Dan Baker - President and CEO Curt Reynders - CFO.

Charles Haff - Craig-Hallum Jon Preizler - RH Capital Jeff Bernstein - Cowen Prime Advisors.

Good day, ladies and gentlemen, and welcome to the NVE Second Quarter 2016 Earning Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call may be recorded.

I would now like to introduce your host for today’s conference, President and CEO, Dan Baker. Please go ahead, sir..

Good afternoon, and welcome to our conference call for the quarter ended September 30, 2015, the second quarter of fiscal 2016. As always, I am 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’ll cover business and governance items and we’ll open the call to questions. We issued our press release and filed our Quarterly Report on Form 10-K in the past hour following the close of market.

Links to documents are available through the SEC’s website, our website and on Twitter at NVE Corporation.

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 future revenue, risks related to our reliance on several large customers for a significant percentage of revenue, uncertainties related to future dividends and stock repurchases, 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, 2015.

The company undertakes no obligation to update forward-looking statements we may make. We're pleased to report solid results for the past quarter despite an expected decrease in product sales, a large increase in contract R&D revenue, a dollar per share dividend and repurchase of more than a million shares -- $1 million dollars of our stock.

I'll turn it over to Curt to cover details of our financial results..

Thanks, Dan. The second quarter of fiscal 2016 total revenue decreased 12% due to a 21% decrease in product sales partially offset by a 449% increase in contract R&D revenue. The decrease in product sales was due to decreased purchased volume by existing customers, and a more aggressive pricing strategy in certain competitive markets.

We had suggested in our previous call and 10-Q that we expected a $1 million to $2 million sequential decrease in product sales and the $1.3 million decrease was at the low end of that range. We hope the more aggressive pricing strategy in certain markets will pay off in higher sales long term.

The large increase in R&D revenue was due to new contracts. Gross profit margin remained a strong 77% of revenue for the second quarter of fiscal 2016 compared to 81% for the second quarter of fiscal 2015 despite a less profitable revenue mix.

Total expenses decreased 18% for the second quarter of fiscal 2016 compared to the second quarter of fiscal 2015 due to a 16% decrease in SG&A expense and a 20% decrease in R&D expense. The decrease in SG&A was primarily due to decreases in performance-based and stock-based compensation.

The decrease in R&D expense was due to an increase in contract R&D which caused us to reallocate resources away from expensed research and development.

We currently expect research and development expense to increase in the third and fourth quarters from the second quarter due to planned additional product development, primarily related to Internet of Things and node sensors. Interest income decreased 17% for the second quarter due to a decrease in interest-bearing marketable securities.

As marketable securities mature, we have used the proceeds to help fund cash dividends and share repurchases. Net income for the second quarter was $3.31 million or $0.68 per diluted share compared to $3.88 million or $0.80 per share for the prior year quarter.

We were able to partially offset decreased products sales and interest income with increased contract R&D and decreased expenses. For the first six months of fiscal 2016, total revenue decreased 7% to $15.6 million from $16.7 million for the first six months of the prior year.

Decrease was due to a 14% decrease in product sales, partially offset by a 452% increase in contract R&D. Gross profit margin decreased to 77% of revenue for the first six months compared to 81% for the first six months of fiscal 2015 due to a less profitable revenue mix.

Net income decreased 10% to $7.11 million or $1.46 per share for the first half of this fiscal year compared to $7.91 million or $1.63 per share last fiscal year. Cash and cash equivalents were $12.7 million at September 30 compared to $9.44 million at March 31, 2015.

The increase was primarily due to $7.84 million in operating cash flow and $6.25 million in bond maturities, less $9.73 million of dividends and $1.85 million of stock repurchases. As of September 30 we had $84 million in marketable securities down from $91 million at March 31, 2015.

The decrease in marketable securities helped fund dividends and share repurchases. Fixed asset purchases were $147,000 for the first half of the year and $28,000 for the prior year period. The purchases were primarily for equipment to test our smallest products.

Free cash flow, which is net cash provided by operating activities, less fixed asset purchases was $7.69 million in the first half. We returned considerably more than our free cash flow $11.6 million to our shareholders in the form of cash dividends and stock repurchases.

We believe our stock is a good investment and repurchases reduced our shares outstanding and increased our return on equity. In the past quarter, we also announced that our Board authorized up to $5 million of additional repurchases. Details of our repurchases and our repurchase programs are in our SEC filings including our recently filed 10-Q.

We continue to aggressively return cash to shareholders. This afternoon we announced that our Board declared a quarterly dividend of $1 per share or an aggregate of approximately $4.84 million payable on or about November 30 to shareholders of record as of November 2. Now I'll turn it over to Dan for his perspective on our business. .

