NVE Corp

NASDAQ:NVEC

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Daniel Baker, executive]

Good afternoon, and welcome to the NVE Corporation Conference Call for the quarter ended June 30, 2024. I'm Dan Baker, NVE's President and CEO. I'm joined by Controller and Principal Financial Officer, Daniel Nelson. This call is being webcast live by YouTube and Amazon Chime and it's being recorded. A replay will be available through our website, nve.com and our YouTube channel, youtube.com/nvecorporation.

[Operator Instructions] After my opening comments, Daniel Nelson will present our financial results. I'll cover products and marketing and will 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, formerly known as Twitter.

Please refer to the safe harbor statement on your screen. 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 and risks and uncertainties related to future sales and revenue 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, 2024. 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 a challenging industry environment and the decrease in revenue from an exceptional year ago quarter. Daniel Nelson will cover details of our financials. Daniel?

[Daniel Nelson, executive]

Thanks, Dan. Total revenue for the quarter ended June 30, 2024, decreased 23% compared to an exceptional prior year quarter. The decrease was due to a 24% decrease in product sales, partially offset by a 28% increase in contract research and development revenue. The decrease in product sales was primarily due to semiconductor industry downturn and high inventory levels, primarily in the distributor channels. However, forecasts indicate the industry is on the path to recover in calendar 2024 and strong growth in 2025. Gross margin percentage for the first quarter of fiscal 2025 was 86% compared to 77% in the prior year quarter. The increase in gross margin percentage was due to a more profitable product mix and a larger portion of direct rather than distributor sales.

Total expenses increased 3% for the first quarter of fiscal 2025 compared to the first quarter of fiscal 2024 due to a 26% increase in research and development expense and a 14% increase in selling, general and administrative expense, partially offset by a decrease in credit loss expense. The increase in research and development expense was due to increased new product development activities. The increase in selling, general and administrative expenses was primarily due to increased sales and marketing activities. We added sales and marketing personnel and increased marketing activities. Dan will talk about those activities shortly.

Interest income for the quarter increased 13% due to higher interest rates. Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes decreased to 16% for the first quarter of fiscal 2025 compared to 24% for the first quarter of fiscal 2024. The decrease was due to changes in the timing and amounts of federal tax credits and deductions. The 7% decrease in net income in the first quarter of fiscal 2025 compared to the prior year quarter was primarily due to decreased revenue, partially offset by increased gross profit margin as a percentage of revenue, increased interest income and a lower effective tax rate. With an unrealized gain from marketable securities, comprehensive income decreased just 1% from the prior year quarter.

It was an exceptionally profitable quarter with 86% gross margin, 65% operating margin, 60% net margin and earnings of $0.85 per share. Operating cash flow increased 16% to $5.85 million for the most recent quarter compared to $5.03 million for the prior year quarter. Operating cash flow more than covered the $4.83 million dividend. Our balance sheet remains strong. Even after $4.83 million dividend and $917,000 in capital expenditure, our cash plus marketable securities increased to $53.2 million from $53 million.

Now I'll turn the call back to Dan Baker to cover the business. Back to you, Dan.

[Daniel Baker, executive]

Thanks, Daniel. I'll cover sales and marketing and CapEx. Our sales and marketing includes 4 main thrusts. First, distributor and direct customer support; second, newsletters and videos; third, evaluation boards; and finally, trade shows. Distributor and customer support involves customer visits, answering questions and providing fast, well-informed application engineering. We increased the frequency of newsletters and videos in the past quarter, and we have good open rates and click-through metrics.

Evaluation board supports more efficient customer product evaluations. And in the past quarter, we introduced dozens of new evaluation boards. We exhibited at 2 major trade shows last month, including Sensor+Test, which is billed as the leading international trade fair for sensor, measuring and testing technology. That show was in Nuremberg, Germany.

We've typically relied on distributors to represent us at international trade shows. We continue to co-exhibit with a German distributor, but this year, we also had our own booth which gave us more space to promote our products. We were also at Sensors Converge in Silicon Valley, which is billed as North America's largest electronics event. We gained some high quality leads, and there was particular interest in tunneling magnetoresistance sensors.

We believe the investments and shows will pay off in future sales. Last quarter, we discussed our plans for $4 million to $5 million in capital investments over the next 2 fiscal years, fiscal 2025 and 2026. The investments will increase our capacity and capabilities, including the capability to manufacture wafer-level chip scale packages in-house. These parts will be smaller, higher performance and allow us to be more self-sufficient and capture more value. Most of our products are currently packaged in Asia by outsourced semiconductor assembly and test or OSAT, subcontractors using conventional plastic overmolding. Wafer-level chip scale parts can be even smaller than these encapsulated components.

