Nve Corp (NVEC) Q2 2024 Earnings Call Transcript

Hello, and welcome to NVE Corporation Conference Call on Second Quarter Results. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to Daniel Baker, President and CEO. Sir, you may begin.

Good afternoon, and welcome to our conference call for the quarter ended September 30, 2023. This call is being webcast live and recorded. A replay will be available through our website, nve.com. I'm Dan Baker, and I'm joined by Accounting Manager and Principal Financial Officer, Daniel Nelson. After my opening comments, Daniel Nelson will present our financial results. Then I'll cover marketing and new products, and we'll open the call to questions. We issued our press release with financial 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 on X, the platform formerly known as Twitter. 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 and risks of credit losses as well as risks 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, 2023, as updated in our quarterly report on Form 10-Q for the quarter ended June 30, 2023. 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 strong earnings and cash flow despite decreased revenue from a record quarter a year ago. Daniel Nelson will cover the details of our financials. Daniel?

Thanks, Dan. Total revenue for the quarter ended September 30, 2023, decreased 33% to $7.13 million, compared to $10.7 million for the quarter ended September 30, 2022. The decrease was due to a 32% decrease in product sales and a 92% decrease in contract R&D. The decrease in product sales was against a tough comparison to last year when product sales increased 59% and is a reflection of the semiconductor industry downturn. The good news is that forecasts are for a strong industry rebound, and it is projecting a 20% increase in semiconductor sales after a 12% decrease this year as demand rebounds for most application lines. The decrease in product sales was primarily due to decreased purchases by existing customers. Product sales to defense markets were especially weak in the quarter. This was related to the timing of procurement cycles, and we expect these sales to recover in the coming quarters. The decrease in contract R&D revenue was due to the completion of most contracts. But we have new active contracts, and contract R&D is expected to strengthen later this fiscal year. Total expenses decreased 17% for the second quarter of fiscal 2024 compared to the second quarter of fiscal 2023, primarily due to a $202,926 credit loss provision reversal, partially offset by a 2% increase in R&D expense. The provision for credit loss reversal was due to a reassessment of our allowance for credit losses based on payments and debt customer information as of September 30, 2023. Interest income for the second quarter of fiscal 2024 increased 46% due to higher yields on securities purchased after September 30, 2022. Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes, decreased to 8% for the second quarter of fiscal 2024 compared to 19% for the second quarter of fiscal 2023. The decrease was due to the reversal of $202,926 credit loss provision and changes in the amounts and timing of tax deductions and credits. Our effective tax rate can vary from quarter to quarter. Our effective tax rate in subsequent quarters will likely be higher than the effective tax rate in the quarter ended September 30, 2023. The 22% decrease in net income for the second quarter of fiscal 2024 compared to the prior year quarter was primarily due to decreased revenue, partially offset by decreased expenses, increased interest income, and a lower effective tax rate. Net margin was an impressive 65% of revenue. For the first six months of fiscal 2024, total revenue decreased 12% to $16 million from $18.1 million for the first six months of the prior year. The decrease was due to a 10% decrease in product sales and a 68% decrease in contract R&D revenue. Net income for the first six months decreased 11% to $9.13 million or $1.89 per diluted share from $10.2 million or $2.12 per diluted share for the first half of fiscal 2023. Net cash flow provided by operating activities increased 11% to $10.4 million for the first half of fiscal 2024 compared to $9.35 million for the first half of fiscal 2023. The strong operating cash flow more than covered our dividend so far for this fiscal year. And cash plus marketable securities increased from $53.3 million to $53.8 million. Now I'll turn the call back over to Dan Baker to cover the business. Over to you, Dan?

