Earnings Call Transcript - NVEC Q4 2022

Sue Miller, Senior Accountant

Good afternoon and welcome to our conference call for the quarter and fiscal year ended March 31, 2022. I'm Sue Miller, Senior Accountant at NVE. This call is being webcast live and being recorded. Our replay will be available through our website, nve.com. We issued our press release with Fourth Quarter and fiscal year results, and filed our annual report on Form 10-K in the past hour following the close of markets. On today's call, our President and CEO, Daniel Baker, and our CFO, Joe Schmitz. After Dan's opening comments, Joe will cover financial results for the quarter and fiscal year. Dan will cover the business and new products and then we'll open the call to questions. All lines will be muted until we open the call to questions. 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, 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 first filed 10-K links to the documents we filed this afternoon are available on the SEC's website, our website, and our Twitter timeline. Actual results could differ materially from the information provided and we undertake no obligation to update forward-looking statements we may make. Now, I'll turn the call over to Dan Baker, our President and CEO.

Daniel A. Baker, President and CEO

What's going on with this people? Thank you, Sue. We're pleased to report a 22% increase in net income for the fourth quarter to $0.79 per diluted share, driven by a 15% increase in revenue. For the full fiscal year, net income increased 24% to $3 per share driven by a 26% revenue increase. The strong growth was despite continuing supply chain disruptions. Joe will cover the details. Joe.

Joseph R. Schmitz, CFO

Thank you. Total revenue for the most recent quarter increased 15% to $6.75 million, from $5.8 million in the prior period. Our presenting challenges include certain shortages that present both opportunities and threats. We've seen new sales opportunities because many of our competitors have longer lead times than us. On the other hand, shortages have impacted our production capacity. We've been quoting 12 to 20-week lead times for most parts, which is longer than before the pandemic. However, according to the April monthly market update by one of our distributors, the lead time for parts from one of our traditional semiconductor competitors is 52 to 90 weeks or more. That's an increase from 15 to 90 weeks or above annually. We've addressed the threats posed by these strategies by increasing work in progress inventory. We invested in additional production and test equipment, and we expanded our production space. We have invested in tooling and materials, alternate packaging vendors, and we have invested in tooling for onshore foundry wafers. Gross margin was 77% compared to 78% last year. Like most companies in the semiconductor industry, many of our costs increased significantly in the past year, including foundry wafers, chemicals, packaging costs, and labor. In response to these increased costs, we continued discounting and increased prices in the past year. We believe that the impact of the COVID-19 pandemic on customer demand was significantly less in the most recent quarter and fiscal year when compared to the prior year. However, we believe the impact of the pandemic on our supply chain was significantly more in the recent quarter and year than in the prior period. Expenses for the quarter decreased 2% from the prior year, largely due to a 15% decrease in SG&A expenses, partially offset by a 4% increase in R&D expense. The decrease in SG&A for the quarter was due to staffing changes. Interest income for the fourth quarter of fiscal '22 decreased 9% due to a decrease in our available-for-sale securities, and a decrease in the average interest rates on those securities. Net income for the fourth quarter of fiscal '22 increased 22% to $3.82 million or $0.79 per diluted share compared to $3.13 million or $0.65 per share for the prior year quarter. For the fiscal year, total revenue increased 26% to $27 million from $21.4 million in the prior year. Product sales increased 26%, and R&D and contract revenue increased 36%. Net income for the year increased 24% from the prior year period to $14.5 million or $3 per diluted share, an increase from $11.7 million or $2 per share for fiscal 2021. Our profit metrics continue to be strong. Gross margin was 77%, operating margin was 61%, pre-tax margin was 55%, and net margin was 54%. Capital expenditures were $485 thousand in the fiscal year, the most since fiscal 2018. This was primarily for the deployment of new test handlers to increase our production test capacity and alleviate potential bottlenecks. We repurposed part of the building to make room for the new equipment. Equipment lead times have stretched out considerably recently, and our new equipment purchases this year are a result of procurement efforts that started a year ago or more. We believe our stock is a good investment, and we took advantage of buying opportunities in the quarter, repurchasing $154 thousand of our stock. With $4.83 million in dividend payments in the quarter, we returned a total of $5 million to shareholders. In addition to the past quarter's $1 per share dividend, today we announced that our board declared another quarterly dividend of $1 per share payable May 31 to shareholders of record as of May 16. Now, I'll turn the call back to Dan to cover the business, products, and marketing.

