NVE Corporation (NASDAQ:NVEC) Q3 2023 Earnings Call Transcript

NVE Corporation (NASDAQ:NVEC) Q3 2023 Earnings Call Transcript January 25, 2023

Operator: Good day, and thank you for standing by. Welcome to NVE conference call on third quarter results. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session . I would now like to turn the conference over to your speaker, Dan Baker, President and CEO. You may begin.

Daniel Baker: Good afternoon, and welcome to our conference call for the quarter ended December 31, 2022. This call is being webcast live and being recorded. A replay will be available through our website, nve.com. I’m joined by our CFO, Joe Schmitz. After my opening comments, Joe will present a financial review then I’ll cover marketing, design wins, new products, and then we’ll open the call to questions. We issued our press release with quarterly 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 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 uncertainties related to the economic environments in the industries we serve.

Risks and uncertainties related to future sales and revenue, uncertainties related to future stock repurchases and dividend payments, our dependence on critical suppliers and risks related to supply chain disruptions as well as the factors listed from time to time in our SEC filings, including our annual report on Form 10-K for the fiscal year ended March 31, 2022, as updated in our just-filed quarterly report on Form 10-Q. 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 a strong quarter. Net income for the quarter increased 22% to $0.88 per diluted share, driven by a 22% increase in product sales. Joe will cover the details of our financials.

Joe?

Joseph Schmitz: Thanks, Dan. Third quarter total revenue increased 18% to $7.4 million from $6.29 million for the prior year quarter. This was our second consecutive quarter with large year-over-year revenue increases. The increase was due to a 22% increase in product sales, partially offset by a 46% decrease in our contract R&D revenue. The large increase in product sales was primarily due to increased purchasing by existing customers and new customers. We acquired new customers from traditional semiconductor companies with our superior products and shorter lead times. Sales increased in most of our markets and product lines. Sales were especially strong in industrial markets, which more than offset some weakness in our medical device markets.

Improvements in our supply chain allowed increased product shipments, although there continue to be risks related to those shortages. Paradoxically, supply chain disruptions may have favorably affected product sales for the quarter and nine months. Since we believe the disruptions may have been less severe for us than some of our competitors. We may be less susceptible to supply chain disruptions because we have our own wafer fabrication and product test operations. On the other hand, we believe the supply chain disruptions have had an unfavorable impact on our cost of sales. Improvement in the supply chain may have been due to reduced demand in some semiconductor industry sectors such as memories, PC and consumer electronics. Demand for our primary sectors of mixed signal integrated circuits appear to have been less affected by the industry downturn, although there are risks and demand could change.

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The decrease in contract R&D revenue was due primarily to the timing of completion of certain projects. Gross profit as a percentage of revenue increased to 80% for the third quarter of fiscal 2023 from 78% for the third quarter of fiscal ’22, primarily due to increased prices and economies of scale due to increased revenue. Total expenses increased 31% to $1.1 million for the third quarter of fiscal 2023 compared to the quarter — third quarter of fiscal ’22, due to a 17% increase in R&D expense and a 62% increase in SG&A. The increases in expenses were primarily due to increased employee compensation expense and increased staffing. While spending was higher in total dollars as a percentage of sales, spending was only 1% higher versus the prior year quarter.

Interest income for the third quarter of fiscal ’23 increased 43% due to an increase in our available for sale securities and an increase in the effective interest rate on those investments. Net income for the quarter increased 22% to $4.23 million or $0.88 per diluted share compared to $3.47 million or $0.72 per share for the prior year quarter. The increase was driven by increased revenue and increased interest income, partially offset by increased expenses. Net income increased from 55% to 57% of revenue. For the first nine months of fiscal 2023, total revenue increased 26% to $24.5 million from $20.3 million for the first nine months of the prior year. The increase was due to a 27% increase in product sales, partially offset by a 13% decrease in contract research and development revenue.

Net income increased 35% to $14.5 million or $2.99 per diluted share from $10.7 million or $2.21 per share for the first nine months of fiscal 2022. Turning to cash flow. Our strong balance sheet and strong margins allowed us to buy equipment to build the capacity we needed and pay premiums, if necessary, for the raw materials we needed. Cash flow from operations for the first nine months of the year was $14.8 million. During the first nine months of the year, we increased inventories $1.37 million to help mitigate shortages. Despite the inventory increase, our cash flow from operating activities actually improved by $288,000. Purchases of fixed assets were $908,000 in the first nine months of the fiscal year, and all but $24,500 were in the most recent quarter.

These were primarily capital expenditures for additional production equipment that we plan to deploy this quarter to increase our capacity. The $14.8 million cash flow from operations more than covered the $14.5 million for the three dividends declared so far this year. We have now paid more than $155 million in dividends since we started paying dividends in 2015. Today, we announced that our Board declared another quarterly dividend of $1 per share payable February 28 to shareholders of record as of January 30. That will bring our total dividends to more than $33 per share since 2015. Now I’ll turn it back to Dan.

