Nve Corp /New/ Q1 FY2023 Earnings Call

Thank you and good afternoon. Welcome to our conference call for the quarter ended June 30, 2022. My name is Dan Baker, I'm the President and CEO of NVE Corporation. This call is being webcast live and being recorded. A replay will be available through our website, nve.com. I'm joined by our CFO, Joe Schmitz. After my opening comments, Joe will present a financial review. Then I'll cover the business and new products, then we'll open the call to questions. We issued our press release with quarterly results and filed our quarterly report on Form 10-Q in the past hour following the close of market. Links to the press release and 10-Q 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, uncertainties related to future stock repurchases and dividend payments, our dependence on critical suppliers and packaging vendors, and risks related to the COVID-19 pandemic and supply chain disruptions, 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, 2022. Actual results could differ materially from the information provided, and we undertake no obligation to update forward-looking statements we may make. We're pleased to report a 16% increase in net income for the first quarter to $0.86 per diluted share. Joe will cover the details. Joe?

Thanks Dan. Total revenue for the most recent quarter increased 3% to $7.34 million from $7.15 million in the prior year quarter. The increase was due to a 2% increase in product sales and a 32% increase in contract R&D revenue. The growth was from a strong quarter last year. Product sales increased 11% sequentially from the March quarter. We continue to be challenged by supply chain shortages, although we're seeing signs of improvement. During the quarter, deliveries from our supply base enabled NVE to increase work in process inventory by $508,000 to support future growth. We're picking up new customers from traditional semiconductor companies with our superior products and shorter lead time. We've increased our capacity with new equipment. We expect to invest as much as $1 million in additional production and test equipment in the rest of the fiscal year. Gross margin was 77% for the quarter compared with 75% last year. Margins decreased last year because of cost increases in the semiconductor industry. However, the price increases we enacted in the prior fiscal quarter are beginning to offset increased costs. Expenses for the quarter decreased 24% from the prior year due to a 26% decrease in R&D and a 20% decrease in SG&A. The decrease in R&D was due to R&D personnel spending more time on revenue-generating activities. The decrease in SG&A was due to lower incentive compensation. Interest income for the quarter decreased 2% due to the timing of maturities for available-for-sale securities, and in late June and early July, we reinvested those proceeds from maturing securities at higher interest rates. Driven by increased revenue, increased margins, and decreased expenses, net income for the quarter increased 16% to $4.14 million or $0.86 per diluted share compared to $3.58 million or $0.74 per share for the prior quarter. In addition to the increase in gross profit margin, operating margin, pretax margin, and net margin all increased compared to the prior year quarter. Net margin was a strong 56% and we recorded our largest quarterly profits since 2018. In addition to the past quarters, today we announced that our Board declared another quarterly dividend of $1 per share payable August 31 to shareholders of record as of August 1. Now, I'll turn it back to Dan to cover the business, new products, and marketing.

