Q3 2022 NVE Corp Earnings Call

January 19, 2022

Thank you for standing by and welcome to the N V E Corporation third quarter results Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised.

Today's conference is being recorded should you require any further assistance. Please press star zero I would now like to hand, the conference over to your host President and CEO Dan Baker. Please go ahead.

Good afternoon, and welcome to our conference call for the quarter and nine months ended December 31 2021.

This call is being webcast live and being recorded a replay will be available through our website <unk> dot com.

We issued our press release with third quarter results and filed our quarterly report on Form 10-Q in the past hour following the close of market.

We also filed a current report on form 8-K, announcing our new CFO , Joe Schmitz, who is on the call. Joe is a seasoned executive who joined US This week.

To help fulfill our mission of leading a spin tronic Revolution, Joe welcome to the call.

Thanks, Dan.

Also on today's call is our vice President of advanced Technology P. Deems, we'll hear from Pete in a few minutes.

Since Joe was new I'll present, the financials as well as the business review today, Pete will cover new products in R&D and then we will open the call to questions 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 and uncertainties.

Related to future sales and revenue uncertainties related to future stock repurchases and dividend payments.

Our dependence on critical suppliers and packaging vendors risks related to renewals of agreements with certain customers and risks related to the COVID-19 pandemic as well as the risk factors 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 2021.

As updated in subsequent filings.

Links to the documents we filed this afternoon are available through the SEC's website, our website and our Twitter timeline.

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 solid earnings despite supply chain disruptions that delayed product shipments.

More importantly, we ended the quarter well positioned with work in process product inventories.

I'll cover some details of the financials.

Total revenue for the most recent quarter decreased 4% to $6 million to $9 million from 653 million in the prior year quarter.

The decrease was due to a 7% decrease in product sales, partially offset by an 86% increase in contract R&D.

Net income for the third quarter of fiscal 2022 decreased 12% to $3 $4 7 million or <unk> 72 per diluted share compared to 393 million or <unk> 81 for the prior year quarter.

We believe the impact of the COVID-19 pandemic on customer to customer demand with significantly less in the quarter and nine months ended December 31 2021.

Compared to the prior year periods.

We believe the impact on.

The pandemic on our supply chain, however was significantly more in the most recent quarter and nine months than in the prior year periods.

Gross profit margin decreased to 78% the third quarter of fiscal 2022 from 84% in the third quarter of fiscal 2021, primarily due to product mix and increased product costs.

Like most companies in the semiconductors industry, many of our costs increase including foundry wafers chemicals packaging costs and labor.

In response to increased costs, we canceled some discounts and increased some prices in the past quarter.

More price increases became effective at the start of the calendar year.

In the past quarter, we quoted 16 week lead times on most of our parts.

Therefore, if we hit our goals of course, many of the parts, where we quoted 16 weeks will be shipped this quarter.

16 week lead times are much longer than before the pandemic or even a few months ago.

But according to the most recent monthly market update by one of our distributors.

The lead time for parts from one of our traditional semiconductor competitors is 52 to 80 weeks or above.

Expenses for the quarter decreased 14% from the prior year due to a 15% decrease in R&D and a 13% decrease in SG&A.

The decrease in R&D expense was primarily due to staffing changes and the completion of certain product development activities.

The decrease in SG&A was primarily due to staffing changes.

Interest income for the third quarter of fiscal 2022 decreased 22% due to a decrease in our available for sale securities and a decrease in the average interest rates on those securities.

Net income for the quarter was a 3.4 dollars $7 million or <unk> 72 cents per diluted share compared to $3 $93 million or 81 cents last year.

We continue to generate strong profitability operating margin was 64% pre tax margin was 69% and net margin was 55%.

For the first nine months of fiscal 2022, total revenue increased 31% to $23 million from $15 5 million in the prior year.

Product sales increased 31% and contract R&D increased 17%.

Net income for the first nine months increased 25% from the prior year period to $10 $7 million or $2 21 per diluted share.

From eight $5 6 million or $1 77 per share for the first nine months of fiscal 2021.

Capital expenditures were $58000 in the first nine months of the fiscal year, we expect that number to increase significantly this quarter the fourth quarter. Since we plan to deploy several new test handlers to increase our production test capacity and alleviate potential bottlenecks.

