Jul 22, 2009
Executives
Dr. Daniel A.
Baker - President and Chief Executive Officer Curt A. Reynders - Chief Financial Officer
Analysts
Steven Crowley - Craig-Hallum Capital
Operator
Good day everyone and welcome to the NVE Corporation first quarter earnings call. This call is being recorded.
With us today from the company is the President and Chief Executive Officer, Dr. Daniel Baker, and the Chief Financial Officer, Mr.
Curt Reynders. At this time, I would like to turn the conference over to the Dr.
Daniel Baker.
Dr. Daniel A. Baker
Thank you. Good afternoon and welcome to our conference call for the first quarter of fiscal 2010.
With me on the call is Curt Reynders, our CFO. This call is being webcast live and being recorded.
A replay will be available through nve.com. After my opening comments, Curt will present a financial review of the quarter, I will highlight some business items, and then we will open the call to questions.
We filed our press release with quarterly results and our quarterly report on Form 10-Q with the SEC in the past hour following the close of the market. Both filings are available for our Web site.
We also email earnings reports and other information to interest parties. You can sign up for our email list through our request/Investor Information page which can be found under the Investor section on our site now.
Links to RSS feeds are also available on that page. 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 in continued revenue growth and continued profitability, uncertainties related to the awarding of future research and development contracts, uncertainties in the possible issuance of a patent, risks related to the liquidity or value of our marketable securities, and uncertainties related to the economic environment in the industries we serve, as well as the risk factors listed from time-to-time in our filings with the SEC, including our just filed annual report on Form 10-K.
The company undertakes no obligation to update forward-looking statements we may make. We are pleased to report strong revenue and earnings for the quarter.
Net income increased 54% to $0.61 per diluted share on a 41% revenue increase and cash plus marketable securities increased more than $6.0 million. Now, I will turn the call over to Curt to discuss details of our financial results.
Curt A. Reynders
As Dan said, revenue for the quarter ended June 30, 2009, the first quarter of fiscal 2010, increased 41% to $6.83 million, our fifteenth consecutive quarterly year-over-year increase in total revenue. Of the $1.97 million revenue increase, a bit more than half, $987,000, was from product sales and the rest, $984,000, was from contract R&D.
The product sales increase was 22% to $5.53 million. This was our eighteenth consecutive year-over-year increase in product sales, despite the continuing global recession.
It was another strong quarter for contract R&D with revenue more than quadrupling to $1.3 million. Dan will discuss some of our R&D programs.
Total expenses decreased 1% to $903,000. We break down expenses into SG&A and R&D.
SG&A expense increased 20% compared to the first quarter of fiscal 2009. The increase was primarily due to increased salaries, increased performance-based compensation and increased commissions.
R&D expense decreased 31% compared to the first quarter of fiscal 2009. The decrease was due to the increase in funded R&D which caused resources to be reallocated from expensed R&D.
With good margins on the increased revenue, operating income increased 59% to $4.04 million in the quarter. Interest income increased 45% to $370,000 for the quarter due to an increase in interest-bearing marketable securities.
Income before taxes for the quarter increased 58% compared to the first quarter of fiscal 2009 to $4.41 million. The provision for income taxes increased to 33% of income before taxes compared to a 32% tax rate for the prior-year quarter.
33% to 34% is currently our best estimate of our effective tax rate for fiscal 2010, although the rate can fluctuate due to a number of factors, some of which are outside our control. Net income for the most recent quarter increased 54% to $2.94 million, or $0.61 per diluted share, compared to $0.40 last year.
Gross margin in the quarter increased to 72% of revenue compared to 71% in the prior-year quarter. This was due to higher margins on both product sales and contract R&D revenue.
Other quarterly profitability metrics also improved. Operating margin was 59% versus 52% in the prior-year quarter, pre-tax margin 65% versus 58% in the prior-year quarter, and net margin 43% versus 39%.
Strong operating cash flow and a good quarter for our bond investments strengthened our balance sheets considerably. Cash plus marketable securities increased by an extraordinary $6.3 million in the quarter and at June 30, 2009, cash plus marketable securities stood at $40.6 million.
The increase was primarily due to $4.79 million in operating cash flow and the $1.27 million net increase in the market value of marketable securities due to market price increases. In accordance with recent account pronouncements, we are providing additional details on our marketable securities in our quarterly report starting with our just-filed 10-Q.
Comprehensive income, calculated as net income plus the unrealized gain from marketable securities, was $3.75 million for the quarter. The accrued payroll and other line in our balance sheets increased $1.27 million, primarily due to the accrual of federal and state income taxes that were paid July 15, 2009.
