NVE (NVEC) Q3 2020 Earnings Call Transcript

NVE (NVEC -1.87%)
Q3 2020 Earnings Call
Jan 22, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the NVE third-quarter results conference call. [Operator instructions] I would now like to hand the conference to your speaker today, Daniel Baker, president and CEO. Please go ahead, sir.

Daniel Baker -- President and Chief Executive Officer

Thank you. Good afternoon, and welcome to our conference call for the quarter ended December 31st, 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 new products and design wins, 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 time line.

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. We're pleased to report a 9% increase in net income for the quarter, driven by a 3% increase in revenue and a decrease in expenses. Curt will cover details of our financial results, then I'll cover new products and share two new design win examples.

Curt?

Curt Reynders -- Chief Financial Officer

Thanks, Dan. As Dan said, total revenue for the quarter ended December 31st, 2019, increased 3% compared to the quarter ended December 31st, 2018. The increase was due to a 3% increase in product sales and a 9% increase in contract R&D revenue. The growth was despite continued weakness in the semiconductor market and a bit of weakness in our medical device market.

Semiconductor industry sales decreased 11% year-to-year in the most recent available month according to the Semiconductor Industry Association. The increase in our product sales included sales of new smart sensors. The increase in contract R&D revenue was due to timing of progress toward contract completion. We hope to have another quarter of year-over-year revenue and net income growth this quarter, the quarter ending March 31st.

Expenses decreased 21% from the prior year due to a 32% decrease in R&D, partially offset by a 22% increase in SG&A. The decrease in R&D expenses was due to completion of certain product development activities. Dan will discuss ongoing and future product development activities in a few minutes. The increase in SG&A was primarily due to staffing changes.

We've added more sales and sales support staff. Interest income for the third quarter decreased 3% due to a decrease in the average interest rates on our marketable securities and money market funds. On the strength of increased revenue and decreased expenses, net income for the quarter increased 9% to $3.73 million or $0.77 per diluted share compared to $3.42 million or $0.71 per share for the prior-year quarter. The $1 per share or $4.85 million dividend in this past quarter brought our total dividends paid to more than $100 million since we began quarterly dividends in 2015.

Additionally, we announced another quarterly dividend today payable February 28th to shareholders of record, February 3rd. For the first nine months of the fiscal year, total revenue decreased 8% due to a 7% decrease in product sales and a 14% decrease in contract R&D. Net income for the first nine months decreased 4% to $11.2 million or $2.30 per share compared to $11.6 million or $2.40 per share last fiscal year. Comprehensive income and cash flow increased for the fiscal year-to-date, despite the decrease in net income.

Comprehensive income for the first nine months increased 2% to $11.9 million from $11.7 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. Cash flow from operations increased 7% for the first nine months to $12.5 million. Cash plus marketable securities as of December 31, 2019 was $73.1 million compared to $74.3 million at the end of the last fiscal year, as operating cash flow and unrealized gains in marketable securities nearly covered $14.5 million in dividends paid.

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

Daniel Baker -- President and Chief Executive Officer

Thanks, Curt. I'll cover new products and design wins. We had a good quarter for new product development, which will drive future growth. Last month, we expanded our smart sensor line with a wider field range smart magnetometer, which is very useful in industrial automation proximity detection.

In the September quarter, we announced our first tunneling magnetoresistance, or TMR, magnetic switches. Our technology makes these switches inherently lower power than conventional semiconductors. To achieve low power, semiconductor sensors need to be turned on and off, what's called duty cycling. This reduces their speed, which is a problem for motor and other controls, and duty cycling introduces noise, which is a problem for hearing aids and other audio devices.

The parts we introduced in the September quarter run on 1.5-volt batteries such as alkaline or zinc air and do not require duty cycling. In the past quarter, we introduced TMR magnetic switches that run on 3 to 4 volts, which is ideal for rechargeable devices such as over-the-counter hearing aids and smart audio devices. There's a video on our website and our YouTube channel, showing the unique combination of low power and high speed for these new products. In the past quarter, we also announced a high-field TMR magnetic switch, which operates at a field strength of thousands of oersteds compared to our traditional sensors, which operate in the tens of oersteds.