Thanks, Daniel. I'll cover products, marketing, and our shareholders' meeting. NVE's line of the world's smallest DC to DC converters recently qualified for the prestigious CE mark under an EU declaration of conformity, which includes safety, electromagnetic compatibility, and reduction of hazardous substances. Our distributors have told us the mark could enable additional sales in Europe. The key to qualifying for the mark was rigorous testing in the International Standards for Radiated Emissions. Unlike most conventional DC to DC converters, our parts pass the test with no external components for electromagnetic compatibility compliance. Also in the quarter, we officially renewed our ISO 9001 certification. The new certificate is valid until October 2026. ISO certification is a seal of approval from a third-party governing body that NVE meets the international standards of excellence published by the International Organization for Standardization, or ISO. ISO 9001 helps ensure consistent quality. Trade shows are an important part of our marketing strategy. Our distributors exhibited at several shows in the past quarter. We exhibited under our own banner at the Medical Design and Manufacturing Trade Show last week in Minneapolis, part of the advanced manufacturing event. Minnesota is a healthcare industry hub, and medical devices are an important market for us. We have a compelling benefit proposition for medical devices with small size, low power, and superb reliability. The nearby show was also a chance for some of our employees who don't usually go to trade shows to interact with customers and prospects. We demonstrated our new high-field tunneling Magnetoresistive sensors, which have a unique omnidirectional capability and can detect the high fields from MRI to enable MRI-tolerant medical devices. We showed our new ultra-high sensitivity tunneling Magnetoresistive sensors, which are ideal for catheter position detection and navigation. In these applications, an array of sensors on a catheter forms a miniature compass using an externally generated field to determine the position of the catheter. Our sensor's small size allows them to be used in small diameter catheters, and their precision improves positional accuracy, enabling more effective procedures. We also featured a new chessboard to demonstrate the wide operating latitude and power efficiency our sensors provide in medical and industrial applications. Demos are also on our website and our YouTube channel. We held our Annual Shareholders Meeting in August at a nearby hotel. Unlike many companies, we returned to in-person meetings after the COVID-19 pandemic. Proxy advisory firms recommend in-person annual shareholders meetings for good governance. All of our directors and officers attended along with our auditors. We had a chance to meet our shareholders and answer questions. Our shareholders could see and try out hands-on product demonstrations. In the formal meeting, each director was reelected. Named executive officer compensation was approved. Shareholders voted in favor of annual say on pay votes, and the selection of our independent registered public accounting firm was ratified. We filed the final vote counts in a current report on Form 8-K shortly after the meeting. There's a replay of the meeting with slides and product demonstrations on our website and YouTube channel. Now I'd like to open the call to questions. Tawanda?

Thank you. Please standby for our next question. Our first question comes from the line of Jeffrey Bernstein with Silverberg Bernstein Capital Management. Your line is open.

Hi, Dan. How are you?

Good, hi, Jeff.

So a couple of questions for you. Just wondering, have you delivered now all the backlog that had built up during COVID?

We don't officially refer to it as backlog since that term has a different connotation, but we do monitor our order flow and the orders present in the system, and we still have orders in place. Although we have resolved some of the shortages that affected many in the semiconductor industry during the pandemic, we are experiencing a robust order flow and are actively fulfilling those orders.

So in terms of your lead times, have those changed at all?

They have. It depends on the part, but our lead times are shorter. We have many parts in stock now that we didn't have in stock. We've always been better than most in the industry, we believe, during the pandemic because we are uniquely positioned in that we have integrated production here at NVE. We have front end, back end, and control over most of our processes. So we're in better shape than most in the industry. And now we're in even better shape because some of the shortages have abated. We've increased our capacity with capital investments. We've increased our staffing. And so we can offer shorter lead times or parts in stock for many of our parts.

Yeah. Okay. And then can you just talk a little bit about the design pipeline sort of versus pre-COVID times? Is there a significant difference in the number of designs that you guys are working on?

Yeah, that's an interesting question. I think it's more, but I don't know that we have data that could support that. It's just a feeling that we've had more interest as companies are less worried about just getting parts, then now they're looking also with new designs and longer-term things. The shortages of personnel, including design personnel, that plagued the industry during the pandemic seem to have abated, at least somewhat. So we're very optimistic also based on the feedback that we've gotten on some of our specific products, including our DC to DC converters, some of our angle sensors, and I mentioned navigation sensors that are particularly useful in the medical business. So our design activity is high.

Got you. And then in terms of just the overall number of customers who are ordering from you versus pre-COVID, what does that look like?

We think it's increased. Well, it has increased. We picked up some customers during the pandemic, during the shortages, and we've retained them by and large. So we have more customers than we had before the pandemic. We continue to pick up customers. But as we've said before, they sometimes came for the lead time, but they stayed for the quality product and the support that they get from NVE.

Got you. That's great. And then I'm just wondering, in terms of any design wins that you've had over the last couple of years, that you think will move the needle at some point as they ramp up? Or are the sort of individual designs just never going to be that important?

