Good day and thank you for being here. Welcome to NVE's conference call regarding third quarter results. Currently, all attendees are in listen-only mode. Following the presentations, there will be a question-and-answer session. I would now like to pass the call to Dan Baker, President and CEO. You may begin.

Good afternoon and welcome to our conference call for the quarter ended December 31st, 2022. 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 marketing, design wins, new products, and 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 uncertainties related to the economic environments in the industries we serve. Risks and uncertainties related to future sales and revenue, uncertainties related to future stock repurchases and dividend payments, our dependence on critical suppliers, and risks related to supply chain disruptions, as well as the factors listed from time to time in our SEC filings, including our annual report on Form 10-K for the fiscal year ended March 31st, 2022, as updated in our just filed quarterly report on Form 10-Q. 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 strong quarter. Net income for the quarter increased 22% to $0.88 per diluted share, driven by a 22% increase in product sales. Joe will cover the details of our financials. Joe?

Thanks, Dan. Third quarter total revenue increased 18% to $7.4 million from $6.29 million for the prior year quarter. This was our second consecutive quarter with large year-over-year revenue increases. The increase was due to a 22% increase in product sales, partially offset by a 46% decrease in our contract R&D revenue. The large increase in product sales was primarily due to increased purchasing by existing customers and new customers. We acquired new customers from traditional semiconductor companies with our superior products and shorter lead times. Sales increased in most of our markets and product lines. Sales were especially strong in industrial markets, which more than offset some weakness in our medical device markets. Improvements in our supply chain allowed increased product shipments, although there continue to be risks related to those shortages. Paradoxically, supply chain disruptions may have favorably affected product sales for the quarter and nine months. Since we believe the disruptions may have been less severe for us than some of our competitors. We may be less susceptible to supply chain disruptions because we have our own wafer fabrication and product test operations. On the other hand, we believe the supply chain disruptions have had an unfavorable impact on our cost of sales. Improvement in the supply chain may have been due to reduced demand in some semiconductor industry sectors such as memories, PC, and consumer electronics. Demand for our primary sectors of mixed signal integrated circuits appears to have been less affected by the industry downturn, although there are risks and demand could change. The decrease in contract R&D revenue was due primarily to the timing of completion of certain projects. Gross profit as a percentage of revenue increased to 80% for the third quarter of fiscal 2023 from 78% for the third quarter of fiscal '22, primarily due to increased prices and economies of scale due to increased revenue. Total expenses increased 31% to $1.1 million for the third quarter of fiscal 2023 compared to the third quarter of fiscal '22, due to a 17% increase in R&D expense and a 62% increase in SG&A. The increases in expenses were primarily due to increased employee compensation expense and increased staffing. While spending was higher in total dollars as a percentage of sales, spending was only 1% higher versus the prior year quarter. Interest income for the third quarter of fiscal ’23 increased 43% due to an increase in our available-for-sale securities and an increase in the effective interest rate on those investments. Net income for the quarter increased 22% to $4.23 million or $0.88 per diluted share compared to $3.47 million or $0.72 per share for the prior year quarter. The increase was driven by increased revenue and increased interest income, partially offset by increased expenses. Net income increased from 55% to 57% of revenue. For the first nine months of fiscal 2023, total revenue increased 26% to $24.5 million from $20.3 million for the first nine months of the prior year. The increase was due to a 27% increase in product sales, partially offset by a 13% decrease in contract R&D revenue. Net income increased 35% to $14.5 million or $2.99 per diluted share from $10.7 million or $2.21 per share for the first nine months of fiscal 2022. Turning to cash flow. Our strong balance sheet and strong margins allowed us to buy equipment to build the capacity we needed and pay premiums, if necessary, for the raw materials we required. Cash flow from operations for the first nine months of the year was $14.8 million. During the first nine months of the year, we increased inventories by $1.37 million to help mitigate shortages. Despite the inventory increase, our cash flow from operating activities actually improved by $288,000. Purchases of fixed assets were $908,000 in the first nine months of the fiscal year, and all but $24,500 were in the most recent quarter. These were primarily capital expenditures for additional production equipment that we plan to deploy this quarter to increase our capacity. The $14.8 million cash flow from operations more than covered the $14.5 million for the three dividends declared so far this year. We have now paid more than $155 million in dividends since we started paying dividends in 2015. Today, we announced that our Board declared another quarterly dividend of $1 per share payable February 28th to shareholders of record as of January 30th. That will bring our total dividends to more than $33 per share since 2015. Now I'll turn it back to Dan.