Daniel A. Baker, President and CEO

Thanks, Joe. Business conditions remain challenging. According to the Commerce Department, the semiconductor supply chain is very fragile, which is certainly what we're seeing. Some semiconductor insiders have said global semiconductor shortages could last into 2024, presenting both medium-term opportunities and threats, as Joe said. We took advantage of some of the opportunities by winning business because we have shorter lead times than traditional semiconductor firms. And we can keep that business by demonstrating that we're a reliable supplier with excellent product performance and quality. I'd like to recognize our Ukrainian distributor, Micro Components, which is based in Kyiv and has represented us for more than 15 years. It's not significant business from a financial perspective, but it is inspirational. The principal continues to represent us even in the immediate aftermath of the invasion, despite hardships we cannot even imagine. FedEx can't deliver to Kyiv, but we're doing our best and doing all we can to get them parts. We wish them the best, and they've helped inspire us to do all we can to overcome supply chain shortages. In-person trade shows and conferences are returning. Last month, one of our Japanese distributors, K.K. Rocky, exhibited at the Embedded and Edge Computing Expo in Tokyo, which is billed as Japan's largest information technology trade show. The booth included several live demonstrations of NVE products. There are links to images and videos from the show on our website, as well as our YouTube, Twitter, and LinkedIn social media sites. We'll be represented by distributors at two major trade shows in Germany later this month. The two shows are 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. Capping off the tradeshow season, we will exhibit at Sensors Converge in San Jose next month, which showcases the latest sensing technologies. The show is back to its traditional early summer schedule for the first time since June 2019. We'll be demonstrating several new products, and we'll have a new mechatronic demonstration using a musical pitch pipe based on one of our smart sensors. Demonstrating our sensors with musical instrument robots has been effective in attracting attention and demonstrating the precision, robustness, and simplicity of our sensors. 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. In the past quarter, we executed an extension to our supplier partnering agreement with Abbott. The extension runs through the end of 2022 and includes price increases to help offset our cost increases. The latest amendment was filed on a current report on Form 8-K and incorporated by reference in our recently filed 10-K. It is also available via our website or the SEC's website. Another example of the extraordinary reliability of our parts is our selection for the Europa Clipper mission. We were notified in the past quarter that NASA has started integrating the spacecraft. One of our NASA contacts reminded us that NASA provided research grants to NVE, starting in 1990, to help us develop spintronic products, which are now being used for a NASA Level 1 mission. This means they are required for successful completion of the mission's objectives, which is one of the most demanding applications there is. The mission will conduct reconnaissance of Jupiter's moon Europa and investigate whether it could have conditions suitable for life. The launch is targeted for October 2024 to arrive at Europa in 2030. Turning to new products, we introduced two new products in the past quarter: a new current sensor and a high sensitivity Smart Magnetometer. Pete Eames, our Vice President of Advanced Technology, discussed plans for these products on our January call, and he and his team enabled these product launches on schedule. Current sensors can be used to operate electric motors more efficiently, and motors represent around 50% of worldwide electricity consumption. The new ACT011 is a Tunneling Magnetoresistance current sensor that can measure lower currents and lower voltages than common semiconductor sensors, allowing control of more motor types and sizes. It also fits in tight spaces and is less than a tenth of an inch square. There's a demonstration video on our website and YouTube channel. The high sensitivity TMR Smart Magnetometer is a smart version of our most sensitive sensor ever, which we discussed on our last call. Magnetometers measure magnetic fields and can be used for position or current sensing. The high sensitivity of the new part allows more precise position control for more effective robotics or a more precise current measurement for more efficient motors. Smart sensors are a central element of our Internet of Things strategy because they have smart network interfaces that allow many sensors to be connected easily for advanced adaptive factories with ubiquitous sensors. We demonstrated the new Smart Magnetometer controlling a mechatronic Monica player on our website and YouTube channel. Despite challenges posed by shortages and long lead times, fiscal 2022 was a productive year for product development. In addition to the two new sensors I just discussed, we introduced several other new products in the past year including our most sensitive magnetic sensor ever, the world's first TMR Gear, two sensors with resolutions in the thousands of a degree for ultra-precise motor control and robotics, ultra-low power magnetic switches for medical devices and hearables, and more parts that transmit power as well as data. In addition to new products, business highlights for the past year include: we made significant investments to increase capacity and diversify our supply chain, we maintained an aggressive dividend and repurchased some of our stock, we extended our supplier partnering agreement with Abbott, we resumed in-person trade shows, which we view as an investment to facilitate future sales, we completed a spruce-up of our building with more production space and a more pleasant and efficient work environment. The cost of the improvements was mostly covered by a build-out allowance as part of our 2020 lease renewal. Finally, we welcome Joe Schmitz as our CFO and Jim Breakey to our Board of Directors. We're fortunate to have extremely 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 look forward to thanking them in person tomorrow at our first in-person employee meeting in more than two years. We're planning a barbecue to welcome spring here in Minnesota and celebrate the foundation we've built for a bright future. Now, I'd like to open the call for questions.