We see some particularly significant areas where we've gained design wins. I want to highlight two of them: charging stations for electric vehicles, which are crucial for developing the infrastructure needed to accommodate the anticipated surge in electric vehicle usage. We have previously mentioned a design win in this area. Additionally, we have secured a design win in power conversion for energy storage systems, which plays a vital role in the transition to green energy. Since renewable electricity, such as wind and solar, is not always available, it must be stored for local use. These are expanding markets with substantial long-term potential. We are pleased with any design win, but these are especially noteworthy as they target large, rapidly growing markets where we have a strong value proposition.

That's great. Thanks for the help today.

Thanks, Jeff.

Thank you. Please standby for our next question. Our next question comes from the line of Chris Jankosky. Your line is open.

Hello, thank you for taking my question. I would like to ask about your YouTube channel, where you showcase your chips being used for a DFI device and as a driver for an electric bike. Do you believe your pricing is practical for entering these markets?

We demonstrated several of our components, including isolators and DC to DC converters, in a YouTube video for driving electric bike motors. This market is intriguing for us regarding power conversion, and we believe we offer a competitive advantage in enhancing the efficiency of these systems. We can reduce their size and maintain cost-effectiveness. There's a larger market for controlling various types of motors, which consume a significant amount of the world's electricity. Even slight improvements in efficiency can greatly contribute to the transition to electricity and carbon-free energy sources. Therefore, we view the overall motor control category as an excellent opportunity.

Can you give us some kind of a neighborhood figure as to how much efficiency gain you would have or kind of like an average industrial motor?

It's challenging to provide an exact figure because it varies depending on the motor and its application. However, significant changes in efficiency, like moving from 50% to 99%, have already been achieved in the past. Even minor improvements, such as 1% or less, are important because they can accumulate across many motors, resulting in substantial electricity savings. While it's hard to put a precise number on it, we can achieve higher efficiency than standard electronics, which is crucial for our target market.

Okay. That's good to hear. Higher efficiencies indicate that you generally achieve better current sensing than the existing systems.

Exactly. Part of it involves current sensing, while another aspect is the efficiency of our DC to DC converters. Additionally, the speed of our isolators is crucial as they act as an interface between the controls and the power switching transistors. This is important because these transistors operate very efficiently when fully on or off, but during transitions, they waste electricity. This transition phase is a significant source of inefficiency. Therefore, the quicker we can switch these devices, the more efficient they will be, and our devices are extremely fast.

Okay. That is good to hear. Are you making progress in broader market industrial applications?

We are addressing the broader market, specifically our traditional industrial control market and the industrial Internet of Things, where we maintain a strong position. We've emphasized our smart sensors used in robotics for industrial control and highly connected robotics. The reception for those parts has been positive. We also continue to produce isolators that serve as the essential components of those systems, alongside the sensors that act as the eyes for the robotics within industrial control systems. This market continues to be strong for us.

Okay. There was another YouTube video discussing your current sensors for GFI, which serves as a safety plug for bathrooms. Is that a market you can enter?

I see. I missed your question the first time. What you were referring to is GFI, or ground fault interrupters, also known as GCFI, ground fault circuit interrupters. We have a demonstration on our website and on YouTube that shows how to do that. It's an interesting market for us. The home market, particularly in areas like bathrooms and kitchens, is fairly commoditized. However, there is an industrial market for these devices that we are exploring. More importantly, we are showcasing the extreme sensitivity and wide range of our current sensors. As you rightly pointed out, current sensors are crucial for controlling motors efficiently, which enables motors to operate more effectively within the system. Additionally, our sensors consume very little power. In contrast, conventional current sensors may require a significant amount of power to measure the current for control purposes. With our current sensors using minimal power, we see this as a demonstration for a specific application and also as evidence of the broader applicability of these components in low-power, high-sensitivity, and wide dynamic range current sensing.

All right. Recently, there have been reports from Taiwan indicating that the inventory correction is concluding and clients are increasing their chip orders. Have you noticed this trend in the past week?

We've seen indications of a recovery of the semiconductor industry, as Daniel alluded to in the prepared remarks, and so that gives us reason for optimism for the coming quarters.

But have you seen it in your own order at your own kind of requests for inbound interest requests including…?

So you mean purchasing from foundries.

It seems like you're observing an increase in client inquiries and orders, indicating a cyclical uptick.