We have provided customers with wafer-level chip scale prototypes, and there has been solid customer interest. We hope to begin some production late this fiscal year. Our $917,000 CapEx in the past quarter was mostly a down payment for custom, purpose-built production equipment to be delivered next year. In the past quarter, the state of Minnesota announced we had been awarded incentives from the Minnesota Investment Fund. There's up to $111,000 of potential incentives to be paid in 2026 based on the number of jobs added and certain other conditions. We were also awarded a $200,000 7-year no-interest loan intended to help finance new production equipment. The funding is subject to agreements that have not been finalized yet.

Our Annual Shareholders' Meeting will be August 1. Our meetings have been in-person, except during the pandemic, so shareholders can meet our managers and directors and see hands-on product demonstrations. In response to shareholders' request, this year's meeting will be here at NVE with tours, so shareholders can see what we do. Our annual meetings follow themes, and this year, the theme will be the Olympics, which will be going on at that time. We'll have live product demonstrations showing the precision, strength and endurance of our products.

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. There are 3 agenda items for the annual meeting. The first agenda item is election of directors. Sadly, Rich Kramp who had been a Director for nearly 10 years passed away in May. Rich had been a valuable member of our Board and was dedicated to our company and our shareholders. We miss him. We were pleased to welcome Dr. Kelly Wei to our Board to fill Rich's unexpired term. She's also nominated for a full term starting at the annual meeting.

Kelly is a Medtronic executive and an accomplished engineer. Her strong management, technical and medical device experience and her engineering and medical education make her exceptionally qualified to serve as a director.

The second agenda item is approval of officer compensation. 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 the ratification of our auditors for this fiscal year, the year ending March 31, 2025. Boulay has been our auditor since 2019, and we recommend their approval for our next audit. We expect representatives from Boulay to attend the annual meeting.

The proxy reports total shareholder return for the past 3 fiscal years was 46%, which far exceeded the broad markets. Returns consisted of 29% stock appreciation and 17% from dividends. Now we'd like to open the call for questions.

[Daniel Baker, executive]

[Operator Instructions]

[Jeffrey Milton Bernstein, analyst]

Dan, it's Jeff Bernstein from Silverberg, Bernstein Capital Management. So just wanted to talk a little bit more about the CapEx investment. Just going back and looking, you guys spent a little over $3 million between 2015 and 2024. And revenue actually is pretty much flat over that time period. You're going to make a big CapEx investment here, and I understand that it's going to bring you some new capability packaging-wise, which may actually improve your margins because you're not going to have to buy that capability externally. But can you talk a little bit to what kind of revenue improvement you think this can lead to?

[Daniel Baker, executive]

Yes, that's a great question, Jeff. And we are excited about the expansion plan that we talked about last quarter and we talked about briefly this quarter. That's well underway. As Daniel noted, we've made a down payment on a piece of equipment. As we speak, our folks are scurrying around to move things and make room, and we hope to begin construction this quarter. It will give us a wafer-level chip scale capabilities, which we believe have excellent revenue potential, both for existing customers who would like to make even smaller products than the products we offer them now using our smaller components and also, we believe it opens prospects in the medical and industrial markets for new customers who want the smallest sensors available. So we do see it as not only providing us with in-house capability and capturing more value but also with excellent potential to increase our revenues.

[Jeffrey Milton Bernstein, analyst]

And so do you have indications from folks that, hey, if you can deliver this, we have orders to give you? Or what's kind of your certainty of being able to start filling up that equipment with new revenue orders sometime soon after it's delivered and installed.

[Daniel Baker, executive]

Well, we do believe that we have excellent expressions of interest from customers. They haven't quite said, and we wouldn't expect them to say something as direct as once you have this product, there's a purchase order waiting. That's just not realistic. But we've gotten good customer feedback and expressions of interest, and we wouldn't have made this type of investment or committed to this type of investment without strong indications from existing and potential customers that they're going to buy these products when they're available.

So in addition to that, we have general prospects who are always looking for smaller products and for products that can -- that have the additional capabilities that will be able to offer higher sensitivity and better detectivity.