This high-field capability allows our sensors to continue to operate when exposed to the large fields of MRI machines, which enables MRI-tolerant medical devices. MRI tolerance is important as both medical implants and MRI imaging become more common. TMR technology also uses very little power, which extends the life of battery-powered medical devices. High-field switches are also used in security and industrial applications.

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. An example of our TMR research is in a paper by five of our researchers presented at the Annual Magnetism and Magnetic Materials conference in the past quarter. That was titled Noise Optimization in Magnetic Tunnel Junctions.

We reported on our development of sensors with higher-than-ever detectivity, which is a key performance figure of merit affecting accuracy. These sensor elements have been deployed in some of our smart sensors and other products we discussed recently. There are links to the paper abstract on our website and our Twitter time line. In addition to product introductions, we met a significant smart sensor development milestone recently with the release of a new custom-integrated circuit design to our foundry, a milestone that's often called tape-out.

This is after an R&D investment of several hundred thousand dollars. Custom ICs are expensive, but this will allow us to make our most accurate smart sensor ever. The IC represents the culmination of a lot of hard work and ingenuity by our engineers, scientists and contractors. In the past quarter, we completed a NASA contract by successfully qualifying couplers for the Europa Clipper mission to one of Jupiter's moons.

We had shipped the couplers to the Jet Propulsion Laboratory in a previous quarter, but we still had testing to do to qualify the production lot. We did environmental stress testing and other tests. NASA did even more rigorous testing, including total ionizing dose radiation testing to ensure the parts can withstand the harsh deep space environment. Testing of our parts is a high priority at JPL because our parts will be in a number of spacecraft systems.

NASA is targeting to have this spacecraft complete and ready for launch as soon as 2023. In a paper published in the past quarter in the journal, Nature Astronomy, NASA scientists believed they detected water, which would mean Europa has all of the elements necessary for life. The Europa mission will do a detailed survey and look for landing sites for future missions. Our part of the Europa project was for a bit more than $100,000, so not huge revenues, but it validates the ruggedness of our technology, which is applicable to commercial markets.

For example, we have begun selling versions of similar couplers for Internet communication satellite constellations, which have been in the news as a way to extend the Internet all over the world. These do have decent revenue potential. As we start 2020, we look back on 2019 as a productive year for product development, starting the first working day of 2019 with our announcement of the world's only smart tunneling magnetoresistance angle sensor, other new smart sensor products including a smart TMR magnetometer, two new lines of ultra-low power TMR magnetic switches for medical devices and battery-powered systems, the high-field sensors, we discussed a few minutes ago, high-speed automotive couplers using the CAN FD network protocol and new couplers for the industrial Internet of Things that use a lower voltage data bus. We've been pleased with the response to our new products, especially our smart sensors.

I'd like to share two application examples. The first example is a smart sensor design win for a sophisticated proximity sensor with a European robotics manufacturer. The design win quickly and is a good validation of our smart sensor strategy. We demonstrated the product to the customer in May, and we shipped the first production order of several thousand smart magnetometers in the past quarter.

We gave them an evaluation kit, so they were able to quickly evaluate the sensor without having to design a circuit board or write firmware. After testing, they said it was a very good product and selected it for their project contingent on some customizations. With the flexibility of our smart sensor architecture, our team was able to turn those customizations around in just a few months. The first order was for $10,000 to $20,000, and we hope the first of many orders for this project and for this customer.

In addition to revenue, feedback from this customer helped us improve the sensor and improve our development tools. The second application example is for an Internet of Things battery dispenser developed in cooperation with one of our distributors for a major supplier of consumer batteries in Japan. The system uses our smart sensors to detect whether the dispenser is running low on batteries. The system notifies the merchandiser via smartphone, so the batteries can be replenished.

This optimizes travel, inventory and spoilage. The system is being field tested now and was shown as a smart sensor use case at a trade show in the past quarter. The advantages of our sensor in this application are high sensitivity for wide design latitude and low power since the system not only dispenses batteries, but uses batteries for power. Now I'd like to open the call for questions.

Joelle?

Questions & Answers:

Operator

[Operator instructions] And our first question comes from Jeff Bernstein with Cowen. Your line is now open.

Jeff Bernstein -- Cowen and Company -- Analyst

Hey, good evening guys. So a quick question for you on a couple of the product announcements. Do you ever have design wins on these products for a particular customer before you announce the general availability of the product?