We are seeing some improvement. It's been gradual. It would be difficult to point to a particular week and say that we saw improvement. But in general, we've been seeing an improvement in the order flow, and that makes us optimistic about the future.

All right. That's it for me. Thank you for your very detailed answers and good luck.

Thank you, Chris.

Thank you. Please standby for our next question. Our next question comes from the line of Steven Lewis with Lewis Capital Management. Your line is open.

Good afternoon. I had a question about your bond portfolio. Have you had any change in the way it's been managed in the last three to six months? You're showing a small valuation difference of only $1 million plus versus cost?

What we've been indicating regarding the unrealized losses in the bond portfolio, which I believe you're asking about, is that generally interest rates have been rising. This increase results in unrealized losses in our bond portfolio. Unrealized losses mean that even though the current value appears lower when checked in bank statements or online, we still expect to receive the face or par value of the bonds. On the other hand, as interest rates rise, our interest income has significantly increased, as reflected in the income statement. This is due to our ability to reinvest our bonds as they mature into higher interest securities compared to the original investments.

That's what you're doing now?

Yes.

In the higher rate. Okay?

Yes. When we reinvest in a bond that matures, we typically find that the interest rates for the new bonds are higher than those of the old ones. Some of our bonds have several years left until maturity, and when we purchased them several years ago, the interest rates were lower. As those bonds mature, we can reinvest in bonds with higher interest rates, resulting in an increase in our interest income.

Assuming you can forecast your cash flow near term, do you think you will eradicate the difference between cost and fair value by the end of the year?

It is unlikely to happen by the end of the year because the bonds have longer maturities. We generally invest in multiyear bonds since we have strong cash flow and do not anticipate needing the funds right away. When the bonds mature, we expect them to return their full value. For example, if we have a $1 million bond, its book value might currently be lower, but we expect it to pay off at $1 million. Over the term of the bond, the value tends to move closer to the par value, which will result in a decrease in the loss.

Thank you. Regarding the average hearing aid business, there has been a lot of publicity about the ability to buy cheaper hearing aids without having to go through the doctor. I haven't checked to see if there are any comments on their call today. Is that business holding up versus your estimates?

The hearing aid business continues to hold up. It's an important part of our market. The broader market that you referred to about over-the-counter hearing aids and hearables is an excellent market for us. Hearing aids are a large underserved market. The estimates are that only 20% of those that could use a hearing aid seek help, as you implied that many are discouraged by the cost as well as the inconvenient dispensing. So having over-the-counter hearing aids and lower cost hearing aids, we believe, will expand the market, and we have a compelling benefit proposition in hearing aids. So we see that as a good long-term opportunity.

Have you secured an OTC backlog?

We have talked about some design wins in that space and the broader hearables market, which would be things that would go in once a year but may not necessarily be a hearing aid. It's a relatively small market now, but we expect it to grow.

You said you are pleased with the solid earnings for the quarter and the six months. Does that mean that the actual results for the quarter September were within 3% to 5% of your estimate going into the quarter, so to be pleased?

We were pleased considering the industry downturn and, as Daniel mentioned, our defense business can be unpredictable and somewhat volatile. Although it faced a significant decline in the September quarter, we anticipate a recovery in the coming quarters. Taking into account the industry's conditions and the specific challenges within our defense sector, we were satisfied with the overall results, especially with the cash flow and profitability that Daniel highlighted.

So you were pleased that the results were what you expected earlier, at least three months?

Well, we do not provide forward-looking guidance, so there's not much to compare to, but we assess our performance by considering the environment and the challenges faced. We were pleased with how our team executed in delivering orders and securing new business. The profitability, efficiency, and execution from our team during the quarter were commendable.

You're pleased with the backlog?

We're pleased with the order flow, given the industry conditions, but the industry is improving as we touched on in other questions. And we expect the expectations are for a much stronger semiconductor market in the coming year in calendar 2024.

Thank you very much.

Thank you, Steven.

Thank you. Please standby for our next question. Our next question comes from the line of Pete. Your line is open.

Hi, Dan, with the significant patent portfolio the company has, do you see any opportunities to license some of those patents to create additional revenue streams?

