NVE (NVEC) Q2 2020 Earnings Call Transcript

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NVE (NVEC 0.76%)
Q2 2020 Earnings Call
Oct 23, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the NVE conference call on second-quarter results. [Operator instructions] As a reminder, this conference call is being recorded. And now, I would like to turn the conference over to your host, Mr. Dan Baker, president and CEO.

Sir, you may begin.

Dan Baker -- President and Chief Executive Officer

Good afternoon, and welcome to our conference call for the quarter ended September 30th, 2019. 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.

After my opening comments, Curt will present a financial review of the quarter, I'll cover product development, sales, and governance, and then 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, uncertainties related to the impacts of the Federal Tax Reform Act enacted in 2017, 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 31st, 2019.

The company undertakes no obligation to update forward-looking statements we may make. Despite a challenging semiconductor market, we're pleased to report 3% sequential growth in revenue, 6% sequential growth in net income, three product launches and four new distributors this past quarter. Curt will cover the details of our financial results, and I'll cover product development, sales, and governance. Curt?

Curt Reynders -- Chief Financial Officer

Thanks, Dan. For year-over-year comparisons, total revenue for the quarter ended September 30th, 2019, decreased 13% compared to a strong year-ago quarter. The decrease was due to a 12% decrease in product sales and a 30% decrease in contract R&D revenue. We've been facing a challenging macro environment for product sales in what's been called the weakest semiconductor market in a decade.

Semiconductor sales decreased 16% year over year in the most recent available month according to the Semiconductor Industry Association. But it's a cyclical industry so it's expected to recover. The decrease in contract R&D revenue was due to the completion of certain contracts. Sequentially, as Dan said, total revenue increased 3% compared to the quarter ended June 30th, that was our second consecutive sequential revenue increase.

Smart sensor sales have not been significant yet, but we have several interested customers and an important robotics design win recently. We're hoping for a third consecutive sequential revenue increase this quarter, the December quarter, as well as, year-over-year revenue growth with new products gaining traction and a less challenging compare. Gross margin decreased to 79% for the quarter from 82% in the second quarter last year due to a less profitable product mix. Expenses decreased 4% from the prior year, primarily due to a 5% decrease in R&D as we completed the development of several new products.

Dan will discuss the new products in a few minutes. Interest income for the second quarter increased, 3% due to an increase in the average interest rates on our marketable securities. Net income for the quarter decreased 11% year over year to $3.82 million or $0.79 per diluted share, compared to last year's record $4.28 million or $0.88 per share. We had an unusually low tax rate of 11% due to the benefits from the Tax Reform Act enacted in 2017.

We currently expect the tax rate for each of the remaining two quarters of the fiscal year of approximately 18%, which is similar to what we've reported in other recent quarters. Due in part to those tax benefits, our net margin was a record 59% of revenue. Net income increased 6% sequentially, compared to the quarter ended June 30th. The $1 per share or $4.85 million dividends this past quarter brought our total dividends paid to more than $97 million.

Adding in stock repurchases, we have returned over $100 million to shareholders in the form of dividends and repurchases since we began aggressively returning cash to shareholders in fiscal 2014. Additionally, we announced another quarterly dividend today payable November 29th to shareholders of record November 4th. For the first six months of the fiscal year, total revenue decreased 12% due to a 12% decrease in product sales, and a 24% decrease in contract R&D. Net income for the first half decreased 10%, $7.43 million or $1.53 per share compared to $8.23 million or $1.70 per share last fiscal year.

Comprehensive income for the first half increased slightly to $8.18 million from $8.17 million for the prior-year period as an unrealized gain from marketable securities more than offset the decrease in net income. The gain was due to strong bond market conditions. Now, I'll turn it over to Dan to cover the business. Dan?

Dan Baker -- President and Chief Executive Officer

Thanks, Curt. And I'll cover product development, sales, and governance. New product development sometimes takes longer than we'd like, but we had a good quarter for new products as we introduced three new products since our last call in July, two new network couplers, one for automotive, and one for industrial controls, and a new type of magnetic switch. We expanded our automotive product offerings with a new isolated coupler based on the Controller Area Network Flexible Data rate or CANFD standard.

