NVE Corporation (NASDAQ:NVEC) Q1 2023 Earnings Conference Call July 20, 2022 5:00 PM ET
Sue Miller - Senior Accountant
Daniel Baker - President and Chief Executive Officer
Joseph Schmitz - Chief Financial Officer
Conference Call Participants
Jeff Bernstein - Cowen
Alex Woodward - Bridge City Capital
Thank you and good afternoon. Welcome to our conference call for the quarter ended June 30, 2022. My name is Dan Baker, I'm the President and CEO of NVE Corporation. This call is being webcast live and being recorded. A replay will be available through our website, nve.com.
I'm joined by our CFO, Joe Schmitz. After my opening comments, Joe will present a financial review. Then I'll cover the business and new products, then we'll open the call to questions. We issued our press release with quarterly results and filed our quarterly report on Form 10-Q in the past hour following the close of market. Links to the press release and 10-Q and are available through the SEC's website, our website, and our Twitter timeline.
Comments we may make that relate to future plans, events, financial results, or performance are forward-looking statements that are subject to certain risks and uncertainties, including among others, such factors as risks and uncertainties related to future sales and revenue, uncertainties related to future stock repurchases and dividend payments, our dependence on critical suppliers and packaging vendors, and risks related to COVID-19 pandemic and supply chain disruptions, as well as the risk factors listed from time-to-time in our filings with SEC, including our annual report on Form 10-K for the fiscal year ended March 31st, 2022. Actual results could differ materially from the information provided and we undertake no obligation to update forward-looking statements we may make.
We're pleased to report a 16% increase in net income for the first quarter to $0.86 per diluted share. Joe will cover the details. Joe?
Thanks Dan. Total revenue for the most recent quarter increased 3% to $7.34 million from $7.15 million in the prior year quarter. The increase was due to a 2% increase in product sales and a 32% increase in contract R&D revenue. The growth was from a strong quarter last year.
Product sales increased 11% sequentially from the March quarter. We continue to be challenged by supply chain shortages, although we're seeing signs of improvement. During the quarter, deliveries from our supply base enabled NVE to increase work in process inventory by $508,000 to support future growth.
We're picking up new customers from traditional semiconductor companies with our superior products and shorter lead-time. We've increased our capacity with new equipment. We expect to invest as much as a $1 million in additional production and test equipment in the rest of the fiscal year.
Gross margin was 77% for the quarter compared with 75% last year. Margins decreased last year because of cost increases in the semiconductor industry. But the price increases we enacted in the prior fiscal quarter are beginning to offset increased costs.
Expenses for the quarter decreased 24% from the prior year due to a 26% decrease in R&D and a 20% decrease in SG&A. The decrease in R&D was due to R&D personnel spending more time on revenue generating activities. The decrease in SG&A was to lower incentive compensation.
Interest income for the quarter decreased 2% due to the timing of maturities for available for sale securities and in late June and early July, we reinvested those proceeds from maturing securities at higher interest rates.
Driven by increased revenue, increased margins and decreased expenses, net income for the quarter increased 16% to $4.14 million or $0.86 per diluted share compared to $3.58 million or $0.74 per share for the prior quarter.
In addition to the increase in gross profit margin, operating margin, pretax margin, and net margin all increased compared to the prior year quarter. Net margin was a strong 56% and we recorded our largest quarterly profits since 2018.
In addition to the past years, or excuse me, in addition to the past quarters, $1 for dividends, today we announced that our Board declared another quarterly dividend of $1 per share payable August 31st to shareholders of record as of August 1st.
Now, I'll turn it back to Dan to cover the business, new products, and marketing.
Thanks Joe. In-person trade shows and conferences are returning. We exhibited at Sensors Converge in San Jose a few weeks ago. The exhibition showcases the latest sensing technologies and was back to its traditional early summer schedule for the first time since the pandemic. We received a number of new leads and continue to follow up.
In an industry wracked by shortages, a number of prospects were impressed by our inventory levels and lead-times. We demonstrated several new products and we had a mechatronic demonstration of using one of our new smart sensors to control a musical pitch pipe.
Musical instrument robots have been effective in attracting attention and demonstrating the precision, robustness, and simplicity of our sensors. We also had sales staff supporting distributors at two major trade shows in Germany the past quarter, PCIM Europe and Sensor+Test.
Both shows reach important target markets for us. PCIM is built as the world's leading exhibition and conference for power electronics, intelligent motion, renewable energy, and energy management. Sensor+Test claims to be the world's leading forum for sensor measurement and testing technology.
