NVE Corporation ( NVEC)

F2Q 2011 Earnings Call

October 19, 2011 5:00 pm ET

Executives

Daniel A. Baker – President, Chief Executive Officer, Director

Curt A. Reynders – Chief Financial Officer, Treasurer & Secretary

Analysts

Steven Crowley – Craig-Hallum Capital

Patrick Kirksey – Perimeter Capital

Jon Jung – Trailhead Asset

Presentation

Operator

Good day, ladies and gentlemen. And welcome to the NVE Conference Call on Second Quarter Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions on how to participate will be given at that time. (Operator Instructions) And as a reminder, today’s conference call is being recorded.

Now, I would like to turn the conference over to your host Daniel Baker.

Daniel A. Baker

Good afternoon and welcome to our conference call for the quarter ended September 30, 2011, the second quarter of fiscal 2012. As always, I’m joined by Curt Reynders, our Chief Financial Officer.

This call is being webcast live and being recorded. A replay will be available through our website, nve.com. After my opening comments, Curt will present a financial review of the quarter, I will cover business items and we will open the call to questions.

We filed our press release with quarterly results plus our quarterly report on Form 10-Q with the SEC in the past hour following the close of market. Both filings are available through our website and our 10-Q includes XPRL format data.

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 continued profitability, uncertainties related to future revenue and growth, risks related to developing marketable products, uncertainties relating to the revenue potential of new products, risks related to loss of supply from our packaging vendors, as well as the risk factors listed from time-to-time in our filings with the SEC, including our most recent Annual Report on Form 10-K as updated in Part II, Item 1A of our just filed quarterly report on Form 10-Q. The company undertakes no obligation to update forward-looking statements we may make.

In a challenging quarter we reported solid earnings despite decreases in product sales and total revenue, net income was $0.52 per diluted share on total revenue of $6.6 million.

Now I’ll turn the call over to Curt for details.

Curt A. Reynders

Thanks Dan. Total revenue for the second quarter of fiscal 2012 decreased 16% to $6.6 million due to a 13% decrease in product sales and a 26% decrease in contract, research and development revenue. Product sales were $5.56 million with lower sales into industrial markets.

According to industry analysts chip sales have been slowing rapidly and supply chain inventory levels have been elevated. Other analysts have reported that capital intensive industries including our core industrial manufacturing markets appear to be canceling or pushing back their spending until there is more certainty in the global economy.

Additionally, there appear to have been inventory adjustments by certain of our medical device customers perhaps in response to revised sales forecast. Also contributing to the product sales decline the past quarter, shipments of certain types of couplers were delayed by manufacturing process changes that ultimately increased production efficiency, and we believe those changes have now been successfully implemented.

Although we would have liked to have seen year-over-year growth of course, we were pleased to have solid profits as we have through good times and bad for 38 consecutive quarters, that's every quarter for nearly 10 years.

Despite the difficult comparisons, our order backlog is strong especially for medical device markets and some customer orders shifted from the past quarter into the current quarter. So although we faced a variety of factors that reduced product sales in the most recent quarter, we see the challenges as temporary and continue to see a bright future for existing and potential new products.

Contract R&D revenue decreased 26% to $1.04 million due to the completion of certain contracts and contract activities. It has been a challenging environment for government funding.

Gross margin remained strong although it decreased to 65% of revenue compared to 67% last year due to lower volume and increased labor costs. The increased labor costs were from adding production personnel needed to support future products.

Total expenses increased 29% for the second quarter of fiscal 2012 compared to the second of fiscal 2011, due to a near doubling of a 97% increase in research and development expenditures.

The increase in research and development expense was due to increased product development activities. We redeployed resources from contract R&D to company sponsored R&D. We believe the investment in R&D will pay off in future revenues and profits. Dan will give R&D highlights in a few minutes.

Interest income increased to 20% due to an increase in interest bearing marketable securities. Income before taxes for the quarter was $3.7 million and pre-tax margin was 56%. The provision for income taxes was a slightly lower percentage than the prior year quarter. 31% of income before taxes compared to 33% last year, because of lower state and federal effective tax rates.

Net income for the second quarter was $2.56 million or $0.52 per diluted share compared to $0.66 last year and net margin was 39%.

September 30 was the halfway point in our 2012 fiscal year. For the first half of the fiscal year, product sales were about the same as last year and total revenue was down slightly 2% due to a decrease in contract R&D.

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