Thanks, Curt. As we've said before, our growth strategy is new and improved products in the near term and game-changing extensions for the long term. We will market these products through effective distributors. Contract R&D supports long-term growth with bold new ideas such as biosensors. So I'll cover R&D contracts, product development and governance.

We continued work on a biosensor contract we were awarded in June by the US Department of Agriculture. The project titled High Throughput Salmonella Detector focuses on detecting live salmonella organisms in industry-relevant large sample volumes, faster, at lower cost and with comparable accuracy through existing methods.

The goal is to dramatically improve food safety and this contract could help us develop commercial systems. Turning to new products, last year we introduced our V-Series couplers with best-in-class high-voltage performance.

In the past quarter, we made a significant upgrade, increasing the key isolation rating by 20% to 6000 volts, which we are able to bill as the best-in-class, keeping us on the cutting edge of coupler technology.

We won 100% test V-Series couplers at more than 10,000 peak volts which is remarkable for a device that's small enough that four of them fit on a postage stamp. It's the equivalent of about 6800 flashlight batteries or d-cell flashlight more than a quarter-mile long.

We introduced several of the new grade last quarter and plan to add other part types this quarter. Applications of the high voltage couplers include medical instruments and Internet of Things power management. Moving onto governance, our Annual Meeting was held last quarter.

For good corporate practice, our entire Board of Directors stands for election every year and each of our directors was overwhelmingly reelected. We hold annual say-on-pay votes.

Our executive officer compensation supports goals of profitable growth and improving long-term shareholder value without being excessive and shareholders overwhelmingly voted to approve compensation. And finally, the selection of our auditors was ratified.

Details of the shareholder votes were reported on a Form 8-K that we filed with the SEC today after the meeting. Now I'd like to open the call for questions.

Malory?.

[Operator Instructions] Our first question comes from the line of the Charles Haff with Craig-Hallum. Your line is open..

Hi, thanks for taking my questions and congratulations on a nice bounce-back quarter here. A couple of financial questions. Curt, you mentioned that you are expecting R&D to pick up in the third and fourth quarter.

Are you talking about in dollar terms or as a percentage of sales?.

Well, I can answer that. We've added people and programs and the impact on R&D expense could be in the range of 20% to 25% compared to the September quarter..

Okay. So, if I look at the first half R&D spend of about $1.2 million, are you thinking that back half of the year is going to be higher than that? I tend to think about R&D in terms of dollars because it's projects and so forth, but maybe you could help us understand dollar terms if the second half should be higher than first half..

Right, yeah, we're expecting that amount in the first half to increase by 20% to 25%, which would be in the range of $750,000 to, say, $790,000 per quarter..

Okay, that's very helpful. Thank you. And then in terms of SG&A, that was up was considerably in the second quarter versus the first quarter, kind of a similar question I guess there.

I realized first quarter was lot lower and you had some product sales challenges there, but in the back half of the year should we kind of just add those two quarters together and expect something more or some of these variable incentive comps and so forth going to start to kick in in the back of the year? How should we think about that?.

I would say it would be similar to the most recent quarter, the third quarter, for both the third and fourth quarter..

Okay, great. And then operating cash flow was lower this quarter even after adjusting for the $1.5 million income tax payable that you had last quarter.

Should we expect operating cash flow to be similar in the back half of the year versus the first half or lower? How should we kind of think about that?.

I would say it's probably going to be a little bit lower than the first half. We are going to have additional R&D expenses and as we mentioned before, we are expecting product sales will be lower in the third and fourth quarter than they were in the first quarter..

Okay. And those R&D projects and so forth, there is CapEx there, or is that mostly just expensed. .

That would be pretty much all expense.

Okay. And then, Dan, maybe a question for you. Last quarter you had some challenges on the inventory side and on the pricing side.

It sounds like you’ve kind of hit the pricing side in the prepared remarks, but wondering if you could kind of talk about the inventory side and if your visibility has improved or kind of what you are thinking in terms of inventory as it impacted this quarter. .

Right. So we continued to, as you know, we faced a number of headwinds and that was one of them, but we folded that into the numbers that we talked about at the prior call and that Curt reiterated.

So the third quarter, the third fiscal quarter, which is the fourth calendar quarter, is typically a quarter where we faced some inventory adjustments by our customers as they approach the end of the calendar year, but that's all folded into our thinking and the sorts of things that Curt was talking about a couple of minutes ago.

We certainly hope to grow from here, starting in the coming fiscal year and we’ve got great products and we’re offering better value than ever. So we’re very optimistic about the future and we think that the strategy that we’ve put in place is working pretty well..

Okay.

And we see you expect to grow in the coming fiscal year, are you talking about fiscal ‘17 there?.

