Q2 2024 NVE Corp Earnings Call
Just hang the Magnus from.
Speaker Change: Good afternoon, and welcome to the <unk> Corporation Conference call for the quarter ended September 32024.
Speaker Change: Dan Baker, <unk>, President and CEO I'm joined by our controller and principal financial Officer, Daniel Nelson.
Speaker Change: This call is being webcast live via Youtube and Amazon chime and is being recorded.
Speaker Change: A replay will be available through our website <unk> dot com and our Youtube channel Youtube Dot Com Slash NV Corporation. All participants are currently in a listen only mode. After our presentation there'll be a question and answer session, you'll be able to ask a question by pressing star seven from a phone or clicking raise my hand from the China.
Speaker Change: Website or App. After my opening comments, Daniel Nelson will present, our financial results I'll cover products and marketing and we will open the call to questions.
Speaker Change: 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.
Speaker Change: Thanks to the press release and 10-Q are available through the Sec's website, our website and on X, formerly known as Twitter.
Speaker Change: Please refer to the Safe Harbor statement on your screen 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 and risks and uncertainties related to future.
Speaker Change: Sales and revenue 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 2024.
Speaker Change: Actual results could differ materially from the information provided and we undertake no obligation to update forward looking statements we may make.
Speaker Change: We're pleased to report strong earnings despite continuing challenges in the semiconductor industry, Daniel Nelson will cover the financials Daniel.
Daniel Nelson: Thanks, Dan.
Daniel Nelson: Revenue for the quarter ended September 32020, and food decreased 5% due to a 14% decrease in product sales.
Daniel Nelson: Really offset by a 3950% increase in contract R&D revenue to.
Daniel Nelson: The decrease in product sales was primarily due to continued inventory glut, particularly in the distributor channels driven by weak chip demand in a slower recovery in global manufacturing, although the semiconductor industry recovery has been slower than most of us in the industry had hoped.
We have an optimistic outlook.
Daniel Nelson: Our end markets are improving and we have group markets in the industrial internet of things and electrification.
Gross profit increased 5% from the prior year and gross margin percentage increased to 86% from 78% in the prior year quarter.
The increases were due to more profitable product mix and a larger proportion of direct rather than distributor sales.
Daniel Nelson: Total expenses increased 55% for the second quarter of fiscal 2025 compared to the second quarter of fiscal 2024, mostly due to a 24% increase in research and development expense.
Daniel Nelson: And a 31% increase in selling general and administrative expense.
Daniel Nelson: The increase in research and development expense was due to increased new product development activities.
Daniel Nelson: The increase in selling general and administrative expense was primarily due to increased sales and marketing activities.
Daniel Nelson: We added sales personnel and increased marketing activities.
Speaker Change: Dan will talk about those activities shortly interest.
Speaker Change: Interest income for the quarter decreased 9% due to lower interest rate.
Speaker Change: Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes increased to 17% for the second quarter of fiscal 2025 compared to 8% for the second quarter of fiscal 2024.
Speaker Change: The lower tax rate last year was due to a recovery of credit losses and changes in the timing and amounts of federal tax credits and deductions.
Speaker Change: The 15% decrease in net income in the second quarter of fiscal 2025 compared to the prior year quarter was primarily due to decreased revenue increased R&D increased SG&A decreased interest income and the higher tax rate, partially offset by increased cross <unk>.
Speaker Change: <unk> margin.
Speaker Change: With an unrealized gain from marketable securities comprehensive income increased to $4 $71 million from $4 $67 million the prior year quarter.
Speaker Change: It was a profitable quarter with 86% gross margin, 65% operating margin, 60% net margin and earnings of 83 cents per share.
Speaker Change: For the first six months of fiscal 2025, total revenue decreased 15% to $13 $5 million from $16 million for the first six months of the prior year.
Speaker Change: The decrease was due to a 20% decrease in product sales, partially offset by a 457% increase in contract R&D revenue.
Speaker Change: Net income for the first six months was $8 $2 million or $1.68 per diluted share from $9, one $3 million or $1.89 per share for the first half of fiscal 2024.
Speaker Change: Now I will turn the call back over to Dan <unk> to cover the business over to you Dan.
Dan Baker: Thanks, Daniel I'll cover new products sales and marketing and Capex.
Dan Baker: As Daniel mentioned, we've increased our investment in R&D.
Dan Baker: We spent 13% of revenue in the past quarter on R&D expense plus customer sponsored R&D, which is included in cost of sales.
Dan Baker: As a result of the efforts of our R&D team, we introduced significant new product earlier. This month, the <unk> 521 Dash, one zero E tunneling Magneto resistance rotation sensor, it's billed as the world's most sensitive device of its type for which allows for wide mechanical tolerances.
