Q4 2020 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the N.V. conference call on fourth quarter and fiscal year results.
At this time, all participants' lines are in a listen only mode. After his presentation. There will be a question answer session to ask a question during the session anyone needs Press Star one all your telephone please be advised that todays conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your Speaker today Daniel Baker. Thank you. Please go ahead Sir.
Good afternoon, and welcome to our conference call for the quarter in fiscal year ended March 30, Onest 2020.
As always I'm joined by Curt Rogers, Our Chief Financial Officer. This call is being recorded and webcast live a replay will be available through our website envied dot com. After my opening comments Kirk will present, a financial review of the quarter in the fiscal year I'll cover business, a new products and then we'll open the call the questions we issue.
Our press release and filed our annual report on form 10-K in the past our following the close of market.
Links to those documents are available through the Fccs website, our website and our Twitter timeline.
Comments, we may make that relate to future plans advanced financial results or performance. Our 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 the cobot 19 pandemic.
Uncertainties related to future stock repurchases and dividend payments as well as the risk factors listed from time to time in our filings with the FCC, including our just filed annual report on form 10-K.
Actual results could differ materially from the information provided and we undertake no obligation to update forward looking statements we may make.
For the fourth quarter were pleased to report and 18% increase in net income driven by an 11% increase in product sales for the fiscal year, we reported record net income and cash flow.
And maybe it's been operating effectively through the cobot 19 pandemic, thanks to the dedication and resourcefulness of our employees suppliers and distributors.
There have been some material shortages in order push outs, which we'll discuss but they have been manageable. So far Minnesota has been under a stay at home order since late March until at least May 18th.
And then be has continued to operate because it's in critical sectors as defined in the order, including healthcare infrastructure National defense and other critical manufacturing.
As an envy employee and shareholder I, especially appreciate the efforts of our distributors in hard hit areas, such as China, Northern Italy.
Who kept working on our behalf despite hardships.
Tough times show what were made other than we're seeing the dedication and resourcefulness of envy employees.
Manufacturing employees form the doorknob squad working during breaks to wipe down common areas.
Purchasing people, who usually by integrated circuit masks turn their attention to face masks and other supplies to keep our employees safe and our manufacturing running our web site staff posted employee notifications and important information well still finding time to upgrade our main website.
Now current will cover the details of our financial results Kurt.
Thanks, Dan.
Total revenue for the quarter ended March 31st 2020 increased 10% compared to last year.
On the 11% increase in product sales.
Partially offset by a 14% decrease in contract R&D revenue.
The decrease in contract R&D revenue was due to completion of certain contracts.
We believe to cope with 19, and then make a slight negative impact on our results of operations.
The past quarter.
Due to deteriorating business conditions, especially late in the quarter.
The pandemic is having a significant impact our business this quarter to quarter ending June thirtyth.
Cope with 19 is also having an impact on medical devices.
Sturkie hearing.
Larry.
Furloughed, 10% of its workforce.
At 600 employees.
Due to a hearing industry slowdown.
None urgent and elective procedures have been postponed to free up beds for cobot 19 patients.
For example, the American College of Cardiology as recommended postponing money.
Maker and ITD procedures.
Some of our important customers have delayed orders due to the impact of cobot 19.
However, based on input from these customers.
Good recovered at least some of the loss business when the effects of the Pandemics subside hopefully late 2020.
With this background currently said total revenue and net income.
Decreased significantly in the first fiscal quarter fiscal 2021, the June quarter.
In subsequent quarters total revenue.
For the continued to decrease.
Fair to the prior year quarters.
Due to the effects of the Cobot 19 endemic on general economic conditions.
Market consistent history, so when the current Uh huh.
Kurt you cut out at about with this club with this background. After a after you talked about late 2020 for the pandemic to subside.
Okay.
With his background. We currently expect total revenue and net income decreased significantly in the first quarter of fiscal 2021.
The June quarter.
In subsequent quarters total revenue and net income continued to decrease compared to the prior year.
Quarters due to the effects of the cobot 19 pandemic on general economic conditions.
Market conditions and industries, we and our customers are.
