NVE Corp

NASDAQ:NVEC

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the NVE conference call of First Quarter Results. [Operator Instructions]. Please be advised that today's conference is being recorded.

I would now like to turn the call over to Dan Baker, President and CEO. Please go ahead.

[Dan Baker, President & Chief Executive Officer]

Good afternoon, and welcome to our conference call for the quarter ended June 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. Daniel was promoted to his current position in early May and also presented on our last call. He goes by Daniel, I go by Dan to reduce confusion. Also, he's originally from Liberia, and I'm from Columbus, Ohio. So I'm the one with the bland accent. After my opening comments, Daniel will present our financial results. 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 our Twitter timeline.

Comments we may make that relate to future plans, events, financial results or performance are forward-looking statements that are subject to certain risks and uncertainties including, among others, such factors as uncertainties relating 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 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, 2023, as updated in our just filed quarterly report on Form 10-Q. Actual results could differ materially from the information provided, and we undertake no obligation to update forward-looking statements we may make.

We're pleased to report solid growth for the quarter compared to the prior year despite industry headwinds. Product sales increased 23% compared to the prior year quarter, and net income increased 6% to $0.91 per diluted share.

Now Daniel Nelson will cover the details of our financial results. Daniel?

[Daniel Nelson]

Thanks, Dan. Total revenue for the quarter ended June 30, 2023, increased 20% compared to the quarter ended June 30, 2022. The increase was due to a 23% increase in product sales partially offset by a 50% decrease in contract R&D. The increase in product sales was despite a downturn in the semiconductor industry. The increase in product sales was primarily due to increased purchases by existing customers and new customers. The decrease in contract R&D revenue was due to the completion of certain contracts.

Total expenses increased 42% for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2023 due to a 16% increase in R&D expense, a 28% increase in SG&A and $212,000 credit loss expense for the most recent quarter. The increases in R&D and SG&A were primarily due to increased staffing and compensation expenses. The credit loss expense was due to an increase in our allowance for credit losses under the newly adopted accounting standard. This resulted into a new expense line in our income statement.

Interest income for the quarter -- for the first quarter of fiscal 2024 increased 54% due to high yields on security purchase after June 30, 2022. Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes increased to 24% for the first quarter of fiscal 2024 compared to 17% for the first quarter of fiscal 2023. The increase was due to changes in the timing and availability of tax credits.

Net income for the first quarter of fiscal 2024 increased 6% to $4.4 million or $0.91 per diluted share compared to $4.14 million or $0.86 for the first quarter of fiscal 2023. The increase was primarily due to increased revenue and increased interest income, partially offset by increased expenses and higher taxes. Net income as reported includes an unfavorable noncash impact of $212,000 or $0.04 per share of credit loss expense under the newly adopted accounting standard.

Net cash provided by operating activities increased 51% to $5.03 million for the first quarter of fiscal 2024 compared to $3.33 million for the first quarter of fiscal 2023. The strong operating cash flow more than cover the quarterly dividend.

Now I'll turn the call back to Dan Baker to cover marketing and new products and to preview our Annual Shareholders' Meeting. Over to you, Dan.

[Dan Baker, President & Chief Executive Officer]

Thanks, Daniel. First, I'll cover marketing. We promoted our products at three major trade shows in the past quarter. PCIM Europe and Sensor+Test in Germany 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. We coexhibited with one of our German distributors. Sensors+Test claims to be the world's leading forum for sensor, measurement and testing technology. We supported a distributor at that show. We exhibited under our own banner at Sensors Converge in Santa Clara, California, a few weeks ago. The exhibition showcases the latest sensing technologies and is claimed to be North America's largest electronics event for design engineers. We demonstrated several new products and interest was especially strong for our angle sensors and DC to DC converters.

Turning to new products. It's been said that energy and data are the major currencies of our lives. We enable both currencies. Our data couplers transmit data and our DC to DC converters transfer energy. In the past quarter, we expanded our line of combination data couplers with DC to DC converters. These devices transfer data and energy from one system such as a computer to another, such as a robot.

Unlike many companies, after COVID-19, we returned to in-person annual shareholders' meetings, so shareholders can meet our managers and directors and see hands-on product demonstrations. This year's meeting is on August 3 at the newly renovated SpringHill Suites in Eden Prairie. If you can't attend, you can see product demonstrations on our website or YouTube channel. Our proxy statement for the meeting is available via our website or the SEC's website. The first annual meeting agenda item is the election of directors. We're fortunate 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 an experienced Director for several successful public companies, Terry Glarner.