We repurposed part of the building to make room for the new equipment.

We paid a one dollar per share dividend in the past quarter and today, we announced that our board of directors declared another quarterly dividend of $1 per share payable February 28th to shareholders of record as of January 31st.

Turning to the past quarters business highlights some analysts have said global semiconductor shortages could last several more years.

That would pose both medium term opportunities and threats.

We took advantage of some of the opportunities by winning business because we have shorter lead times than traditional semiconductors, and we can keep that business by demonstrating more reliable supplier with excellent product performance and quality.

We've addressed the threats posed by the shortages by increasing work in process inventory.

We are investing in additional production and test equipment.

We expanded our production space.

We have invested in tooling and materials for alternate packaging vendors and we have invested in tooling for onshore foundry wafers.

With these steps as I discussed in the financial review, although our lead times are longer than they have been they are much better than industry averages.

We're proud to supply products to some of the world's most demanding customers, including Abbott's pacesetter subsidiary Abbott as a leading supplier of implantable medical devices.

I am pleased to report that we have reached a tentative agreement to extend our supplier partnering contract with Abbott.

The extension will run through the end of 2022 and will include a price increase in the face of our increased materials and manufacturing costs.

We will file the amendment on a current report on form 8-K, after it's fully executed.

There are still some in person trade shows and conferences are Taiwan distributor Caltech International exhibited at Taipei International Industrial automation exhibition in December .

<unk> reported turnout was lighter than before the pandemic, but they still had some leads.

The joint Mmm Intermarried conference a major conference for Magnetics and spend Tronox was last week.

The lights of our participation or on our website and Twitter timeline.

We provided several types of our giant Magneto resistance and tunneling Magneto resistance sensors to student entrance at the conference. So they can learn how to use them.

The students came up with some clever applications, including a magnetic flute and a beer level sensor there are links to videos on our Twitter timeline.

Now I'd like to turn the call over to Peter <unk>, Our Vice President of advanced technology to cover new products and product development.

Peter has been on these calls before he's been with <unk> since 2003 and it has been in his current position since 2017.

<unk> has a ph D in experimental condensed matter physics from the University of Minnesota.

Pete.

Thanks, Dan I'll cover recent new products and summarize our product development strategy.

In the past quarter, we launched our most sensitive sensor ever.

The new sensors is a version of our groundbreaking tunneling Magneto resistance or TMR sensors.

High sensitivity means new sensors can detect smaller magnetic fields, which allows more precise position our current sensing for more accurate and efficient electronic controls.

A demonstration of our web site on a demonstration on our website and Youtube channel shows how the new sensors can precisely detect and position a very small magnet a one by one a seven inch cylinder.

At this scale is important for applications requiring precise automation.

The new product as a result of advancements in our TMR sensor materials by our advanced technology team.

We continue researching even higher sensitivity devices to maintain and extend our leadership in this area.

Applications of high sensitivity sensors include precise position sensing and biometric monitoring.

Despite challenges posed by shortages and long lead times 2021 was a productive year for product development.

In addition to the new sensor I just discussed we introduced several other new products in the past year.

The world's first TMR gear, two sensors with thousands of a degree resolution for ultra precise motion control and robotics.

Ultra low power magnetic switches for medical devices and <unk>.

And.

More parts, the transmit power as well as data.

Up next we're working on to near term advanced smart sensors for the industrial Internet of things.

In advanced high sensitivity Tmr's, smart magnetometer and an advanced single smart angle sensor.

Both we hope to announce these new products soon in this in this quarter.

Long term, our R&D strategy and it is in advanced materials and sensors for couplers and for sensors for the Internet the industrial Internet of things and hybrid electric vehicles.

And M Ram for anti tamper niches to build our intellectual property.

Our primary enabling technology for advanced products as tunneling Magneto resistance or TMR.

We're real world leaders in TMR, which is an advanced been tronic technology.

<unk> offers higher sensitivity and lower power than traditional semiconductors or even other spintronics technologies.

Thanks Pete.

Now, we'd like to open the call for questions Latif.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

Draw your question press the pound key again Thats star one on your Touchtone telephone to ask a question. Please standby, while we compile the Q&A roster.