Yeah..

Okay.

And did you get any sense for inventory levels for the second fiscal quarter here in fiscal ’16? Were you able to do any scrubbing of that to get a sense for where inventory levels shook out in the second quarter versus the previous quarter?.

We really didn’t see anything unusual. We don’t always know, but I think the challenges that we face were primarily on pricing, which we’ve talked about. There were several other headwinds and we try not to itemize every little thing, but I think we didn’t have anything unusual or unexpected happen in the quarter.

Is that what you were getting at?.

Yeah.

That’s what I was trying to find out if this was kind of a normalized level or if there were some one-timers that were in this product sales?.

Yeah. No, there wasn’t anything unusual in the second quarter related to inventory adjustments..

Okay. Great. And my last question is on the contract R&D side, so very nice growth there, even sequentially.

Any thoughts on contract R&D, I mean, this is a big step up, were there one timers that hit this quarter or should we just straight line the second quarter to the first quarter and just keep going throughout the remaining quarters this fiscal year, I’m sure you probably don’t want us to do that, but how should we kind of think about this big sequential increase here?.

Well, contract revenue can bounce around based on a number of factors, but we do have a strong pipeline of possible contracts, so we expect to continue to show a significant year-over-year increase in contract R&D revenue..

Okay.

Any more detail beyond that, I mean, where you kind of made that increase even just in the first half of this year, so it’s not much of a stretch to say an increase versus fiscal ’15, any other granularity you can give us on that or is it just bounced around too much that you don’t really want to get into specifics there?.

Yeah. It does bounce around quite a bit, but we do expect it to continue to be significantly higher than last year..

Okay. Sounds good. Thanks guys..

Thank you. Our next question comes from the line of Jon Preizler with RH Capital. Your line is now open..

Hi. Thanks. Good questions by Charles. Just wanted to follow-up on contracts.

Just, are there new programs in there or is the -- are these all existing programs that have started to ramp, how would you characterize that mix in contract?.

Contract R&D revenue..

Yes..

Yeah. We have received some new contracts over the last nine months, we have received new contracts, so that has helped to fuel the growth there in contract R&D revenue..

And are these new programs then or are these follow-ons?.

We have new programs, they’re primarily new programs, but they’re concentrated in anti-tamper and biosensors which are strategic areas for us. So, our R&D group has done a great job of showing the unique things that we can do and we’re finding a more favorable contract environment and there is a need for these sorts of technology that we provide..

I know in prior calls, you talked a little bit about hybrid electric vehicle, is there any update on that progress, and are you seeing any design and wins or anything in that opportunity in that segment?.

Well, we continue to see it as a very promising segment and particularly for controller area network transceivers which can be used for battery management systems and we’re looking at -- we’ve had several customer contacts, new customer contacts and we’re looking at possibilities there.

We have a partnership in place that we’re still active in that has excellent potential and we’re looking at the potential for new products that might improve our benefit proposition.

We already have a very strong benefit proposition there and we’re looking at different things like different pin-outs, relatively small changes that we think could be important. So that continues to be very active area of product development for us..

You guys mentioned some lower pricing, but I think that helped drive some volume or keep volume.

Is that only in the healthcare market or is that in other end markets as well for you guys?.

It’s in several market segments and we’re looking at price sensitive markets, price sensitive market areas and looking at how we can make a more convincing benefit proposition.

So for example, on the control area networks that I mentioned a minute ago, that can be used in automotive, we’re looking at functions that they need for that and some functions they don’t need, so we’re looking at how can we change our products, not just lower the pricing, but how we can give our customers the features they need, just the features they need and provide that perhaps for a lower price.

So that’s part of what we’re looking at. But it cuts across several market segments and there are certain markets that are more competitive, more price sensitive and those are the ones that primarily we’re looking at..

You guys mentioned some higher R&D in second half, I was wondering if, is that in one segment or another or is that because there is a program ramping for new product launches that are coming quickly?.

Yeah. There are several things. There is a combination of products that are in the near term and longer term and it’s a combination, as Curt mentioned, of people.

We’ve added some new people, some very talented folks in our engineering departments, development departments and then also we’re looking at particularly programs to provide, as Curt mentioned in our prepared remarks, and node sensors for the Internet of Things.

So these would be interfaces that interface our unique sensors to a smart network, the Internet of Things. And those are areas that we think are very promising, in particular, things like for energy and resource management like angle sensors and current sensors.

So we’re going to be working on those kinds of interfaces that involves semiconductors and developing silicon, which is relatively expensive. But we believe that this will help us serve a very large and very fast growing market in energy management and the Internet of Things..

Well, I appreciate answering all the questions and I look forward to listen to you on the next call. Thank you very much..