The second annual meeting agenda item is approval of our officer compensation. This year's proxy has new pay versus performance disclosures and metrics, which show how we tie compensation to performance and shareholder value. Our compensation principles as detailed in our proxy include, 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 agenda item is to allow shareholders to vote on the frequency of advisory votes on officer compensation. The Board recommends a say-on-pay vote every year for good governance.

And the final agenda item is the ratification of our auditors for this fiscal year, the year ending March 31, 2024. Boulay has been our auditor since 2019, and we recommend their approval for our next audit. We expect our Boulay audit partner and audit manager to attend the annual meeting.

Now I'd like to open the call for questions. Beth?

[Operator]

[Operator Instructions] And your first question is going to be from the line of Jeffrey Bernstein with Silverberg Bernstein Capital Management.

[Dan Baker, President & Chief Executive Officer]

Congratulations on the new firm.

[Jeffrey Bernstein, Silverberg Bernstein Capital Management]

Thanks very much. Appreciate that. So I had a couple of questions for you. So there's been some revenue volatility in the last few quarters in a good way. And obviously, there's some impact from the semiconductor supply chain issues, et cetera. You guys have spent some money on CapEx for testing, et cetera, in order to improve your capacity. When we think about kind of spreading the peanut butter of this lumpiness over several quarters, it sort of feels like that a $7 million to $8 million kind of per quarter run rate is maybe sort of a new norm. But can you just talk a little bit about the volatility you've seen and what you're feeling about a baseline revenue expectation.

[Daniel Nelson]

Yes. I'm sorry, I was muted. So Jeff, great question. This is Daniel Nelson. And so, our revenue for the first quarter of fiscal 2022, obviously, as you pointed out, was somewhat less than what we ended the fourth quarter of fiscal 2024 with -- fiscal 2024 Q4 was an extremely unusual quarter. As you mentioned, we did deploy some additional equipment, which we purchased towards the end of fiscal 2024, which helped us significantly meet demands that our customers had for the fourth quarter. So we don't expect our revenue for fiscal 2024 to significantly differ from fiscal 2023. But that lumpiness, we pretty much expect to kind of wear as the year progresses. So…

[Jeffrey Bernstein, Silverberg Bernstein Capital Management]

That's great. And in terms of the forward-looking indicators in the business, can you say anything about book-to-bill, is that continue to be over one.

[Dan Baker, President & Chief Executive Officer]

This is Dan Baker, Jeff. We don't have precise book-to-bill data, but we've been pleased with the order flow. And although the industry is down, we've outperformed the industry, and our goal is to continue to outperform the industry. So we're getting new orders. There is a little bit of catch-up still in our current order flow. But we're optimistic and we're pleased that we've been able to significantly outperform the industry. As Daniel mentioned in the prepared remarks, the semiconductor industry is down 21% in the most recent report, and our product sales were up 23%.

[Jeffrey Bernstein, Silverberg Bernstein Capital Management]

Dan, can you say anything sort of qualitatively -- you had a kind of a once-in-a-lifetime opportunity with the supply chain of stress that was out there. And additionally, people really starting to think about their supply chain safety and more domestic sourcing and that kind of thing. What do you think you came away with in terms of gain of customers? I know a number of customers is not terribly indicative of anything, but anything you could say about that about sort of new designs with new customers?

[Dan Baker, President & Chief Executive Officer]

Yes, exactly. And you're exactly right, Jeff, that we did get some excellent opportunities to get a foot in the door during the period of shortages. And we've retained those customers. There was, as you might expect, a certain amount of double ordering and making sure that customers had adequate supplies. But we were able to -- it was priceless marketing and that we were able to reach risk-averse customers who might not have considered a smaller company like NVE prior to the shortages. So it was and continues to be a great opportunity, and as we've said before, while they probably or some of them might have come for the lead time, we're confident that they're going to stay for the excellent products and the excellent service that they get from NVE.

[Jeffrey Bernstein, Silverberg Bernstein Capital Management]

That's great. And then just curious, PUFs have been a source of some volatility in revenue.

There's a lot of discussion about having to manufacture a lot higher volumes of armaments. I know you kind of can't tell us a lot about that business or you'll have to kill us. But could you just talk a little bit about PUFs, was their business in the quarter? Any visibility on PUFs in the next few quarters?