Our first question comes from the line of Jeff Bernstein of Cowen Your line is open.

Hey, guys.

Nice to talk to you again, Dan nice to meet you.

And Pete.

A couple of questions for you one.

Any kind of order of magnitude.

Sort of how much business you think you left on the table in the current quarter because of shipment delays.

Yes. It is.

Hard to it's hard to come.

Come up with a number Jeff but it was.

A significant amount of revenue, but the more important thing is that it's been.

Delayed not lost by and large so.

We haven't lost those customers, we haven't lost that business and we've actually picked up quite a bit of business and picked up orders from our competition.

So it was a significant disruption and.

As I mentioned in the prepared remarks.

In the first two quarters of the fiscal year, we had inventory and so.

The demand has picked up and we were uniquely positioned.

The most recent quarter.

Our inventory had been there had been a lot of our inventory has been depleted and so we were in a position to animals, where the shortages started to bite but.

They didn't bite us nearly as hard because of the mitigation steps that our folks talk and the skill and dedication with sir employees put into into managing some of these shortages that they haven't affected us as severely as many other companies.

Companies in the semiconductor industry.

So we could we can.

I assume that you've built a little visibility as a result of the backup.

Yes, we have visibility of orders.

And there are challenges in the industry as you well know but.

We're taking them on and.

And the committed to growth we're betting on.

We're adding equipment, we're expanding our building.

Because we are expecting to deliver those products that have been delayed.

Gotcha.

You referenced redesigns for U S packaging.

I guess on your part redesigning some of your parts to be.

Packaged here as opposed to overseas and cut down on that logistics time.

And I guess whatever delays there are packaging facilities overseas is that the takeaway.

Exactly so.

We've invested in onshoring.

It takes a while but we're expecting wafers that we used to get from Asia, We're expecting the first wafers on one of our.

Highest volume foundry wafers raw materials.

As early as later this month.

Our team.

<unk> got on that.

Fairly early in the in the.

Semiconductor shortage crunch, and we have more wafers on the drawing board that we are redesigning for onshore foundries.

Gotcha, Okay and then.

We've talked in the past you had some drop in sort of pin compatible parts.

You could you could compete.

With some of your peers.

And often I think with better performance.

But has this situation.

Dragged on long enough that people are actually doing some board designs and willing to design and parts that arent incompatible.

Yes, some of them are and we spend a fair amount of time supporting those customers to pointed out the differences and to Uh huh.

Help them through the design process for redesigning their boards and also we picked up.

Significant amount of business of orders for pin for pin replacement.

Replacement parts.

Where there are no board designs required and those redesigns as you can imagine can go much faster.

Gotcha, Okay, that's great.

And can you touch on what's been going on with banks and sister and.

What kind of progress youre, making in automotive.

Yeah, So automotive remains a target market for us and in particular, youre referencing angst and sisters.

So called B fast platform, which is a platform for onboard charging and other.

Power conversion applications, which are which are fast growing applications. As you know so we continue to work with them and work with some of their end customers on designs sampling parts.

We are working on even more improved products that will address that market of <unk>.

Improving the efficiency.

Battery charging and other power conversion system. So it's an area that we see.

As an excellent target market, particularly for our couplers.

Can be used then to drive.

High speed power switches, so called MOSFET.

In order to convert power.

From.

From the Asa.

<unk> AC voltages that we would have in a charging system where in our homes.

To the D C. That's.

Thats required to charge recharge an electric vehicle.

Or.

<unk> energy to a more efficient motor.

Got you and so these are the ones that are that are like silicon carbide compatible.

Exactly so are our couplers provide a bridge between electronics an interface between the control electronics.

And the switches like the silicon carbide or gallium nitride MOSFET that are doing the switching of the power, but because those are at high voltages and require a high current U K.

Connect those directly to the.

To the controller electronics so are.

<unk> been trying to couplers solve that problem of being able to sing.

Signal.

<unk>.

MOSFET to switch without a direct electrical connection.

Gotcha.

And then I had.

About the.

About Abbott a couple of questions about it so it sounds like you are extending the current agreement I think it usually you have like five or six year.