Thanks, Joe. I'll cover marketing, design wins, and product development. The marketing highlight of the past quarter was promoting our products at the Electronica Trade Show in cooperation with our distributors. Electronica is a major industry event and it was live for the first time in four years. Highlighting recent design wins, we're pleased with the interest in products for power conversion and alternative energy. In the past quarter, we received two isolator design wins, a design win in home energy storage for green energy, and another design win in electric vehicle charging stations. The expected revenues from both those design wins are modest in the near term, but highlight our value proposition and our prospects for the future. Farther from home, we've mentioned before that we have parts on the Europa Clipper mission to a moon of Jupiter. The launch is targeted for October 2024, and the mission is to investigate whether Europa has conditions suitable for life. Our parts are also being evaluated for the Mars sample return mission, and this month, we completed rigorous testing and shipped a number of parts to NASA. That mission is to return soil samples from Mars. The mission is scheduled to launch in 2028 and return to earth in 2033. These NASA projects are not large revenue, but they will validate the exceptional reliability of our technology. Turning to product development. In the past quarter, we expanded two product lines, our line of Tunneling Magnetoresistance magnetic sensors and our family of the world's smallest DC-to-DC converters. The new magnetic sensor is an ultra-high sensitivity magnetometer, our most sensitive sensor ever. High sensitivity allows more precise motion, speed, and position control in robotics and mechatronics. There are two demonstration videos on our website and YouTube channel. DC-to-DC converters transmit power without a direct electrical connection. Our smallest parts are less than a quarter by an eighth of an inch. DC-to-DC converters are critical components in several industrial and automotive applications, including interfaces to next-generation power switches such as silicon carbide power transistors. These transistors are an emerging market with the potential to improve the efficiency of power control and energy storage. There is a demonstration showing the simplicity of using our DC-to-DC converters, spintronic couplers, and silicon carbide transistors for power control in the video section of our website as well as our social media sites. We're proud to supply products to some of the world's most demanding customers, including Abbott's Pacesetter subsidiary. Abbott is a leading supplier of implantable medical devices. We recently executed an extension to our supplier partnering agreement with Abbott, which Joe negotiated on our behalf. The extension runs through the end of 2023 and includes price increases that will help offset our cost increases. The latest amendment was filed on a current report on Form 8-K/A and incorporated by reference in our just filed 10-Q. It is also available via our website or the SEC's website. Now I'd like to open the call for questions. Tawanda?

Our first question comes from Jeffrey Bernstein with Cowen. Your line is open.

Hi, Dan and Joe.

Hi, Jeff.

So a few questions here. Just wanted to ask. So 22% product revenue growth during a semiconductor downturn is a nice number. There was obviously a sequential decline after you had some pull-ins, I think, last quarter in the PUF business. But can you just sort of parse out that growth rate in terms of what you think might have been catch-up on prior deliveries versus kind of purely organic growth? Any color you can give around that and any differentiation between new customer sales and legacy customer sales?

Thanks for the question. This is Joe. We typically compare to prior year quarters. That said, there are a couple of things, and you mentioned one of them. Our anti-tamper product sales for the defense sector and isolator sales were exceptionally strong during the September quarter, and they've returned to more normal levels in this quarter, particularly the anti-tamper product. That's a chunky business and tied to the customers' development cycle, so we can't really control that. Medical devices were rather weak in the December quarter. We do expect that this business will recover in the March quarter, though.

Okay, that's great. Thank you. And just curious, so you've been through this period that kind of a once-in-a-lifetime opportunity to get in front of new customers and get some new design wins. What did you guys learn overall about marketing from this experience?