Dan Baker: <unk> sensing is ubiquitous applications include detecting complex motion in factory automation and automotive systems.
Dan Baker: The technology is also applicable to medical device navigation.
Dan Baker: There's more information on our website and our Youtube channel has a demonstration of the new sensors extraordinary sensitivity and precision.
Dan Baker: N V would like to congratulate NASA on its successful Europa Clipper launch last week, our robust components are mission critical parts of the spacecraft's sophisticated instruments that will search Jupiter's icy moon for signs of life.
Dan Baker: Kraft is scheduled to reach your open April 2030.
Dan Baker: NASA rigorously qualified our parts are great validation of our quality and reliability.
Speaker Change: As Daniel noted, we've also increased our investment in sales and marketing.
Speaker Change: We exhibited at the medical design and manufacturing trade show last week in Minneapolis part of the advanced manufacturing event.
Speaker Change: Minnesota is the health care industry hub and medical devices are an important market for us.
Speaker Change: We have a convincing benefit proposition for medical devices, with small size and low power and superb reliability.
Speaker Change: Specifically, we demonstrated our new high field tunneling Magneto resistance sensors, which have a unique omni directional capability and detect high field. So they can detect the high fields from MRI to enable MRI tolerant medical devices.
Speaker Change: We also featured our medical device navigation technology, and our best in class electrical isolated to ensure the safety of medical instruments.
Speaker Change: Turning to Capex, we previously discussed plans for $4 million to $5 million in capital investments over the next two fiscal years fiscal 2025 and 2026.
Speaker Change: We've already spent $1.13 million in the first half of this fiscal year fiscal 2025.
Speaker Change: The investments will increase our capacity and capabilities, including the capability to manufacture wafer level chip scale packages in house.
Speaker Change: These parts will be smaller higher performance and allow us to be more self sufficient and capture more value.
Speaker Change: We are developing several wafer level chip scale part types, we have provided customers with prototypes and theres been strong customer interest.
Speaker Change: We hope to begin some production late this fiscal year.
Speaker Change: We have looked at other buildings in the areas of options for the expansion or we could expand in our current building.
Speaker Change: Our current lease expires in March 2026, and we're exploring a lease extension with an allowance to help pay for an expansion in our current building.
Speaker Change: We held our annual shareholders meeting in August in person here at N V <unk>.
Speaker Change: Proxy advisory firms recommend an in person annual meetings for good governance.
Speaker Change: All of our directors and officers attended along with our auditors we are.
Speaker Change: Had a chance to meet shareholders and answer questions.
Speaker Change: And the formal meeting each director was reelected including Kelly way, who was selected for the first time named.
Speaker Change: Named Executive Officer compensation was approved.
Speaker Change: And the selection of our independent registered public accounting firm was ratified.
Shareholders had a chance to see and try out hands on product demonstrations and tour our facility.
Speaker Change: Demonstrations included a hotdog cooker demonstrate our power conversion products and a chessboard demonstrate an array of position sensors.
Speaker Change: There is a replay of the meeting the slides and product demonstrations on our website and Youtube channel.
Speaker Change: Filed the final vote counts in a current report on form 8-K.
Speaker Change: Now, we'd like to open the call for questions.
Speaker Change: Ask a question from a phone press star seven to on mute.
Speaker Change: Or from a browser chime app click the raise my hand icon under the meeting Chad that's at the bottom of the left column and on mute yourself to speak please.
Speaker Change: Please state your name and affiliation before your question and to prevent background noise. Please mute your line after asking your question.
Speaker Change: Hi, Dan and Dan its Jeff Bernstein from Musselburgh Bernstein capital how are you.
Dan Baker: Good how are you Jeff.
Jeff Bernstein: A couple of questions for you.
Jeff Bernstein: One you had a big uptick in the <unk>.
Jeff Bernstein: R&D contract R&D can you just talk about what that <unk>.
Jeff Bernstein: Completed project was about.
Yes, so most of our contract R&D is related to defense business in developing new systems, particularly anti tamper systems.
Jeff Bernstein: So that is that's usually the nature of the contract R&D and our hope is that it will result in product sales down the road defense product sales.
Jeff Bernstein: No.
Jeff Bernstein: Because of the nature of those types of contracts, we are generally not able to get too specific about them, but the other advantage of those types of contracts as they they build our intellectual property portfolio to expand our technology platform.
Jeff Bernstein: Our R&D team did a great job on that project.
Gotcha, and so is that something that you think could be a product in the next two.
Jeff Bernstein: 12, or 18 months.
Speaker Change: It could be it's difficult to predict timeframes, they depend on procurement cycles, sometimes they take longer than that.