Purchases of fixed assets were approximately $36,000 for the first quarter of fiscal 2010 compared to $41,000 for the first quarter of fiscal 2009. We are seeing a buyers market for equipment so we are evaluating opportunities to acquire equipment to increase our production capacity.
We are working to get two pieces of equipment in this quarter that will total approximately $220,000. With that, I will turn it back to Dan for his perspective on our business.
Dr. Daniel A. Baker
Our products can provide the eyes and nerves of electronics systems and they're smaller and more precise than conventional electronics. As most of you know, our growth strategy has been new products and broader distribution, and longer term, to expand into larger markets such as consumer or automotive electronics.
Our products were on display at two major trade shows in the past quarter. The Sensor Test Exhibition in Germany is billed as the leading forum for sensors, measuring, and testing technologies worldwide.
We show three types of sensors that were new since last year's exhibition. First sensor models in our smallest package, 1.1 mm, less than 5/100 of an inch and smaller than the head of a pin.
The package is designed to be robotically placed onto circuit boards. There were parts targeted at ultra-miniature industrial applications and other parts from plantable medical devices.
Second, giant magnetoresistance current center, 2.5 mm square, less than 1/10 of an inch, and with excellent accuracy. Current centers are used in a wide range of industrial control and instrumentation applications such as motor control.
And finally, our tunneling magnetoresistance angle sensor targeted at motor control, automotive, and non-physician applications. And these sensors and couplers were also on display at the Embedded Systems Exhibition in Tokyo in cooperation with K.
K. Rocky, one of our distributors in Japan.
The show was billed as Japan's largest embedded systems technology expo and conference. That display featured a live demonstration of our new tunneling mangetoresistnace angle sensor.
In addition to these near-term products, we continued to make progress in the past quarter on longer-term development projects, including three areas we've discussed before: biosensors, magnetic compassing sensors, and anti-tamper MRAM. All three of these developments involve innovative products built around specific customer requirements.
We caution, that as with any R&D program, there can be no assurance that these programs will result in commercial success. But first, our biosensors are designed to combine spintronics with biological components with the potential, we believe, to significantly improve analytical equipment and eventually enable laboratories on chips.
In the past quarter, a potential customer tested custom prototypes and we received encouraging feedback. We also received notice of allowance for a patent titled magnetic particle flow detector, which is related to biosensor systems.
I'll talk more about patents in a few minutes. Second, our compassing sensors could enhance location-based services and cell phones and smart phones and enable smaller, more precise, or more power-efficient navigation modules for consumer devices and competing technologies such as Halifax[?]
sensors. And the third development I would highlight is anti-tamper MRAM, which is a type of MRAM that is in demand for defense and aerospace applications.
MRAM is a spintronic-based memory that combines some of the best attributes of different types of conventional memories. Anti-tamper MRAM has fewer bits than general application MRAM.
For example, 256 bits isn't much for a cell phone or a computer operating memory but 256 bits is quite secure for an encryption key. The National Security Agency, the NSA, has approved 256 bit encryption for protecting classified information up to the top-secret level.
Because of the billion dollar investments required to build large-scale memories, our strategy is to license our MRAM technology for large-scale memories rather than build them ourselves. Our goal is to build anti-tamper MRAMs ourselves, however, and to use what we learn from their development to strengthen our MRAM technology portfolio.
Higher level of contract research and development is a good thing but it has stretched our R&D resources. I mentioned on our call in May that we hired a Ph.D.
research scientist. We recently hired another talented Ph.D.
physicist. These additions strengthen an already top-notch research team.
We were recently granted a new patent and received notice of allowance of another. The issued patent is titled Inverted Magnetic Isolator and covers an invention by our vice president of development, John Meyers, and our founder, Dr.
Jim Daughton. Based on our benchmarks, our spintronic isolators transmit information much faster than the fastest optical couplers.
Isolators are also known as couplers because they transmit data between electronic systems while maintaining electrical isolation. So if sensors are the eyes of electronic systems, couplers are the nerves.
The new patent is our 51st U.S. patent, most of which have been issued since 2003.
There is a link to the new patent and the rest of our U.S. patents from our Web site, nve.com.
In addition to the issues patent, in the past quarter we received notice of the allowance of the U.S. patent titled Magnetic Particle Flow Detector.
A notice of allowance is a written notification that a patent application has cleared a patent office review and is nearing issuance. The application discusses biomolecular detection methods, including detecting DNA and disease-causing organisms.