[Daniel Nelson]

Yes, Jeff, this is Daniel. So as we did mention, we saw a considerable increase in our sensor and product sales lines. But unfortunately, did experience some decrease in anti-tamper sales. And that's not unusual because sales -- anti-tamper still very significantly and it's dependent heavily on procurement schedules by our customers. So -- but we're still positive that there are opportunities out there for more anti-tamper sales. But long story short, we did see a decrease in anti-tamper sales for the quarter.

[Dan Baker, President & Chief Executive Officer]

If I could just add also in addition to what Daniel said. As you point out, Jeff, there are opportunities for defense system sales. And it's -- the defense -- the Department of Defense does say that anti-tamper is -- one of the applications of anti-tamper is to protect sensitive technology that might be sold to allies or provided to allies. So of course, there's been a fair amount of that. So in the long run, it's -- there are excellent business opportunities, but it can be, as you correctly pointed out, it can vary significantly quarter-to-quarter depending on defense procurement schedules.

[Jeffrey Bernstein, Silverberg Bernstein Capital Management]

That's great. And then lastly, just a question on how customer behaviors around big product launches. You've got some larger customers, both in the hearing aid market and in the med tech arena. And there are some important kinds of product introductions coming. Do they generally kind of stock up in advance of launching a product or it probably doesn't cost much to stock up on sensors or is there sort of a ramp as they ramp? Or is there really no pattern around that?

[Dan Baker, President & Chief Executive Officer]

Yes. This is Dan Baker. That's a great question, Jeff. It actually is relatively slow in the startups because often there are regulatory restrictions. So a medical device manufacturer, particularly a life support or a Class III medical device manufacturer might have to gradually roll out a product. In many cases, products are rolled out in certain regions. First, the U.S. has a relatively long regulatory cycle through the FDA. So what we often see is long development cycles and a gradual ramp-up as the products are deployed as the regulatory approvals are met, and as the -- as more and more practitioners might use the products. So it's been, as you know, an excellent business for us. We provide a unique benefit proposition in terms of reliability, miniaturization and low power. And those are things that are very important in the medical device industry. And we've been willing to invest in it and to be patient with the regulatory cycles. And so it's a significant part of our business now, and we expect it to be a significant part of our business for the foreseeable future.

[Operator]

[Operator Instructions] One moment for our next question. And our next question is from the line of [Hirosto Makovsky], Private Investor.

[Unidentified Analyst]

This is [Hirosto Makovsky]. Congratulations on great results, especially as compared to the rest of the semiconductor industry. Could you talk a little bit more about any inroads you're making into more mass market applications and where you might be going into if that is happening?

[Dan Baker, President & Chief Executive Officer]

Yes, absolutely. So in addition to the markets that we've talked about, we have invested in markets that are longer term, some that we've highlighted include the hearables market, which includes OTC hearing aids. We see excellent opportunities there and then the broader hearables revolution, which we're engaged with hearables developers and we're developing sensors that can be used in next-generation hearables in particular, we have sensors that are compatible with rechargeable batteries that are often used in consumer wearables and hearables rather, disposable batteries generally used in traditional hearing aids. And our new parts have received positive feedback, and we have design wins in that space. The design cycles aren't quite as long as for life support medical as we talked about in the previous question, but there are still longer development cycles, but we're investing in that.

The other area that I would highlight would be the automotive market. So we've cautioned that automotive can take a while, but we've continued to invest in the development and qualification of products especially for sensors in electric and autonomous and more sophisticated safety systems for next-generation cars. Our parts are smaller, more precise, and lower power, more rugged than conventional electronics, and those are important advantages in the automotive market. We're also expanding our DC to DC power converter product lines, which I touched on during our prepared remarks, which have potential in the electric vehicle market, but also in energy conversion such as green energy and energy storage markets.

[Unidentified Analyst]

Would you be able to keep your margins the same in those mass market devices or would be kind of lowering your margins, but still making more money?

[Dan Baker, President & Chief Executive Officer]

Yes, that's a great question. So the way we look at it is we're looking at the total contribution that a new product line might add and the shareholder value that it could create. So we don't have a specific target market, target gross margin, for example, and in markets such as consumer markets where the gross margins might be lower, but the volumes might be higher. We certainly consider that when we make investment decisions. So it's possible that these types of markets could have lower gross margins, but we also see them as large markets where we have a convincing benefit proposition.

