NVE Corp

NASDAQ:NVEC

Earnings Call Analysis

Steady Performance Despite Revenue Dip

This quarter, revenue decreased by 9% year-on-year due to a 12% drop in product sales, particularly from the defense sector and amid a semiconductor industry downturn. However, a 94% increase in contract R&D revenue helped offset this decline. Total expenses fell by 16%, with R&D expenses down by 23% and SG&A by 4%, contributing to a solidly profitable quarter. Net income dipped slightly by 1%, yet cash flow improved from last year. Major customer Abbott has renewed their contract, ensuring continued collaboration through 2024. The company expects a rebound in defense sector sales and is well-positioned with innovative products and strategic partnerships for anticipated semiconductor market growth in 2024.

Revenue Dynamics and Semiconductor Market Outlook

For the quarter ended December 31, 2023, revenue decreased by 9% compared to the previous year, primarily impacted by a 12% drop in product sales. This decline was attributed to reduced purchases from existing customers and is particularly evident within the defense industry and amid the semiconductor industry downturn. However, there's an optimistic outlook with forecasts predicting a robust recovery for the semiconductor market, projected to grow by 13% in 2024.

Expense Management and Financial Health

The company has effectively reduced total expenses by 16%, with significant reductions in research and development (23%) and selling, general, and administrative expenses (4%). This strategic decrease in R&D expenditure resulted from reallocating resources to customer-funded projects, signifying a shift toward capital-efficient innovation. Additionally, interest income has seen a 21% upturn, reflecting favorably in an environment of rising interest rates. The effective tax rate has also improved, decreasing to 16% from the prior year's 19%, due to increased tax deductions. However, it is important to note that the effective tax rate is subject to variability based on fluctuating conditions from quarter to quarter.

Strategic Partnerships and Technological Advances

NVE Corporation has solidified its relationship with key customer Abbott's Pacesetter subsidiary through a supplier partnering agreement extension until the end of 2024, accommodating price increases to mitigate cost pressures. This enduring alliance since 2006 indicates a steady and reliable customer base. Leveraging long-term research partnerships, NVE has co-published findings alongside academic institutions, bringing advancements in spintronics with energy-efficient magnetic tunnel junctions. This research underpins the company's prowess in pioneering technology fundamental to their product offerings.

Product Innovation and Market Differentiation

NVE has responded to customer demands by unveiling new product extensions, including extended temperature network transceivers and ultra-high isolation data couplers, designed for industrial applications and harsh environments. Notable achievements include raising the isolation voltage rating of their V-Series isolators to 7 kilovolts, emphasizing their commitment to high-performance and safety standards. Additionally, the attainment of the CE mark for the company's compact DC to DC converters broadens market opportunities in Europe, highlighting the company's competitive stance against larger entities in the industry.

Marketing Initiatives and Industry Presence

NVE's marketing efforts are substantiated by active participation in industry trade shows, enhancing their presence and visibility. With exhibits at four major European shows and a significant exhibition in Minneapolis, the company leverages these platforms to demonstrate its products and technological capabilities, reinforcing brand strength and fostering market engagement.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the NVE Corporation Conference Call on Third Quarter Results. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Dan Baker, President and CEO.

[Daniel Baker, executive]

Good afternoon, and welcome to our conference call for the quarter ended December 31, 2023. This call is being webcast live and recorded. A replay will be available through our website, nve.com. I'm Dan Baker, and as always, I'm joined by Accounting Manager and Principal Financial Officer, Daniel Nelson. After my opening comments, Daniel will present our financial results, I'll cover customers' products and marketing. Then 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. 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, 2023, as updated in our quarterly reports on Form 10-Q for the quarters ended June 30 and December 31, 2023. 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, comprehensive income and cash flow despite decreased revenues from a record quarter a year ago. Daniel Nelson will cover the details of our financials.Daniel?