I've been asked about our Ukrainian distributor Cavazza [ph] Micro Components which is based in Kyiv and has represented us for more than 15 years. It's not significant business for us from a financial perspective, but it is inspirational and we continue to have sales dialogue and expedite their orders. They've helped inspire us to do our damnedest to overcome supply chain challenges.
Turning to new products, we introduced an A new Ultra miniature version of our Tunneling Magnetoresistance or TMR magnetic sensors. The new parts are 1.1 millimeters less than a 16th of an inch square. The existing parts were already pretty small, 2.5 millimeters, less than a 10th of an inch.
We believe the new part is the smallest device of its type and can be used to detect position and tight spaces such as industrial or medical robots as they get smaller. There's a demonstration video on our website and YouTube channel.
Our components are inherently safer and more reliable than legacy semiconductors. An industry standard for that is called intrinsically safe. In the past quarter, several of our data coupler models were certified for use as isolating components in intrinsically safe circuits by Underwriters Laboratories.
Our couplers transfer data without direct electrical connections to hazardous areas. This mitigates the risk of arcing or otherwise, starting an explosion. Certification involves rigorous testing by UL and a thorough on-site audit of our control over product safety processes. It's a great validation of our technology and manufacturing capabilities.
And it's valuable in hazardous areas of the Internet of Things such as chemical or food processing plants. Three isolator lines have intrinsically safe, certified versions, our flagship data couplers, isolated network transceivers, and our low power tunneling magnetoresistance data couplers.
There's an intrinsic safety demonstration on our YouTube channel, where we also destroy a competitive part. We're fortunate to have dedicated employees. We make things. So, working from home isn't an option. Our employees have worked through the personal challenges of the pandemic, industry shortages, and supply chain problems.
I was able to thank them as a group at our first in-person employee meeting and more than two years last quarter. We had a barbecue to welcome spring in Minnesota. We demonstrated new products for our employees and celebrated the foundation our employees have built for a bright future.
As promised in last year's proxy, we will return to in-person annual shareholders meetings with our meeting at a nearby hotel and conference center on August 4th. The first annual meeting agenda is the election of Directors and we're pleased to have a strong independent Board of Directors with two former public company CEOs, Rich Kramp and Jim Bracke, a former CFO of a public company Pat Hollister, and experienced Director for a number of successful public companies, Terry Glarner.
The second annual meeting agenda item is approval of officer compensation. As detailed in our proxy, we don't overpay our officers, our officers have the same fringe benefits as all employees and there are no executive perks or golden parachutes.
The third annual meeting agenda item is ratification of our auditors for this fiscal year, the year ending March 31st, 2023. Boulay has audited our past three fiscal years and we recommend their approval for our next audit.
A popular feature of our in-person annual meetings has been live hands-on product demonstrations and we'll have several of those. If you can't attend, you can see the product demonstrations -- a number of product demonstrations on our website or our YouTube channel.
Now, I'd like to open the call for questions. Operator?
Certainly. [Operator Instructions]
Our first question comes from the line of Jeff Bernstein from Cowen. Your question, please.
Hi Joe. Nice to talk to you today and congratulations on -- looks like the best EPS in several years. So, that’s great. Wanted to ask you a little bit about Abbott, I guess you guys had renegotiated your deal with them, good through the end of this year. And I'm just curious about where that stands now, kind of, what you think the term of the next renewal might look like?
We're still in the midst of those negotiations. We've had a number of sessions with our counterparts at Abbott. I can't -- we're still in the middle of working out the details. But I -- what I can report is that there's some strong engagement on both sides and we're looking forward to successfully concluding a long-term agreement with them.
About how long of a long-term agreement would that be? Would that be several years?
That’s one of the negotiating items. Obviously, we are advocating for a longer term. But to be seen that that'll actually ask, but it'll -- the next agreement, I believe, will be a multi-year agreement.
Got you, okay. And then just curious, their business looked this morning for the most part, particularly in the heart failure area, which implantable defibrillators, and I'm just curious, I think you guys are in the cardiac or the management generally so pacemakers and defibrillators. If there's much of a difference in content across those different categories, and also I think you're in neuromodulators, as well.
Right, this is Dan. So, while the -- typically there's more of functionality in an ICD, Implantable Cardioverter Defibrillator than a pacemaker, we're counting our businesses based on the number of sensors which tend to be comparable. So, for us, there's not a huge distinction between CRM devices, we provide the same level of functionality. So, there isn't a direct correlation between our revenue and their revenue.