This is Dan. So we learned the value of some of the features that we have and in particular, some of our customers like different features, and that will inform our future product development. But we have picked up, as you alluded to, we picked up a number of new customers. Some of them came for the shorter lead times, but we expect them to stay for the product performance and we expect to be an excellent supplier. So we saw a great opportunity to open some doors that hadn't been opened to us before as a smaller company. So we saw it as a great opportunity, and we're determined to make the most of it.

And then are there any kind of key performance indicators on design wins or others that you guys kind of share with the Board to give some future indication of future growth?

So we tend to look at our order flow and Joe has commented on that. We look at new customers. We look at design wins. I was able to share two of those. So are we getting design wins in the markets that we've targeted, even though they may not represent large near-term revenues, we see them as important indicators for the future. So those are things that we tend to look at internally. We share them in calls like this wherever we can. And then we also look at things like our key strategic customers, and we've commented on Abbott in this call, and we were happy to be able to report a renewal, and we expect them to continue as a customer for the foreseeable future.

Thanks. And then just on the growth rate, 20% product growth plus in this quarter. Do you think that kind of growth rate is a sustainable number here going forward? Or how should we think about modeling product growth?

Our goal is to grow. And so that's what our plans are. We invest in the future. As Joe mentioned, we invested over $900,000 in fixed assets to increase our production for the year. We continue to invest in people, as Joe mentioned in his comments about our expenses, which are investments we see as investments in the future. So, it's hard to predict the growth rate. As you know, we're in an industry that is cyclical and has its ups and downs. But our goal is over the long-term is certainly to be a growth company. We believe we have products that are in demand. We have excellent technology, great people, and we're picking up some really top-notch customers in key markets that we talked about in the prepared remarks. So that is certainly our goal is to be a growth company.

Thank you for that. I wanted to inquire about the investment in test equipment that you mentioned, as well as the packaging supply issues you've highlighted. Could you provide us with an update? Is the equipment in place, and do you anticipate it will significantly enhance your growth potential?

The equipment has arrived, which is reflected in our fixed asset expenses and cash flow statement. Our team is currently in the process of deploying the equipment, and it is partially operational. While there is still more to do, the progress looks promising. Both our suppliers and engineering team have prioritized this task and have done an excellent job in implementing this complex, cutting-edge equipment with artificial intelligence and additional features aimed at enhancing efficiency for both the company and our employees. This supports our goal of maintaining high productivity and revenue per employee. We aim to fully deploy this equipment in the current quarter, which is an ambitious target for the March quarter, but we believe it is attainable. This will increase our production capacity in the near future. As mentioned by Joe, one of our advantages over traditional semiconductor companies is that we manage both front-end and back-end operations. The equipment you mentioned pertains to the back-end operations, specifically packaging and testing. While we do not handle packaging in-house, we do conduct our own testing, which gives us a significant advantage and alleviates bottleneck issues. The investments in this equipment were made some time ago and are now coming to fruition, and we see the timing as favorable. We believe we have opportunities for growth, and having this capital equipment will facilitate that growth.

And so, Dan, just from a revenue perspective, is that the impact of this test equipment from the fact that you can show potential customers a domestic supply chain capability kind of thing down to testing? Or is it that you actually have product that your backlog on because you had a bottleneck of testing? Or is it both?

It's both. I might put a little color on the second point, which is that we quote lead times. So we quote lead times that allow for us to test the parts. So having more equipment allows us to quote shorter lead times. So we think that that is important to many customers. To your first point, with supply shortages and the supply chain challenges that have been well publicized throughout the semiconductor industry, many companies are looking for domestic suppliers and onshore supply. So there's been a lot written about that. And of course, the priorities that have been set domestically by the CHIPS Act and other actions that encourage the domestic supply of semiconductors. So we're proud to be a part of that. And some of these investments may benefit from those incentives. And we do have customers that ask us about the security of supply, and being able to tell them that our back-end operations and much of our front-end operations are here in the United States, that is important to some of our customers and that's a competitive advantage.

