NVE Corp

NASDAQ:NVEC

Earnings Call Analysis

NVE Corporation Reports Mixed Quarter with Improved Margins and New Product Launch

In the latest earnings call, NVE Corporation reported a 5% revenue decline, driven by a 14% drop in product sales, although contractual R&D revenue surged by 3,950%. Despite this, gross profit rose 5%, boosting the gross margin to 86%. Increased R&D and SG&A expenses led to a 15% decrease in net income year-over-year. Importantly, the company is optimistic about future growth in the Industrial Internet of Things and electrification sectors. They plan $4-5 million in capital expenditures over two years to enhance manufacturing capabilities and expect new product production by late this fiscal year【4:2†source】【4:9†source】.

Earnings Overview

NVE Corporation reported a 5% decrease in total revenue for the quarter ending September 30, 2024, driven primarily by a 14% drop in product sales. This decline was slightly mitigated by a staggering 3,950% increase in contract R&D revenue, highlighting the company's shift towards more lucrative, specialized projects.

Profitability and Margins

Despite the decrease in revenue, the company showed resilience with a 5% increase in gross profit, resulting in a gross margin rise from 78% to 86% year-over-year. This improvement was attributed to a more favorable product mix and a reduction in distributor sales, favorably impacting the company's bottom line.

Expense Management

NVE faced a significant 55% rise in total expenses compared to the prior year, stemming from a 24% increase in research and development (R&D) costs and a 31% hike in selling, general, and administrative (SG&A) expenses. The latter reflects increased personnel and marketing efforts as the company seeks to bolster its presence in the market.

Net Income Performance

Net income for the most recent quarter declined by 15%, falling to $4.71 million, or $0.83 per share. This downturn was influenced by decreased revenue, higher operational costs, and increased taxes, resulting in an effective tax rate that rose to 17% from last year's 8%.

R&D Investments and New Products

NVE is actively investing in R&D, allocating 13% of its revenue towards new product development. The launch of the ALT521-10E Tunneling Magnetoresistance Rotation sensor is a notable achievement, which claims to be the world's most sensitive device of its kind and has broad applications in automation, automotive, and medical sectors.

Opportunities in the Market

With the semiconductor sector showing signs of recovery, NVE anticipates growth in key sectors such as the Industrial Internet of Things and electrification. The management expressed optimism about improvements in end markets despite the persistent inventory challenges affecting distributor channels.

Capital Expenditures and Future Growth

The company has earmarked $4 million to $5 million for capital expenditures over the fiscal years 2025 and 2026, with $1.13 million spent already. This investment is designed to enhance both capacity and operational capabilities, including in-house manufacturing of specific high-performance components.

Strong Balance Sheet and Shareholder Value

Despite recent expenditures impacting cash flows, NVE maintains a robust balance sheet that supports its ongoing dividend payments. Management confirmed their commitment to shareholder value while continuing to invest in growth opportunities.

Key Takeaway

In conclusion, while NVE Corporation faces challenges in the current semiconductor environment with fluctuating product sales, its strategic focus on R&D, innovation, and market expansion positions it well for future growth. Investors should be mindful of the company's solid margins and growth potential, especially within the promising medical and defense sectors.

Earnings Call Transcript 2025-Q2

[Daniel Baker, executive]

Good afternoon, and welcome to the NVE Corporation Conference Call for the quarter ended September 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 via YouTube and Amazon Chime and is being recorded. A replay will be available through our website, nve.com, and our YouTube channel, youtube.com/nvecorporation.

All participants are currently in a listen-only mode. After our presentation, there will be a question-and-answer session. You'll be able to ask a question by pressing Star 7 from a phone or clicking raise my hand from the Chime website or app. After my opening comments, Daniel Nelson will present our financial results. I'll cover products and marketing 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 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 despite continuing challenges in the semiconductor industry. Daniel Nelson will cover the financials. Daniel?

[Daniel Nelson, executive]

Thanks, Dan. Total revenue for the quarter ended September 30, 2024, decreased 5% due to a 14% decrease in product sales, partially offset by 3,950% increase in contract R&D revenue. The decrease in product sales was primarily due to continued inventory clots, particularly in the distributor channels driven by weak chip demand and a slow recovery in global manufacturing. Although the semiconductor industry recovery has been slower than most of us in the industry had hoped, we have an optimistic outlook. Our end markets are improving, and we have growth markets in the Industrial Internet of Things and electrification.