Got you. Okay. And then they do have a couple of new pretty promising sounding products in that area, this new Aveir, single chamber leadless pacemaker that doesn't need a chest pocket incision. This thing looks like it's about the size of a little cold pill. I know you can't say whether you're in it, but is there a reason to believe that it would not need the same functionality that you provide to their other products?
Well, I appreciate your elegant wording of the question, Jeff. So, the miniaturization is really amazing in some of these devices and our products uniquely support miniaturization. We have the world's smallest devices of their type, we just talked about one in the prepared remarks that's not necessarily for -- designed for medical devices, but it highlights the advantages that we have with our spintronic technology of being able to make the world's smallest devices.
So, I would imagine that's a benefit that that's very important as medical devices get smaller and smaller. The smaller they get, of course, the less invasive they are, the more people that can get the therapies. So, it drives long-term growth. So, we like to see that trend and we'd like to support it.
Got you. Okay. And -- so I guess the same would sort of follow for this implantable deep brain stimulator for the treatment of -- treatment of resistant depression, or Bear Market Depression, I guess, which hasn't been approved yet. But they have a breakthrough designation for. So, the same concept would apply to that.
Yes. And we've talked about in the past, as you know, Jeff, we've talked about extending our technology to other types of neuro stimulators, such as deep brain stimulators, which are relatively small markets now, but which have excellent growth potential to treat new type new diseases that like drug resistant depression, which has been -- which is a significant medical issue.
So, that's something that we think is a good development. And again, we design -- as you pointed out, we designed sensors that allow smaller implantable medical devices and you can imagine that for something like a deep brain stimulator, that would be an important benefit, the smaller size.
So, -- and as you mentioned, with the breakthrough designation, the system could be available as a new treatment options sooner for treatment, resistant depression. It's currently investigational use. But it is already used in -- to treat movement disorders such as Parkinson's disease. But that's a growing market area and an opportunity to help more and more people.
That's great. Can you talk about any progress with the Angst+Pfister hybrid EV onboard charger reference design?
So, we continue to get inquiries and leads for devices both onboard charging and the charging systems for hybrid electric vehicles, as well as for other types of motor controls and charging systems.
So, it's an important area for us and it uses a number of our products. We recently did a demonstration showing how we can use our isolators our DC-to-DC converters and our angle sensors to run a highly efficient motors. Now, we wouldn't need the angle sensors -- we don't need the angle sensors for things like the [indiscernible] system, which is for battery charging.
But we can do the battery charging with our DC-to-DC converters and our isolators. They allow much faster systems, much higher speed systems, which means more efficiency for energy conversion, either energy conversion to charge batteries in the case of the Angst+Pfister system, or to run a motor in the case of motor control systems where we've been offering a number of components.
So, it's an important market area for us. We see excellent potential for growth and there's more and more emphasis on energy efficiency and that's what our systems help to do, our products help to do that.
Okay. And then can you talk a little bit about the newer distributors, you've added, I guess, a Japanese distributor, an Indian distributor?
Yes. Well, we've received good activity from our new distributors. As you might expect, sometimes they're asking questions that that are more experienced distributors don't ask. But that's great. And that's all part of the process. We provide them excellent support. We help them understand the markets that our products are used in, we help them understand our benefits compared to conventional technology.
And we try to provide them with excellent design support when they have specific questions from their customers. So, it's an important part of -- it's the main way we reach our market and having great distributors, we feel very fortunate that we've got excellent distributors, they're very technically good, as well as being good salespeople.
So, we were pleased with what we've seen so far, particularly in India, which is a very fast growing market. And, of course, a very large country. So, we have now several distributors, covering most of the major areas in India.
And dan can you give us an update on what your lead-times look like versus competitors? I would think that would be pretty appealing to both customers and distributors.
Yes, yes, it is, indeed. So, we just answered that question for a particular customer on a particular part and our lead-time for that part was running, I'm giving this as an example. Of course, the lead-times can vary, but the part -- our part was approximately 12 week lead-time and a competitive conventional semiconductor part was approximately 84 weeks. So that was -- those were lead-times that we pulled off of a distributor, one of our distributors, who also distributed some competitive products.
So, as you can imagine, that's a pretty attractive benefit proposition. In addition, we have better parts, they're more reliable, they have better specifications, higher speed, and longer barrier life.
So, we are picking up a number of new leads for customers who are attracted by the lead-times. So, we're glad they're attracted for -- by the lead-times, but we're also very optimistic that they're going to stay for the quality of the products, the quality of the support they get, and that they're going to be able to use the advantages that we have over conventional semiconductors.
