Dan Baker - President and CEO Curt Reynders - CFO.

Charles Haff - Craig Hallum Jeff Bernstein - Cowen Prime Advisors Thomas Pilgrim - Lakewood Partners.

Good day, ladies and gentlemen, and welcome to the NVE Corporation Q4 2016 Earnings 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 is being recorded.

I would now like to turn the conference over to Mr. Dan Baker, President and CEO. Please go ahead, sir..

Good afternoon, and welcome to our conference call for the quarter and fiscal year ended March 31, 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 and year, I'll cover business items and we'll open the call to questions. We issued our press release and filed our Annual 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.com/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, uncertainties related to whether backlog will result in 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 just filed Annual Report.

The company undertakes no obligation to update forward-looking statements we may make. We're pleased to report solid results for the past quarter and fiscal year. For the quarter we had a sequential increase in product sales and a large year-over-year increase in contract R&D revenue.

For the year we continued exceptional profitability and efficiency despite less revenue from products and we continue to return large amounts to shareholders in the form of dividend and stock repurchases. We also announced a $1 a share dividend today. I'll now turn the call over to Curt to cover details of our quarterly and annual financial results..

Thanks Dan. Fourth quarter total revenue decreased 19% year-over-year from a strong fourth quarter last year, due to a 31% decrease in product sales, partially offset by more than a thirtyfold increase in contract R&D revenue.

The decrease in product sales from the prior year quarter was primarily due to decreased purchase volume by existing customers. An encouraging sign is that product sales increased 4% sequentially from the immediately prior quarter. Contract R&D for the quarter increased 3700% to $888,000 from $23,000 last year.

The large increase in R&D revenue was due particularly to syntronic anti camper development contracts. Gross margin decreased to 76% of revenue for the fourth quarter of fiscal 2016 compared to 82% last year due to a higher percentage of revenues from contract R&D. Margins tend to be significantly higher on product sales than on contract R&D.

Total expenses increased 9% for the fourth quarter of fiscal 2016 compared to the prior year quarter due to a 42% increase in R&D expense partially offset by a 36% decrease in SG&A.

The large increase in R&D expense in the quarter was due to new projects including increased product development related to the Internet of Things N node centers which is central to our growth strategy. The decrease in SG&A was primarily due to decreased sales commission and performance based compensation.

Interest income decreased 10% for the fourth quarter due to a decrease in interest bearing marketable security. We have used some of the proceeds of maturing marketable securities to help fund dividends and share repurchases.

Income before taxes which is operating income plus interest income was $3.75 million for the quarter and pre-tax margins were 61%. After-taxes net income for the fourth quarter was $2.6 million or $0.54 per diluted share compared to $3.66 million or $0.75 last year. Net margins for the quarter was 43%.

For the fiscal year total revenue decreased 9% from the prior fiscal year due to an 18% decrease in product sales partially offset by a 379% increase in contract R&D revenue. US revenue increased for the year but most of our revenue has been from foreign sales and Europe and Asia were affected by the strong dollar.

Contract R&D generates revenue, supports long term product development and builds intellectual property. We had a good year winning contracts, so our contract backlog remains strong. As of March 31, 2016, we had $2.12 million of contract R&D backlog we believe to be Firm compared to $2.2 million at year earlier.

We expect the Firm backlog to be filled this fiscal year. Gross profit margin for the year was 76% despite the less profitable revenue. Total expenses decreased 9% for the year due to 24% decrease in SG&A partially offset by a 2% increase in R&D. The decrease in SG&A was primarily due to decreased sales commission and performance based compensation.

In addition to R&D expense, we report customer and company sponsored R&D ending at fiscal year end and we significantly increased R&D activity. The total of customer sponsored and company sponsored R&D activities was $5.45 million in the past fiscal year, or 20% of revenue compared to $3.59 million or 12% in the prior year.

Interest income decreased 14% for the year because we used a portion of the proceeds from maturing securities to help fund cash dividend and stock repurchases. Net income for the year was $12.3 million or $2.53 per share compared to $14.4 million or $2.95 per share last year.