Daniel Baker: Thanks, Joe. I’ll cover marketing, design wins and product development. The marketing highlight of the past quarter was promoting our products at the electronica trade show in cooperation with our distributors. Electronica is a major industry event and it was live for the first time in four years. Highlighting recent design wins, we’re pleased with the interest in products for power conversion and alternative energy. In the past quarter, we got two isolator design wins, a design win in home energy storage for green energy and another design win in electric vehicle charging stations. The expected revenues from both those design wins are modest in the near term, but highlight our value proposition and our prospects for the future.

Farther from home, we’ve mentioned before that we have parts on the Europa Clipper mission to a moon of Jupiter. The launch is targeted for October 2024 and the mission is to investigate whether Europa has conditions suitable for life. Our parts are also being evaluated for the Mars sample return mission, and this month, we completed rigorous testing and shipped a number of parts to NASA. That mission is to return soil samples from Mars. The mission is scheduled to launch in 2028 and return to earth in 2033. These NASA projects are not large revenue, but they will validate the exceptional reliability of our technology. Turning to product development. In the past quarter, we expanded tow product lines, our line of Tunneling Magnetoresistance magnetic sensors and our family of the world’s smallest DC-to-DC converters.

The new magnetic sensor is an ultra-high sensitivity magnetometer, our most sensitive sensor ever. High sensitivity allows more precise motion, speed and position control in robotics and mechatronics. There are two demonstration videos on our website and YouTube channel. DC-to-DC converters transmit power without a direct electrical connection. Our smallest parts are less than a quarter by 8th of an inch. DC-to-DC converters are critical components in a number of industrial and automotive applications, including interfaces to next-generation power switches such as silicon carbide power transistors. These transistors are an emerging market with the potential to improve the efficiency of power control and energy storage. There is a demonstration showing the simplicity of using our DC-to-DC converters, spintronic couplers and silicon carbide transistors for power control in the video section of our website as well as our social media sites.

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, which Joe negotiated on our behalf. The extension runs through the end of 2023 and includes price increases that will help offset our cost increases. The latest amendment was filed on a current report on Form 8-K/A and incorporated by reference in our just-filed 10-Q. It’s also available via our website or the SEC’s website. Now I’d like to open the call for questions. Tawanda?

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Q&A Session

Operator: Our first question comes from the line of Jeffrey Bernstein with Cowen. Your line is open.

Jeffrey Bernstein : Hi, Dan and Joe.

Daniel Baker: Hi, Jeff.

Jeffrey Bernstein : So, a few questions here. Just wanted to ask. So 22% product revenue growth during a semiconductor downturn is a nice number. There was obviously a sequential decline after you had some pull-ins, I think, last quarter in the PUF business. But can you just sort of parse out that growth rate in terms of what you think might have been catch-up on prior deliveries versus kind of purely organic growth? Any color you can give around that and any differentiation between new customer sales and legacy customer sales?

Joseph Schmitz: Thanks for the question. This is Joe. We typically compare to prior year quarters. That said, there are a couple of things, and you mentioned one of them. Our anti-tamper product sales for the defense sector and isolator sales were exceptionally strong during the September quarter, and they’ve returned to more normal levels in this quarter, particularly the anti-tamper product. That’s a chunky business and tied to the customers’ development cycle, so we can’t really control that. Medical devices were rather weak in the December quarter. We do expect that, that business will recover in the March quarter, though.

Jeffrey Bernstein : Okay, that’s great. Thank you. And just curious, so you’ve been through this period that kind of a once-in-a-lifetime opportunity to get in front of new customers and get some new design wins. What did you guys learn overall about marketing from this experience?

Daniel Baker: This is Dan. So we learned the value of some of the features that we have and in particular, some of our customers like different features, and that will inform our future product development. But we have picked up, as you alluded to, we picked up a number of new customers. Some of them came for the shorter lead times, but we expect them to stay for the product performance and we expect to be an excellent supplier. So, we saw a great opportunity to open some doors that hadn’t been opened to us before as a smaller company. So we saw it, as you say, it was a great opportunity, and we’re determined to make the most of it.

Jeffrey Bernstein : And then are there any kind of key performance indicators on design wins or others that you guys kind of share with the Board to give some future indication of future growth?

Daniel Baker: So, we tend to look at our order flow, and Joe has commented on that. We look at new customers. We look at design wins. I was able to share two of those. So are we getting design wins in the markets that we’ve targeted, even though they may not represent large near-term revenues, we see them as important indicators for the future. So those are things that we tend to look at internally. We share them in calls like this wherever we can. And then we also look at things like our key strategic customers, and we’ve commented on Abbott in this call, and we were happy to be able to report a renewal and we expect them to continue as a customer for the foreseeable future.