NVE Corporation (NASDAQ:NVEC) Q2 2024 Earnings Call Transcript

NVE Corporation (NASDAQ:NVEC) Q2 2024 Earnings Call Transcript October 18, 2023

Operator: Hello, and welcome to NVE Corporation Conference Call on Second 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 [Operator Instructions]. I would now like to hand the conference over to Daniel Baker, President and CEO. Sir, you may begin.

Daniel Baker : Good afternoon, and welcome to our conference call for the quarter ended September 30, 2023. This call is being webcast live and recorded. A replay will be available through our website, nve.com. I’m Dan Baker, and I’m joined by Accounting Manager and Principal Financial Officer, Daniel Nelson. After my opening comments, Daniel Nelson will present our financial results. Then I’ll cover marketing and new products, and we’ll open the call to questions. We issued our press release with financial 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 on X the platform formerly known as Twitter.

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 and risks of credit losses as well as risks listed from time to time in our filings with the SEC, including our annual report on Form 10-K for the year ended March 31, 2023, as updated in our quarterly report on Form 10-Q for the quarter ended June 30, 2023. 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 strong earnings and cash flow despite decreased revenue from a record quarter a year ago. Daniel Nelson will cover the details of our financials. Daniel?

Daniel Nelson : Thanks, Dan. Total revenue for the quarter ended September 30, 2023, decreased 33% to $7.13 million, compared to $10.7 million for the quarter ended September 30, 2022. The decrease was due to a 32% decrease in product sales and a 92% decrease in contract R&D. The decrease in product sales was against a tough comparison to last year when product sales increased 59% and a reflection of the semiconductor industry downturn. The good news is that forecast are for a strong industry [technical difficulty] is projecting a 20% increase in semiconductor sales after a 12% decrease this year as demand rebounds for most application lines. The decrease in product sales was primarily due to decreased purchases by existing customers.

Product sales to defense markets were especially weak in the quarter. This was related to the timing of procurement cycles, and we expect these sales to recover in coming quarters. The decrease in contract R&D revenue was due to the completion of most contracts. But we have new active contracts and contract R&D is expected to strengthen later this fiscal year. Total expenses decreased 17% for the second quarter of fiscal 2024, compared to the second quarter of fiscal 2023, primarily due to a $202,926 credit loss provision reversal, partially offset by a 2% increase in R&D expense. The provision for credit loss reversal was due to a reassessment of our allowance for credit losses based on payments and debt customer information as of September 30, 2023.

Interest income for the second quarter of fiscal 2024 increased 46% due to higher yields on securities purchased after September 30, 2022. Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes decreased to 8% for the second quarter of fiscal 2024 compared to 19% for the second quarter of fiscal 2023. The decrease was due to the reversal of $202,926 credit loss provision and changes in the amounts and timing of tax deductions and credits. Our effective tax rate can vary from quarter-to-quarter. Our effective tax rate in subsequent quarters will likely be higher than the effective tax rate in the quarter ended September 30, 2023. The 22% decrease in net income for the second quarter of fiscal 2024 compared to the prior year quarter was primarily due to decreased revenue, partially offset by decreased expenses, increased interest income and a lower effective tax rate.

Net margin was remarkable — was a remarkable 65% of revenue. For the six months — for the first six months of fiscal 2024, total revenue decreased 12% to $16 million from $18.1 million for the first six months of the prior year. The decrease was due to a 10% decrease in product sales and a 68% decrease in contract R&D revenue. Net income for the first six months decreased 11% to $9.13 million of $1.89 per diluted share from $10.2 million or $2.12 per diluted share for the first half of fiscal 2023. Net cash flow provided by operating activities increased 11% to $10.4 million for the first half of fiscal 2024 compared to $9.35 million for the first half of fiscal 2023. The strong operating cash flow more than cover our dividend so far for this fiscal year.

And cash plus marketable securities increased from $53.3 million to $53.8 million. Now I’ll turn the call back over to Dan Baker to cover the business. Over to you, Dan?

Daniel Baker : Thanks, Daniel. I’ll cover products, marketing and our shareholders’ meeting. NVE’s line of the world’s smallest DC to DC converters recently qualified for the prestigious CE mark, under an EU declaration of conformity, which includes safety, electromagnetic compatibility and reduction of hazardous substances. Our distributors have told us the mark could enable additional sales in Europe. The key to qualifying for the mark was rigorous testing the International Standards for Radiated Emissions. Unlike most conventional DC to DC converters, our parts pass the test with no external components for electromagnetic compatibility compliance. Also in the quarter, we officially renewed our ISO 9001 certification. The new certificate is valid until October 2026.

ISO certification is a seal of approval from a third-party governing body that NVE meets the international standards of excellence published by the International Organization for Standardization, or ISO. ISO 9001 helps ensure consistent quality. Trade shows are an important part of our marketing strategy. Our distributors exhibited at several shows in the past quarter. We exhibited under our own banner at the Medical Design and Manufacturing Trade Show last week in Minneapolis, part of the advanced manufacturing event. Minnesota is a healthcare industry hub and medical devices are an important market for us. We have a convincing benefit proposition for medical devices with small size, low power and superb reliability. The nearby show was also a chance for some of our employees who don’t usually go to trade shows to interact with customers and prospects.