And supply disruptions affecting our ability to produce certain products.
But in the long run there could be pent up demand.
And one trade journal noted that emerging technologies.
Such as the Internet of things were more than likely be fundamental to an overall global recovery by the technology sector.
We provide sensors for the internet of things.
Returning to the quarter ended March 31st gross margin increased to 81% from 77% due to more profitable revenue mix.
Expenses increased 3% for the fourth quarter.
From the prior year due to a 17% increasing yesterday.
The increase was due to increased sales activities and staffing changes.
Interest income for the fourth quarter decreased 7%.
Due to a decrease in the average interest rate on our marketable securities and money market funds.
The decrease in our securities as when you some of our maturing securities to fund dividends.
Our effective tax rate remained at 18% for the quarter.
Net income for the quarter was $3.37 million or 69 cents per diluted share an increase of 18% compared.
Compared to $2.86 million or 59 cents last year.
We believe our stock is a good investment and we took advantage of a week stock market in the quarter.
Repurchase approximately $687000.
Of our stock.
In the past quarter.
With $4.84 million dividend payment, we returned a total of more than $5.5 million to shareholders in the quarter.
For the fiscal year total revenue decreased 4%.
Due to a 4% decrease in product sales in a 14% decrease in contract R&D.
Calendar year, 2019 was a tough year for the semiconductor industry.
Total revenue decreasing 12% year over year, according to the semiconductor industry Association.
Or decrease in product sales for the year was primarily due to a decrease in purchases by existing customers.
In the decrease in contract R&D was due to the completion of certain contracts.
Gross margin, however increased to 81% for the year from 80% for the prior year.
Due to a more profitable revenue mix.
Expenses in fiscal 2020 decreased 6%.
Due to a 10% decrease in our Angie the partially offset by an 8% increase in S. DNA.
R&D expense was 15% of revenue.
Which is a substantial investment in our future.
In addition to company sponsored R&D, which is an expense item.
Customer sponsored R&D activities included in cost of sales.
The high level of R&D investment yielded a number of new products with more on the way.
Dan will discuss new products in a few minutes.
Our effective tax rate was 16% for the fiscal year compared to 18% in the prior year.
The decrease tax rate was due to the full effects of tax reform.
Net income for the full fiscal year increased slightly to $14.53 million were $3 per diluted share compared to $14.51 million or $2.99 per share less.
Decreased to 57% from 55%.
Including a $599000 net unrealized gain on marketable securities.
Comprehensive income was $15.1 million as a strong bond market increased the value of many of our marketable securities.
Cash flow from operations increased 12% for the year to a record $15.9 million compared to 14.2 million for the prior year.
Fixed asset purchases were a modest $52000 in the past year, but included investments to speed new product qualifications.
We paid $4 per share and dividends in the past year, and we pay more than $100 million since 2015.
In addition, today, we announced that our board declared another quarterly dividend of $1 per share payable may 29 to shareholders of record as of May 18th.
Cash flows marketable securities as of March 30, Onest 2020 was $70.8 million compared to 74.3 million at the end of last fiscal year.
As operating cash flow and unrealized gains covered most of our 20.
That's strength puts us in unique position to whether the current endemic.
Hey, dividends consider additional stock buybacks and consider strategic acquisitions.
Now I'll turn the call over to Dan to cover the business Dan.
Thanks, Curt I'll cover the business some new products. Despite some challenges posed by their cobot 19 pandemic, we continue to innovate and we look forward to helping automate infrastructure as a world starts returning to normal.
We pride ourselves on being selected as a supplier to some of the world's best on most demanding companies and then the past corridor, we executed an amendment to extend that supply agreement personnel for AG through March 31st 2025, So develops manufactures and sells gathering systems using our magnetic sensors.
Our first supply agreement was 10 years ago. When it was known as far back and there are several extensions we look forward to continuing our long standing relationship.
Also in the past quarter, we executed an amendment to extend our building lease which would have expired at the end of the year.
The amendment extends at least until March 31st 2026.
Those of you visited no. It's not then the opulent space, but it's a fish catch and cost effective.
Now we can plan our infrastructure knowing will be here for at least six more years.