Jeffrey Bernstein, Analyst

Hey, Dan, it's Jeff Bernstein from Cowen.

Daniel A. Baker, President and CEO

Hi, Jeff.

Jeffrey Bernstein, Analyst

How are you?

Daniel A. Baker, President and CEO

Good. How are you?

Jeffrey Bernstein, Analyst

I'm good. I have a bunch of questions. We've talked about some sizable markets that you guys have the potential to penetrate. I'd just like to get an update on where you stand. We've talked about isolators for hybrid high voltage and low-voltage systems, including EVs, and increasing applications with electrification of all kinds of things. What kind of traction are you getting there?

Daniel A. Baker, President and CEO

So we are getting a lot of traction, particularly in our isolators. Our new isolators convert power as well as transmit data. Those are being used for smart grids and power supplies. We have some additional part types that we've introduced in the past year that I mentioned in the prepared remarks, and we have some more that we're working on that we hope to introduce in the coming quarter of the year. So it's opening up new market segments for us for power control and smart grids. Right now, the parts are relatively new, so the revenue contribution is modest, but we see that as having excellent growth potential.

Jeffrey Bernstein, Analyst

That's great. We talked in the quarter about the potential for replacing milli and micro ohm resistors in current sensing applications for very low voltage systems. That sounds like it's actually a huge market. Can you give any kind of background on that and how you might penetrate that?

Daniel A. Baker, President and CEO

Yes. That's a great question. Sub milliohm resistors, for the general audience, are used for current sensing. The lower the resistance, the lower the losses. However, they still have resistance, which means that they waste energy in order to measure energy. The whole idea of current sensing is to make motors and other current-consuming devices more efficient, but wasting power to measure current is counterproductive. We see this as a great opportunity. We make non-contact current sensors that avoid the problems of temperature variation, self-heating, losses, and noise that you have with those resistors. Our sensors have no resistance, they are much easier to use, and they are inherently isolated. If you put a resistor into a socket and it's hooked up to line voltage, it's still hooked up to line voltage. So you can't hook up computers and things like that to it as it would be dangerous. Our new device isolates the signal so that you can safely connect it to line voltage on one side and then hook it up to a computer or control system on the other side. We demonstrated that on a YouTube video with a tester that we got from a hardware store showing that we have dangerous line voltage on the input of the sensors, but everything is perfectly safe on the output of the sensors, and you can't do that with sub milliohm resistors. If unsafe voltages are put on them, the output is unsafe. We see significant advantages here and view it as an excellent market opportunity.

Jeffrey Bernstein, Analyst

Any idea about the order of magnitude of the size of that market?

Daniel A. Baker, President and CEO

Yeah. That's hard to say. I don't think we have numbers that we'd be able to quote with any reliability. Current sensing is a very large market; this is a subset of that market. We see current sensing as a very fast-growing market as more energy mandates kick in, and more efficient appliances and motors are being mandated, along with the implementation of higher electrical efficiency standards. This market has a great deal of potential, and as you can tell from your research into conventional alternatives such as sub-milliohm resistors, companies are seeing this opportunity. We believe that with our technology, we have a unique value proposition that can't be matched by conventional technologies.

Jeffrey Bernstein, Analyst

That's great. Can you talk a little bit about MOSFET drivers for GaN and silicon carbide MOSFETs? That market seems to continue to grow and gain traction.

Daniel A. Baker, President and CEO

That's another important market for us. A lot of those are used for motor control. The challenge is to switch those MOSFETs as quickly as possible; the faster you can switch them, the lower the losses are. Our isolators can drive those types of MOSFETs, either directly or with another driver, and do it faster and therefore more efficiently than conventional alternatives to drive the MOSFETs. We provide a bridge between the control system and the MOSFETs that are actually controlling the high power. We can enable more efficient control of these types of motors. They're also used for battery chargers, and for the systems onboard charging in electric vehicles. As discussed on previous calls, we are on a platform called BeFAST in cooperation with one of our distributors that uses next-generation MOSFETs, and they use our isolators and couplers to drive those MOSFETs faster than otherwise possible while continuing to provide essential electrical isolation for that type of high voltage control. We see this as another excellent market in the Internet of Things and the industrial Internet of Things to yield more efficiency and power conversion.