Agreements.

Is that just because of how things are moving so quickly in the industry or just expand a little bit on what's going on with Abbott.

Yes, well.

We've had a.

Longer term extensions with Abbott or their predecessor companies, St Jude or pacesetter.

But recently the extensions have been shorter than one year.

So we do expect to negotiate a longer term agreement with Abbott.

Those things take a little bit of time.

But what we're pleased with is that the agreement the tentative agreement that I alluded to codify some price increase and that's important to us in the face of increasing costs.

Yeah.

Okay, that's great and then I noticed these guys have recently.

Fielded a new.

Electrophysiology cardiac mapping.

Platform and it would seem like your sensors.

Really appropriate for that kind of a product.

To get in.

To see them on that design cycle or is that something to potentially go after in the future.

Right, Jeff that's an exciting new application had out that I guess, we're not really familiar to all of the inner workings on on that particular device, but certainly.

Some of our low field sensors are exciting for applications like that and that's something that we're hopeful it will be in those.

Those types of markets in the future.

Gotcha and then Pete.

While we have your expertise here I'm, just wondering I keep reading about.

Various.

Quantum computing kinds of architectures.

And I'm wondering if any of your parts or.

Potentially potential to be used either either in Q that storage in some of the error correction monitoring kinds of applications in any of these different kinds of architectures.

Right right.

That's a real exciting application and it's something that we have looked at closely in the past from the Spintronics perspective, I think longer term there are some opportunities there for us but in the short term I think we're focused on some other areas like TMR materials.

I field sensing.

Gotcha Okay.

Then.

Wanted to ask about I guess, the FDA comment period on the new over the counter hearing AIDS.

Regulation is coming to an end here.

Yeah.

Is that kept design activity.

From happening or are you deep into that.

So it's sort of give us an update on the hearing aid market.

Yeah, well in particular for <unk>, that's a real exciting time and there's.

There's a lot of changes coming in that market.

You're referring to a couple of popular press articles, particularly the Wall Street Journal was published.

On the availability of devices in the <unk> market.

That's something that we're real optimistic about we see opportunities there and we think we're well positioned for those types of devices and.

Where we're seeing a lot of growth and and hopefully an opportunity to talk a lot more in the future about.

Okay, that's great and then and then lastly, Dan.

It would seem like there's these electric vertical takeoff and landing vehicles would similarly.

Evs.

Market.

For you guys.

How are you looking to try and access the.

Hey, guys designing those products.

Yeah, exactly so so that would be a next generation beyond hybrid electric vehicles, so called flying cars, which is very exciting area.

And there is even more of a premium on efficiency of batteries and power conversion those types of systems, because because of the extremely high cost of weight.

So we are looking at those markets also as.

Of course, a bit longer term than hybrid electric vehicles, but for power conversion and a lot of the systems, we think will be.

We will be an evolution of the systems that are coming onboard and we talked about in answer to one of your previous questions about power conversion for hybrid electric and autonomous vehicles.

And so is that a direct sales effort.

That's going on there and you guys just have to knock on doors.

It's more targeted than that we are looking at providing a system like the angst and pfister be fast system.

We're providing a key element of the system, but we think the best approach is to be part of the reference designs for power conversion modules and to get in.

In the early stages with the module.

Manufacturers and.

There is there is as I alluded to in one of your other questions or there has been some progress there.

Gotcha, that's great. Thanks, so much.

Thanks, Jeff.

Thank you. Our next question comes from Alex Woodward Bridge City capital Your line is open.

Hi, Dan.

First time, questioner, but long time listener.

Thanks, Alex.

Welcome to the call. Thank.

Thank you you mentioned that the <unk>.

Lead times, right now or 16 weeks.

And there are longer than they used to be pre pandemic where lead times.

Well, we endeavored to have most of our parts in stock. So we would ship the same day.

Depending on the time of day.

So we still have parts that are in stock.

It's not the usual case for a large order for a large production order.

Lead times vary, but I was giving the 16 weeks of sort of a representative number.

So.

And even as I mentioned, even in the first two quarters of this year when we had inventory in many cases, we were we were shipping.

Out of stock directly from stock rather so therefore, we could ship we could ship the same day.