Thanks Joe. In-person trade shows and conferences are returning. We exhibited at Sensors Converge in San Jose a few weeks ago. The exhibition showcases the latest sensing technologies and was back to its traditional early summer schedule for the first time since the pandemic. We received a number of new leads and continue to follow up. In an industry wracked by shortages, a number of prospects were impressed by our inventory levels and lead times. We demonstrated several new products and we had a mechatronic demonstration using one of our new smart sensors to control a musical pitch pipe. Musical instrument robots have been effective in attracting attention and demonstrating the precision, robustness, and simplicity of our sensors. We also had sales staff supporting distributors at two major trade shows in Germany the past quarter, PCIM Europe and Sensor+Test. Both shows reach important target markets for us. PCIM is billed as the world's leading exhibition and conference for power electronics, intelligent motion, renewable energy, and energy management. Sensor+Test claims to be the world's leading forum for sensor measurement and testing technology. I've been asked about our Ukrainian distributor Cavazza Micro Components, which is based in Kyiv and has represented us for more than 15 years. It's not significant business for us from a financial perspective, but it is inspirational, and we continue to have sales dialogue and expedite their orders. They've helped inspire us to do our utmost to overcome supply chain challenges. Turning to new products, we introduced a new ultra miniature version of our Tunneling Magnetoresistance or TMR magnetic sensors. The new parts are 1.1 millimeters, less than a sixteenth of an inch square. The existing parts were already pretty small, 2.5 millimeters, less than a tenth of an inch. We believe the new part is the smallest device of its type and can be used to detect position in tight spaces such as industrial or medical robots as they get smaller. There's a demonstration video on our website and YouTube channel. Our components are inherently safer and more reliable than legacy semiconductors. An industry standard for that is called intrinsically safe. In the past quarter, several of our data coupler models were certified for use as isolating components in intrinsically safe circuits by Underwriters Laboratories. Our couplers transfer data without direct electrical connections to hazardous areas. This mitigates the risk of arcing or otherwise starting an explosion. Certification involves rigorous testing by UL and a thorough on-site audit of our control over product safety processes. It's a great validation of our technology and manufacturing capabilities. And it's valuable in hazardous areas of the Internet of Things, such as chemical or food processing plants. Three isolator lines have intrinsically safe certified versions: our flagship data couplers, isolated network transceivers, and our low-power tunneling magnetoresistance data couplers. There's an intrinsic safety demonstration on our YouTube channel, where we also destroy a competitive part. We're fortunate to have dedicated employees. We make things, so working from home isn't an option. Our employees have worked through the personal challenges of the pandemic, industry shortages, and supply chain problems. I was able to thank them as a group at our first in-person employee meeting in more than two years last quarter. We had a barbecue to welcome spring in Minnesota. We demonstrated new products for our employees and celebrated the foundation our employees have built for a bright future. As promised in last year's proxy, we will return to in-person annual shareholders meetings with our meeting at a nearby hotel and conference center on August 4. The first annual meeting agenda is the election of Directors, and we're pleased to have a strong independent Board of Directors with two former public company CEOs, Rich Kramp and Jim Bracke, a former CFO of a public company, Pat Hollister, and an experienced Director for a number of successful public companies, Terry Glarner. The second annual meeting agenda item is approval of officer compensation. As detailed in our proxy, we don't overpay our officers; our officers have the same fringe benefits as all employees, and there are no executive perks or golden parachutes. The third annual meeting agenda item is ratification of our auditors for this fiscal year, the year ending March 31, 2023. Boulay has audited our past three fiscal years, and we recommend their approval for our next audit. A popular feature of our in-person annual meetings has been live hands-on product demonstrations, and we'll have several of those. If you can't attend, you can see a number of product demonstrations on our website or our YouTube channel. Now, I'd like to open the call for questions. Operator?

Certainly. Our first question comes from Jeff Bernstein from Cowen. Please go ahead with your question.

Hi Joe. Nice to talk to you today and congratulations on what looks like the best EPS in several years. So, that’s great. Wanted to ask you a little bit about Abbott; I guess you guys had renegotiated your deal with them, good through the end of this year. And I'm just curious about where that stands now, kind of, what you think the term of the next renewal might look like?

We're still in the middle of those negotiations with Abbott. We've had several sessions with them. I can't provide specific details right now, but I can say that there is strong engagement from both sides, and we are optimistic about reaching a successful long-term agreement.

About how long a long-term agreement would that be? Would that be several years?

That’s one of the negotiating items. Obviously, we are advocating for a longer term. But we will have to see how that will actually unfold. But I believe the next agreement will be a multi-year agreement.

Got you, okay. And then just curious, their business looked this morning for the most part, particularly in the heart failure area, which includes implantable defibrillators, and I'm just curious, I think you guys are in the cardiac or management generally so pacemakers and defibrillators. If there's much of a difference in content across those different categories, and also I think you're in neuromodulators, as well.

Right, this is Dan. So, while typically there's more functionality in an ICD, Implantable Cardioverter Defibrillator than in a pacemaker, we're counting our businesses based on the number of sensors, which tend to be comparable. So, for us, there's not a huge distinction between CRM devices; we provide the same level of functionality. So, there isn't a direct correlation between our revenue and their revenue.