CANFD has up to 5 times the data rate and 8 times the data payload of standard Controller Area Network transceivers. And the protocol is part of our Industrial Internet of Things strategy. It allows more bandwidth to support more complex data through in-vehicle networks, as well as, faster software updates and data downloads for automotive manufacturing and service. Our unique technology allows us to offer the smallest isolated transceivers in the industry's so-called quarter-size outline packages or QSOPs, which have one-fourth the footprint of conventional parts.

The second product introduction in the past quarter was an isolated coupler for next-generation RS-485 buses. RS-485 also known as TIA-485 or EIA-485 is an industry-standard network protocol used for factory automation and the Industrial Internet of Things. We have a number of RS-485 transceivers and the new part is compatible with next-generation 3.3 volt RS-485 buses, which use less energy than legacy five-volt parts. The third new product line was announced just last week and is a series of tunneling magnetoresistance or TMR, magnetic switches that provide unique combination of low voltage, low power, and high speed.

The new sensors can operate on less than a volt. So, they can be powered by single-cell batteries. With the ultra-low power of our TMR technology, the new sensors can run for years on watch batteries, making them ideal for Internet of Things applications such as utility meters and portable instruments. We are leaders in TMR development.

TMR uses structures called magnetic tunnel junctions and is generally lower power, and more precise than our older giant magnetoresistance or GMR-based products. Our researchers led by Dr. Joe Davies will present a paper at the Annual Conference on Magnetism and Magnetic Materials known as MMM in early November titled Noise Optimization in Magnetic Tunnel Junctions. There are links to the abstract from our website, and there is a demonstration of the energy efficiency and speed of the new TMR sensor in a motor control application on our website and YouTube channel.

Turning to sales. We recently added two distributors in India, one in Vietnam, and one in Taiwan. These are price-sensitive markets where we see growth potential. We already received a significant order from one of those distributors.

Covering corporate governance, our Annual Shareholders Meeting was August 1st for good corporate practice our entire board of directors stands for election every year and each of our directors was overwhelmingly reelected. And our executive officer compensation supports goals of profitable growth and improving long-term shareholder value without being excessive and shareholders overwhelmingly voted to approve compensation. And finally, the selection of our new auditors was ratified. Details of the shareholder votes were reported on a Form 8-K we filed the day after the meeting.

In addition to the formal items of business at the meeting, we explained our growth strategy of smart sensors for the Industrial Internet of Things and we had hands-on smart sensor product demonstration. There is a video of the demonstrations on our YouTube channel that's youtube.com/nvecorporation. And now, I'd like to open the call for questions. Lance?

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Thomas Cochran from Lake Road Partners. Your line is open.

Unknown speaker

Thank you. Good afternoon, Dan.

Dan Baker -- President and Chief Executive Officer

Afternoon, Tom.

Unknown speaker

I've got one question, breaks, which kind of breaks down into three sections. The Internet of Things is here and getting bigger. And NVE makes devices ideally suited to serve the Internet of Things. When is the Internet of Things going to make a big difference to NVE revenues? That's the question.

Dan Baker -- President and Chief Executive Officer

Right. Well, that's a great question, Tom. I think part of the reason for the global slowdown in the semiconductor industry has been that the Internet of Things. Well, I think, most experts believe it's inevitable, has been slower to be adopted than a lot of people thought.

But it does seem inevitable, the benefits are so overwhelming and the technology that enables it, and of course, we're a part of that, is available. So, we're hoping, as Curt mentioned in the prepared remarks, we're hoping that it's going to start to show up in this quarter, which would be our -- that's our December quarter, our third fiscal quarter, particularly our smart sensors. So, we're optimistic. Sometimes things take longer than we would like, but we believe it's a historic opportunity.

Unknown speaker

Hey, thank you, Dan.

Operator

[Operator instructions] I am showing no further questions at this time. I would like to turn the conference back to Dan Baker for closing remarks.

Dan Baker -- President and Chief Executive Officer

Thank you. We were pleased to report sequential revenue and earnings growth, three new products, and four new distributors. We look forward to speaking with you again in January to discuss third-quarter results. Thank you again for participating in the call.

Operator

[Operator signoff]

Duration: 17 minutes

Call participants:

Dan Baker -- President and Chief Executive Officer

Curt Reynders -- Chief Financial Officer

Unknown speaker

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