Cash provided by operating activities was $14.3 million in the year and free cash flow which is net cash provided by operating activities less asset purchases was more than $14 million.

We believe our stock is a good investment and we took advantage of the lead stock market in the quarter to repurchase approximately $460,000 with our stock in addition to the $4.84 million dividend payment in the quarter.

For the fiscal year, we’ve returned more than $21 million to shareholders with $19.4 million in dividend and $1.7 million in stock repurchases. We continue to aggressively return cash to shareholders.

This afternoon we announced that our Board declared another quarterly dividend of $1 per share or approximately $4.84 million payable on or about May 31st to shareholders of record at May 16th. According to one survey the past quarter, NVE had by far the highest dividend yield in the semiconductors industry.

As we have throughout our recent history, we continued to significantly outperform our industry on key metrics. According to Standard & Poor’s company stat, NVE’s gross margin is in the 99 percentile of the semiconductors and semiconductor equipment industries and operating margins within the 100 percentile. We continue to have a strong balance sheet.

At March 31st, we had $85.4 million in marketable securities, down from $91 million at March 31, 2015. The decrease in marketable securities in fiscal 2016 helped fund our dividend payout.

As we’ve discussed before, our capital allocation strategies has included a high dividend payout ratio to return a portion of our balance sheet and enhance shareholder value. Now I’ll turn the call back over to Dan for his perspective on our business.

Dan?.

Thanks Curt. I’ll cover contracts, product development, patent tradeshows and review our accomplishments in the past fiscal year. We are a proven supplier of some of the most innovative and demanding customers in the world.

On our last call, we discussed an expansion into our long-term buy agreement with Phonak AG, a leading manufacturer of hearing aid. We recently also extended our supplier partnering agreement with St. Jude Medical through January 1, 2021.

The agreement is with a subsidiary that’s one of the world’s leading suppliers of implantable pacemakers and implantable cardioverter defibrillator. We filed the agreement with the SEC and it's available on the SEC’s Web site or via our Web site.

As we said before, our growth strategy is to improve products in the near-term, targeted at the burgeoning Internet of Things and game changer technology for the long-term. The creativity of our development team is one of NVE's greatest assets. Just last week we were granted a patent titled Low Hysteresis High Sensitivity Magnetic Field Sensor.

The investment relates to magnetic tunnel junction also known as independent tunnel junction. These independent tunnel junction are a synchronic effect that produces a dramatic resistance change across a normally insulating layer. We typically issue information bulletins when patents are granted.

You can subscribe to these email alerts from our Investor Events Web page, or you can follow us on twitter.com/nvecorporation. In the past quarter, we introduced the new isolated controller area network transceiver called the IL 410-50 KEY-T. The new product is in response to customer request.

Controller area network markets include cars, car factories but protocol is also being used in the Internet of Things because of its elegant simplicity.

We’re participating in several important tradeshows next week in cooperation with our distributors power conversion, Intelligent Motion Europe, and Center Plus test measurement they're both Koln and the Embedded Systems expo in Japan.

If you can't make to Japan or Germany and would like to see an example of our demonstration, we posted a YouTube video of one of our engineers rehearsing the Center Plus our YouTube channel is at YouTube.com/NVE Corporation and that video is in the live demonstration playlist.

There are a number of other live demonstration videos on that playlist with simple direct demonstrations of our product features and benefits. For example the dramatized low power we have a demonstration of one of our sensors powered by a tomato. Finally I'd like to summarize some of the important accomplishments of the past year.

Our accomplishments position us for leadership and growth. Specifically, we implemented a new pricing strategy to reach more price sensitive markets. We developed new products for the Internet of Things including [indiscernible] for smart grid medical instruments.

New angle set for energy and resource management and new sensors for smart medical devices. For the longer term we began development of smart sensor interface for the Internet of Things and advanced our biosensor technology.

And we strengthened our intellectual property portfolio with three new patents last year relating to tamper sensing, biosensors and this independent tunneling patent I covered a few minutes ago.

Our accomplishments for the past year position us for future growth NVE is uniquely positioned with sensors and interfaces to lead a revolution in sensing and communication and provide innovative N node for the Internet of Things. Now let's open the call for questions.