Our annual shareholders meeting has been scheduled for August 6 here in Eden Prairie. The materials are proxy statement, letter to shareholders, and annual report on Form 10-K have been filed with the SEC, sent to shareholders and are available on our Web site.
We look forward to seeing some of you at the annual meeting. In addition to our formal business we'll review 20 years of NVE history.
We are planning a cake to celebrate NVE's 20th birthday and we will have commemorative coffee cups for attending shareholders. You won't want to miss it.
Institutional shareholders services and others evaluate our governance practices after we file our proxy. As evidence of our commitment to good governance, NVE's ISS corporate governance quotient stands at 88.5% of the Russell 3000, meaning that although we're one of the smaller companies in the Russell 3000, our CGQ is better than more than 88% of the companies in that index.
For good corporate practice, our entire board stands for election every year. We are fortunate to have an exceptionally well qualified and hard working board.
Our chairman, Terry Glarer, for example, recently ranked high on the Minneapolis-St. Paul Business Journal's list of the hardest working board members.
My letter to shareholders highlights our financial performance for fiscal years 2005 through 2009, the period of the financial data in our 10-K. In just that four-year span, our revenue more than doubled.
Gross profit margin increased nearly 32% from less than 40% to more than 70% of revenue and operating income increased nearly ten-fold. I noted in my letter that with our exceptional performance, we received the national recognition of being named to the 2008 Deloitte Technology Fast 500 and the 2008 Forbes List of Best Small Companies.
Since my letter, we received another honor. NVE was included in the 2009 Fortune Small Business 100, a list of America's 100 fastest growing small public companies.
The FSB 100 list is featured in the current issue of Fortune Small Business and there is a link from the Awards and Accolades page of our Web site. Now I would like to open the call for questions.
Operator
(Operator Instructions) Your first question comes from Steven Crowley - Craig-Hallum Capital.
Steven Crowley - Craig-Hallum Capital
In terms of this contract R&D line, that's continued to be robust and I guess it's appropriate for us to assume that you're able to fund some worthwhile projects, or you have been able to fund some worthwhile projects via that mechanism. The number has been a bit higher than I've forecasted.
It seems to be solidly above a million dollars. How should we think about that revenue item as we move forward.
Can it hang a million dollars a quarter or is there going to be some pretty significant variability in that line.
Curt A. Reynders
We are happy that we reported a 311% increase in contract R&D in the quarter but it continues to remain a challenging contract funding environment and we don't know how many future contracts we'll win. Contract R&D can fluctuate from quarter to quarter due to timing and amount of contract wins and a number of factors that are beyond our control.
It's important to remember, though, that our long-term strategy has been to reduce our dependence on contract R&D toward future of products and licensing as our primary revenue sources.
Steven Crowley - Craig-Hallum Capital
All of that understood. Is it a fair assumption on our part that you've been able to point that project works towards areas of significant interest for your commercial endeavors.
Dr. Daniel A. Baker
Yes, we have been able to get contracts in areas that we consider strategic to us. We don't break down the specific areas that are funded, R&D versus company-funded R&D that we fund ourselves, but I highlighted three of the areas, biosensors, magnetic compassing sensors, and anti-tamper MRAM, that are areas that we consider strategic and we've been able to make very good progress on those.
Some of the contracts, as we discussed before, are dependent on our performance. In other words, is we execute well on these contracts, then the funding can continue, or at least we have a shot at having the funding continue.
So the funding and the revenue line that we had this quarter is a credit to our team. They've executed very well.
We certainly hope that they'll continue to execute well and that we can continue to gain these contracts. But it's difficult to predict.
We don't always have a lot of long-term visibility and with government contracts there's uncertainty relating to the change in administration, what the priorities might be in the Department of Defense and other government agencies, and that's difficult for us, or anyone, to predict. So we are pleased with how we've done so far.
We hope that it will continue but it's very difficult to predict that and, as Curt said, we see it as a challenging environment.
Steven Crowley - Craig-Hallum Capital
Well, it looks like you're off to a pretty good start for that category as a whole, so at least some modest growth. The way I've tried to approach it is to keep conservative assumptions, in particular around that category which can be pretty variable.
Now, in terms of your discussion of progress on the biosensor project, or area of projects. The fact that a customer has tested some custom prototypes, it would seem to be indicative that they're moving down the path towards—now what's the next step?
They kind of lock down the design, form factor of the products they would like to have from you and give you a commercial order and you ship them product? How long a fuse might that be?
Just ballpark.
Dr. Daniel A. Baker
Well, we were very pleased at the feedback that we received on those devices. They were prototypes, though, so they weren't production-ready devices.
But we were able to demonstrate that the concept can work. There are a number of steps to get that into commercial production.