And -- so this is kind of giving you a one-time opportunity to steal some share from competitors, at least raise your profile, get in front of people with customers now willing to do Board redesigns and that kind of thing. Can you just talk about how we should think about that impact your topline and seeing that?
Right. So, as you say, it should have a near-term benefit to our topline when we -- we're delivering some of those, we'll be delivering more of those new design wins. And our hope is that it overcomes some of the trepidation, I suppose that some companies have about, about working with a smaller company.
We're not -- we recognize that we may not be a household name like one of the large semiconductor conglomerates, but we provide excellent products, excellent support and service, and excellent on time delivery performance and short lead-times. So, we hope that however these customers came to us, we're very optimistic that they're going to stay with us because we're confident that we're going to be an excellent supplier for them.
We have excellent supplier ratings and always have. So, the challenge is -- we retain a very high percentage of our customers, the challenge is reaching them as a small company, and I suppose the silver lining of the shortages that we're seeing in the industry is that we're able to reach customers who we may not have reached before and we're determined to retain them.
So, you guys said you attributed the growth in the quarter to pricing. And so I'm sort of wondering, what's going on with units, are units down? Is that a sort of supply chain kind of issue? Or what's the story on units?
Well, we -- to your point, we attributed our product sales, absolutely, to some pricing actions, but we also have some pretty strong R&D revenue as well. So, I going to be a little bit careful when you call that.
Talking about units is always a little bit difficult, it’s a different product mix. But so I would not say that that higher revenue from sales equates to lower unit volume. I don't think that's the case at all based on what we're putting through our facility.
I think in that sense the higher price was obviously better margins, but I don't think that that equates to lower unit.
Understand. Okay. Thanks very much for the time, guys.
Thank you. [Operator Instructions]
And our next question comes to the line of Chris [indiscernible] from Private Investor. Your question, please.
Congratulations on great results.
So, like to continue on that theme of the previous question about the fact that you're picking up orders, because of the shorter lead-times and your ability to keep those customers.
Now, he's kind of viewed you as kind of like a really like the highest quality, you know, the highest quality sensor manufacturer, that's why you're -- the MRI machines, and pacemakers and so on, and also the most expensive one.
And even if you if you do provide great service, how do you ensure that those clients that picked you for your, you know, for your availability now, wouldn't go to the lower price sensors when they become available?
In other words, can you point to savings on the PCB, less -- fewer component counts, or any other kinds of savings that the quality of your components would allow?
Yes, that's a great point, Chris. And first of all, we can point to advantages that save our customers' money. So, one of them is chip count, particularly with our DC-to-DC converter parts, and other is reliability. Sometimes that's an intangible cost, but it's important to many of our customers.
And then finally, size, which reduces PCB size. In the case of industrial customers, we talked about the obvious advantages in the case of implantable medical devices. But it's also an advantage in industrial devices too, because circuit boards, as you know, are priced by the square of the square inch.
And while we offer the highest quality, our prices are competitive, we have top of the line products, but our prices are reasonable. And we're also in many cases, a relatively low share of budget, the components that we make enable very expensive system.
So, we believe that our products are fairly priced and the biggest challenge that we've faced is brand awareness, and the perceived risk of working with a smaller company. And the shortages and our short lead-times -- our shorter lead-times help us overcome that. So, we believe that we'll retain a large percentage of these new customers and the new business that we're getting,
I guess I'd like to add to what Dan just said too. One of the things that I've observed is, as we get to know, some of these customers, yes are coming to u, you know, out of an extreme need for part for product, once we begin working with them and understand their business, we've had in some cases been able to offer different configurations, different specs of parts that allow them to meet a price target that they may have. So, I've seen some of that ongoing dialogue take place and to me, that's a value proposition for the customer to help them right-size their products so to speak.
Okay, that's good to hear. And in case, you get designed in some very high volume applications, are you able to ramp up your volumes?
So, that is something as we talked about in our prepared comments, we are building that capacity -- upwards of $1 million this year. We believe that we'll be prepared for that step volume change and function. We're also looking to add people to some of our second and third shift operations. So balance, particularly given supply chain constraints, but that's what we are aspiring to do.
Okay, good to hear again. And another question on automotive. I've been following many automotive semi companies and it seems that it's very, it's a very time consuming process to get design into like a large volume automotive platform, it ends up being rewarded in the end, but it's very time consuming. So, you told us encouraging news, but can you tell us, like where are you in the designing process? And perhaps maybe in the kind of the in the place? I know you have like, many applications, but the -- in the application where you're closest to a high volume automotive platform where are you in terms of the designing process?