And lead times were shorter as I mentioned in the prepared remarks lead times were shorter even a few months ago.

But we're still in a much better much better situated than.

Many conventional semiconductor companies.

So I guess my real question is what are your cycle times from like wafer to finished product how long does it take.

Yes.

That's a good question.

It's quite a bit longer than it used to be so we used to say approximately.

The three month cycle time, and now we're talking about closer to four to five months cycle time.

We've worked very hard.

To improve our internal cycle times.

Yeah.

Despite some challenges in material shortages.

We're pretty pleased with where we are for our internal cycle times and the biggest challenge is the.

Packaging.

Vendors so.

Some of you know, we make wafers and then the products are sent to Asia.

Like most semiconductor companies, we send wafers to Asia, where they are packaged into the <unk>.

Plastic packages the ubiquitous semiconductor packages that are soldered into circuit boards for the electronics that we use and that's been a significant bottleneck throughout the industry.

We're better situated than most companies because we.

<unk> been able to keep up with our wafer production.

We've been able to diversify our suppliers on that front.

And we've been.

Working on.

Very aggressively when problems come up shortages of certain materials. Our engineering team has been very good at finding alternate materials at redesigning our parts the way we make our parts. So that they can be packaged tour packaged using alternate materials. So.

We.

We continue to be.

Better situated than the industry, even though.

That kind of disruption.

<unk> has an impact on us.

Okay. So when you're shipping products to Asia, you've got the free transport issues costs are going up there and you've also got the port congestion. So is that where a lot of the one to two months incremental time.

Taking place.

That's some of it we have the luxury of we we usually airfreight so.

There have been delays, there, but not as bad as what we've been what you hear about for containers. So we can we can ship a significant amount of we might ship.

Wafers that can make.

Tens or hundreds of thousands of dollars worth of parts and a relatively small box.

So we can airfreight that and most of the incremental time is just because of the capacity limitations and material raw material shortages at the packaging vendors in Asia.

That's where the big increase has been logistics as part of it but the bigger the.

Bigger challenge is just the capacity limitations at those vendors.

Okay.

Speaking of capacity utilization your factory in Minnesota.

Capacity utilization are you running at.

Yes, that's a great question, Alex and we don't have a specific number but.

But we run it at a much lower utilization than traditional semiconductors, we add more value and so we have the luxury of having excess capacity, which is another reason why despite shortages, we have been able to manage our internal cycle times are fairly well we do have.

Certain pieces of equipment in certain areas and particularly final test, where we feel that we need more capacity and we've invested in it as I mentioned in the prepared remarks, it hasn't shown up in our capital expenditures yet because the equipment hasn't been fully deployed we have one new piece of equipment for.

Example, thats here to increase our capacity in that area.

And we have more equipment that we expect in this quarter the fourth quarter the quarter ending March 31, but in answer to your core question. We're not we don't have a significant overall constraint on capacity like a conventional semiconductor manufacturer, who might be making DRAM or something like that.

Whether they'd be running very close to 100% capacity in any disruptions.

Will ripple through.

Disrupt their shipments are very severely.

Okay.

How are you able to.

Build finished goods inventory in the quarter. It went up almost 190000 and thats about three quarters of $1 million, if I use a representative gross margin.

How are you able to do that when it's supply constrained I would've thought that.

Anything you had available.

Customers are taking.

Yes, that's a very good point, so the shortages are not spread evenly across the board.

We have some products that are in demand that we have had to delay and then we have other products.

Where we have parts in inventory as I mentioned in answer to another question and we can ship them straight away, we can ship them the same day.

So.

So that's that's the reason then we we've kept building.

It's not that we're idling and our production our production area is as busy as ever.

We're building parts that we can and working on the raw materials and the work in process and shipping as much as we possibly can to the packaging vendors. So that they can they can turn it around even with the longer lead times.

Longer cycle times.

So I got it I got a question for Pete here since he's on the call and he has been a long time listener just like me. So we have that in common.

But.

First of all I've got amazing respect for your products and how sensitive they are and how amazing there and how advanced and probably in front of everybody else.

