NVE Corp (NVEC) Q3 2019 Earnings Conference Call Transcript

NVEC earnings call for the period ending December 31, 2018.

Motley Fool Transcribers
Motley Fool Transcribers
Jan 23, 2019 at 8:55PM
Energy, Materials, and Utilities
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

NVE Corp  (NASDAQ:NVEC)
Q3 2019 Earnings Conference Call
Jan. 23, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the NVE Conference Call on Third Quarter Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference may be recorded.

I would now like to turn the call over to Mr. Daniel Baker, President and CEO. Sir, you may begin.

Daniel A. Baker -- President and Chief Executive Officer

Good afternoon, and welcome to our conference call for the quarter ended December 31, 2018. As always, I'm joined by Curt Reynders, our Chief Financial Officer. This call is being webcast live and being recorded. A replay will be available through our website, nve.com. And after my opening comments, Curt will present our financial review of the quarter, I'll cover business items and we'll open the call to questions. We issued our press release and filed our quarterly report on Form 10-Q in the past hour following the close of market. Links to documents 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, risks related to changes in tariffs and other trade barriers, as well as the risk factors listed from time to time in our filings with the SEC including our 10-K for the year ended March 31, 2018.

The company undertakes no obligation to update forward looking statements we may make.

We're pleased to report strong earnings of $0.71 per share, despite a 32% increase in R&D expense which included smart sensor development and product launches, the past quarter. I'll cover smart sensors in a few minutes. But first, Curt will cover the details of our financial results. Curt?

Curt A. Reynders -- Chief Financial Officer

Thanks, Dan. Total revenue for the third quarter decreased 15% due to a 7% decrease in product sales and a 69% decrease in contract R&D. The decrease in product sales from the prior year quarter was primarily due to a decrease in custom, anti-tamper products sales which are primarily from military markets with timing that can fluctuate. We have however received additional anti-tamper orders and we currently believe sales will pick up starting next quarter.

The decrease in contract R&D revenue for the third quarter of fiscal 2019 was due to the completion of certain contracts. Gross margin increased to 81% from 77% last year due to a more profitable revenue mix. Total expenses increased 20% for the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 due to a 32% increase in R&D, partially offset by a 14% decrease in SG&A. Dan will discuss R&D and product development in a few minutes. The decrease in selling, general and administrative expense was due to staffing changes.

Interest income for the third quarter of fiscal 2019 increased 13% due to rising interest rates partially offset by a decrease in our securities as we use some of our maturing securities to fund dividends. Our effective tax rate was 18% of net income before taxes for the quarter compared to 28% in the prior year quarter. The decreased tax rate was due to the full effects of a decrease in the federal tax rates. We currently expect our effective rate to be about 18% for the full fiscal year.

After-tax net income for the quarter was $3.42 million or $0.71 per diluted share compared to $3.57 million or $0.74 last year. Comprehensive income which includes unrealized gains and losses, increased 8% to $3.52 million for the quarter compared to $3.28 million last year. For the first nine months of the fiscal year, total revenue decreased 5% due to a 57% decrease in contract R&D. Net income for the first nine months increased 16% to a $11.6 million or $2.40 per diluted share compared to $10 million or $2.07 per share last fiscal year. Comprehensive income increased 19% to a $11.7 million in the first nine months compared to $9.8 million last year. Cash flow from operations was $11.7 million in the first nine months compared to a $11.3 million last year.

Exceptional operating cash flow and modest fixed asset outlays drove strong free cash flow. Fixed asset purchases were a modest $68,000 in the first nine months compared to $605,000 for the same period last year, and we currently don't expect significant fixed asset purchases in the rest of the fiscal year. In addition to the dollar per share dividend paid in the past quarter, we announced today that our Board declared another quarterly dividend of $1, payable February 28 to shareholders of record as of February 4.

Now, I'll turn it over to Dan to cover the business. Dan?

Daniel A. Baker -- President and Chief Executive Officer

Thanks, Curt. I'll cover R&D, strategic new products and a major technical conference. As previously reported, we demonstrated the feasibility of our biosensor technology with our Department of Agriculture biosensor grant. We will look for additional government agency sponsorships and other partnerships to improve aptamer chemistry to enhance the commercial viability. We're also studying the possibilities for medical applications of the technology such as exosome detection for cancer diagnosis.

Innovative research is key to our future and our researchers presented two papers at the Joint MMM-Intermag Conference last week in Washington DC. The prestigious conference is only convened every three years. One of the papers related to our industry-leading Tunneling Magnetoresistance or TMR technology. The paper was titled characterization of magnesium oxide based magnetic tunnel junctions with super-paramagnetic free layers. One of our researchers, Dr. Joe Davies, presented a paper and shared two technical sessions.