[Daniel Nelson, executive]

Thanks, Dan. Total revenue for the quarter ended December 31, 2023, decreased 9% compared to the prior year quarter. The decrease was due to a 12% decrease in product sales, partially offset by a 94% increase in contract R&D revenue. The decrease in product sales was primarily due to decreased purchases by existing customers, particularly in the defense industry and the semiconductor industry downturn. The good news is that the industry is gaining strength and forecast are for a strong industry recovery in calendar 2024.World Semiconductor Trade Statistics is forecasting the global semiconductor market to grow 13% in 2024 compared to a 9% decrease in 2023. Product sales to defense markets can fluctuate and -- were especially weak in the quarter. This was related to the timing of procurement cycles and we expect these sales to recover in this quarter, the March quarter. The increase in contract R&D revenue was due to new customer research and development contracts. Total expenses decreased 16% for the third quarter of fiscal 2024 compared to the third quarter of fiscal 2023, primarily due to a 23% decrease in R&D expense, a 4% decrease in SG&A. The decrease in R&D expense was primarily due to the redeployment of resources to customer-funded research and development projects. The decrease in SG&A was primarily due to decreased performance-based compensation accruals.Interest income for the third quarter of fiscal 2024 increased 21% 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 third quarter of fiscal 2024 compared to 19% for the third quarter of fiscal 2023. The decrease was primarily due to increase in certain tax deductions. Our effective tax rate can vary from quarter-to-quarter and may be higher in future quarters than in the past quarter. The 1% decrease in net income from the third quarter of fiscal 2024 compared to the prior year quarter was primarily due to a decrease in revenue, which was nearly offset by decreased expenses, increased interest income and a lower effective tax rate.Comprehensive income increased 8% to $4.93 million from $4.56 million the prior year quarter. It was a solidly profitable quarter with gross margins of 80% of revenue and net margin of 62%. Total revenue for the 9 months ended December 31, 2023, decreased 11% compared to the 9 months ended December 31, 2022. The decrease was due to 11% decrease in product sales and a 20% decrease in contract research and development revenue. Net income decreased 8% and comprehensive income increased 3%.Net cash provided by operating activities increased 2% to $15.1 million for the first 9 months of fiscal 2024 compared to $14.7 million for the first 9 months of fiscal 2023. The strong operating cash flow more than cover our [ 3 ] dividends so far this fiscal year, and cash and cash equivalents plus marketable securities increased to $54.7 million from $53.3 million at the start of the fiscal year. Purchases of fixed assets have been only [ $17,000 ] so far this fiscal year, but would expect it to increase significantly in future periods.Now, I'll turn the call back to Dan Baker to cover the business. Over to you, Dan.

[Daniel Baker, executive]

Thanks, Daniel. I'll cover customers, products and marketing. We're proud to supply products to some of the world's most demanding customers, including Abbott's Pacesetter subsidiary. Abbott is a leading supplier of implantable medical devices. We recently executed an extension to our supplier partnering agreement with Abbott. The extension is through the end of 2024 and includes price increases that will help offset our cost increases. We have had a formal partnering agreement with Abbott since 2006, and this is the 10th amendment to extend the agreement. The agreement amendment was filed on a current report on Form 8-K and incorporated by reference in our just filed 10-Q. It is available via our website or the SEC's website.We do long-term research to build our technology portfolio and help advance the field of spintronics. In the past quarter, NVE along with researchers from the University of Texas and Virginia Commonwealth University published research on technology that could provide the energy efficiency needed to accelerate the use of magnetic tunnel junctions in memory, logic and neuromorphic computing. Magnetic Tunnel Junctions or MTJs are spintronic structures we help pioneer that we use in many of our products. There are links to a recent journal paper and a conference presentation on the subject on our Papers and Presentations web page and our X and LinkedIn feeds.A key advantage of our technology is that our products are extremely rugged. We extended that advantage with 2 product line extensions in the past quarter; extended temperature isolated network transceivers and ultra high isolation data couplers. The new extended temperature products include a transceiver that's billed as the fastest such device in the industry and allows high-speed data transfer in harsh environments, such as the industrial Internet of Things and power conversion modules. The new parts were requested by a customer.Isolation voltage is the key figure of merit for data couplers. It's what makes them isolators. We've long had best-in-class isolation voltage and in the past quarter, we extended that advantage by increasing the isolation voltage rating on several of our unique V-Series isolators to 7 kilovolts. With required safety margins, this means the parts that are just [ 0.3 inches] wide can withstand 8.4 kilovolts or at least a second. Demonstrations of the extended temperature and higher isolation products are on our website and YouTube channel.Certifications help us compete with larger, better-known companies by providing credibility and reducing perceived risk. In our previous call, we reported we had earned the prestigious CE mark for our line of the world's smallest DC to DC converters. In the past quarter, we also qualified our data couplers with integrated DC to DC converters. These devices transmit data as well as convert power in a single integrated circuit less than [ 1/8 ] of an inch square. They help solve an important challenge in power conversion systems by transmitting data between the subsystems on different power supplies. Our distributors have told us the CE mark could enable additional sales in Europe. The key to qualifying for the mark was rigorous testing for radiated admissions. These emissions are a problem with conventional parts because they can interfere with other electronics.In addition to the line extensions I just summarized, new products in 2023, we began marketing products, including more products combining data couplers with isolated DC to DC converters to transmit power as well as data, long-term product development programs in the past year included next-generation MRAM for anti-tamper applications, next-generation sensors for hearing aids and implantable medical devices and extremely sensitive TMR sensors as well as wafer level chip scale sensors.Trade shows are an important part of our marketing strategy. We supported distributor exhibitions at 4 European shows in the past quarter; AGRITECHNICA in Hanover, Space Tech in Bremen, SPS in Nuremberg and MEDICA in Dusseldorf. We also exhibited under our own banner at the Medical Design and Manufacturing show in Minneapolis, which was part of the advanced manufacturing event. Some of the trade show demonstrations are on our website and YouTube channel.Now, I'd like to open the call for questions. Josh?