We demonstrated our new high-field tunneling Magnetoresistive sensors, which have a unique omnidirectional capability and they can detect the high fields from MRI to enable MRI-tolerant medical devices. We showed our new ultra-high sensitivity tunneling Magnetoresistive sensors, which are ideal for catheter position detection and navigation. In these applications, an array of sensors on a catheter form a miniature compass using an externally generated field to determine the position of the catheter. Our sensor’s small size allows them to be used in small diameter catheters and their precision improves positional accuracy, enabling more effective procedures. We also featured a new chessboard to demonstrate the wide operating latitude and power efficiency our sensors provide in medical and industrial applications.

Demos are also on our website and our YouTube channel. We held our Annual Shareholders Meeting in August at a nearby hotel. Unlike many companies, we returned to in-person meetings after the COVID-19 pandemic. Proxy advisory firms recommend in person annual shareholders meetings for good governance. All of our directors and officers attended along with our auditors. We had a chance to meet our shareholders and answer questions. Our shareholders could see and try out hands-on product demonstrations. In the formal meeting, each director was reelected. Named executive officer compensation was approved. Shareholders voted in favor of annual say on pay votes and the selection of our independent registered public accounting firm was ratified. We filed the final vote counts in a current report on Form 8-K shortly after the meeting.

There’s a replay of the meeting with slides and product demonstrations on our website and YouTube channel. Now I’d like to open the call to questions. Tawanda?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Jeffrey Bernstein with Silverberg Bernstein Capital Management. Your line is open.

Jeffrey Bernstein: Hi, Dan. How are you?

Daniel Baker : Good, hi, Jeff.

Jeffrey Bernstein: So a couple of questions for you. Just wondering, have you delivered now all the backlog that had built up during COVID?

Daniel Baker : Well, we don’t formally call it backlog because backlog has a gap meaning — but we do look at order flow and orders in the system, and we continue to have orders in the system. So while we’ve recovered from some of the shortages that plagued many in the semiconductor industry during the pandemic, we continue to have strong order flow and orders that we’re continuing to fulfill.

Jeffrey Bernstein: So in terms of your lead times, have those changed at all?

Daniel Baker : They have. It depends on the part, but our lead times are shorter. We have many parts in stock now that we didn’t have in stock. We’ve always been better than most in the industry, we believe, during the pandemic because we are uniquely positioned in that we have integrated production here at NVE. We have front end, back end and control over most of our processes. So we’re in better shape than most in the industry. And now we’re in even better shape because some of the shortages have abated. We’ve increased our capacity with capital investments. We’ve increased our staffing. And so we can offer shorter lead times or parts in stock in many — for many of our parts.

Jeffrey Bernstein: Yeah. Okay. And then can you just talk a little bit about the design pipeline sort of versus pre-COVID times? Is there a significant difference in the number of designs that you guys are working on?

Daniel Baker : Yeah, that’s an interesting question. I think it’s more, but I don’t know that we have data that could support that. It’s just a feeling that we’ve had more interest as companies are less worried about just getting parts then now they’re looking also with new designs and longer-term things. The shortages of personnel, including design personnel, that plagued the industry during the pandemic seem to have abated, at least somewhat. So we’re very optimistic also based on the feedback that we’ve gotten on some of our specific products, including our DC to DC converters, some of our angle sensors and I mentioned navigation sensors that are in particular, useful in the medical business. So our design activity is high.

Jeffrey Bernstein: Got you. And then in terms of just the overall number of customers who are ordering from you versus pre-COVID, what does that look like?

Daniel Baker : We think it’s increased. Well, it has increased. We picked up some customers during the pandemic, during the shortages, and we’ve retained them by and large. So we have more customers than we had before the pandemic. We continue to pick up customers. But as we’ve said before, they sometimes came for the lead time, but they stayed for the quality product and the support that they get from NVE.

Jeffrey Bernstein: Got you. That’s great. And then I’m just wondering, in terms of any design wins that you’ve had over the last couple of years, that you think will move the needle at some point as they ramp up? Or are the sort of individual designs just never going to be that important?

Daniel Baker : Well, we see some especially important areas where we’ve had design wins. And two, that I would highlight include charging stations for electric vehicles which is a major thrust to build out the infrastructure required to support the expected increase in use of electric vehicles. And we have a design win there that we’ve talked about before. We also have a design win in power conversion for energy storage systems, which is important for the conversion to green energy because green energy electricity — mostly electricity has to be stored because the wind doesn’t always blow and of course, solar energy goes away at night. So being able to store that locally is important. So these are growing markets that we see as having tremendous potential long-term potential. So those are design wins we pleased with any design win. But those, of course, are important because they address large, fast-growing markets where we have a convincing benefit proposition.