Thank you..

Thank you. Our next question comes from the line of Jeff Bernstein with Cowen Prime Advisors..

Hi, thanks for taking my questions. I had a couple of questions for you. Could you give us any more detail on the product weakness? I guess you guys only break out St. Jude as the significant customer and I guess you have a contract expiring there in January of 2016.

Is this been around that or any other color you can give and then you also I guess have an Avago deal which I guess is a distribution deal I’m assuming expiring in June of 2016, any color around that?.

Right, so the issues that we’ve talked about and the challenges that we face as I mentioned in the prior question are across industries. The St. Jude agreement that you mentioned is still in force, although it will expire at the end of the calendar year and also the Avago agreement is not yet expired.

So it’s hard to say whether they’ll be renewed or not, we’ve renewed each of them several times and we consider them excellent customers. We provide them great products and our people provide them superb service we believe.

So, and as you correctly point out the Avago agreement is a private label distribution agreement where we provide products and it’s a great validation of our technologies that a company with reputation and the history that Avago has dating back to their roots as Hewlett-Packard, has chosen to use our products as part of their product line.

So we do have some excellent customers and we hope that those relationships will continue..

And then in terms of the R&D contracts, are those with entities that would be described as commercial who might be able to actually bring these products to market or they more governmental or sort of think tanks or people who are looking at what is possible rather than what is marketable?.

I think I understand your question, they are both. Some of them are more R&D contracts and tend to be longer term. But some of them are to develop products in relatively near term. And as I mentioned they tend to focus on things like anti-tamper and biosensors, which are two strategic areas for us.

But we make and sell anti-tamper sensors; some of them are based on MRAM technologies, some are based on other types of spintronic technology.

So they do result in product sales and that’s part of the reason why we believe these contracts are helpful, they help fund R&D, they help advance things like our MRAM technology and they can result in product sales. So they’re more than just a revenue source for us, they built intellectual properly and potential business in the future..

And then, you didn’t mention PUF and just interested if there has been any current progress at all on the cyber security front?.

So right, PUFs are our Physical Unclonable Functions and those are a type of anti-tamper component and a type of anti-tamper technology. In the general category of anti-tamper that’s an area that we’re strong in particularly for high-value assets such as military and aerospace system.

So we continue to develop anti-tamper systems and we continue to improve the security of them.

Some of that is for the sorts of high-end niches of protecting extremely valuable data and extremely valuable electronic systems but some of it could be deployed for more everyday electronics and security and I think we’ve all seen examples of where cyber security is important. And as you know that’s an area where we have excellent technology.

So, some of the contracts that we’re talking about are going into those types of areas..

And I think in the past we’ve talked about AC to DC converters and computer type power supplies.

Is there anything, any new developments going on there?.

So that’s one of our target markets particularly for our couplers is that we provide a component that can enable smaller and more efficient power supplies. And that’s an excellent target market for us and our new D-Series couplers that I talked about in the prepared remarks are targeted partly at that market.

And also we have new very small micro small outline package couplers that have the highest voltage rating in that package size and the industry.

So we have strong offerings there and we have customers who are using them in that application now for power supplies and we have prospects who are looking at them and developing products using those couplers..

And in the past, you guys have been successful in defending your IP in advanced memories, there is a lot going on with new memory innovation, is any of it around things that you have IP relevant to or is it undeterminable at this point because we haven’t seen -- we’ve seen a lot of talk about next generation memories but we haven’t seen a lot of it yet..

Right, what we have -- NVE has excellent intellectual property for MRAM which is magneto resistive random access memory which is one of the most promising next generation technologies.

And as you know Jeff, there has been quite a bit in the trade press about the importance of next generation memories to fill large gaps and what’s sometimes called the hierarchy of conventional memories where there are different of memories for different functions, and there are gaps that can be filled by something like MRAM which has a unique combination of speed, non-volatility and endurance.

So, our MRAM strategy has been to continue to develop MRAM for high-value applications like anti-tamper and to license our technology for large scale memory applications and we continue to see excellent potential and a tremendous need for next generation memory technology such as our spintronic MRAM..

And lastly, you usually give us an update on patents granted; was there any developments in the quarter?.

I don’t think we had any patents granted in the quarter, but we’re almost continuously working on new things and patents in various stages. So we’ll update those as they come along and put them on our website and through our email list..

Great, thanks very much..

Thank you..

Thank you. I’m showing no further questions at this time. I would like to turn the call back to Dan Baker for any further remarks..

Well, if there are no other questions, we were pleased to report solid results and significant dividend and share repurchases. We look forward to speaking with you again in January to report third quarter results. Thank you again for participating in the call..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect, everyone have a great day..