Jul 21, 2010
Executives
Daniel Baker - President and CEO Curt Reynders - CFO
Analysts
Steven Crowley - Craig-Hallum Capital David Wu - GC Research Patrick Kirksey - Perimeter
Operator
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Daniel Baker
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We filed our press release with the quarterly results and our quarterly report on Form 10-Q with the SEC in the past hour following the close of the market. Those filings are available through our website.
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 growth and revenue and profits, uncertainties related to agreements with large customers, uncertainties related to research and development contract funding, risks related to developing marketable products, uncertainties relating to the revenue potential of new products, risks of losses on our marketable securities and uncertainties related to economic environments, as well as the risk factors listed from time-to-time in our filings with the SEC including our most recent Annual Report on Form 10-K is updated in our recently filed quarterly report on Form 10-Q. The company undertakes no obligation to update forward-looking statements we may make.
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Curt Reynders
Thanks Dan and good afternoon. As Dan mentioned total revenue for the quarter increased 6% to $7.24 million, our 19th consecutive quarterly year-over-year increase in total revenue.
The increase was despite a comparison to an extraordinary year ago quarter, its contract research and development revenue more than quadrupled. The revenue increase was due to a 12% increase in product sales to $6.19 million, our 22nd consecutive year-over-year increase in product sales, very robust sales into industrial markets more than offset weakness in medical device markets.
The strength of industrial markets was encouraging and we continue to be quite optimistic about the medical device markets long term. Demographics are favorable in health care reform, could make medical devices available to more people.
Quarterly contract R&D revenue decreased 20% to $1.05 million due to the successful completion of certain contracts and contract activities. Dan will talk more about contracts in a few minutes.
Gross margin remained very strong, although it decreased to 71% of revenue compared to 72% last year due to a slightly less favorable product mix with the particularly strong sales into industrial markets. Total expenses increased 7% for the first quarter of fiscal 2011, compared to the first quarter of fiscal 2010 due to a 28% increase in research and development expense.
The increase in research and development expense was due to a decrease in contract research and development activities which caused resources to be reallocated to expense R&D. We also increased product development activities.
Interest income increased 29% to $476,000 for the quarter due to an increase in interest bearing marketable securities. Income before taxes for the quarter increased 6% compared to the first quarter of fiscal 2010 to $4.67 million and pre-tax margin with 65%.
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Cash flow strengthened our balance sheet considerably and a strong balance sheet allows us to defend our intellectual property if necessary and allows for contingencies. Operating cash flow was $5.42 million for the quarter, as of June 30th, cash plus marketable securities was $54.7 million, an increase of $5.13 million in the quarter to exceed $50 million for the first time.
Income taxes payable increased $1.54 million because we had no estimated income tax payments due in the most recent quarter. We have two payments due in the current quarter, the quarter ending September 30th.
Purchases of fixed assets were approximately $62,000 for the quarter. Capital expenditures could be several $100,000 during the rest of the fiscal year as we complete our major capacity expansion.
Our previous Agilent agreement amendment, amendment number two provided a non-refundable payment of $250,000 by Avago to us. In accordance with accounting rules, we recognized the payment as revenue over the amendment term at a rate of approximately $210,000 per quarter, ending in the past quarter.
In the past quarter, we began converting underutilized space into a new production test area and a new R&D lab. We expect costs related to that phase of our expansion to be covered by a tenant improvement allowance that was part of the extension to our building lease that we signed in 2007.
We expect however that including a planned expansion of our production clean room space, that cost will exceed the tenant improvement allowance by $500,000 to $1 million. We expect to account for costs not covered by the tenant improvement allowance by advertising them as leasehold improvements over the remaining lease which is through December 31st, 2015.
Dan will provide some details on our expansion as well as his perspective on our business. Dan?
Daniel Baker
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We also test parts at greater temperature which is up to 125 degree Celsius or 257 degrees Fahrenheit. This is done with custom equipment and now those production tests which were scattered around the building will be consolidated.
There are currently two sections in our clean room: one, they have equipment primarily for spintronic layer deposition; the other is primarily photolithography and patterning. They have completed construction, it frees up space for a third day which will increase our capacity by separating photolithography and patterning into separate days.
We filed agreements with two important customers in the past quarter. First, we executed a letter of intent relating to a supply agreement.
We signed with Phonak AG last year. Phonak sells hearing instruments, hearing systems using our spintronic sensors.
The letter of intense less pricing and defines terms for an amendment to the supply agreement, including an extension of the supply agreement term through March 31st, 2015, an expansion of NVE products under the scope of the agreement and minimum purchase requirement. Second, we executed a third amendment to a 2001 OEM supply agreement between us and Agilent Technologies.
Agilent and later Avago, has distributed private label versions of certain of our couplers since 2002 under that agreement. Avago has an excellent reputation in the high performance coupler market, good distribution and expert customer support.