Industry, you are but in a way it almost feels like some of your products or field of dreams, you've built it and we've been waiting for the market to come for a really long time, how do you determine when youre, making the most sensitive TMR sensor in the world.

That's great.

From.

From an academic and maybe science perspective, but where is the real customer demand and how do you determine new products with customers.

Maybe just some insights there.

Sure sure.

Thanks, Alex.

Of course.

Product development for us.

Several variables involved of course customer input is key to our process and lead customers are very important in many of these.

And many of these efforts.

For us.

The high sensitivity translates into new markets and precision in things like motion control.

And that's a that's a pretty universal requirement in the industrial automation.

So.

When those translate directly into dollars is difficult to predict, especially on new products, but but we're optimistic.

How optimistic are you on some of the advanced products you have in automotive.

Yeah.

Generally we are very optimistic.

We have advanced products now for transferring power and data describe some of the new products. We've released in the past quarters for those technologies and again, we continue to be optimistic with where we're at in the market and where we're at with lead customers there.

What how.

How would you define new products.

For us a new product as well.

Well it varies from.

A range of.

Incremental improvements and innovations to complete new developments and inventions.

New products for us are new Spintronics devices.

And new applications and new markets.

So as you've just to find new products what percentage of revenue are they.

Yes, I don't have that number in front of me Alex.

I assume it depends on which products you are talking about and how there.

How they are accounted for on that.

Okay.

Switching gears I've just got one more question and this is for Joe since he is also the first time Tucker on the call Joe Why did you join.

Okay.

Yeah.

I am excited to be a part of a team that that is helping to create the future I think.

Some of the challenges we have from the financial.

Perspective.

Really enjoy.

I think the opportunity to develop the team and hopefully scale of this operation.

Great. Thank you that's all for me.

Thank you again to ask a question. Please press star one on your Touchtone telephone again Thats Star one on your Touchtone telephone to ask a question.

And as there are no further questions in queue. At this time I would like to turn the call back over to Dan Baker for closing remarks, Sir.

Thank you well we were pleased to report solid earnings despite the supply chain disruptions. We look forward to speaking with you again in early may to discuss fourth quarter and full fiscal year results. Thank you for participating in the call.

Yeah.

This concludes today's conference call. Thank you for your participation you may now disconnect.

[music].

Is being recorded should you require any further assistance. Please press star zero I would now like to hand, the conference over to your host President and CEO Dan Baker. Please go ahead.

Good afternoon, and welcome to our conference call for the quarter and nine months ended December 31 2021.

This call is being webcast live and being recorded a replay will be available through our website and the E Dot com.

We issued our press release with third quarter results and filed our quarterly report on Form 10-Q in the past hour following the close of market.

We also filed a current report on form 8-K, announcing our new CFO , Joe Schmitz, who is on the call. Joe is a seasoned executive who joined US This week.

To help fulfill our mission of leading a spin tronic Revolution, Joe welcome to the call.

Thanks, Dan.

Also on today's call is our vice President of advanced Technology P. Deems, we'll hear from Pete in a few minutes.

Since Joe has new I'll present, the financials as well as the business review today, Pete will cover new products in R&D and then we will open the call to questions 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 and uncertainties.

Related to future sales and revenue uncertainties related to future stock repurchases and dividend payments.

As updated in subsequent filings.

Links to the documents we filed this afternoon are available through the SEC's website, our website and our Twitter timeline.

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 solid earnings despite supply chain disruptions that delayed product shipments.

More importantly, we ended the quarter well positioned with work in process product inventories.

I'll cover some details of the financials.

Total revenue for the most recent quarter decreased 4% to $6 million to $9 million from 653 million in the prior year quarter.

The decrease was due to a 7% decrease in product sales, partially offset by an 86% increase in contract R&D.

Net income for the third quarter of fiscal 2022 decreased 12% to $3 $4 7 million or <unk> 72 per diluted share compared to $3 nine 3 million or <unk> 81.

For the prior year quarter.

We believe the impact of the COVID-19 pandemic on customer to customer demand with significantly less in the quarter and nine months ended December 31, 2021 compared to the prior year periods.

We believe the impact on.

The pandemic on our supply chain, however was significantly more than the most recent quarter and nine months than in the prior year periods.