Amanda?.

Thank you, [Operator Instructions] our first question comes from the line of Charles Haff from Craig Hallum, your line is open, please go ahead sir..

Hi, thanks for taking my questions. Couple for Curt here.

Curt do you have the share count at the end of the quarter?.

Yes, they're good. Total shares was 4,835,010..

Great, thank you. And then you talked about R&D you know it increased substantially in the second half versus the first half and in your prepared remarks I think you talked about Internet of Things sensors.

What should we think about R&D you know going forward, should it be at this elevated level or is it going to oscillate you know back to the lower level or how should we kind of think about that..

In the last couple of quarters we had a bit of an increased specially in the fourth quarter, I think overall we're probably going to be in a similar range to where we were the last two fiscal years around that $3 million range..

Okay, thank you. And then I had a question for you on inventories. Product revenues fell by 31% but it looks like inventories only fell by 14%, is there something going on here, something we should kind of think about as we look at these metrics..

You know I don’t think so, some of what we end up with in inventory is related to work in process related to contracts so that can have an effect on our inventory levels, as well as just the timing of our inventory purchases sometimes we buy significantly more or less inventory depending on pricing available..

Okay, thank you and then a couple of questions for you Dan, Abbott's proposed acquisition of St. Jude Medical wondering if there're any impacts to your business from that and do you do any business with Abbott today..

Right so, as far as the direct impact that's hard to say, but in general I think way both companies price the acquisition was that it would give them broader reach make them more effective in terms of product development and marketing and sales and that would indirectly help us.

So having our customers being more innovative and having broader reach I think is a good thing. It probably wouldn't be a good idea for me to comment on specific customers particularly those that where we haven't filed but in general I think a lot of folks looking at the acquisition felt that it was synergistic, there wasn't a lot of product overlap.

St. Jude traditionally has a very strong medical device business, Abbott not known for that..

Great, great, okay thanks. And then regarding pricing I think you mentioned over the last couple of quarters that you've had increased penetration with existing products over the long term to maintain your marketshare and maybe some lower ASP on some of your newer products.

Was that the consistent trend this quarter as well or how do you see that pricing dynamic going forward..

Well I think we're very pleased with the strategy takes time to have an effect. We were encouraged by the sequential increase in product revenue and a lot of the decrease in product sales was due to a decrease in average selling prices that are exposed to unit. So I think we’re pleased with how the strategy is working.

It’s very -- Ben, as you know, Charles it's been a very challenging market in the semiconductor industry and that tends to lead the price pressure. But we do feel that we’re very well positioned with the design wins for when the industry starts to turn around. So, I think we feel that we’re going to see -- was the right strategy.

We are seeing more and more inquiries for business, the new product that I mentioned, the IL 410-50 KEY-T is targeted at price sensitive market, the Internet of Things it's a simple but elegant product.

And having it at an attractive price point I think gives us a position to compete with some very high volume business of win that business with a superior product at a competitive price..

And then a question for you about the first quarter fiscal ’17 product revenue. First quarter I believe is usually been a pretty strong quarter for you.

Would you expect to see a sequential increase in the first quarter versus this fourth quarter?.

I think we expect to continue to see product sales increase sequentially at least for the next couple of quarters..

And then on the product side Dan, the USDA programs for [indiscernible] detection.

Any updates that you can provide to us there?.

It's going quite well. We don’t have -- we’ve filed some reports there, I don’t believe they’re public yet. But just been general I think our team did an outstanding job of demonstrating the ability to detect truly infinitesimal level of pathogens.

And we talked about that at the last call that our goal is to detect the equivalence of a needle in the mall of America. And it's like the results from looking for the expose and it takes time to analyze the data and then it has to be reviewed. But we feel very good about where we are and we’re proud of what the teams accomplished.

So the goal now is to look forth commercialization, we’ve been talking to potential commercialization partners with companies that can use the technology to improve foot safety, foot wholesalers and large food producers. So, hopefully we’ll be able to report some progress on that front on the commercialization front in the calls..

And is there a data point that you’re looking for? I had something in June of this year that was anticipated.

Could you remind me what that was?.