Got you. Okay. And then they do have a couple of new promising sounding products in that area, this new Aveir single chamber leadless pacemaker that doesn't need a chest pocket incision. This thing looks like it's about the size of a little cold pill. I know you can't say whether you're in it, but is there a reason to believe that it would not need the same functionality that you provide to their other products?

Well, I appreciate your elegant wording of the question, Jeff. So, the miniaturization is really amazing in some of these devices, and our products uniquely support miniaturization. We have the world's smallest devices of their type; we just talked about one in the prepared remarks that's not necessarily designed for medical devices, but it highlights the advantages that we have with our spintronic technology of being able to make the world's smallest devices. So, I would imagine that's a benefit that is very important as medical devices get smaller and smaller. The smaller they get, of course, the less invasive they are, the more people that can get the therapies. So, it drives long-term growth. So, we like to see that trend and we'd like to support it.

Got you. Okay. I guess the same would apply to this implantable deep brain stimulator for the treatment of resistant depression, which has not been approved yet, but has received a breakthrough designation. So, the same concept would apply to that.

Yes. As we have previously discussed, we are considering expanding our technology to include other types of neuro stimulators like deep brain stimulators. Although these markets are currently small, they have significant growth potential for treating new diseases such as drug-resistant depression, which is a major medical concern. We believe this is a positive development. We focus on designing sensors to create smaller implantable medical devices, and the reduced size would be a key advantage for deep brain stimulators. Additionally, with the breakthrough designation, the system could be available sooner as a treatment option for patients with treatment-resistant depression. While it is still in investigational use, it is already being used to treat movement disorders like Parkinson's disease. This represents a growing market and an opportunity to assist more individuals.

That's great. Can you talk about any progress with the Angst+Pfister hybrid EV onboard charger reference design?

So, we continue to get inquiries and leads for devices both onboard charging and the charging systems for hybrid electric vehicles, as well as for other types of motor controls and charging systems. So, it's an important area for us and it uses a number of our products. We recently did a demonstration showing how we can use our isolators, our DC-to-DC converters, and our angle sensors to run highly efficient motors. Now, we wouldn't need the angle sensors for things like the battery management system, which is for battery charging. But we can do the battery charging with our DC-to-DC converters and our isolators. They allow much faster systems, much higher speed systems, which means more efficiency for energy conversion, either energy conversion to charge batteries in the case of the Angst+Pfister system, or to run a motor in the case of motor control systems where we've been offering a number of components. So, it's an important market area for us. We see excellent potential for growth, and there's more and more emphasis on energy efficiency, and that's what our systems help to do, our products help to do that.

Okay. And then can you talk a little bit about the newer distributors you've added? I guess a Japanese distributor and an Indian distributor?

Yes. Well, we've received good activity from our new distributors. As you might expect, sometimes they're asking questions that are more experienced distributors don't ask, but that's great. And that's all part of the process. We provide them excellent support. We help them understand the markets that our products are used in, we help them understand our benefits compared to conventional technology, and we try to provide them with excellent design support when they have specific questions from their customers. So, it's an important part of the process. It's the main way we reach our market, and having great distributors, we feel very fortunate that we've got excellent distributors; they're very technically capable as well as being good salespeople. So, we were pleased with what we've seen so far, particularly in India, which is a very fast-growing market and, of course, a very large country. So, we have now several distributors covering most of the major areas in India.

And Dan, can you give us an update on what your lead times look like versus competitors? I would think that would be pretty appealing to both customers and distributors.

Yes, yes, it is indeed. So, we just answered that question for a particular customer on a particular part, and our lead time for that part was running, I'm giving this as an example. Of course, the lead times can vary, but our part was approximately 12 weeks, while a competitive conventional semiconductor part was approximately 84 weeks. So those were lead times that we pulled off of a distributor, one of our distributors, who also distributes some competitive products. So, as you can imagine, that's a pretty attractive benefit proposition. In addition, we have better parts; they're more reliable, they have better specifications, higher speed, and longer barrier life. So, we are picking up a number of new leads for customers who are attracted by the lead times. So, we're glad they're attracted by the lead times, but we're also very optimistic that they're going to stay for the quality of the products and the quality of the support they get, and that they're going to be able to use the advantages that we have over conventional semiconductors.