The agreement would have expired last quarter, but the amendment extends the term for three more years.
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In the past quarter, we introduced a new medical sensor designated the BD027 Low-Voltage Nanopower sensors which are lower voltage, lower power versions of our award wining BD020 sensors. The BD027 runs on a supply voltage as low 0.9 volts making it ideal for single battery implantable medical devices.
Typical power consumption is remarkable 29 nanowatts at 0.9 volts. The BD027 is packaged in our 1.1 millimeter square ultra leadframe land-grid-array or ULLGA package, which fits on the head of a pen.
A size 312 hearing aid battery would theoretically run the sensor for about 200 years. I say theoretically because the battery has a three year typical shelf life.
Since hearing aid batteries are usually replaced every week or so, our sensor is an almost insignificant battery drain. Our products were promoted at two important trade shows in Germany last quarter, the Power Conversion Intelligent Motion exhibition and the Sensor+Test exhibition in cooperation with our distributors.
Germany is a strong market for industrial control and factory automation and has been a very good market for us. As Curt noted, first quarter contract R&D revenue decreased as a result of the successful completion of certain programs and program phases.
We hope that the completed programs will lead to production devices, although that may depend on factors beyond our control.
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NSS contracts are held to high standards for scientific merit and commercial potential, and the NSS has supported Nobel Prize winning research. The contract start date was July 1st and there is a link to the abstract in the news page of our website.
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This is an example of the value created by our government contracts and under federal legislation, companies normally may retain the principle worldwide patent right to any invention developed with US government support. In addition to the MRAM patent granted last quarter, just last week, we received notice of allowances of two patent, a Magnetothermal MRAM patent and coupler patent.
Also in the past quarter, we received an ex-party Quayle action on a US patent application titled Thin-Film Structure Magnetizable Bead Detector, a notice of allowances, a written notification to the patent application has been examined by the patent office and is nearing issuance. And ex parte Quayle action indicates that prosecution on the applications merits is closed, but there maybe amendments on formal matters.
And we provided those amendment. The recently allowed MRAM patent is titled magnetic memory layers, thermal pulse transition and relates to Magnetothermal MRAM, Magnetothermal MRAM is an MRAM design that uses a combination of magnetic field and ultra-fast heating from electrical current pulses to reduce the energy required to write data.
Magnetothermal MRAM could allow smaller MRAM cells and lower power consumption and that in turn would allow denser MRAM. We believe Magnetothermal technology can also be combined with spin-momentum transfer technology.
The recently allowed coupler patent is titled is signal isolator linear receiver and relates to couplers also known as signal isolators because they electrically isolate the coupled system. We make spintronic couplers to transmit information faster than the fastest optical couplers.
The bead detector patent application describes the system used for detecting the presence of selected molecular species, biosensors have been one of our long-term R&D thrust, we continue to plan for production of biosensor disposables next year for a manufacturer of clinical analyzers. Longer-term In vitro Diagnostics could shrink and our Biosensor technology could move to a point of care and eventually it could be a part of laboratories on chips.
There are links to the Crosspoint Magnetoresistive Memory patent as well as the Magnetothermal MRAM, signal isolator and bead detector patent applications from our website.
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The Letter to Shareholders with our ProxyMailing highlights our financial performance for fiscal years 2006 through 2010, the period of the financial data in our 10-K. In just that four years stand, total revenue more than doubled.
Net income increased more than 500% and cash plus marketable securities more than quadrupled.
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The Letter to Shareholders with our ProxyMailing highlights our financial performance for fiscal years 2006 through 2010, the period of the financial data in our 10-K. In just that four years stand, total revenue more than doubled.
Net income increased more than 500% and cash plus marketable securities more than quadrupled.
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The Letter to Shareholders with our ProxyMailing highlights our financial performance for fiscal years 2006 through 2010, the period of the financial data in our 10-K. In just that four years stand, total revenue more than doubled.
Net income increased more than 500% and cash plus marketable securities more than quadrupled.
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The Letter to Shareholders with our ProxyMailing highlights our financial performance for fiscal years 2006 through 2010, the period of the financial data in our 10-K. In just that four years stand, total revenue more than doubled.
Net income increased more than 500% and cash plus marketable securities more than quadrupled.
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Now I would like to open the call for questions. Patty.
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Now I would like to open the call for questions. Patty.
Operator
Thank you. (Operator Instructions) Our first question comes from Steven Crowley of Craig-Hallum Capital.
Steven Crowley - Craig-Hallum Capital
A couple of questions driven by the performance in your prepared commentary. You spoke to the character of products business in the first quarter with quite strong activity out of the industrial side your business and some weakness on the medical device side of the equation over the short term.
Should we view the weakness in the medical business as a temporary phenomenon that we have just lived through, is it an ongoing phenomenon? What can you tell us about the ingredient shift for that side of your business as we look forward?