Daniel Baker -- President and Chief Executive Officer

We often will develop new products with the input from customers. So maybe not what you strictly classify as a design win, but in many cases, we're developing a product that the customer has requested and the presumption is that if it's good product and meets their expectations, that they'll use it. So we try to work closely with our customers, and those smart sensors fell into that category. But those two examples that I gave were both from what would you call it a standing start.

So those were customers who learned about the product when we announced it. And we had development kits and data sheets -- final data sheets ready to go. So the development environment was very important to that first customer, the robotics manufacturer that I mentioned.

Jeff Bernstein -- Cowen and Company -- Analyst

Yep. So I was interested particularly in the TMR magnetic switch, as you mentioned, that 1.5 volt you said. I think that that would be appropriate for hearing aids. And I know there's a Phonak hearing aid that's out now, and there was a discussion about it, talking about a disposable-type battery and then wanting to go to a rechargeable battery, and it sounded like the second TMR magnetic switch you talked about would be appropriate for that.

Do you have some wins in the hearing aids already?

Daniel Baker -- President and Chief Executive Officer

We have a fair amount of business in the hearing aids sector. We generally don't talk about it.

Jeff Bernstein -- Cowen and Company -- Analyst

New, because that's...

Daniel Baker -- President and Chief Executive Officer

Right.

Jeff Bernstein -- Cowen and Company -- Analyst

Yeah.

Right. So we generally don't talk about the specific products because our customers tend to guard that fairly closely. But as you correctly point out, there's interest in rechargeable battery systems, both by traditional hearing aid manufacturers and companies entering the hearing market sometimes for hearing aids or personal sound amplification devices and sometimes for devices for normal hearing folks, things like translators or navigation systems. So the higher-voltage products that we mentioned, as you know, are ideal for rechargeable batteries.

And there's been a fair amount of interest. We have a design win in that space. We haven't said whom, but there's a lot of interest in rechargeable battery systems, which can go up to 4.2 volts. And then also, as you know, the one and a half volt zinc-air battery is still used quite a bit in traditional hearing aids, and that's a different type of challenge because that's not very much voltage to get a sensor to run on a single zinc-air battery.

Yep. Gotcha. OK. And then I was just curious from -- obviously, you've had Phonak as a disclosed customer in the past.

They have this $6,000 hearing aid -- super fancy hearing aid that's supposed to be particularly -- potentially paradigm changing. And I guess, Starkey has been talked about as having a product in that class as well. And I know they're close to you, I think, in Minnesota. And then -- but at the same time, you have this change in the regulation, where they're allowing these personal amplification devices which are supposed to be much, much cheaper, like an order of magnitude cheaper than that.

Is the opportunity set different for you in these different things? I would assume that the low price would be much higher volume. But do you get a premium, if it's going into a premium price product or anything you can sort of say about the hearing aid segments?

Daniel Baker -- President and Chief Executive Officer

Right. So that's a great point, Jeff, is that there's a very broad market for hearing devices and ranging from, as you say, some very high end amazing products that are coming out and to some lower cost products. And we have product lines that span those types of offerings. So we have different products for different applications and the voltages are different, which is one thing that you've pointed out because whether they're running on single cells that are typically one and a half volts or they're running on rechargeable batteries, they require different sensor elements.

And then the types of sensing that they do, the fields that they're sensitive to, the outputs, the amount of current that they draw, those all vary with the application. And so we've been developing a lot of products in that space, particularly using our tunneling magnetoresistance platform, which gives us a lot more flexibility and a lot more horsepower, if you will, that we can trade either for sensitivity or power or voltage. So our development team has done a great job of working with our customers and developing products that fit in those various markets. And as you know, it's really an exciting time in that marketplace.

I think you had pointed out an article where somebody had said that hearing aids were going to be like Jarvis from Iron Man and that the ear is the new wrist, it's the new peripheral platform for wearables. So we think we're well positioned to lead that market.

Jeff Bernstein -- Cowen and Company -- Analyst

So it sounds like you have the capability to price to value to some degree, where there's some pretty significant kinds of parameters that have to be hit, and there's some ability to price to that?

Daniel Baker -- President and Chief Executive Officer

Yeah. Typically -- exactly. So typically, if we've got a higher-performance product, it costs more to make and it has more value. And then we recognize that there are some products that are much more price sensitive.

And we have defeatured products that we can make less expensively that are targeted at those.