[Jeffrey Milton Bernstein, analyst]

So I just -- I want to push back on that a little bit because Abbott has got a new AVEIR dual chamber cardiac rhythm management product that's kind of record breaking in terms of its size. And one would assume that a big customer like that has a road map and that you're sort of privy to that road map. And so you would have a high degree of confidence that putting that kind of capacity in place would be there to serve an existing road map. So are there some large customers with road maps that imply that this capacity is going to get used.

[Daniel Baker, executive]

There are road maps and we figure in those road maps. It wouldn't be appropriate for us to comment specifically on Abbott's plans, the AVEIR is a leadless pacemaker. And we -- our technology enables smaller devices, which as you, of course, point out. This is an excellent example of the type of device where having a very small component helps them fulfill their mission and make deeply implanted medical devices. So we see that as an excellent market. We have a long-term partnership with Abbott and other companies who are in this space and so that's part of what gives us a high degree of confidence that this is a good investment.

[Jeffrey Milton Bernstein, analyst]

Got you. Understand. Okay. And then you talked about your TMR magnetometers. Last year, Allegro, which is a big competitor in current measurement and very focused on auto, bought Crocus which is a TMR supplier and paid a lot of money for that and a big multiple. And they're talking about how there are 40 current measurement points within an EV and they see current measurement market growing at a 30% CAGR, et cetera.

I know it's been difficult for you guys to break into the EV market specifically. But can you comment a little bit about -- just general electrification that's going on of all kinds of products and your TMR opportunity.

[Daniel Baker, executive]

That's an excellent market for us, as you know, Jeff, the electric vehicle market and then the broader energy conversion market. And we have a number of products geared for that market, and we have a number of successes of customers and design wins in that space. So we do see that as one of these revolutionary opportunities with a move towards electrification, towards better energy management of batteries, energy storage and motors.

So in particular, we have current sensors, which you alluded to. It's a competitive market, but we have the best current sensors available and we have introduced new current sensors. And then we also have isolators or couplers, which can provide a link between microcontrollers or control systems and the power transistors that switch on and off the power to manage the energy. And our devices, our couplers are faster and therefore allow more efficiency than competitive products. So we believe we're very well positioned for one of the biggest changes in energy management in a generation.

[Jeffrey Milton Bernstein, analyst]

And just correct me on the isolators. There really isn't anybody else who is making those spintronic-type isolators, the rest are largely optical and other technologies?

[Daniel Baker, executive]

Exactly. We have unique spintronic isolators. Other isolators use optical or other semiconductor technology. And we have a number of advantages there. One of them is speed and that allows us to switch wideband gap switching transistors faster, which makes them more efficient.

[Jeffrey Milton Bernstein, analyst]

Got you. Okay. And then just talk about the PUF business. I know it's been a source of volatility in revenue and whether that was a factor this quarter. And then I'm sort of curious, it sounds like there's going to be more smaller and more autonomous systems used by the military and they are maybe not as high value as some of the very large systems, but the software is very high value. And so you would think that PUFs would have a larger unit market potentially with that trend. But can you just discuss your thoughts on that?

[Daniel Baker, executive]

Yes. So the defense business, which includes PUFs, which are anti-tamper devices, in particular, PUFs are a function that can be embodied in a physical structure that is easy to evaluate but hard to predict and replicate. So they're important components of anti-tamper systems and those primarily are used in defense systems.

So our defense business was relatively strong in the past quarter, and we expect that, based on what we know now, to continue to be strong in the current quarter, the September quarter, at least. Sometimes, we don't get great visibility on that. But so far, there's been a great deal of interest in those products and in that business. And one of the factors as you point out in the second part of your question is that these systems are tending to move from very high value-added or very expensive defense systems to smaller but more important systems.

And also as we sell defense systems, as we as a nation sell defense systems to allies, those are particularly vulnerable to falling into unfriendly hands and so there's an importance to have anti-tamper or tamper protection technology, and we provide excellent anti-tamper technology. So we see this as good business and with solid prospects, near-term prospects. It's not the type of business that we look at and say this is going to drive the dramatic growth that we hope for and see with tremendous opportunities like energy management, hybrid electric vehicles. But nevertheless, it's a solid business and one that we take pride in.

Well, we don't have any other questions in the queue, so I can sum up. We were pleased to report strong earnings and a 16% increase in operating cash flow despite a challenging environment. We look forward to speaking with you again on our next earnings call in October and meeting some of you at our annual meeting, August 1. A replay of this call will be available on the Investor Events section of our website, nve.com and our YouTube channel that's www.youtube/nvecorporation. Thank you. You may now disconnect.