As you say, they have to refine their specifications to us. They have a machine that we presume built around this, so there's some work that they have to do on their end and we don't have a lot of visibility as to what's involved on their end on the machine side.
But we're working to refine those devices on our end. They're working on the machine and the equipment end of things and it would be difficult to predict but we see this as a great opportunity to improve analytical equipment, to reduce the size of the equipment, and to improve the turnaround time so that you can get meaningful medical test date, for example, back from a machine faster than you can now and eventually, as I mentioned, we see that the technology can be extrapolated to ultra-miniature laboratories on chips.
So we see it as an important milestone, but in a longer-term process in a long-term strategic area for us.
Steven Crowley - Craig-Hallum Capital
So maybe just the nature of that animal is that it's likely a bit longer fuse than the magnetic compassing opportunity and initiative you've described. Is that probably the one out of the three that you talked about today that might have the quickest fuse to commercialization?
Dr. Daniel A. Baker
So the quickest fuse was which one?
Steven Crowley - Craig-Hallum Capital
The magnetic compassing.
Dr. Daniel A. Baker
Well, it could be but all three we describe as longer-term development projects. So we're trying to give a sense of what we're working on and what the future may hold but these are not projects that we're seeing as really short-term opportunities, and it's difficult to say exactly what the time frame would be for these.
We are relying on other companies for their testing and their integration and it's hard for us to predict that. But we are working it very aggressively on our end.
We've got very talented people on all three projects, and we're optimistic.
Steven Crowley - Craig-Hallum Capital
In terms of the strengths of the products out of your business in the quarter, can you give us a feel for what the market segments were that were driving the business, and embedded in that question is the implied question of whether or not you're seeing any recovery, or signs of a recovery, on the more industrial side of your business.
Curt A. Reynders
Information that we're getting from customers is mixed. We remain concerned about the macroeconomic environment and inventories in the channel.
That may have an impact on near-term product sales but we continue to see excellent long-term prospects. Our medical market, they seem to be more recession-resistant, although they're not recession-proof.
Unemployment and other effects of the recession may have a negative effect and hospitals could reduce medical device inventories in a tough economy. Recession seems to be hitting factories such as automotive and semiconductor manufacturing especially hard.
Although we attempt to adjust to the uncertainties and we have the flexibility to expand production when we need to and we believe our strong balance sheet and low fixed costs and high value products position us well to ride out the current economic conditions.
Steven Crowley - Craig-Hallum Capital
So should we hear that as kind of more of the same on the product side of your business? Similar kind of environment and set of characteristics that you've been dealing with over the last couple of quarters.
Dr. Daniel A. Baker
Yes. We continue to see and be concerned about the effects of the economy.
We are pleased with how our revenues have held up, both on the product side and contract R&D but we continue to see a challenging environment and no one knows for sure when the macroeconomic environment will improve.
Steven Crowley - Craig-Hallum Capital
In terms of the discussion of progress towards applications, or products into the consumer and automotive marketplace, is there any kind of status update you can give us beyond showing some products at these trade shows that cater to those markets. Is it fair to say you've seen kind of grass-roots adoption of some of your component products in those marketplaces so that you're just seeing the seeds of things or are we still prior to those seeds germinating?
Dr. Daniel A. Baker
Well the seeds are germinating. They're not huge trees yet.
But we mentioned a couple of initiatives. First, we have new sensor systems that are 1.1 mm square, smaller than the head of a pin.
So those are targeted at a number of areas, but they are targeted toward consumer electronics, such as small electrics or cell phones for position sensing. And we talked about navigation technology, which is longer term.
We have seen interest from customers. We've provided some sample and done some early feasibility assessments of our designs and we're pleased with how those initiatives are going.
This is a longer-term initiative for us, as you probably know, but we see the consumer or automotive markets as much larger markets than the markets we currently serve and we're going to go at this the right way with excellent products and with a lot of customer feedback. We're also working this with the cooperation of some next-level suppliers so these would be suppliers who are used to selling into the consumer electronics and automotive markets, so they would take our devices and put them into subassembly levels.
So that allows us to get more credibility to provide a more of a complete solution. So we're optimistic about our prospects there although it probably is early yet.
We hope to be able to update you on that in the future calls.
Operator
There are no further questions in the queue.
Dr. Daniel A. Baker
Thank you for participating in this call. We were pleased to report a 41% revenue increase and a 54% net income increase for the quarter.
We look forward to seeing some of you at our annual meeting two weeks from tomorrow, and we plan to speak with you again in October to report our second quarter results.
Operator
This concludes today’s conference call.