This presents a unique opportunity to gain market share from competitors, at least to enhance your visibility and engage with customers who are now interested in redesigning their Boards. Can you elaborate on how we should assess the impact of this on your revenue growth?

As mentioned, we expect a short-term positive impact on our revenue as we secure more new design wins. Our goal is to alleviate any hesitations that companies may have about collaborating with a smaller firm. While we might not be as widely recognized as larger semiconductor companies, we deliver high-quality products, outstanding support and service, and excellent on-time delivery with short lead times. We believe that regardless of how customers find us, they will choose to stay with us because we are committed to being a reliable supplier. We consistently maintain high supplier ratings. Our challenge lies in reaching these customers effectively, but a positive aspect of the current industry shortages is that it has opened doors to customers we may have previously missed, and we are committed to retaining their business.

So, you guys said you attributed the growth in the quarter to pricing. And so I'm sort of wondering, what's going on with units? Are units down? Is that a sort of supply chain kind of issue? Or what's the story on units?

Well, to your point, we attributed our product sales absolutely to some pricing actions, but we also have some pretty strong R&D revenue as well. So, I'm going to be a little bit careful when you call that. Talking about units is always a little bit difficult; it's a different product mix. But I would not say that that higher revenue from sales equates to lower unit volume. I don't think that's the case at all based on what we're putting through our facility. I think in that sense the higher price was obviously better margins, but I don't think that equates to lower unit.

Understand. Okay. Thanks very much for the time, guys.

Thanks Jeff.

Thank you. Our next question comes from Chris, a private investor. Please go ahead with your question.

Congratulations on great results.

Thanks Chris.

I'd like to expand on the previous question regarding your ability to secure orders due to shorter lead times and retain customers. You are perceived as a top-tier sensor manufacturer, which is evident in your presence in MRI machines, pacemakers, and similar applications, as well as being the most expensive option. Considering your excellent service, how do you prevent customers who chose you for your availability from switching to lower-priced sensors when they become available? Can you highlight cost savings related to PCB, reduced component counts, or other efficiencies that justify the quality of your components?

Yes, that's a great point, Chris. And first of all, we can point to advantages that save our customers' money. One of them is chip count, particularly with our DC-to-DC converter parts, and another is reliability; sometimes that's an intangible cost, but it's important to many of our customers. And then finally, size, which reduces PCB size. In the case of industrial customers, we talked about the obvious advantages in the case of implantable medical devices. But it's also an advantage in industrial devices too because circuit boards, as you know, are priced by the square of the square inch. And while we offer the highest quality, our prices are competitive; we have top-of-the-line products, but our prices are reasonable. And we're also in many cases, a relatively low share of budget; the components that we make enable very expensive systems. So, we believe that our products are fairly priced, and the biggest challenge that we've faced is brand awareness and the perceived risk of working with a smaller company. And the shortages and our short lead times help us overcome that. So, we believe that we'll retain a large percentage of these new customers and the new business that we're getting.

I'd like to add to what Dan just said too. One of the things that I've observed is as we get to know some of these customers, yes, they're coming to us out of an extreme need for parts; but once we begin working with them and understand their business, we've had in some cases been able to offer different configurations, different specs of parts that allow them to meet a price target that they may have. So, I've seen some of that ongoing dialogue take place, and to me, that's a value proposition for the customer to help them right-size their products, so to speak.

Okay, that's good to hear. And in case you get designed in some very high volume applications, are you able to ramp up your volumes?

We are working on building our capacity to reach upwards of $1 million this year. We believe we will be ready for the expected increase in volume and functionality. Additionally, we are looking to hire more staff for our second and third shift operations, especially due to supply chain constraints, which is part of our goal.

Okay, good to hear again. And another question on automotive. I've been following many automotive semi companies, and it seems that it's a very time-consuming process to get design into like a large volume automotive platform. It ends up being rewarded in the end, but it's very time-consuming. So, you told us encouraging news, but can you tell us where you are in the designing process? And perhaps maybe in the application where you're closest to a high-volume automotive platform, where are you in terms of the design process?