Great. Thank you for that clarification. And so I'm going to jump off and let somebody else ask some questions. So I may come back with some more.

Thank you. Please standby for our next question. Our next question comes from the line of Andrew Bell with Shores Edge Financial. Your line is open.

Hey, Dan, this is indiscernible. I'm here with Andrew from Shores Edge. Congratulations on a great quarter and on being included in some significant space missions. That sounds very exciting. I have a question regarding the receivables and inventory and the contrast between the two. Your receivables are quite low, and could you explain that? Your sales have been high these last two quarters, yet the receivables are decreasing, which seems unusual. Have you altered anything regarding customer payment terms, billing and shipping procedures, or requiring prepayment? Or is there something else at play?

This is Joe Schmitz. I'll address the question, and thank you for noticing that. Our accounting team has taken a lot of pride in our results this quarter. There are really two aspects to consider. First, our terms and the customer mix have not changed to a degree that would significantly impact days sales outstanding. The improvement you're seeing is due to our diligent efforts to follow up on accounts that are nearing past due. Additionally, this quarter, as you may recall from last quarter, we collected on many outstanding receivables related to a high level of anti-tamper and large project-related sales, which contributed to the favorable outcome. I want to commend my team for their efforts in managing this situation effectively. Typically, I would see inventory as a drain on working capital; however, in this particular situation, it is helping us reduce our backlog and serve our customers more quickly. This is beneficial for our business right now. We are also trying to manage our working capital in a way that doesn't require us to tap into our bank account, so these factors are connected.

So I understand that the increase in inventory is primarily to avoid supply chain shortages and to ensure there are enough parts available for quick turnaround times. It seems like part shortages could be a significant issue, as not having certain items might mean waiting for months to obtain them.

Yes, to Dan's point or in reference to earlier comments, we have paid a bit of a premium to acquire the inventory we need to meet our customer delivery timelines. Additionally, we've ordered larger quantities than usual because the supply chain has been inconsistent. At this stage in the company, this increase in inventory will assist us in the future with fulfilling customer schedules.

Right, right. That makes sense. Okay. One other question. Can you provide any color on the kind of the order flow within the quarter, would you say it was relatively even? Or did it kind of slow down towards the end of the quarter or been increasing? A lot of the other companies, there's some slowdown happening in certain sectors, so I'm just kind of curious if there's any commentary you can provide on the sort of the trajectory of the order flow in general over the course of the quarter?

Yes. I would say we still have good order flow. I think if anything, we are seeing customers, in some cases, reseasonalizing their demand based on their schedule. But in terms of the flow itself, we've not seen a decrease.

Okay. Excellent quarter. Congratulations on being able to earn the dividend for the three quarters and hope for market news for you next quarter.

Thank you. Our next question comes from the line of Donald Hall. Your line is open.

All right. Hello?

Hi, Don.

Yes, Dan. You had strong year-over-year growth, and as a shareholder, I appreciate that. However, I want to focus on product sales, which were $10.5 million last quarter and dropped to $7.2 million this quarter, a decrease of over $3 million. You mentioned this was partially due to a significant defense order and some cyclical factors. This suggests that you were not limited by capacity in the third quarter, yet you continue to expand capacity, which is encouraging. Can we anticipate that sales will recover to $10 million soon based on these factors? Additionally, you mentioned having several top-notch customers, so I'm assuming they contribute to the reasons for the capacity increases. Could you elaborate on the anticipated sales and capacity?

Well, this is Joe. I'll try and answer some of those questions. You were correct that there is some inconsistency in our government-related business that we mentioned in our comments. We're still serving that market, and it’s just returning to a more normal state. I would say that jumping back up to a $10 million quarter is not something we readily see in the future, although that is certainly our goal. The discussion about capacity is focused on reducing our backlog, improving our service levels, and positioning ourselves to attract new business when the opportunities arise. In the short term, we will be reducing our product backlog with these new investments, but we are also laying the foundation for hopefully positive outcomes in the future.

Okay. Dan, do you have anything to add to that?