Gross profit increased 5% from the prior year and gross margin percentage increased to 86% from 78% in the prior year quarter. The increases were due to more profitable product mix and a larger proportion of direct rather than distributor sales. Total expenses increased 55% for the second quarter of fiscal 2025 compared to the second quarter of fiscal 2024, mostly due to a 24% increase in research and development expense, and a 31% increase in selling, general and administrative expense.

The increase in research and development expense was due to increased new product development activities. The increase in selling, general and administrative expense was primarily due to increased sales and marketing activities. We added sales personnel and increased marketing activities. Dan will talk about those activities shortly.

Interest income for the quarter decreased 9% due to lower interest rate. Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes increased to 17% for the second quarter of fiscal 2025 compared to 8% for the second quarter of fiscal 2024. The lower tax rate last year was due to a recovery of credit losses and changes in the timing and amounts of federal tax credits and deductions. The 15% decrease in net income in the second quarter of fiscal 2025 compared to the prior year quarter was primarily due to decreased revenue, increased R&D, increased SG&A, decreased interest income and higher tax rate partially offset by increased gross profit margin.

With an unrealized gain from marketable securities, comprehensive income increased to $4.71 million from $4.67 million the prior year quarter. It was a profitable quarter with 86% gross margin, 65% operating margin, 60% net margin and earnings of $0.83 per share. For the first 6 months of fiscal 2025, total revenue decreased 15% to $13.5 million from $16 million for the first 6 months of the prior year. The decrease was due to a 20% decrease in product sales, partially offset by a 457% increase in contract R&D revenue. Net income for the first 6 months was $8.12 million or $1.68 per diluted share, from $9.13 million or $1.89 per share for the first half of fiscal 2024.

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

[Daniel Baker, executive]

Thanks, Daniel. I'll cover new products, sales and marketing and CapEx. As Daniel mentioned, we've increased our investment in R&D. We spent 13% of revenue in the past quarter on R&D expense plus customer sponsored R&D, which is included in cost of sales. As a result of the efforts of our R&D team, we introduced a significant new product earlier this month, the ALT521-10E Tunneling Magnetoresistance Rotation sensor. It's build is the world's most sensitive device of its type, which allows for wide mechanical tolerances. Rotation sensing is ubiquitous. Applications include detecting complex motion and factory automation and automotive systems.

The technology is also applicable to medical device navigation. There's more information on our website and our YouTube channel has a demonstration of the new sensors extraordinary sensitivity and precision. NVE would like to congratulate NASA on its successful Europa Clipper launch last week. Our robust components are mission-critical parts of the spacecraft sophisticated instruments that will search Jupiter's Icy Moon for signs of life. The craft is scheduled to reach Europa in April 2030. NASA rigorously qualified our parts, a great validation of our quality and reliability.

As Daniel noted, we've also increased our investment in sales and marketing. We exhibited at the Medical Design and Manufacturing Trade Show last week in Minneapolis, part of the Advanced Manufacturing Event, Minnesota is a health care industry hub and medical devices are an important market for us. We have a convincing benefit proposition for medical devices with small size, low power and superb reliability. Specifically, we demonstrated our new high field Tunneling Magnetoresistance sensors, which have a unique omnidirectional capability and detect high field so they can detect the high fields from MRI to enable MRI-tolerant medical devices. We also featured our medical device navigation technology and our best-in-class electrical isolators to ensure the safety of medical instruments.

Turning to CapEx. We've previously discussed plans for $4 million to $5 million in capital investments over the next 2 fiscal years, fiscal 2025 and 2026. We've already spent $1.13 million in the first half of this fiscal year, fiscal 2025. 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. We are developing several wafer-level chip scale part types. We provided customers with prototypes and there's been strong customer interest. We hope to begin some production late this fiscal year.

We have looked at other buildings in the areas options for the expansion or we could expand in our current building. Our current lease expires in March 2026, and we're exploring a lease extension with an allowance to help pay for an expansion in our current building. We held our Annual Shareholders Meeting in August in person here at NVE. Proxy advisory firms recommend in-person annual meetings for good governance. All of our directors and officers attended along with our auditors. We had a chance to meet shareholders and answer questions. In the formal meeting, each director was reelected, including Kelly Way, who was elected for the first time, named executive officer compensation was approved, and the selection of our independent registered public accounting firm was ratified.

