NVE Corporation (NASDAQ:NVEC)
Q1 2015 Earnings Conference Call
July 23, 2014 4:30 PM ET
Dan Baker - Director, President and CEO
Curt Reynders - CFO
Good day, ladies and gentlemen and welcome to the NVE Conference Call on First Quarter Results. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at the time. (Operator Instructions) As a reminder, this conference call is being recorded.
I would now like to introduce your host for today’s conference, President and CEO, Dan Baker. Sir, you may now begin the conference.
Thank you, and good afternoon. Welcome to our conference call for the quarter ended June 30, 2014 which was the first quarter of fiscal 2015. As always, I am joined by Curt Reynders, our Chief Financial Officer. This call is being webcast live and being recorded. A replay will be available through our Web site, nve.com.
After my opening comments, Curt will present a financial review of the quarter, I’ll cover business and governance items, and we’ll open the call to any questions. In the past hour following the close of market, we filed our press release with the quarterly results and our quarterly report on Form 10-Q with the SEC. The filings are available through our Web site or the SEC’s Web site.
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, uncertainties relating to future revenue and growth, uncertainties related to future R&D contracts, risks related to developing marketable products, uncertainties relating to the revenue potential of new products, as well as the risk factors listed from time-to-time in our filings with the SEC, including our Annual Report on Form 10-K for the year ended March 31, 2014. The Company undertakes no obligation to update forward-looking statements we may make.
We’re pleased to report by far the best quarter in our 25 year history with record revenue, product sales and earnings. Net income increased 57% to $0.83 per diluted share driven by a 40% increase in product sales.
I’ll turn the call over to Curt to cover details of the financial results.
Thanks, Dan. Total revenue for the first quarter of fiscal 2015 increased 37% due to a 40% increase in product sales, partially offset by a 48% decrease in contract R&D revenue. The increase in product sales from the prior year quarter was due to new customers, increased purchase volume by existing customers and favorable order timing. We’re also seeing evidence of an improving semiconductor industry market. The decrease in research and development revenue was due to the completion of a contract and a continued challenging environment for new U.S. government contract funding.
Gross margin increased to a record 82% of revenue compared to 78% last year, due to a more favorable revenue mix and a more favorable product sales mix. Total expenses decreased 5% for the first quarter of fiscal 2015 compared to the prior year quarter due to a 17% decrease in R&D expense, partially offset by a 14% increase in selling, general and administrative expense. The increase in SG&A was primarily due to increased sales commissions and performance-based compensation. The decrease in R&D expense was due to the completion of certain product development activities. Some R&D personnel were deployed in process engineering and their efforts can help improve yields and reduce product costs.
Our non-operating income consisted of interest income which increased 4% for the first quarter due to an increase in interest bearing marketable securities, partially offset by a decrease in interest rates earned on reinvested funds. Net income for the first quarter increased 57% to a record $4.04 million, or $0.83 per diluted share, compared to $2.57 million or $0.53 last year. Margins were the best in our history. Gross profit margin was 82% of total revenue. Operating margin was 65%, pre-tax margin was 71 % and net margin was 48%.
Our operations generated cash flow of $4.48 million for the quarter and as of June 30th, cash plus marketable securities increased to $100.2 million. Fixed asset purchases were $28,000 for the quarter and none for the prior year quarter. Investments both quarters were lower than most quarters in our history because we completed an upgrade of our production capabilities in 2013.
Now I’ll turn it over to Dan for his perspective on our business. Dan?
Thanks, Curt. I’ll cover R&D contracts, patents, product development, distribution and governance. As we’ve discussed before our growth strategy is new and improved products in the near-term and game changing extensions for the long-term. We have significantly increased R&D expenses the past three fiscal years to invest in the future. Contract R&D supports long-term growth with both new ideas such as biosensors.
We continue to work on our National Science Foundation project grant titled “Real Time Detection for Salmonella” which has been extended into the current quarter. The project is to develop biosensors for enhanced food safety in cooperation with the University of Minnesota and the University of Florida. The goal of the project is to develop sensors for faster detection of food-borne pathogens compared to existing techniques while retaining sensitivity.
We’re in discussions about commercial deployment with leading companies in the food industry, and we’re also considering applying for a Phase II NSF grant to help commercialize the technology. We are close to completing a Missile Defense Agency small business innovation research Phase I contract titled “Spintronics-based Physical Unclonable Functions” Our goal is to complete the contract this quarter. Physical Unclonable Functions, PUF or PUF is a function that’s embodied in a physical structure and is easy to evaluate but hard to predict and replicate. The proposal for spin PUFs is based on existing and future PUFs in spintronic devices. Possible commercial applications include high-speed encryption and security for consumer electronics. There is a link to an abstract approved by the MDA for public release from the, In The News page of our Web site.
In the past quarter we continued R&D under our cooperative research and development agreement with the U.S. Naval Surface Warfare Center Crane division for assessment of anti-tamper sensor technologies. Although the work is at our expense it demonstrates our anti-tamper capabilities and lays the groundwork for future Department of Defense-related contracts.