Right. So, as you say, it's a large endeavor; it's one we've committed to at NVE to reach the automotive market. We do that through our own efforts and also through private label partnerships with companies that have a strong presence in the automotive industry. So, it is time-consuming, but we're willing to spend the time and to make the investments. We have also achieved international automotive Task Force or ATF conformance with their quality standards, which is a rigorous process and bolsters our credibility in that market. So, as far as the specific parts, the ones that are the farthest along are isolators, especially for Controller Area Network buses, which are one of the key network backbones in all cars, especially hybrid electric vehicles, but they're also in internal combustion-based cars as well. So, those parts we have some interest. We don't have any really high volume in-car applications; we have some applications in automotive factories that are in production. That's sometimes a natural segue into in-car applications, which I think is what you're asking, because they tend to be higher volume. But being able to interface to the car in the factory is also important. So, we believe that we're reasonably close on some applications for Controller Area Network transceivers. We'll have to see, and we don't have any in-full production in in-car applications at this point.

Okay. Thanks for that, and great results. Again, that's it for me, and good luck.

Thanks Chris.

Thank you.

Thank you. And one moment for our next question. Our next question comes from the line of Alex Woodward from Bridge City Capital. Your question, please.

Yes, good afternoon, gentlemen. I wanted to ask about the increase in inventory. And specifically, it's up $0.5 million, the work in process sequentially. If you go back and look year-over-year, it's up almost $1.5 million. How much of this is maybe orders that you have or commitments that you have versus just building this back in, and I'm hoping it'll ship as opposed to knowing it's going to ship?

The vast majority of it is to meet existing orders.

Very good. So, with the increase of $500,000 sequentially, does that indicate that you feel optimistic about the near-term prospects for sequential growth? Your earnings are close to the levels set in 2018, although your revenue is still slightly below that. Considering the changes in the industry, is NVE aiming for a record year? I understand you don't provide guidance, but the numbers on the balance sheet suggest you are positioned for growth. Is fiscal 2023 expected to be a growth year for the company and potentially take it to new heights?

That's always a difficult one to answer. I think we've got a lot of challenges. As I mentioned, we are working against very strong order flow. We are seeing some of our segments with some nice growth prospects. So, we're trying to hit our commitments to our customers. We think that's going to get us to a good place by the end of the year, but there are lots of challenges ahead of us.

So, given 12 months might be a little bit of a reach to know what the visibility looks like there, the near-term visibility, and you just commented on strong orders, should we expect sequential growth in the September quarter?

I think we're going to try and do everything we can to hit that.

It's certainly our goal to grow. And, as Joe mentioned, we've been very pleased with the order flow.

It's great to hear, because for a long time, the revenues feel like they've kind of gotten to these levels and then stagnated. And it's been hard to break through. But another data point that I'm encouraged with is the increase in CapEx and the incremental capacity, that's another sign that you're looking to grow, at least that's what I see from my perspective. Am I reading that wrong?

I think Joe and I are going to answer it the same way. No, we're making those investments because we see the potential, we have the order flow, and we need to increase our capacity. So, that's what we're doing. It's reflected in the whip, and it's reflected in what Joe was talking about in our capital planning.

Great. The last question I have is about your significant cash balance and stable interest income. You mentioned that some investments have matured and been reinvested. How will this affect the interest income moving forward, especially with rising interest rates and the possibility of them increasing further?

So, as you can see from our quarterly filing, we will be undertaking this reinvestment three or four more times over the next 60 days. We are noticing improved interest rates. I must mention that we have observed changes, particularly with the performance of treasury bills and the five-year treasury bond. Therefore, we are currently benefiting from that. I anticipate we will achieve slightly higher interest rates and, consequently, a bit more interest income as a result.

Thank you for the opportunity to ask a question or two.

Thank you for your questions. Appreciate it.

Thanks Alex.

Thank you, ladies and gentlemen, for your participation. This does conclude the program. You may now disconnect. Good day.

We were pleased to report a 16% increase in earnings and our largest quarterly profits since 2018. We look forward to meeting some of you at our shareholders meeting in a couple of weeks. Our next earnings call will be in October. Thank you for participating in the call.