Our goal is not just research, but practical products. Our strategy is focused on the huge Internet of Things market, particularly, the industrial Internet of Things and Automotive Submarkets. In the past quarter, we introduced two strategic new products, a Smart Magnetometer and the Smart Angle Sensor. Smart sensors are key to our Internet of Things strategy. The new sensors are smart because unlike our legacy sensors, they include analog to digital conversion, digital factory calibration and digital interfaces in the IC. Those features provide simple smart connectivity to the Internet of Things.

The first new smart sensor is a versatile magnetometer that can be used as a proximity sensor or a current sensor. And the second new product is billed as the world's first Tunneling Magnetoresistance Smart Angle Sensor. Applications include automotive sensing and advanced robotics for the industrial Internet of Things. There are demonstrations of the new products on our website and YouTube channel. A demonstration of our prototype mechatronic xylophone player and another demo using a high-speed RB (ph) car motor, show the speed and precision of the sensors. We highlighted our smart sensors and automotive applications at the Sensors Midwest Trade Show in the past quarter. We demonstrated a smart sensor and an automotive application using a windshield washer pump. There is also a video of that demonstration on our website and YouTube channel. On previous calls, we discussed the importance of IATF 16949 Conformance to our automotive growth strategy. IATF 16949 is a stringent quality management system standard for the automotive sector.

I'm pleased to report that in the past quarter, we earned a Letter of Conformance in accordance with the Automotive Certification Scheme for IATF 16949. The letter certifies that NVE has established and applies a quality management system for design and manufacturing of semiconductor magnetic sensors and isolated components for the automotive industry.

Turning to space programs. Since our last call, we were awarded a contract of burn in and test our couplers for the Europa Clipper Mission. The mission is to look for conditions for life on one of the moons of Jupiter. The contract was for a slightly more than $100,000, so it's not huge revenue but it demonstrates the rugged reliability of our parts and could help our -- expand our military, aerospace and space business. In addition to the Europa Clipper Mission, we recently provided evaluation parts for the NASA Psyche space probe. The Psyche mission is the journey to a unique metal asteroid between Mars and Jupiter and is scheduled to launch in 2022. The spacecraft's payload will include a magnetometer to study the asteroid's composition. It's a trip to a ferromagnetic world carrying our ferromagnetic parts.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Thank you. And our first question comes from the line of Jeff Bernstein with Cowen. Your line is open.

Jeff Bernstein -- Cowen -- Analyst

Hey guys. Just a couple of questions. You mentioned in the script that you were expecting sales to increase next quarter. Is that fiscal Q4 or is that fiscal Q1 of the following year?

Curt A. Reynders -- Chief Financial Officer

Hi, Jeff. That would be fiscal Q1 of fiscal year '20.

Jeff Bernstein -- Cowen -- Analyst

Got you. Okay. And then can you give us a little update about the Cardiac Rhythm Management business and maybe what's going on with your hearing aid customers?

Daniel A. Baker -- President and Chief Executive Officer

Sure. This is Dan. So the Cardiac Rhythm Management business has been as you know has been a challenging business. It's good business for us but it's been down modestly in recent quarters. As you may know, Abbott reported this morning and they reported that the -- they reported a modest downturn in their Cardiac Rhythm Management business. And they said that was about 5% and they said that it was in line with the business with the -- with the general business. So, in the near term we face some challenges, but the long term demographics remain favorable for CRM. As the population ages, our technology has a strong benefit proposition in CRM. And we're also gaining traction in the broader neurostimulator market.

As far as hearing aids, there are some possible changes that hearing aids as you know could be deregulated in the next year or so. So proponents of lower cost and over-the-counter hearing aids point out that many people who need hearing aids, don't have them because of the expense or dispensing inconvenience. So this could help expand the market. And again the -- like CRM, pacemakers and ICDs, the long term demographics remain favorable as baby boomers age and we're probably going to need pacemakers and hearing aids.

Jeff Bernstein -- Cowen -- Analyst

And with your existing customer, what's going on with the business there?

Daniel A. Baker -- President and Chief Executive Officer

You're referring to Abbott, Jeff?

Jeff Bernstein -- Cowen -- Analyst

No, in hearing aids.

Daniel A. Baker -- President and Chief Executive Officer

Well, so hearing aids has been a solid market for us. Our goal is to expand outside of these medical markets with smart sensors. And as I mentioned in the prepared remarks, into the Internet of Things particularly the industrial Internet of Things and automotive markets to reduce our dependence on this business. It's -- the medical business is stable, that's good business, we have an excellent benefit proposition. But it doesn't have the kind of growth potential that we have in some of the emerging markets. So our goal is to continue to innovate in those medical markets to continue to provide products that are smaller, lower power, more reliable and we're doing that. But the strategic projects that I mentioned in the prepared remarks, smart sensors, those are more applicable to the Internet of Things in automotive markets.