Turning to patents, as we previously reported in the quarter -- in the past quarter, our 6744086 patent was reissued. The patent is titled “Current switched magneto-resistive memory cell” and concerned spin momentum magnetic memory cells. This patent was one that we identified as particularly important in our most recent 10-K. Spin momentum memory, also called spin transfer or spin transfer torque, is a type of memory that uses spin currents rather than magnetic fields. This could significantly reduce MRAM write currents, especially with small lithographic feature sizes. The reissue adds claims and improves the patent.
And earlier this month we were granted the new patent title “Magneto-resistive based mixed anisotropy high field sensor”. This could have applications in power control, navigation and other areas. There are links to the new patents from our Web site, nve.com.
Turning to product development, we recently announced two new products in response to the customer needs, new current sensors and new high voltage couplers. The new current sensor combines elements of our two main product line, sensors and couplers. The new products are smaller and more rugged than existing technology, applications for the current sensors includes factory automation and smart grid infrastructure.
There has been strong interest and we’re planning to create a line of current sensors by developing higher current ranges to address more markets. Secondly, just today we introduced what we call our new V-series couplers with best-in-class high voltage performance. They are tested to work at line voltage up to 1000 volts, most line voltage is 120 or 220 volts, so that’s an impressive figure of merit. V-series couplers are 100% tested to a jolt worthy 8500 peak volt twice as much as our existing parts. That’s the equivalent of more than 5000 flashlight batteries or a d-cell flashlight more than 1000 feet long. Applications of the high voltage couplers include medical instruments, smart grids and power management to save energy. There are details about the new couplers on our Web site.
On the sales front we participated in two major trade shows the past quarter in cooperation with distributors PCIM Europe was in May and Sensor Test was in June. We had new products for both shows. I was at PCIM and also visited perspective customers while I was in Europe for the show. Isolated transceivers and new quarter size couplers were well received. The Sensor Test trade show focus on our sensor lines and we had good boot traffic and solid interest, especially for our new angle sensors.
Finally, I’ll cover some governance items. Our Annual Meeting has been scheduled for August 7th here in Eden. The materials, our proxy statement letter to shareholders and Annual Report on Form 10-K have been filed with the SEC and are available from the Investors section of our Web site. The agenda for the Annual Meeting is to; first, elect five directors to serve until the next Annual Meeting; second, advisory approval of named executive officer competition; and third, ratify the selection of our Independent Registered Public Accounting Firm.
For good corporate practice, our entire Board of Directors stands for election every year. As we discussed in our last call, two of our directors, Jim Hartman and Bob Irish, have decided not to stand for reelection this year. Jim has served eight years on our Board of Directors and Bob, 22 years. The meeting is an opportunity for us to thank Jim and Bob for their selfless service to NVE, and to present them with geeky tokens of appreciation.
We are fortunate to have two exceptionally qualified first-time director nominees, Gary Maharaj and Rich Kramp are both remarkably accomplished and committed to enhancing your long-term shareholder value. Gary Maharaj is President and CEO of SurModics. He also served as President and CEO of the Arizant where he successfully developed the business. Rich Kramp has served as CEO of Synovis Life Technologies, President and CEO of ATS Medical which is now part of Medtronic and Vice President of Sales & Marketing for St. Jude Medical.
The second Annual Meeting agenda item is to approve the officer compensation. We strive for good compensation practices. Some of our do’s and don’ts from our proxy, we don’t overpay because the compensation committee believes that it would be difficult to achieve performance that would result in CEO compensation comparable to public companies with comparable revenues or capitalization, market capitalization. We don’t unduly dilute our shareholders. Our named executive officers or NEOs have not been granted stock options in the past three years.
We don’t have executive perks. Our NEOs have not received any significant benefits or perquisites, other than those offered to all employees. We don’t have golden parachutes like all our employees. Our NEOs are employees at will, and don’t have changing control or severance agreements. Our NEOs have skin in the game, although we aren’t required to do so, both of us retain a substantial portion of the options or shares from the exercise of the options we've been granted. And NEO compensation is aligned with performance, particularly net income and growth.
The third item of business at the Annual Meeting will be to ratify the selection of our Independent Registered Public Accounting Firm for the fiscal year. Grant Thornton audited our past year’s financials and we recommend our shareholders ratify their selection. Their fresh perspective has helped us improve our internal controls. Our annual meetings are generally well attended and we look forward to seeing many of you there. Each year we have a meeting theme and this year we’ll commemorate NVE’s 25th Anniversary. So we plan to celebrate 1980s phrases and culture, so in other words the meeting will be totally rad. It’s also a chance to recognize our outgoing directors and introduce the new nominees.
Now I’d like to open the call for any questions. Marcus?
(Operator Instructions) We’re showing no questions in the queue at this time.
Well, if there are no questions, I’ll recap, that we were pleased to report the highest revenue, sales and earnings in our 25 year history. We look forward to seeing some of you at our Annual Meeting in a couple of weeks. And we plan to speak with you again in October to report second-quarter results. Thank you for participating in the call.
Ladies and gentlemen, thank you for attending today’s conference. This does conclude today’s program. You may now all disconnect, and have a wonderful day.
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