We filed absent office supply agreements and our lease amendment with the FCC links are available through the Fccs web site at our website.
It was a productive quarter for new products with three new launches.
We expanded our line of general purpose smart angle sensors, with the new ANSR or one to.
Hey, the M. B S. R O two to both our based on the same tunneling Magneto resistance sensor elements in digital processing core.
As our previously introduced MSR O two but with different interfaces for different markets.
With our flexible smart sensor architecture development team was able to design and sample the new parts within just weeks of the customer requests.
The Asaro 12 uses an interface called inter integrated circuit or ice squared C.
Hi, squared see is a popular seek a serial computer Boston was requested by a prospective customer that makes connected to exercise machines.
Yes, our old 20 to use is whats called Navy interface and was requested by a company that automates machine tools.
We also introduced ultra high common mode transient immunity isolators called the I O six ex FX C.M.T.I. series.
Common mode transient immunity, commonly abbreviated C.M.T.I. is an important figure of merit in power switching devices I see M.T.I. allows it fishing control of devices such as motors.
See M.T.I.s, usually expressed in kilovolt for micro second.
The new parts have a remarkable specification of 200 kilobits per micro second.
Which is 10 times better than our standard versions.
In addition to a component market for power supply modules and motor controls.
One of our private label partners is exploring integrating our technology into power factor control modules.
Power factor controls improve the efficiency of electrical distribution to motors.
And by one estimate motors account for 45% of global power consumption.
You asked energy Star guidelines and European Union standards encouraged for power factor control.
There are links to product announcements for the past quarters, new products on the press releases page of our thought the new section of our website and they're also demonstrations in the video section in our you tube channel.
With the expansion of our Spintronics magnetic switch product lines. We also did a video demonstration of a chessboard with 64 GMR magnetic switches to show how a number of sensors consent consolidated data to computer using local or whats called the edge computing and the internet of things.
This shows how you can track the movement of chess pieces, which is also applicable to robots some factories.
One of our goals with new products or any of our products is to allow our customers to design the man as quickly as possible.
To help support that ease of use in the past quarter, we contracted with a company called snappy D.A. to offer a wide range of electronic design automation files, commonly called de da files.
We also redesigned our website to make downloads more accessible and for easier navigation throughout the web site.
The website also has a bold new law, Ken is more mobile friendly.
There are links to the new E.D.A. files from Snappy Da's website and did you keys website Digikey is one of our major distributors.
And there is a short video demonstration of the D.A.H.D.A. files on our website Youtube channel and Twitter timeline.
[noise]. So fiscal 2020 was a productive year for R&D, we already talked about the new smart angle sensors and ultra high C.M.T. Isolators.
Other successes the past year include new Smart GM arent TMR magnetometers.
Three new types of ultra low power TMR magnetic switches for medical devices and battery powered systems.
Hi, speed automotive network couplers, using Mccann F.D. network protocol.
New couplers for the industrial Internet of things that use an emerging lower voltage data by us.
And we qualified our couplers for the rope equipped permission to one of Jupiter's moons, demonstrating a remarkable ruggedness and reliability of our technology.
With a number of new products, we were looking forward. The two big trade shows in June sensor plus test in Germany, which was build is the industry's largest event dedicated to sensors connectivity and systems.
And sensors Expo in San Jose.
Unfortunately sensor plus test was cancelled Dansensor Expo.
It appears likely to be postponed or canceled due to the van Dam Act. So instead of the shows we're working with our distributors for promotional opportunities tend to upgrade their websites with evaluation kits and product demonstrations.
Another impact of Cold in 19 is that we're planning to have our annual meeting via webcast and telephone similar to these quarterly conference calls.
We've been holding the meetings in early August and it seems likely there will still be restrictions on that a central travel and gatherings of more than 10 people.
Virtual annual meetings are permitted under Minnesota statutes, and our board amended our bylaws to allow such meetings, we filed the amended bylaws with our 10-K. This afternoon, we expect to file our proxy statement of late June with details about the meeting. So we're sorry, we won't be able to meet some of you in person as we have for many years.
