NVE Corporation

Good afternoon and welcome to the NVE Corporation conference call for the quarter ended September 30th, 2024. I'm Dan Baker, NVE's President and CEO. I'm joined by Controller and Principal Financial Officer, Daniel Nelson. This call is being webcast live via YouTube and Amazon Chime, and it's being recorded. A replay will be available through our website, nve.com, and our YouTube channel, youtube.com slash nvecorporation. All participants are currently in a listen-only mode. After our presentation, there will be a question and answer session. You'll be able to ask a question by pressing star 7 from a phone or clicking raise my hand from the Chime website or app. After my opening comments, Daniel Nelson will present our financial results, I'll cover products and marketing, and we'll open the call to questions. We issued our press release with financial results and filed our quarterly report on Form 10-Q in the past hour following the close of market. Links to the press release and 10-Q are available through the SEC's website, our website, and on X, formerly known as Twitter. 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 and the industries we serve, and risks and uncertainties related to future 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. Actual results could differ materially from the information provided and we undertake no obligation to update forward-looking statements we may make. We're pleased to report strong earnings despite continuing challenges in the semiconductor industry. Daniel Nelson will cover the financials. Daniel?

Thanks, Dan. Total revenue for the quarter ended September 30, 2024 decreased 5% due to a 14% decrease in product sales, partially offset by a 3,950% increase in contract R&D revenue. The decrease in product sales was primarily due to continued inventory gluts, particularly in the distributor channels, driven by weak chip demand and a slow 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. Our end markets are improving, and we have growth 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. 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 and a 31% increase in selling, general, and administrative expense. The increase in research and development expense was due to increased new product development activities. The increase in selling general and administrative expense was primarily due to increased sales and marketing activities. We added sales personnel and increased marketing activities. Then we'll talk about those activities shortly. Interest income for the quarter decreased 9% due to lower interest rate. 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. 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. 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 a higher tax rate partially offset by increased gross profit margin. With an unrealized gain from marketable securities, comprehensive income increased to $4.71 million from $4.67 million the prior year quarter. It was a profitable quarter with 86% gross margin, 65% operating margin, 60% net margin, and earnings of $0.83 per share. 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. The decrease was due to a 20% decrease in product sales, partially offset by a 457% increase in contract R&D revenue. Net income for the first six months was $8.12 million, a $1.68 per diluted share. from $9.13 million, or $1.89 per share, for the first half of fiscal 2024. Now I'll turn the call back over to Dan Baker to cover the business. Over to you, Dan.

Thanks, Daniel. I'll cover new products, sales and marketing, and CapEx. As Daniel mentioned, we've increased our investment in R&D. 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. As a result of the efforts of our R&D team, we introduced a significant new product earlier this month, the ALT521-10E Tunneling Magneto-Resistance Rotation Sensor. Its build is the world's most sensitive device of its type, which allows for wide mechanical tolerances. Rotation sensing is ubiquitous. Applications include detecting complex motion in factory automation and automotive systems. The technology is also applicable to medical device navigation. There's more information on our website, and our YouTube channel has a demonstration of the new sensor's extraordinary sensitivity and precision. NVE 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. The craft is scheduled to reach Europa in April 2030. NASA rigorously qualified our parts, a great validation of our quality and reliability. As Daniel noted, we've also increased our investment in sales and marketing. We exhibited at the Medical Design and Manufacturing Trade Show last week in Minneapolis, part of the Advanced Manufacturing event. Minnesota's healthcare industry hub and medical devices are an important market for us. We have a convincing benefit proposition for medical devices with small size, low power, and superb reliability. Specifically, we demonstrated our new high-field tunneling magnetoresistance sensors, which have a unique omnidirectional capability and detect high fields so they can detect the high fields from MRI to enable MRI-tolerant medical devices. We also featured our medical device navigation technology and our best-in-class electrical isolators to ensure the safety of medical instruments. Turning to CapEx, we've previously discussed plans for $4 to $5 million in capital investments over the next two fiscal years, fiscal 2025 and 2026. We've already spent $1.13 million in the first half of this fiscal year, fiscal 2025. The investments will increase our capacity and capabilities, including the capability to manufacture wafer-level chip-scale packages in-house. These parts will be smaller, higher performance, and allow us to be more self-sufficient and capture more value. We are developing several wafer-level chip scale part types, we have provided customers with prototypes, and there has been strong customer interest. We hope to begin some production late this fiscal year. We have looked at other buildings in the area as options for the expansion, or we could expand in our current buildings. 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. We held our annual shareholders meeting in August in person here at NVE. Proxy advisory firms recommend in-person annual meetings for good governance. All of our directors and officers attended, along with our auditors. We had a chance to meet shareholders and answer questions. In the formal meeting, each director was re-elected, including Kelly Way, who was elected for the first time. Named executive officer compensation was approved, 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. Demonstrations included a hot dog cooker to demonstrate our power conversion products and a chessboard to demonstrate an array of position sensors. There's a replay of the meeting with slides and product demonstrations on our website and YouTube channel. We filed the final vote counts in a current report on Forum 8K. Now we'd like to open the call for questions. To ask a question from a phone, press star 7 to unmute, or from a browser or Chime app, click the Raise My Hand icon under the meeting chat. That's at the bottom of the left column, and unmute yourself to speak. Please state your name and affiliation before your question. And to prevent background noise, please mute your line after asking your question.