, but do you also receive a premium if it’s part of a higher-end product? What insights can you share about the hearing aid market?

Right. So, that's a great point Jeff. There is a very broad market for hearing devices ranging from as you say, some very high-end amazing products that are coming out to some lower-cost products. And we have product lines that span those types of offerings. So, we have different products for different applications, and the voltages are different, which is one thing that you've pointed out, because whether they're running on single cells that are typically 1.5-volt, they are running on rechargeable batteries, they require different sensor elements. And then, the types of sensing that they do, the fields that they're sensitive to, the outputs, the amount of current that they draw, those all vary with the application. And so, we've been developing a lot of products in that space, particularly using our tunneling magnetoresistance platform, which gives us a lot more flexibility and a lot more horsepower, that we can trade either for sensitivity or power or voltage. So, our development team has done a great job of working with our customers and developing products that fit in those various markets. And as you know, it's really an exciting time in that marketplace. I think, you pointed out an article where somebody had said that hearing aids were going to be like Jarvis from Ironman and that the ear is the new wrist. It's the new peripheral platform for wearables. So, we think we're well-positioned to lead that market.

So, it sounds like you have the capability to price to value to some degree where there are some pretty significant kinds of parameters that have to be hit and there is some ability to price to that?

Yes, typically if we have a higher performance product, it costs more to produce and has greater value. We also recognize that some products are more sensitive to pricing, which is why we offer de-featured versions that are less expensive and aimed at that market.

Got you. Okay. And then, I just wondered if you could say anything about your discussions on automotive and robotics. You mentioned a robotics design win, but also brought up topics like current sensing, rotation sensing, and the smart interface for those products in automotive, in addition to couplers as automotive opportunities. Can you discuss each of these segments and provide an update on the traction you're gaining in the automotive sector specifically?

We view the automotive sector as a significant growth opportunity for us. The number of sensors in vehicles is expected to grow rapidly due to the shift toward electric, autonomous, and advanced safety systems. We have sensors that detect current for battery management in cars, rotation sensors for engine cam and crank, electric motors for electric vehicles, and various user interfaces such as knobs and dials along with proximity sensing. On the coupler side, our components are smaller, more precise, consume less power, and are more durable than traditional electronics, allowing us to effectively transmit information. We intend to promote these products through our private label partnership with a company that holds strong automotive sales channels. We have achieved a letter of conformance from the automotive task force and the International Automotive Task Force, which helps eliminate some of the barriers to entering the automotive market. We are developing specific products with a particular focus on current and proximity sensors, as there is interest from automotive manufacturers in qualifying these for their rigorous processes to integrate them into vehicles. This is a longer-term opportunity that may take a couple of years for qualification, but given the large and fast-growing market, we believe it is a worthwhile investment. We are actively working to get our components qualified, particularly one of our current sensing smart sensors designed for battery management systems.

Got you. Great. And then, I think, obviously, the PUF business can be a little bit volatile. You saw some recovery there. I think it was last quarter. And just wondering how that's looking, what kind of visibility you have on that going forward?

Yes, I can address that. We have some visibility on the situation. We anticipate that the medical market will stabilize in the current quarter. Long-term demographic trends are quite positive for these types of devices. However, we have faced challenges due to weaknesses in the semiconductor market, and our anti-tamper business tends to fluctuate.

And that anti-tamper is there. Do you have some visibility on that in the next couple of quarters or is it more of a quarter-by-quarter situation?

That's really on a quarter-by-quarter basis. We don't have a lot of forward visibility on that. And we're pretty early in the current quarter.

Got you. Good, okay. And then, any progress you guys are making on the exosome detection or the food safety applications or are those sort of suspended for now?

We are still working on them and don’t have any specifics to report. Exosomes are a very exciting area for early cancer detection, and we continue to address some of the remaining issues with biosensors, especially in the realm of food safety. We hope to have more specifics to share in future quarters. We consider these initiatives as long-term opportunities, but they are very exciting, and we continue to invest in this research area.

Great, great, thanks. I'll let somebody else ask.

Thanks, Jeff.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Daniel Baker for any closing remarks.

Well, thanks, Joelle. And thank you. We were pleased to report solid revenue growth and earnings growth, and two new products in the past quarter. We look forward to speaking with you again in early May to discuss fourth quarter and full fiscal year results. Thank you again for participating in the call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.