Shareholders had a chance to see and try out hands-on product demonstrations and tour our facility. Demonstrations included a hot dog cooker to demonstrate our power conversion products and a chessboard to demonstrate an array of position sensors. There's a replay of the meeting, the slides and product demonstrations on our website and YouTube channel. We filed the final vote counts in a current report on Form 8-K.

Now we'd like to open the call for questions. To ask a question from a phone, press star 7 to unmute or from a browser or the Chime App, click the raise my hand icon under the meeting chat. That's at the bottom of the left column, and unmute yourself to speak. Please state your name and affiliation before your question and to prevent background noise, please mute your line after asking your question.

[Jeffrey Milton Bernstein, analyst]

Dan, it's Jeff Bernstein from Silverberg Bernstein Capital. I had a couple of questions for you. One, you had a big uptick in the R&D contract R&D. Can you just talk about what that completed project was about?

[Daniel Baker, executive]

Yes. So most of our contract R&D is related to defense business and developing new systems, particularly anti-tamper systems. So that is -- that's usually the nature of the contract R&D and our hope is that it will result in product sales down the road, defense product sales. So because of the nature of those types of contracts, we are generally not able to get too specific about them. But the other advantage of those types of contracts is they build our intellectual property portfolio. They expand our technology platform and our R&D team did a great job on that project.

[Jeffrey Milton Bernstein, analyst]

Got you. And so is that something that you think could be -- a product in the next 12 or 18 months?

[Daniel Baker, executive]

It could be. It's difficult to predict time frames. They depend on procurement cycles. Sometimes they take longer than that. But that's -- the goal is that we -- we typically do R&D with the goal of developing either technology that we can turn into products or that it's for a customer that will buy a custom high value-added product.

[Jeffrey Milton Bernstein, analyst]

Understand. Okay. And then the -- unclonable functions business -- has been volatile over time. Can you just give us an update there -- things like we're sending a lot more sophisticated systems overseas these days and that at some point, that ought to convert into some positive momentum?

[Daniel Baker, executive]

It does, Jeff. As you say, systems that are -- defense systems that are sold to allies often need anti-tamper protection. They're especially susceptible to falling into unfriendly hands. So while we hate to see some of the some of the conflicts and instabilities, Allied weapon sales and Defense system sales do tend to help that business. And as you know, there was recent earlier this year. There was an appropriation for Ally specifically for Taiwan, Ukraine and Israel. So those types of systems tend to require anti-tamper.

[Jeffrey Milton Bernstein, analyst]

Okay. And was it kind of a low quarter on unclonable functions this quarter? Or is that -- this business been strong?

[Daniel Baker, executive]

They were strong in the past quarter. But as you know, the sales can be lumpy and vary from quarter-to-quarter based on procurement schedules. We're optimistic about the long-term defense sales -- based on what we see now. But it's hard to predict quarter-to-quarter.

[Jeffrey Milton Bernstein, analyst]

Got you. Yes. And you did make the comment in the Q and on the call about a mix shift in revenue towards -- more towards direct and less distribution that had a very nice positive impact on gross margin. And you mentioned that the product revenue weakness was more due to inventory hangover in the distribution channel than with direct customers. Can you just dive into that a little bit further?

[Daniel Baker, executive]

Yes. So the industry is in a slowdown. The semiconductor industry in general is in a slowdown. So when that happens, what tends -- distributors tend to build up their inventories because end customers aren't buying them and then we get what's sometimes called the bullwhip effect, the supply chain amplifies market changes since customers tend to cancel orders, to manage inventories during downturns.

So -- but the positive was that our end customer sales remain strong -- and because we don't have a distributor margin in there, that tends to help our margins. And so as Daniel pointed out in the prepared remarks, our gross profit actually increased in the quarter year-over-year, even though the revenue was down slightly.

[Jeffrey Milton Bernstein, analyst]

And can you just give us kind of an order of magnitude range of sales as a percent to the distribution channel? Is it ranged from -- 40% to 50% or 10% to 20% or et cetera? And I would assume that so we're in a trough now and what we're kind of at the lower end of whatever that range is.

[Daniel Baker, executive]

You're exactly right. We are -- well, we certainly hope we're at the lower end and that the inventories in the channel appear to be being depleted, which is a good sign for us because that means that the distributors will tend to return to buying so that the -- that their book-to-bill, if you will, that the amount that they're buying is going to more closely correlate to what their customers are buying we don't report a percentage or a number, but I think qualitatively, you're right.