Jeffrey Bernstein, Analyst

Were you referring to that design for the onboard charger?

Daniel A. Baker, President and CEO

Exactly. The trade name for that is BeFAST.

Jeffrey Bernstein, Analyst

Got you. And I know this has drawn out the over-the-counter hearing aid issue; they now want to put out a law to ensure that the FDA follows existing laws and puts out regulations on over-the-counter hearing aids. Do you see growth there regardless of what happens with these regulations, or is that an important catalyst for you that's being delayed?

Daniel A. Baker, President and CEO

Yes. As you point out, it's been difficult to predict when over-the-counter hearing aids will be formally approved, but it seems inevitable. We're prepared for that, and we've been working with our customers to ensure that we have components that are well-suited to the over-the-counter market. We're also looking at the broader market for audio devices, so-called hearables. That's estimated to become a $93 billion market by 2026, growing very quickly. The broader hearables market is ongoing regardless of FDA regulations on over-the-counter hearing aids. A lot of the things we've developed for over-the-counter hearing aids are also applicable to the broader hearables market. As you may recall, we've begun offering sensors compatible with rechargeable batteries often used in consumer wearables instead of disposable batteries generally used in traditional hearing aids. We have design wins in that space for consumer wearables that fit in the ear, and our new parts have received very positive feedback. We see this as an excellent market. We're watching closely what the FDA will do, but we believe we are well-positioned for the broader market, regardless of the outcome for over-the-counter hearing aids.

Joseph R. Schmitz, CFO

[Indiscernible]?

Jeffrey Bernstein, Analyst

I wanted to ask about the R&D, which looks like it's rebounded. It had been under $700 thousand a quarter for a couple of quarters and had been higher earlier. What's going on there exactly?

Joseph R. Schmitz, CFO

This is Joe, and this quarter you saw a ramp-up of spending for chemicals and supplies related to current and future business. So while we're not setting a target, I think it's a reflection of the activity we have going on in our R&D team.

Jeffrey Bernstein, Analyst

Okay. And then the tax rate was only 13% this quarter. Joe, could you talk about what the normalized tax rate here might be?

Joseph R. Schmitz, CFO

Yeah, I think the tax rate is lower this quarter due to some of our tax breaks for foreign sales. I think that was probably the biggest driver. We also had a little bit of a change in our business mix, with some more foreign-source income than we've seen in prior quarters.

Jeffrey Bernstein, Analyst

Okay. Great. Thanks very much for the time, guys. I'll let somebody else ask some questions.

Daniel A. Baker, President and CEO

Thanks, Jeff. Are there any other questions? Yes. Go ahead, please.

Thomas Cochran, Analyst

Tom Cochran of Lake Road Partners.

Daniel A. Baker, President and CEO

Hey Tom.

Thomas Cochran, Analyst

Hey, and congratulations on a good report.

Daniel A. Baker, President and CEO

We were very pleased.

Thomas Cochran, Analyst

Yes, I should think. Over the past year, Dan, you have mentioned a couple of times that you were hoping to penetrate the automotive market. How is that doing?

Daniel A. Baker, President and CEO

We have been making some good headway, particularly in the automotive market, especially in hybrid electric vehicles. I mentioned the onboard charging system where we are part of a reference design. That system converts electricity from a high-voltage outlet or charger to low-voltage to charge the battery. This relates to the MOSFET drivers and the advanced GaN and silicon carbide MOSFET drivers that we discussed. Our sensor technology is being investigated in several automotive applications for rotational or position sensing. Finally, our data couplers are used to transmit information between modules in a car, and we have some activity there. The challenge in hybrid electric vehicles is that the voltages can be several hundred volts, and of course, you can't hook up that kind of voltage directly to a controller; the data needs to be isolated. Our isolators allow for the transmission of data without direct electrical connection, which is crucial in high-voltage systems like hybrid electric vehicles. We see that as not a real near-term market, but there are some promising activities going on, particularly with the rise of hybrid electric vehicles and autonomous vehicles. We see excellent opportunities there for sensors and couplers.

Thomas Cochran, Analyst

Thank you, Dan.

Daniel A. Baker, President and CEO

Thank you, Tom. So, are there any other questions? Well, if not, I'll wrap up. We were pleased to report a 24% increase in earnings for the fiscal year, driven by a 26% increase in product sales. We look forward to speaking with you again in July to discuss results for the first quarter of fiscal 2023. Thank you all for participating in the call, and you may all disconnect.