We've looked from time to time at the possibility of licensing. And in particular, we talked about licensing our MRAM portfolio. We were a pioneer in MRAM, which is spintronic memory, but our target market for that technology is in high-value low-density memories where we can build the type of fab that can be used as opposed to the multibillion-dollar fabs that make large-scale memories. So there's an opportunity for potentially licensing. It's a long-term opportunity. And then we have other ways of monetizing our intellectual property. We're very proud of our portfolio of intellectual property. And one way we can monetize that is private label sales, where we sell our products under another company's brand name. So we're still manufacturing it. We're proud of our manufacturing capability. And so licensing the technology and not making it means getting that up. And it's also, in some cases, we've invested quite a bit in the technology and in the infrastructure, and it's not that easy for somebody else to build it. But we do explore opportunities to leverage our intellectual property portfolio in other ways than simply selling parts under our own brand.

Great. Thank you very much.

Thanks, Pete.

Thank you. Please standby for our next question. Our next question comes from the line of Collin McBirney with Topline Capital Management. Your line is open.

Hi, Dan. Thanks for taking the question. I was curious about the variability in defense. Can you comment on the business outside of defense, either for the quarter or the first half? Is it flat, or can you provide an idea of the run rate?

We don't provide a detailed breakdown of our defense versus non-defense business, but defense had a significant impact on the most recent quarter in September. As I mentioned earlier, we were satisfied with the results from the non-defense business. However, the industry has been slow, which has affected us. Additionally, defense specifically contributed to a decline in revenue during the latest quarter.

Got it. Regarding the defense business, are those orders usually placed by the U.S. government, like the DLA, or do prime contractors typically handle them? Additionally, could you provide some insight into the number of customers in defense? Is it just one customer that orders millions of dollars, or are there about ten customers that place varying orders? It seems like the orders are quite inconsistent. Is that primarily due to having one major customer, like the U.S. government?

The customers are typically prime contractors, defense contractors. And it's not one, but it's not a large number either. There's a relatively small number of large defense contractors. And so the lumpiness tends to be tied to defense procurement cycles and our products that we sell into the defense industry are primarily anti-tamper products, which are used to protect electronic technology in large systems. So those tend to be tied to particular procurement systems for the large defense system. We can't say what types of systems they are, and we often don't know for obvious reasons, but they tend to be things that take a while to build, and so we get big orders when the systems are starting to be built and then they can sometimes drop off. And that's what happened in the September quarter.

Got it. Okay. Do you have a sense for the environment for defense spending over the next year? It seems like it might be as favorable or better than it was a year ago. How do you evaluate that in relation to your future expectations compared to where things have been?

That's a valid point, Collin. We would definitely prefer not to suggest that conflicts benefit business, but the government, specifically the Defense Department, has indicated that it is crucial to safeguard electronics for systems intended for foreign sales to allies, as these are particularly susceptible to reverse engineering and potentially ending up in the wrong hands. In that regard, it seems to create a favorable environment for our defense sales. However, these systems typically have long procurement cycles, meaning we don't see immediate revenue once a defense system is shipped. Still, we take pride in contributing, albeit in a small way, to the protection of U.S. technology and support for our Allied warfighters.

Okay. Great. That makes sense. Personally, I fully support the U.S. military. I think I recall you mentioning that your revenue for fiscal 2024 would be somewhat similar to that of fiscal 2023. The first half started off a bit lower, which would imply something around $11 million each for the third and fourth quarters. Is that feasible, or has there been a change in your outlook, or did I misunderstand your previous comment?

Yes, Collin, the earlier comments we made about revenue being similar were specifically in relation to anti-tamper sales. We were discussing the fluctuations within the anti-tamper sales business, and our statement was aimed at indicating that we did not expect to see a major change in those fluctuations, rather than a prediction about the overall revenue for the entire fiscal 2024. So, yes.

Okay. Got it. And so it's presumably the kind of the positive lump in into kind of 2Q '23 and then the positive lump in 4Q '23. Those were both from the defense. So assuming that comment still holds you would have kind of a couple of positive lumpiness to match last year's lumpiness?

We expect anti-tamper sales, defense sales to increase. We expect defense sales to recover in the remaining quarter of fiscal 2024. But as far as the timing is hard to say, again, because of the lumpiness of this part of our business, because as Dan mentioned in his comments, sales are tied to defense procurement cycles and defense contracts, which can be terribly difficult to predict.

Got it, understood. Okay, great. Well, thank you, guys. Appreciate it.

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

Well, thanks, everyone. We were pleased to report strong earnings and increased cash flow despite the challenging conditions. We look forward to speaking with you again at our next earnings call in January.

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