The distributor sales are low right now. End user sales have not been as depressed because of the effects that I mentioned. And so we're hopeful that the distributor sales will pick up again and the percentage will increase.

[Jeffrey Milton Bernstein, analyst]

Okay. And then I wanted to touch on -- you had a piece out during the quarter, and you touched on this in the call about precise navigation sensors for catheters. And we talked about -- you and I during the quarter -- that was potentially something that was applicable to the new pulse feed ablation catheters out there. And your biggest customer is offering one, and is expected to be a big growth area for them. Looks like Medtronic where your new director is from -- is also offering the same thing.

And they describe their's as -- the Medtronic as having real-time local impedance reading to assess catheter proximity to tissue. So I'm assuming that we're kind of talking about the same thing in terms of the navigation capabilities that your parts bring, but can you just discuss that a little bit?

[Daniel Baker, executive]

Yes. So as you point out, that is an important area for us and an important -- and an area where we have a convincing benefit proposition in that our sensors are smaller and more sensitive than other technologies. So the way our customers can use this is to detect an external magnetic field with the that's imparted on the catheter and then they can infer from that the position of the catheter in the body. And that's very important so that they can get the catheter to the right place and deliver the therapy or make sure that it's in the right blood vessel in the case of things like coronary angioplasty catheters.

So it's an area that's becoming more important and where precision and small size is becoming more important. So our sensors have unique advantages in that area, and that was one of the things that we were promoting at the recent MD&M conference that we talked about in the prepared remarks.

[Unknown Analyst]

This is Mike Austiner. Can I ask a question?

[Daniel Baker, executive]

Yes, go ahead, sir.

[Unknown Analyst]

Yes. Dan, this is Mike Austiner. I met you a couple of years ago at the annual meeting.

[Daniel Baker, executive]

Oh, yes, of course.

[Unknown Analyst]

Yes. Two questions. First of all, I know you finished up your trade show -- all your trade shows. I was just wondering what the outcome was? Anything real positive is going to come out of that? And then the second question is, since you've increased your CapEx expenditures. Is that affecting your cash flow? Or how is it affecting your cash flow in relation to the dividend?

[Daniel Baker, executive]

All right. So with regard to the first question, we were -- trade shows -- we were pleased with the response, the traffic and the leads that we got at the trade shows. We recently did a wrap-up of video. It's on YouTube if you're interested, but we had three major trade shows during the season. And the last one was MD&M, which was last week. And we have a lot of leads to follow up. So our sales and sales support staff are working on that, and we're working on -- with the customers and with our distributors -- to follow up on some of the leads that we got at shows and the trips that were associated with those shows. So we're pleased with that. It -- sometimes there's obviously a lag there, and it takes some time to develop these leads but we're optimistic that these will turn into business and into sales.

In terms of the capital expenditures and cash flow -- so the cash flow tends to lead the capital expenditure. We often make down payments. So much of the $1.1 million that we mentioned that we've spent so far in CapEx this fiscal year, the first half of the fiscal year is down payments on equipment. So the equipment will be delivered subsequently, but in the meantime, we have to pay cash for it to get the equipment going because these are custom pieces of equipment that are being designed to our specifications.

The hope, of course, is that they will be able to generate products and business and will have a good return on the investment. But in the meantime, we're spending money that we believe is an investment. We believe, though, that we have a strong balance sheet and that we can continue to have both -- an aggressive dividend to build our shareholder value, and the investments in capital expenditures, sales and marketing and R&D that will pay off in the future.

[Unknown Analyst]

Okay. Because -- because your balance sheet, the cash balance has come down as you've been making these forward payments for equipment, correct?

[Daniel Baker, executive]

It has, yes. But we still have -- by most metrics, very strong balance sheet. We can support a dividend, and we can continue to make the investments we need to make.

[Unknown Analyst]

Okay. And this equipment hopefully comes online? And do you have a time frame that I may have missed the timing that you said?

[Daniel Baker, executive]

This fiscal year and next fiscal year, so that's fiscal 2025 and 2026. However, we do hope to be in some production of some of the new products that are related to the investments this fiscal year, which would end March 31, 2025.

Are there any other questions you can unmute your microphone?

Well, if not, we were pleased to report strong earnings for the past quarter and increases in gross profit and comprehensive income as the industry continues to recover. We look forward to speaking with you again on our next earnings call in January. A replay of this call will be available on the investor events page of our website, nve.com and our YouTube channel, that's youtube.com/nvecorporation. Thank you for participating in today's call.