[Operator]

Thank you. [Operator Instructions] Our first question comes from [ Pete Privi ], Individual Investor.

[Unknown Analyst]

Dan, on last quarter's call, I asked a question about licensing your IP, and you gave a great answer saying that you do all manufacturing in-house and you wouldn't license it, but you would maybe manufacture under other brands. My question today is, could you talk a little bit about with all the investments you've made in equipment and facilities, what your potential revenue for the business is with your existing equipment and facilities and running 2, 3 shifts and so forth. Maybe just give some color of what the potential could be.

[Daniel Nelson, executive]

Yes, that's a great question, Pete. So, in terms of our capacity, we don't have a -- it's hard to give a specific number because it depends heavily on the mix and which equipment would be used for the products. But in general, we do not run -- we try not to run close to our capacity. We're not like conventional semiconductor companies, which need to run very close to their capacity at high utilization or they run into -- they just can't cover their fixed costs. Our cost structure is different because of the uniqueness of our technology. So, our goal is to have plenty of capacity. That allows us to provide shorter lead times for our customers and to provide more assurance with redundancies and extra equipment that in the case of a problem with our equipment, we'd be able to continue to produce the products that our customers need.So in general, we run a relatively low percentage of our capacity. We have adequate room to grow. We are looking at increasing our capital expenditures, as Daniel mentioned in the prepared remarks in the coming year to increase our capacity further and to ensure that we don't have any bottlenecks to continue our growth.

[Operator]

[Operator Instructions] Our next question comes from Steven Lewis with Lewis Capital Management.

[Steven Lewis, analyst]

On the previous call, you said you were pleased to report for 6 months in September. And I indicated I wasn't sure what you were pleased about. But then I thought you said something about there were some orders that were coming that would lapse over into the next quarter. The stock went from $80.5 to $66.55 in a day. Now here you are pleased with 9 months. So, when do we start talking about expectations and budget and accomplishment and forget the pleasing part?

[Daniel Baker, executive]

Well, this is Dan Baker. We were pleased with the results in the context of the markets that we compete in with a slowdown in the industry. And then as Daniel mentioned in the prepared remarks that we have a significant defense business that can be variable from quarter-to-quarter. And as he said, we expect that to recover in the current quarter, the March quarter. So, we're optimistic about the future and we have an excellent order flow. The industry is strengthening, as Daniel mentioned. And so we were pleased with the results under the conditions and we look forward to better results and growth in the future.

[Steven Lewis, analyst]

What were year results for the quarter versus your expectation for the quarter in October?

[Daniel Baker, executive]

Well, as you probably know, like most public companies, we don't provide forward-looking guidance, but we were...