Our goal is to grow, which is why we are expanding our capacity. We serve various segments, with our test capacity focused on the industrial and medical sectors, our core business. We also have the fluctuating anti-tamper business that Joe mentioned. The cycles you observe are less about a business slowdown and more about the variability inherent in our operations. As you might be aware, we are structured to be quite flexible, with ample equipment to ensure we can accommodate increases in business and prevent bottlenecks. We invest well in advance to avoid these issues, so the equipment we currently have are investments made over a year ago or more. We remain very optimistic about the future and are committed to being a growth company.

Thank you. I have one more question. You renewed the Abbott contract. Can you share if this means they will continue ordering as they have previously, or is there significant potential for increased business with this renewal?

We aim to avoid speaking for Abbott, but we believe we have a strong advantage in supplying parts for their medical devices. These devices have favorable long-term trends, although we did experience a slight decline in revenues recently, as mentioned by Joe. However, the long-term outlook remains very promising. As the population ages, there's a growing need for pacemakers and other medical devices. We are beginning to see a rebound in healthcare services after the pandemic's impact on discretionary care. An article in the Star Tribune highlighted the increase in healthcare services we are witnessing in Minnesota and nationwide. Overall, we perceive the trends positively, but the business does involve a significant amount of inventory, which can create short-term cyclical fluctuations. Factors such as new model launches, competitive entries, FDA approvals, and treatment practices for heart failure and other ailments can also affect the business in the near term. Nonetheless, we regard this as a strong business with significant growth potential.

So probably, the renewal is just sort of a general agreement. It's not product specific. Is it makes sense?

Well, it is product specific, but it's an agreement of.

No. This is Joe. It's product specific from our perspective from what we delivered to them.

What is publicly known is that they list the subsidiary in the contract, which is part of the public record. The subsidiary that acquires these parts is Pacesetter, the cardiac rhythm management division of Abbott. One can certainly deduce that these devices are used there. However, from our perspective, it's simply a contract to supply a specific type of sensor. The rest of the details had to be removed from the agreement for confidentiality reasons.

Okay, thank you very much, and good luck going forward. It was a nice quarter. Thanks.

Thanks, Don. Always a pleasure talking to you.

Thank you. Please standby for our next question. Our next question comes from the line of Alex Woodward with Bridge City Capital. Your line is open.

Hi. I wanted to ask about linearity in the quarter. Looking at the days sales outstanding and the days inventory, what was linearity like, especially at the end of the quarter?

So for clarification, could you define for me what you mean by linearity?

Linearity in terms of revenue being recognized.

I'm not sure I understand the question. If you're asking whether there is a direct correlation between the drop-off in revenue and the reduction in receivables, I'm not sure you can make that connection. Much of our receivable activity, as I mentioned, was related to large outstanding project work that we are currently collecting on. Therefore, I wouldn't attribute this to a decrease in revenue but rather to the effective work we’ve been doing. I'm not sure if that answers your question, but I hope it helps.

Well, I don't doubt that there was a lot of hard work on your end, but your DSOs are 25 days. And if your terms are 30 days, then you're less than a cycle if everyone is paid. So it would appear that maybe you didn't have as many sales in the last month of the quarter?

Well, I think we had said in our prepared comments, we did have some softness in our medical device sales. Some of that was in December. Not all of our customers are on 30 days. Some of our customers actually have shorter terms.

It's a very good number, 25; it's a record as far as I can tell. But inventory days are also a record, excluding the first COVID quarter. And a lot of that is in work in process raw materials, which I view is a good thing. But would you anticipate that the raw materials would start to work their way lower from here?

Yes, I think that is clearly our intention. That seems like a reasonable assumption. The raw material and work in process will be used to fulfill existing orders. Additionally, you may have noticed a slight increase in our finished goods inventory, which is intended to meet some of our future demand in the first quarter of this year. So, it's not solely finished raw materials and work-in-process.

No, that's correct. All three categories grew, but it seems that due to supply chain constraints, the use of raw materials has decreased while work-in-process has increased. One of the gentlemen earlier asked about maintaining the 20% growth. However, looking year-over-year, both finished goods and work-in-process are up almost 30% or 40%. This suggests that your inventory is positioned for the company to continue to grow at a rapid rate.