Jeff Bernstein -- Cowen -- Analyst

So, just to talk about that a little bit. I guess, at CES, Infineon had a display on sensors and they talked about having 20 magnetic and light pressure sensors in every automobile, all centered -- sensors, GMR and I guess AMR sensors. You know, what do you think your opportunity is in terms of number of potential sensors in an -- in automobile?

Daniel A. Baker -- President and Chief Executive Officer

We think there's a tremendous amount of potential in the automotive market. The sensor content is growing rapidly driven by innovations such as hybrid electric vehicles and autonomous vehicles and driving systems, automated driving systems. And those need sensors. So, we're targeting some particular areas, rotation sensors, angle sensors and current sensors where we have an especially strong benefit proposition and we're doing it with smart sensors and newer technologies than the ones that you mentioned. As I highlighted in the prepared remarks, Tunneling Magnetoresistance or TMR which has a number of advantages, lower power, more precision. And the angle sensor that I mentioned that we launched in the past quarter is the world's first Tunneling Magnetoresistance Smart Angle Sensor. So we see excellent potential. I'm not sure we could come up with an exact number but we're targeting lots of sensors in lots of cars. So we see it as an excellent market as cars become more and more automated and sensors become more and more important.

Jeff Bernstein -- Cowen -- Analyst

Great, thanks. I'll hop back in the queue and let someone ask a question.

Daniel A. Baker -- President and Chief Executive Officer

Thanks, Jeff.

Operator

Thank you. (Operator Instructions) We do have a follow-up question from Jeff Bernstein with Cowen. Your line is open.

Jeff Bernstein -- Cowen -- Analyst

Right, if no one else is going to step up. Yes. So, you mentioned the USDA project for food safety and looking for additional funding et cetera. Can you just sort of clarify what's going on with that project and deliverables et cetera on the food safety side, and then any other details you can give about the future applications?

Daniel A. Baker -- President and Chief Executive Officer

Certainly. So, the main thing, the main message is that we met the critical goal of scaling our biosensor technology to large samples for industrial use which was the goal of that USDA project. So we demonstrated that we can look at lots of fluid and find that metaphorical needle in a haystack that bacteria that could make people sick in a large sample of rinse water say from fresh vegetables. So that's a very important area and an area of focus for the USDA and for food safety.

And we overcame -- our folks overcame some big challenges such as hundreds of sensor interconnects, the microfluidics. We have some challenges with the aptamers which are not as you know those really aren't our part of the project but we believe that they're solvable. And we're looking at some exciting new opportunities to deploy the technology in medical applications such as exosomes for cancer diagnosis. So it's powerful (ph) technology and we're determined to get it commercialized.

Jeff Bernstein -- Cowen -- Analyst

So, do you have any idea when you might have commercial revenue from a food safety standpoint or from medical?

Daniel A. Baker -- President and Chief Executive Officer

You know, it's hard to give an exact timeframe. We're working on it as fast as we can. We had the project runs in parallel with multiple items to reduce the time that it takes to get to market. And we have smart fast talented people who are committed to this area and to this project. So we hope to have some news about it in future calls.

Jeff Bernstein -- Cowen -- Analyst

Okay. And then just to change gears a little bit, can you talk a little bit about distribution? I guess you had a semiconductor partner that was reselling six of your products, the last update that I knew of. What's going on with that relationship? And then I think you had added another distributor and one in the Far East, maybe you can just cover those.

Daniel A. Baker -- President and Chief Executive Officer

Yes. So, the private label partnership, so, yes, six might have been the last report. We had two new products that we launched under their brands in the past quarter and they've released now, well there would be eight products. And it hasn't produced huge sales yet but both, we and our partner are working to ramp up sales. It's an important line for them, and it's important partnership for us and it opens up in the long term, new market such as automotive. So they're a leading supplier of semiconductors in the automotive market. So we see that as a very important partnership and particularly for getting into markets that are like automotive that are notoriously insular. And it helps us get at risk averse customers who may not be familiar with NVE. And just because of our scale, we don't always have the support or the local presence that the larger companies have.

As far as distribution, as you mentioned, we've added distribution particularly in Asia and that's going very well. There's interest in particularly for the industrial Internet of Things for industrial, automation. And in China, Taiwan, Korea, there are a number of prospects that we're working with, some of them with our new products, our new smart sensors, some with our traditional products to automate factories and to make more efficient manufacturing. So, we're pleased with our distributors there. They tend to be specialized distributor, they know our products very well, they know their industry very well, they're not the huge worldwide distributors that are mostly buying and reselling and not adding a lot of expertise or value that way. We have value added distributors that are technically savvy and have spent, invested a lot of time and effort in learning our products.