So we think it makes sense, and we're not looking at a particular margin that we have to have as a minimum. Obviously, we have to be able to demonstrate that we can make money, but we're not using gross margin as a primary metric.

[Unidentified Analyst]

Have you gotten new automotive qualifications yet?

[Dan Baker, President & Chief Executive Officer]

So we have some qualifications. We have a letter of conformance from the IATF under Standard 16949. We look at individual products. So as you probably know, the company needs to be certified for automotive in practice, that's the IATF 16949. And so we passed those audits and then the products themselves often have to be approved. So we look at the product approvals on a case-by-case basis and -- but we certainly have gone through much of the testing involved in things like Q101 or other automotive-specific certification. So we're prepared to do that. And it's a significant -- that's part of the reason why the design cycles might be -- might take a while, but we're prepared to do that. We have people who know how to do it. And we recognize that, that's part of getting into these markets.

[Unidentified Analyst]

Okay. That's good to hear. And what is your advantage in automotive because there, you can afford to have like kind of higher, bigger size than what you need in hearables and in pacemakers. But do you have a significant power efficiency advantage?

[Dan Baker, President & Chief Executive Officer]

Yes. That's a good point. So size is sometimes important in the automotive industry. Often, they're trying to cram more and more sophisticated electronics in an existing footprint. But you're right, it's not -- it's a lot bigger than a hearing aid, for example, or a pacemaker. But as you point out, lower power is an advantage because, particularly for our hybrid and electric vehicles, that helps determine the vehicle's range and the equivalent miles per gallon. So every little bit helps and lower power in sensors or couplers can be important and the ruggedness of our parts, the fact that they are inherently nonvolatile, that they can withstand extremes and temperature and electrical transient is important in the automotive market.

And then the final advantage I might highlight is the precision. So having a very precise sensor is important for some applications. Now some applications, one could imagine a seat position sensor, which is not extremely critical. But in many cases, things like things like motor rotation or position or current sensing for motors and batteries, precision can be an important advantage. So those are the advantages that we highlight in the automotive market.

[Unidentified Analyst]

And I assume you have like no drainage current for current sensing whatsoever because you're not connected to the wire, right?

[Dan Baker, President & Chief Executive Officer]

Yes. So we often call that noncontact current sensing. So there aren't the losses. You appear very familiar with that. So if one puts a conventional device that's often called a shunt or resistor, in series with the device you're trying to sense, there's inherent losses there. So the way our current sensors work is -- most of our current sensors is their noncontact. And so therefore, they would go next to the wire or the circuit board, and there are no inherent losses and they can sense very high currents without having to have a resistor in series. So that's part of the efficiency advantage that I was talking about. So that would eventually ripple through to higher efficiency and longer range for an electric vehicle.

[Unidentified Analyst]

Right. And I assume the DC to DC converters have a similar efficiency advantage?

[Dan Baker, President & Chief Executive Officer]

Yes. So the advantage there is that we can drive things like high side switches for power conversion and our devices are fully isolated. So they allow more efficient power conversion either in electric vehicles, power storage or other types of energy storage markets. So the efficiency advantages that accrue there also from our couplers is that they can switch faster, the couplers can switch faster than conventional isolators. And the faster they can switch, the more efficient they are and the lower the losses because the switches that are used for power conversion are very efficient when they're on or off, but they're not very efficient during the transitions. So we've reduced that transition time.

[Unidentified Analyst]

All right. Sounds great. And I understand all those applications require some time to get qualified and get to market. When are you going to see revenues from these? Are you already seeing revenues from this?

[Dan Baker, President & Chief Executive Officer]

We're seeing some small revenues. It's not enough to be significant, but we look at it as long-term opportunities. And so you asked a great question what are we looking at longer term. And we do see it as a longer-term opportunity. We don't have a particular time frame, but we want it to be as fast as possible, of course.

[Unidentified Analyst]

All right. Thank you. Thank you for getting into the details of complicated technical details and good luck.

[Operator]

And I am showing no further questions at this time. I would now like to turn the conference back to Dan Baker for closing remarks.

[Dan Baker, President & Chief Executive Officer]

Well, if there are no other questions, we were pleased to report continued growth with product sales up 23% and operating cash flow, up 51%. We look forward to seeing some of you at our annual meeting on August 3 and to our next earnings call in October. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating.

You may now disconnect.