We're not going to get into the business of projecting future sales, but that has been one of the things we've talked about on these calls over the past year is having the inventory ready to meet customer demand. So, yes, that's our intent.

Thank you. Please standby for our next question. We have a follow-up question from the line of Jeffrey Bernstein with Cowen. Your line is open.

Hi, guys. Just a couple of quick follow-ups. So Dan, I think you have said in the past that you guys might actually be the dominant player in sensors used in the new generation of hearing aids. And those OTC hearing aid regulations came out, I guess, in October after a lot of delays, etc. I know it's very early in the development of this market. What are your thoughts about what kind of traction you're seeing from customers? Is this a needle-moving event next year or the year after? Or how are you thinking about this at this point?

We view this as a significant long-term opportunity to address a large underserved market. Statistics from the FDA indicate that only about 20% of people who could benefit from hearing aids actually pursue them, likely due to high prices and the challenges in obtaining them. Recently, we have noticed major retailers starting to offer over-the-counter hearing aids, a development we couldn't confirm during our last call in October. We are seeing various announcements from both physical stores and online vendors committing to providing OTC hearing aids, which we see as a great opportunity for market growth. We have already developed products tailored for this market, leaning towards rechargeable options rather than primary batteries that are common in traditional hearing aids. Our aim is to cater to both the OTC and conventional hearing aid markets while also tapping into the expanding hearables sector as more companies launch consumer wearables. We have created sensor devices that are compatible with rechargeable technology, and we have received encouraging feedback from the industry about these products. Overall, we believe this represents an excellent market opportunity.

Great. Thank you. And then just a couple of others. You guys did some development work on a Spin-Torque diode. I think it was like a gigabaud kinds of data rate and with implications that there was government interest, of course, they funded the research, I think, and then potentially some commercial interest at some point. Whatever happened with that?

Yes, you've remembered correctly, Jeff. We worked on some devices and research in 2018, completing a contract with the Army that successfully showcased the feasibility of a Spin-Torque microwave diode spectrograph, which has military applications. We also saw potential in the technology to enhance speed and its relevance to the anti-tamper and physical unclonable function market. One area you pointed out is the intriguing research in probabilistic computers. We've demonstrated stochastic magnetic tunnel junctions, which are akin to the technology developed for the Spin-Torque diodes and proposed them as a vital component for probabilistic computers. While it's a long-term prospect, we recognize the potential of this research in various fields beyond our initial defense focus from five years ago.

Got you. Okay, that's great. And then just one other. You guys have looked at the analytical equipment market as a potential end market at some points in the past. And I know you were doing something looking at exosome detection. I was just wondering if anything had progressed there.

Yes. So we continue to see exosomes as a fascinating area. So exosomes are biological components that can be used to diagnose disease such as cancer and to make less invasive cancer tests. So we do have biosensor technology for higher sensitivity electronic rather than the optical test that can be used to detect exosomes. So we are looking at possible partnerships to use our technology. We don't envision ourselves getting into the medical diagnostic market. We don't have the distribution or the expertise on the equipment side. But we do see the possibility there of providing sensor systems and advanced biosensor systems to support those. So that's an area of long-term research and exploration for us.

Got it. That's great. Thanks very much for the help today.

Thanks, Jeff.

Thank you. Please standby for our next question. Our next question comes from the line of Walter Morris with Baraboo Growth. Your line is open.

Hi, Dan. Hi, Joe. Excellent quarter. My question was on the emerging hearing aid market, and that has been answered. So I'm okay. Thank you.

Okay. Thanks, Walter. By the way, my Midwestern roots won't let me go without saying it's Baraboo.

Thank you. I'm showing no further questions in the queue. I'd now like to turn the call back over to Dan for closing remarks.

Well, thank you for all the questions. We were pleased to report a 22% increase in product sales and earnings for the quarter. We look forward to speaking with you again at our fiscal year-end call tentatively in early May. Thank you again.

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