Speaker Change: But that's that's the goal is that we we typically do R&D with a with a goal of developing either technology that we can.
Speaker Change: Turn into products or that it's for a customer that will buy a custom high value added product.
Speaker Change: Okay and then.
Speaker Change: The uncountable functions businesses is been volatile over time.
Speaker Change: Can you just give us an update.
Speaker Change: There.
It seems like we are.
Spending a lot more sophisticated systems overseas these days and that at some point that order.
Speaker Change: Convert into some some positive momentum.
Speaker Change: It it does Jeff as you say.
Speaker Change: <unk> systems that are defense systems that are sold to allies often need.
The anti tamper protection.
Speaker Change: They are especially susceptible to falling into unfriendly hands, so well, we hate to say see some of the.
Speaker Change: Some of the.
Conflicts and instabilities.
Speaker Change:
Speaker Change: Allied weapon sales in defense systems sales do tend to help that to help.
Speaker Change: Helped that business.
Speaker Change: And as you know there was a there was recent earlier this year.
Speaker Change: There was an appropriation for for ally, specifically for Taiwan, Ukraine, and Israel. So those those types of systems tend to.
Speaker Change: Require anti tamper.
Speaker Change: Okay.
Speaker Change: It was it kind of a low quarter on unquotable functions this quarter or is that this business being strong.
Speaker Change: They were strong in the past quarter.
Speaker Change: But as you know the sales can be lumpy and vary from quarter to quarter based on procurement schedules. We are optimistic about the long term.
Speaker Change: Defense sales.
Speaker Change: Based on what we see now, but it's hard to predict quarter to quarter.
Speaker Change: Got it and you.
Speaker Change: You did make the comment in the Q and on the call.
Speaker Change: Our mix shift.
Speaker Change: In revenue towards more towards direct and less.
Speaker Change: Distribution.
Speaker Change: Had a very nice positive impact on.
Speaker Change: Gross margin.
Speaker Change: And you mentioned that.
Speaker Change: The product revenue weakness was more due to inventory hangover in the distribution channel than with direct customers can you just dive into that a little bit further.
Yes, so the industry is in a slow down the semiconductor industry in general is in a slowdown so when that happens what turns the distributors tend to build up their inventories because then customers arent buying them and then we get a what's sometimes called the bullwhip effect the supply chain amplifies market changes since come.
Speaker Change: <unk>.
Speaker Change: Tend to cancel orders to manage inventories during downturns.
So, but the positive was that our end customer sales remained.
Speaker Change: Remained strong and because we don't have a distributor margin in there that tends to help our margins and so as Daniel pointed out in the prepared remarks.
Speaker Change: Our gross profit actually increased in the quarter year over year.
Speaker Change: Even though the revenue the revenue was down slightly.
Speaker Change: And can you just give us kind of an order of magnitude.
Speaker Change: Range of sales as a percent to the distribution channel is it range from you know.
Speaker Change: 40% to 50% or 10% to 20% or et cetera, and I would assume that so we're in a trough now.
Speaker Change: We're kind of at the lower end of whatever that ranges.
Speaker Change: Yeah, you're exactly right. We are well, we certainly hope we're at the lower end and that the inventories in the channel appear to be being.
Speaker Change: Depleted, which is a good sign for us because that means that the distributors will tend to.
Speaker Change: <unk> returned to buying so that the.
Speaker Change: You know that their book to Bill if you will that the amount that they are.
Speaker Change: They're buying is going to more closely correlate to what their customers are buying we don't we don't report in a percentage or a number but I think qualitatively youre right.
Speaker Change: The distributor sales R. R.
Speaker Change: Our low right now.
Speaker Change: And user sales have not been as depressed because of the effects that I mentioned and so we're hopeful that our distributor sales will pick up again and the percentage will increase.
Speaker Change: Okay.
Speaker Change: And then I wanted to touch on you you had.
Speaker Change: Hey.
Speaker Change: Piece out.
Speaker Change: During the quarter and any touched on this in the.
Speaker Change: Call them.
Speaker Change: About.
Speaker Change: Precise navigation sensors for catheters.
Speaker Change: And we talked about you and I during the quarter.
Speaker Change: That was potentially.
Speaker Change: <unk>.
Speaker Change: Something that was applicable to the new pulsed field ablation.
Speaker Change: Catheter is out there and your biggest customer is.
Speaker Change: Is offering one and.
Speaker Change: It's expected to be a big growth area for them.
Speaker Change: Like Medtronic, where your new director.
Speaker Change: It's from is also offering the same thing and they describe.
Speaker Change: There is as.
Speaker Change: This is medtronic.