But of course, our first obligation as the safety of our shareholders and other attendees.
Now I'd like to open the call for questions scenario.
As a reminder to ask a question you need to press star one on your tone.
Once again this star one on your telephone to ask a question.
Well pause for just a moment to allow the participants are the Q.
Your first question comes from a line of Jeff Bernstein with Cowen.
I hate to anchor or.
How are you guys.
Well, Jeff how are you good good staying healthy.
That's good hearings are things getting better in New York.
I think so slowly, but surely I'm a little nervous about whether people are going to maintain their discipline here and you know I'm not sure everybody gets the exponential math. So so we'll just have to see I'm curious about you know how you guys are doing a kind of running the sales and marketing side of the business.
Virtually.
Yeah. That's a great question I think our team has been very creative and or distributors as well about oh shifting very quickly and effectively to virtual platform. So I mentioned.
The redo of our website, that's a project that started before.
The pandemic.
But it turned out to be pressure because our website as much more effective now engineers can download the information that they need they don't have to call us email us or have us visit and explain it we have more demonstration videos as I mentioned a in the prepared remarks on our on our web site and we have a you tube channel.
All that I know, you're familiar with where we have a number of our product demonstrations and our team has been busy doing a lot of those demonstrations. We just posted several in the past week.
That I mentioned in the prepared remarks, and then finally, we're doing webcast. So we were just preparing for one.
Just before this this call.
With our distributor in Germany, where so were getting together some of their customers. We're talking about our new product some of the products that I talked about and in my remarks.
And.
Is there.
We were just saying how.
They they really are well attended and effective so.
So the world seems to be adapting and engineers are interested in our products.
It's a different type of marketing of course, we're not doing the type of travel and face to face visits that we would like to do and getting in front of our customers and seeing their plants, but but but we've been we I think we've been able to to.
Be effective and our team has transitioned very well.
And I was curious are you talked about the a the couple of products that were the result of customer design, a customer requests and you just go into that a little bit more most of the products that you're designing our are not custom there, they're very generally applicable right, but but how.
Does that interaction jet generally go is this is this the case you know more often that somebody comes to you and says we like this general part, but we want to tweak or how does that work.
Yeah, that's a great question. It a it comes up because there's so many interfaces to the internet of things and to our sensors. So we tend to pick the ones that we think are going to be the most popular the most flexible and so for example, I mentioned not to get too much into the alphabet soup.
The existing product that we had is called the MSR AUO too, which uses a an interface called S.P.I., which is a common interface, but then we had a customer I mentioned it in the prepared remarks, who makes exercise machines and those are more and more connected to the internet of things and ER.
That was a market that we weren't that familiar with and they use what's called I squared C or enter integrated circuit and its I I didn't get a good answer that theres. Some important technical reason for it it's just conventional in that market and.
Because of the flexible architecture that we use with our smart sensors, where they use a common sense or element and then a digital core.
We can adapt that digital core to different interfaces using software. So we're not redesigning the I see and we're not going through the long fabrication cycles that are inherent in semiconductors. So that's how our team was able to turn that product around in a in and really a matter of weeks from when the customer requested.
That type of interface. So when we look at doing those sorts of custom things were looking at several considerations.
Is the customer large enough to justify an investment of Evercore valuable engineering resources. In this case, we believe it is and then it is are there other markets for this are there other applications and we believe there are in this case as well and then the second product where people who are using.
Or older legacy Encoders, what are called optical encoders and they wanted a drop in replacement to use our technology, which is a much more flexible and immune to dust and and contamination as opposed to the optical couplers, they were replacing and again that.
Wasn't a market that to that we initially identified but I think we had enough interest in this case it was several customers.
And the lead customers wanting the machine tool industry, which uses those older couplers.
So this is leveraging the smart interface that you announced just a year or two ago is that right.
Yes, exactly so actually a smart sensor technology. They use a common platform yeah. Okay. Terrific can you talk a little bit about the unclonable reference a business and the military business overall I know that's kind of lumpy. It has kind of waned a little bit at one point in that and then I think it's been a little.