Jeff Bernstein -- Cowen -- Analyst

And I guess you have a new but veteran head of sales. Can you just talk about what he's doing since he's returned?

Daniel A. Baker -- President and Chief Executive Officer

Well we have -- I'm not sure exactly who you're referring to, but we do have a very talented Sales Manager, Max Skerke, who knows our products inside-out and was promoted, well, I guess about a year ago to Sales Manager. He's been traveling Sensors Midwest, which I mentioned, some of those distributors that I mentioned, visiting them. And he really exemplifies what the strength is of NVE, which is folks who are committed to leading a spintronic revolution, who know our products very well and can come up with ways of helping our customers, solve their problems.

So we're very pleased with the team we have on board. We've added several other people. The large increase in R&D also reflects the addition of personnel. And we have a very talented group of people here, I admit to being biased, but it is just amazing to see what our people can do. And the latest smart sensors are an example of that talent and that ability to get products -- excellent products, get them built, and get them sold.

Jeff Bernstein -- Cowen -- Analyst

And I know you guys don't do things lightly, so maybe could you delve a little bit more into the discipline on the ramp of R&D?

Daniel A. Baker -- President and Chief Executive Officer

Well, so a lot of it is to support smart sensors. And smart sensors are, they are not just a new paradigm for customers, they're a new paradigm for us because they're all digital. So we don't adjust them using -- we adjust some of our traditional products to get them extremely precise. We do that with lasers. So we actually cut them and shape them. And with these products, we're doing it digitally. So our testing is digital. Our parts now have calibration memories in them. And so we've invested in new testers, in new, what are called handlers, which are the mechanical, the electromechanical things that move our parts around to get them built automatically. So, of course, we don't just sell industrial automation, we use it here. So we've invested in that. Our products have embedded software, which means they're running on software, not just electronics. So we have people who can write software and do it very efficiently and make sure that the products work under any conceivable circumstance.

And then we also have development kits and evaluation kits. So these are software-based products that will hook up to computers and allow our customers to modify or look inside the sensor if you will. And I know you follow us a little bit on YouTube, so you may have already seen some of the demonstrations of that. But those are new products for us, those types of evaluation kits and boards. So those are software-based products, based on PCs, they hook up to USB ports. And that's -- those are things that we need to do to get into this market and to be a leader in this market, and we committed to do that. We've hired the people, we built the infrastructure, we bought the equipment and now we have the products.

Jeff Bernstein -- Cowen -- Analyst

Got you. That's great. And then any update on torque microwave isolators and circulators?

Daniel A. Baker -- President and Chief Executive Officer

You know, I keep hoping that the army will make the final report public, but they haven't. So it's been, when was that, last year that we completed a research contract with the army that successfully demonstrated the feasibility of a spin-torque microwave diode spectrograph. So of course there are military uses for it. The technology could lead to an increase in coupler speed, and that could help us with the Internet of Things. So it's exciting technology, it's longer term, and there's not an awful lot we can talk about specifically because it was a military program. But it's amazing, the speeds that our guys were able to demonstrate, the number of bits that go through it.

Jeff Bernstein -- Cowen -- Analyst

Is there a some kind of exclusivity or something? Or could you pursue commercial products without the government's OK or et cetera?

Daniel A. Baker -- President and Chief Executive Officer

Well, we can pursue commercial products. There are some restrictions that usually don't come into play on the technology when it's funded by the military. But part of the reason that the -- this was a small business contract with the army. And part of the reason they do it is to build the American industry and to help us hire people and do all those things that have a sort of a global benefit. But the specific military applications, those are up to the army to deploy here.

Jeff Bernstein -- Cowen -- Analyst

Got you. All right. Thanks very much.

Daniel A. Baker -- President and Chief Executive Officer

Thank you, Jeff.

Operator

Thank you. And I'm showing no further questions at this time. I'd now like to turn the call back to Mr. Daniel Baker for closing remarks.

Daniel A. Baker -- President and Chief Executive Officer

Well, thank you, and thanks Jeff for the questions. We were pleased to report strong earnings and cash flow, successful smart sensor product launches and IATF Conformance. We look forward to speaking with you again in early May to discuss fourth quarter and fiscal year results. Thank you for participating in the call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

Duration: 28 minutes

Call participants:

Daniel A. Baker -- President and Chief Executive Officer

Curt A. Reynders -- Chief Financial Officer

Jeff Bernstein -- Cowen -- Analyst

More NVEC analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.