Speaker Change: As having real time local impedance.
Speaker Change: Reading to access assess catheter proximity to tissue. So I'm, assuming that were kind of talking about the same thing in terms of the navigational capabilities that youre part spring, but can you just discuss that a little bit.
Speaker Change: Yeah. So as you point out that is an important area for us and an important in an area where we have it.
The convincing benefit proposition and that our sensors are smaller and more sensitive than other technologies. So the way our customers.
Speaker Change: Can use this is to detect an external magnetic field with the.
Speaker Change: That's that's imparted on the catheter and then they can infer from that the position of the catheter in the body and that's very important so that they can get the catheter to the right place and deliver the therapy or make sure that it's in the right blood vessel in the case of things like coronary.
Speaker Change: Angioplasty catheter so.
Speaker Change: It's an area, that's becoming more important and where precision.
Speaker Change: And small size is becoming more important so our sensors have.
Speaker Change: Unique advantages in that area and that was one of the things that we were promoting at the recent M. D. N M conference that we've talked about in the prepared remarks.
Speaker Change: Gotcha understood. Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you Jeff.
Speaker Change: Yeah.
Speaker Change: This is Mike Goss Humira can I ask a question.
Speaker Change: Yes go ahead Sir.
Yes, Dan. This is Mike asked me if I may a couple of years ago at the annual meeting.
Oh, Yes of course, yes, two questions first of all Yeah, I know you finish up your trade show.
Speaker Change: Oh, you trade shows I was just wondering.
Speaker Change: What the outcome was anything real positive is going to come out of that.
Speaker Change: And then the second question is.
Since you've increased your capital Capex expenditures.
Is that affecting your cash flows or how is that affecting your cash flow in relation to the dividend.
Speaker Change: All right. So with regard to the first question. We were Tradeshows, we were pleased with the response.
Speaker Change: Traffic and the leads that we got at the trade shows we recently did a wrap up the video ads on Youtube, if you're interested but we had three major trade shows during the season.
Speaker Change: And the last one was M D N M, which was which was last week and we have a lot of leads to follow up so our sales and sales support staff are working on that and we're working on with the customers and with our distributors to follow up on some of the leads that we got to show.
Speaker Change: And it trips that were associated with those shows so.
Speaker Change: We're pleased with that.
Speaker Change: Sometimes there's a there's obviously a lag there and it takes some time to develop these leads.
Speaker Change: But we're optimistic that these will.
Speaker Change: Turning to turn into business and then to sales.
Speaker Change: In terms of the capital expenditures and cash flow. So the cash flow tends to lead the capital expenditure, we often make down payments. So much of the $1 $1 million that we mentioned that we've spent so far and capex. This fiscal year. The first half of the fiscal year is <unk>.
<unk> payments on equipment. So the equipment will be delivered to subsequently, but in the meantime, we have to pay cash for it to get the equipment going because these are custom piece or pieces of equipment that are being designed.
Speaker Change: To our specifications.
Speaker Change: The hope of course is that they will be able to generate.
Speaker Change: Products and business and we'll have a good return on the investment.
Speaker Change: But in the meantime.
Speaker Change: We're spending money that we believe is an investment we believe though that we have a strong balance sheet and that we can continue to have both a.
Speaker Change: An aggressive dividend to build our shareholder value and the investments in capital expenditures sales and marketing and R&D that will pay off in the future.
Speaker Change: Yeah.
Speaker Change: Okay because about.
Speaker Change: Because of your balance sheet, the cash balance has come down as you've been making these.
Speaker Change: Former payments for equipment correct.
Speaker Change: It has yes, but we still have a we still have by most metrics are very strong balance sheet. We can support a dividend and we can continue to make the investments we need to make.
Speaker Change: Okay and this equipment.
Hopefully comes online.
Did you have a timeframe that I may have missed the timing that you said.
Speaker Change: This fiscal year and next fiscal year, So thats fiscal 2025 and 2026. However, we do hope to be in some production of some of the new products that are related to the investments there.
Speaker Change: This fiscal year, which would end March 31 2025.
Speaker Change: Okay. Okay.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
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Speaker Change: No.
Speaker Change: Yeah.
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Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Are there any other questions you can mute your microphone.
Speaker Change: Well if not we were pleased to report strong earnings for the past quarter and increases in gross profit in comprehensive income as the industry continues to recover.
Speaker Change: We look forward to speaking with you again on our next earnings call in January.
Speaker Change: A replay of this call will be available on the investor events page of our website and the dot com and our Youtube channel that's Youtube Dot Com Slash N V Corporation. Thank you for participating in today's call.
Speaker Change: This meeting is no longer being recorded.
Speaker Change: Goodbye.