Bit stronger obviously, it's nice to have that kind of business in a a in a covert 19 kind of situation can you just give us a little color on what's going on there.
Yeah, Kurt there do you want to take that question.
Yeah, Yeah, as you say that that business can be.
I'm trying to lumpy, but Uh huh, so have a lot of interest out there we've got a orders coming in and we expect it to continue to grow.
Gotcha, Okay, that's great and I believe at one point in the a in the crisis year. Your Italian distributor was was shut down our they actually back open again.
They are they're working from home Oh, which is.
Which is required but they've been very dedicated as you know a northern Italy was one of the most hard hit areas in the world and that's our new distributor a dime ACA, we talked about before a distributor and manufacturer's rep and we certainly with some of the very best and and.
They they seem to be knock on wood, all all healthy and able to work and I know there looking forward to being able to get back into the office and get back in front of customers.
Great.
And I noticed in in the K, which is conveniently short. Thank you that you have a new over 10% customer in fiscal <unk> 2020, who was below 10% before is that a brand new customer can you give us just a general.
Sorry, what industry therein.
Yeah, I think we're probably bound by confidentiality in that case or Jeff I'm sorry.
Okay and.
Can you talk a little bit about what you're seeing eye you mentioned, a obviously a in terms of or the a the current order a picture that one of your customers in the hearing aid market. A you know is being impacted but on the design side. What are you seeing there theres obviously.
Please have the new very high end hearing aid platforms, which are several guys seem to be out with now and then you've got this F. D O T C hearing aid.
Situation, which I guess is delayed again, but but by by August Theres a deadline.
For the Ft, Ada bless over the counter hearing AIDS. So have you been seeing you know design activity has or that.
Oh, we have on both fronts, Jeff So you're very well informed on the next generation hearing AIDS. The advanced hearing AIDS. It we've began offering sensors that are compatible with the rechargeable batteries that are often used in a wearables.
Rather than the disposable batteries that are generally used in traditional hearing AIDS. So.
The the.
The metaphor is that the here is going to be the new wrist and we'll have these hearing appliances that will give us information that will give us a feedback and I think the the analogy that I think you picked up on was Jarvis from Iron Man. So we do have activities and we have in.
Our design win in that space I think we've talked about it before.
Of of a company that's it that's doing a next generation hearing aid and we have interest from several others. So that's an exciting area for us to get into those advanced hearing AIDS and wearable technology and then at the other end of the spectrum and expansion of the hearing aid markets such as over the counter or private label.
Hearing AIDS could certainly help us if it expands the market.
And we can provide components for those hearing AIDS now, there's obviously been a near term slow down.
People are postponing things like that for obvious reasons, but in the long run that people who need hearing AIDS. After the world starts returning to normal are still going to need them. So we see that as an excellent opportunity and proponents of lower cost an over the counter hearing AIDS point out that many people who need hearing.
AIDS don't have them because of the cost to and dispensing and convenience and the dispensing inconveniences course being highlighted in the wake of the pandemic so those new categories.
That that allow people to get hearing AIDS easier or seem like they could expand the market and that seems like it would be even more important in a in a in a post pandemic environment.
Great Great and then can you talk a little bit about automotive are obviously, you've been working a there there's a lot of design activity going on and you're starting to see some of the kind of very high tech things like gallium nitride, Oh power circuits and things like that getting design wins are you.
As seen any design wins, yet for for sensors and in automotive.
We're seeing interest we can't reported any design wins are major design wins right now.
It's a little bit of a longer term process, but as you know we're investing in that we're into that we have a we are in conformance now with the industry standard or the I T. F 16, I'm 49 standard so that open some doors for us we're working with the company that makes battery management.
Systems for hybrid electric vehicles or to get our parts qualified so we're hoping that we might be able to reported design win there.
We can't yet.
The qualification is very rigorous.
In addition to the environmental standards that you would expect for a car, particularly cars that might end up but here in Minnesota is there is also requirements for electrical a stress and our parts are very rather than we have to prove it. So we think we have a competitive advantage there unlike conventional vehicles.
Gasoline vehicles that used 12 volt batteries. These use batteries that are several hundred volts. They can have surges that are extremely high voltage and so.