Right. So, as you say, it's a large endeavor, it's one we've committed to at NVE to reach the automotive market. We do that through our own efforts and also through private label partnerships with companies that have strong presence in the automotive industry.
So the -- it is time consuming, but we're willing to spend the time and to make the investments. We have also achieved international automotive Task Force or ATF conformance with their quality standards, which is a rigorous process and bolsters our credibility in that market.
So, as far as the specific parts, the ones that are the farthest along are isolators and especially for CAN, Controller Area Network buses, which are the one of the key network backbones in all cars, especially hybrid electric vehicles, but they're also in ICE, an internal combustion based cars as well.
So, those parts we have some interest. We don't have any really high volume. In-car applications, we have some applications in automotive factories that are in production. That's sometimes a natural segue into in car applications, which I think is what you're asking because they tend to be higher volume. But being able to interface to the car in the factory is also important.
So, we believe that we're reasonably close on some applications for Controller Area Network transceivers, we'll have to see and I'm we're not, we don't have any in full production and in-car applications at this point.
Okay. Thanks for that and great results. Again, that's it for me and good luck.
Thank you. And one moment for our next question. Our next question comes from the line of Alex Woodward from Bridge City Capital. Your question please.
Yes, good afternoon, gentlemen. I wanted to ask about the increase in inventory. And specifically, it's up $0.5 million, the work in processes sequentially. If you go back and look year-over-year, it's up almost $1.5 million, how much of this is maybe orders that you have or commitments that you have versus just building this back in, and I'm hoping it'll ship as opposed to knowing it's going to ship?
The vast majority of it is to meet existing orders.
Very good. So, with the increase, $500,000 sequentially. Does that -- is that an indication that you feel good about the near-term prospects for sequential growth, maybe to your earnings are within a couple of pennies of the level that was set in 2018.
Your revenue, still a little bit away from where you got in 2018. With the -- what's gone on in the industry, is NVE looking to have a record year, and I know you guys don't guide but the numbers on the balance sheet would indicate that you're positioned for growth? And so I'm asking is fiscal 2023 going to be a growth year for the company and maybe take it to new levels?
That's always a difficult one to answer. I think we've got a lot of challenges. As I mentioned, we are working against very strong order flow. We are seeing some of our segments with some nice growth prospects. So, we're trying to hit our commitments to our customers. We think that's going to get us to a good place by the end of the year, but lots of challenges ahead of us.
So, given 12 months might be a little bit of a reach to know what the visibility looks like there, the near-term visibility, and you just commented on strong orders, should we expect sequential growth in the in the September quarter?
I think we're going to try and do everything we can to hit that.
It's certainly our goal to grow. And, as Joe mentioned, we've been very pleased with the order flow.
It's great to hear, because for a long time, the revenues feels like it's kind of gotten to these levels and then it's kind of stagnated. And it's been hard to break through. But another data point that I'm encouraged with is the increase in CapEx and the incremental capacity, that that's another sign that you're looking to grow, at least that's what I see from my perspective. Am I reading that wrong?
I think Joe and I we're going to answer it the same way. No, we're making those investments because we see the potential, we have the order flow, and we need to increase our capacity. So, that's what we're doing. It's reflected in the whip, and it's reflected in what Joe was talking about in our capital planning.
Great. And then the last question I have is -- and this is kind of, not why we're invested. But I think it might have an effect, you have a pretty big cash balance and you -- the interest income has been fairly stable. You said that some of the investments matured and you reinvested them, what is that going to do to the to the interest income line going forward, especially with interest rates higher and likely, likelihood of rates, increasing even further.
So, as you can see from our from our quarterly filing, we got -- we're going to be doing this reinvestment three or four more times, over the next 60 days, we are seeing better interest rates. I've got to say that we've seen things evolve and watching what the treasury bills -- the five-year treasury bond is doing. So, we're benefiting from that now. So, I'm thinking we'll capture a little bit higher interest rates, a little bit higher interest income as a result of that.
Thank you for the opportunity to ask a question or two.
Thank you for your questions. Appreciate it
Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.
We were pleased to report a 16% earnings increase and our largest quarterly profits since 2018. We look forward to meeting some of you at our shareholders meeting in a couple of weeks. And our next earnings call -- earnings call will be in October. Thank you for participating in the call.
Thank you, ladies and gentlemen for your participation. This does conclude the program. You may now disconnect. Good day.