[Steven Lewis, analyst]

I'm talking about your expectations internally.

[Daniel Baker, executive]

Right. So, we don't disclose our internal expectations for obvious reasons. We're not permitted to do so if we're not giving forward-looking guidance. So -- but what we looked at was what are the conditions in the industry. What is the defense business backlog. And we were pleased with the performance of our team, with our production, with our sales team under those conditions for the quarter.

[Steven Lewis, analyst]

Do you think tomorrow your stock will reflect what you're so pleased about?

[Daniel Baker, executive]

We're generally not in the business of predicting our stock price, we're not very good at it and I admit to being biased. I almost always think the stock is undervalued and I have a fair amount of exposure to the company stock, but I do that because I think it's an excellent value and an excellent investment. But that's my personal opinion.

[Operator]

[Operator Instructions] Our next question comes from [ Chris Makowski ], Private Investor.

[Unknown Analyst]

I wanted to ask more about the general conditions of the industry. You said that the [ meter ] industry will improve in the present quarter. Can you tell us anything about what you're seeing in the general industry and the medical industry?

[Daniel Baker, executive]

In the general industry, as we said in the prepared remarks, we are seeing a strengthening of the semiconductor market as we go into the new year into 2024. And the WSTS, the World Semiconductor Trade Statistics organization is forecasting growth of double-digit growth in 2024, 13% compared to a 9% decrease in 2023. So, the numbers haven't been tallied for 2023, but the latest forecast was for a significant decrease for the industry in 2023 and a significant increase in 2024. And that, I think, coincides with what we're hearing from our customers that the industry is starting to pick up. Obviously, we are participating in a segment of the overall industry. So, it's not a perfect barometer and it's not a perfect predictor of the future for us. Nevertheless, it gives us reason for optimism and reason for being pleased with the performance that we had in the face of a downturn in the industry in calendar 2023.

[Unknown Analyst]

So, you make a good point and I read the same reports, but the general semiconductor industry reports basically more or less say that the improvement in 2024 is expected to come in the second half. Are you currently seeing improvement in your order flow? Or are your clients also saying, well, it's probably going to be coming in the second half?

[Daniel Baker, executive]

We are seeing the same thing that while the industry seems to be improving and sequentially rather than decreases, we're seeing slight increases. So, it's not a booming industry, but it's better. We're facing fewer headwinds. That is what we're seeing. And we do certainly look forward to a strong second half of the year if the industry forecasts are correct.

[Unknown Analyst]

Okay. It's good to hear that you're already seeing improvement. Now, you have a new networking isolator. Are you getting orders for networking for factory automation equipment?

[Daniel Baker, executive]

We are. And the specific new product we had extends our temperature advantage or speed advantage to high temperature products, which was of interest to particular customers. It's a very harsh environment sometimes in factories. So, being able to withstand high temperatures and transmit very high speed is an important advantage. And as I mentioned, we have best-in-class products that can transmit very high amounts of data, 40 megabits per second, which is just an incredible amount of data in a relatively short time through a complex network protocol. So, those are important products and they serve a growing market, the industrial Internet of Things. So, we're seeing some interest in them and we are optimistic about the future of those products.

[Unknown Analyst]

And that is a new market for you. Am I correct?

[Daniel Baker, executive]

It's an existing market for us. We've always -- or we've been in factory automation for a long time, but there are certain applications that we couldn't get into because of the temperature limitations. So, we meet the industry standard 85-degree Celsius temperature requirements, but we have customers who are interested in 125 Celsius, which is 257 Fahrenheit, that's pretty hot. But there are applications that require that. And even if they don't require it, it's a figure of merit that some of our customers want to be sure that our products have lots of margin and design margin and that they aren't going to fail even under extremely harsh conditions.

[Operator]

Thank you. I would now like to turn the call back over to Dan Baker for any closing remarks.

[Daniel Baker, executive]

Well, thank you for the questions. We reported strong earnings for the quarter and an increase year-over-year in cash flow. We look forward to speaking with you again at our next earnings call -- our next earnings call, which will be in early May to review the full fiscal year. Thank you again.

[Operator]

Thank you. Thank you for your participation. You may now disconnect.