There's a demand for extremely rugged components and we fit that.
Market and we demonstrated that ruggedness and some of the most demanding markets in the world things like life support medical mission is to Jupiter. So we think we're well positioned we have a private label partnership with a company with strong automotive sales channels.
And we have parts that are more precise lower power and more rugged than conventional electronics.
Great, Okay, I'll get back into queue and see if someone else.
Take a shot thanks, thanks, Jeff.
As a reminder to ask a question needs press Star one.
Once again that star, one way or telephone to ask a question.
And you have a question from the line of Jeff Bernstein with Cowen.
Yeah, if there's no one else I got a couple more in a in the K you talk about a couple of your M. ran patents that are expiring and I was just wondering what they applied to is that sort of put you out of the the spin torque business or do you still have a appreciable IP there and it does.
Talk about a couple of I guess, even more advanced Amram technologies, and and maybe you could just talk about those for a minute.
Yes, exactly and Oh, we're always impressed by the careful read that you make on our 10-K in a relatively short period of time. So yes, we do have some patents that are expiring, but we have other patents that are newer and so we have a lottery those patents that apply to amiram. Another.
Technologies so.
The patents that we have that are expiring as you might expect our older patents that apply a they apply to a range of technology, but primarily older Amiram technology and non spin torque amiram or conventional amiram, primarily so.
We have as you correctly pointed out we do have an excellent portfolio of Amiram, another spintronics patents and.
Some of them have quite a ways to go.
So we believe that we have an excellent intellectual property position we have excellent.
Technology, we have trade secrets that are that are valuable we are working on development of Amiram you. It in the question you asked earlier, Jeff that Kurt answered so part of the.
So it's part of the applications that we use amiram for our in.
Some of the anti tamper technology that we provide to the primarily now government military customers and Amiram as excellent for that because the data is inherently persistent and very difficult to defeat because it's it's based on electronic spin rather than charge. So.
We're continuing to work on our intellectual property and develop it.
We're not scaled to make large scale m. Rams that would end up in phones are computers, but the technology is there and could be scale by somebody who has a memory manufacturing capability and those types of scale of plants. So our strategy.
He is.
To develop our technology and use that technology in anti tamper applications relatively small devices, a relatively small number of bids and to build our intellectual property with the potential of licensing that for large scale memories.
Okay. Last question you guys had done a project I think it was for DARPA might have been for the army on the spin torque magnetic diode spectrograph and I think there were potential applications a in high speed Communications I'm, just wondering where where that technology stands now.
Yes, that's exciting technology and.
Unfortunately, we were hoping that the army would make those reports public and they haven't are they didnt.
So we completed that in a 2018 and it to demonstrate the feasibility of the spin torque microwave diode spectrograph.
So it has military uses which which are difficult for us to get into.
But the technology could lead to an increase in couple of speed, you know and it perhaps perhaps as much as a gigabaud. So thats a billion bits per second is considerably faster than a couple is now we're in the range of 100 megawatts. So in order of magnitude a higher speed.
So some of the commercial applications could be a remote video monitoring those are very high speed. The interfaces. So the interfaces, even the HTM I interfaces to our monitors as comment as those are our remarkably high speed because of all of the data there has to go across the to build a an image and a picture they can and.
Ken animate and change in real time, so there's more and more demands for bandwidth. We we think the technology could have some applicability in the long term.
The near term applications are primarily military.
And those are modest in terms of revenue potential but important.
Gotcha, so you're not working on anything there from a commercial standpoint.
We don't have anything eminent from a commercial a standpoint right.
Okay, great. Thanks, so much guys.
Thanks, Jeff stay safe.
You too.
Hi.
And there are no other questions.
Oh led to turn the call back to you.
Closing remarks.
Great well. Thank you well we were pleased to report an 18% increase in net income for the quarter record earnings and cash flow for the year and three new products in the quarter.
We remain well positioned to weather than pandemic pandemic and we look forward to speaking with you again in July to discuss fiscal 2021 first quarter results.
And hopefully in early August for annual meeting stay save everyone and thank you for participating in the call.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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