Jeff Bernstein -- Cowen and Company -- Analyst

Gotcha. OK. And then I just wondered if you could say anything about -- you've talked about in the past, automotive and robotics, and you did talk about a robotics design win. But you've talked about current sensing, rotation sensing, having that smart interface for those kinds of products in automotive and couplers also being automotive opportunities.

Can you just talk about each one of those segments and give us an update on what kind of traction, if any, you're making in automotive specifically?

Daniel Baker -- President and Chief Executive Officer

Right. So we see automotive as an excellent growth market for us, and the number of sensors in cars is projected to increase rapidly, driven by a move toward electric, autonomous and more sophisticated safety systems. So as you mentioned, we have sensors that can be used to sense current, which is used for battery management systems in cars; rotation sensors, which is used for engine, cam and crank; electric motors for electric vehicles; as well as a lot of user interfaces, knobs and dials and things that turn; and then proximity sensing. And then on the coupler side, our parts are smaller, more precise, lower power and more rugged than conventional electronics transmit information.

So we plan to market those products through our private label partnership with a company that has strong automotive sales channels. We have an automotive task force letter of conformance and IATF, International Automotive Task Force, letter of conformance, which removes some of the barriers to the automotive market. We're working on specific products, and in particular, we're focusing on current sensors and proximity sensors because we have interest from automotive manufacturers, getting those qualified and getting those through the rigorous qualification process that automotive manufacturers have and get them into cars. Now that's sort of a longer-term or a medium-term opportunity, perhaps a couple of years to get products qualified.

But it's a very large market. It's growing rapidly, and we think it's well worth the investment. We're pushing that as fast as we possibly can to get our parts qualified. And in particular, as I mentioned, one of the thrusts is one of our current sensing smart sensors that can be used for battery management systems.

Jeff Bernstein -- Cowen and Company -- Analyst

Gotcha. Great. And then I think, obviously, the PUF business can be a little bit volatile. You saw some recovery there.

I think it was last quarter, and I'm just wondering how that's looking. What kind of visibility you have on that going forward?

Curt Reynders -- Chief Financial Officer

Yeah. Yeah, I can answer that. We have a little bit of visibility on that. The medical market, we expect to stabilize in the most current quarter, the quarter we're in right now.

Obviously, longer-term demographics are very favorable for those types of devices. And so -- but the -- we have had some struggles with the weakness in the semiconductor market as well as some of our anti-tamper business can be kind of up and down.

Jeff Bernstein -- Cowen and Company -- Analyst

And that anti-tamper, is there -- do you have some visibility now on that in the next couple of quarters? Or is that a sort of quarter-by-quarter basis?

Curt Reynders -- Chief Financial Officer

That's really a quarter-by-quarter basis. We don't have a lot of forward visibility on that, and we're pretty early in the current quarter.

Jeff Bernstein -- Cowen and Company -- Analyst

Gotcha. Good. OK. And then any progress you guys are making on the exosome detection or the food safety applications? Or are those sort of suspended for now?

Daniel Baker -- President and Chief Executive Officer

Well, we're still working on them. We don't have any specifics to report, but exosomes is a very exciting area for cancer detection -- early cancer detection. And we continue to work on some of the remaining issues with biosensors, particularly for food safety. And hopefully, we'll have something -- some more specifics to report in future quarters.

But we view those as longer-term opportunities, but very exciting opportunities. And it's one of the research areas that we continue to invest in.

Jeff Bernstein -- Cowen and Company -- Analyst

Great. Great. Thanks. I'll let somebody else ask some.

Daniel Baker -- President and Chief Executive Officer

Thanks, Jeff.

Operator

[Operator instructions] I'm not showing any further questions at this time. I would now like to turn the call back over to Daniel Baker for any closing remarks.

Daniel Baker -- President and Chief Executive Officer

Well, thanks, Joelle, and thank you. We were pleased to report solid revenue growth and earnings growth and two new products in the past quarter. We look forward to speaking with you again in early May to discuss fourth quarter and full fiscal year results. Thank you, again, for participating in the call.

Operator

[Operator signoff]

Duration: 29 minutes

Call participants:

Daniel Baker -- President and Chief Executive Officer

Curt Reynders -- Chief Financial Officer

Jeff Bernstein -- Cowen and Company -- Analyst

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