Daniel Baker
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Steven Crowley - Craig-Hallum Capital
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Daniel Baker
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Steven Crowley - Craig-Hallum Capital
Okay. And then, your comments about the industrial side of the business certainly sound encouraging at first blush, besides it being quite strong in the period, what you can tell us about the ingredient set going forward there, are those drivers whether their applications or products or particular customers seemingly still on good stead.
Curt Reynders
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Steven Crowley - Craig-Hallum Capital
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Daniel Baker
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Steven Crowley - Craig-Hallum Capital
Okay and then in terms of the contract research and development and the variability we saw in that revenue line in the first quarter, I am trying to rationalize some of your comments about kind of the definitive completion of some projects, contracts that should lead to commercial product revenues in the future.
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Daniel Baker
Maybe what we could do is I could first talk about the possible transition from contract R&D to production and then maybe Curt can talk about what we see for prospects going forward or what our visibility is there. And if we successfully complete an R&D project we hope to demonstrate the feasibility of a particular part or device or approach.
But there can be a gap in between the completion of the R&D and that product moving into production. I think as you correctly point out all those production revenue can generally be much larger and grow much more quickly than contract R&D.
And the reason we do contract R&D is twofold to do.
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And then it takes time for the products to ramp up, but we think it bodes very well for the long term. And Curt, do you want to address the visibility of contract R&D revenue?
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And then it takes time for the products to ramp up, but we think it bodes very well for the long term. And Curt, do you want to address the visibility of contract R&D revenue?
Curt Reynders
Steve, contract R&D is really, really hard to predict and as you probably noticed over years it can be lumpy. Revenue can be affected, by not only when contracts and when we may get follow-on contracts, but also could be affected by particular tasks within contracts.
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Steven Crowley - Craig-Hallum Capital
Understood, as we try and build a model we are coming off a March quarter that was a high watermarks for contract R&D and the June quarter represented the lowest quarter in the last I guess seven. It is reasonable to expect as we go forward that the likely performance of that business segment should be kind of between those two goal posts or is there a much wider range of outcomes?
Curt Reynders
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Steven Crowley - Craig-Hallum Capital
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Daniel Baker
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Steven Crowley - Craig-Hallum Capital
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Daniel Baker
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Steven Crowley - Craig-Hallum Capital
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Operator
Our next question comes from David Wu of GC Research.
David Wu - GC Research
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Daniel Baker
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David Wu - GC Research
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Daniel Baker
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David Wu - GC Research
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Curt Reynders
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Daniel Baker
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David Wu - GC Research
The reason I asked that question is because once again into the December quarter, late September or December quarter, hopefully two things happened. The industrial, one hears about the companies that reported numbers, their September guidance is pretty good in the industrial automation side, and if you can get your inventory correction done in the quarter, we could pretty well have both of these end markets go up, sometime either late September or the December quarter.
Is that a reasonable scenario?
Daniel Baker
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David Wu - GC Research
And if I would look at the capacity planning you are putting in place in that 1900 square feet conversion, should I think about revenues, product revenues capability well in excess of $10 million a quarter?
Daniel Baker
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David Wu - GC Research
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Daniel Baker
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David Wu - GC Research
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Daniel Baker
Exactly.
Operator
Thank you. And our next question comes from the line of Patrick Kirksey of Perimeter.
Patrick Kirksey - Perimeter
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Daniel Baker
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Operator
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Steven Crowley - Craig-Hallum Capital
Just a quick follow up as it relates to the anti-tamper MRAM. In terms of your capacity expansion and some of the capabilities that you are adding and detailed in your prepared commentary, I trust having the ability to add advance spintronic structures to products, ducktail the necessary capability for you to manufacture that lower density MRAM in-house or mine mixing apples and oranges there.
Daniel Baker
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Steven Crowley - Craig-Hallum Capital
And in terms of your recent accomplishment of delivering prototypes with working memory bits, you are delivering those prototypes to prospective customers directly in contrast to our prior discussion about wireless.
Daniel Baker
Yes, in that case we are dealing more directly with customers. That tends to be, at least initially that tends to be military aerospace and the protection of high-value assets and longer-term it could move into a more of a business model similar to what we envision for automotive and for consumer electronics with Tier I suppliers, where the end users tend to limit their number of suppliers and look to buy modules from their direct suppliers, the Tier I supplier.
So longer-term, that might move that direction, but in the near-term we are more tightly coupled with the customers in that kind of business.
Steven Crowley - Craig-Hallum Capital
And you are targeting, it sounds like multiple customers at this stage with those prototypes?
Daniel Baker
Yes.
Steven Crowley - Craig-Hallum Capital
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Daniel Baker
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Well, I think we are about out of time. So, I do want to thank you.
We were pleased to report strong product growth and strong earnings 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.
Thank you again for participating in the call.
Operator
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