Yes, that was -- you’ve got a great memory. That was the -- we had extended the completion date on that program and we believe we’re ahead of that completion date. The program was originally scheduled at the end of the calendar year, it was extended six months, but then I think we were able to get to actual goal and so we should be done for that..

And then last question on automotive design wins.

Is there anything that you anticipate in fiscal ’17 at this point?.

It's hard to say. We continue to see the automotive market as an excellent market, particularly hybrid electric vehicles.

We have the IL 410-50 KEY-T which I mentioned in the prepared remarks is ideal for hybrid electric vehicles and that product was developed in response to customer demand for more reliability than as possible with conventional semi-conductors.

So, we are working in cooperation with our distributors to get that product to systems integrators, sub-systems integrators for automotive. And we feel it's an excellent product that not only for the Internet of Things but for next generation of power so it’ll be highly connected with many sensors and will need these kind of networks..

Thank you. Our next question comes from the line of Jeff Bernstein from Cowen Prime Advisors. Your line is open. Please go ahead..

So, we’re continuing to see a lot of development going on in next generation memories, that look like their magnetic resistant in nature. I wonder if you can just give us view here. I think you guys have a deal with [indiscernible] where you’re not going to actually benefit from any commercialization they have a magneto resistant memory.

But if anyone else comes out with something you might have some claims there.

But can you just give us an update on your thoughts on area and any licensing activities you’re talking about or whether you would be willing to spend money in litigation to prosecute some of your IP there?.

Right, well several good questions in there. First we continue to devote R&D resources and talent to the development of MRAM, of syntronic memories.

We believe it has excellent potential, we have excellent intellectual property and that's part of the internal R&D that we are funding and spending on and our teams has made very good progress on advancing the technology in terms of increasing the data persistence and decreasing power, so that is building a very valuable intellectual property portfolio.

In the short term our goal is to use that for anti tamper memories and those are relatively low density, those are memories that we can build ourselves and those end up for testing high value targets such as military and aerospace and we've had excellent success on that front and that's evidenced by the large increase that we had in contract R&D revenue.

Some of that is related to anti tamper memories. And in terms of licensing the settlement agreement that you alluded to with Everston applies to what sometimes classic or consentional M&A.

We have intellectual properties, strong intellectual property for next generation MRAM called syn momentum MRAM or sometimes called syn for transfer and that's not covered by the settlement agreement so believe that intellectual property can be licensed not only to other companies but also conceivably to one that we have the settlement with..

So correct me if I'm wrong but they are talking about I think delivering a gigabit into a transfer type memory this year so kind of a real commercial type product and I think there're other guys from little guys like Alien Minds to some of the big guys who were talking about syntronic memory..

Indeed it's a very -- you know it's a very active research area, many experts feel that it has excellent potential for mainstream memory and for large scale memory..

Got you, okay and the anti tamper type applications in the defense market, this is aimed at essentially protecting any sort of hard coded software in a system where the system could fall into the wrong hands or even be sort of dissected for IP by our friends who buy the systems, is that what this is about..

Yes, in general -- in general that's the idea, protect valuable sensitive electronic and that as you can imagine that's a major priority of the DoD and its subcontractors, we're proud to contribute to that effort by having spintronic devices that have unique advantages and are very difficult to crack..

Okay, that's great, and then I just wanted to touch on the Evago distribution agreement I think that's coming up here in another month for renewal and obviously there's Broadcom merger is going on there, any thoughts about that upcoming negotiation or renewal..

Well Evago has been and before that it was Agilent has been a very strong partnership for many years.

That started in 2001, so they have a very constructive relationship with them and have a common interest, so I would certainly hope that we could -- that relationship and expect that that relationship would continue but it'd be hard to say when contract would be renewed but that would be probably be reported..

Got you, terrific, thanks very much..

Thank you..

Thank you, [Operator Instructions], our next question comes from Thomas Pilgrim from Lakewood Partners. .

I apologize he has withdrawn his question. Mr. Pilgrim your line is open..

Dan I know the revenues were down but by value you got the highest return on sales of any company in the country not just your industry and that shows the strength of the products you turn out. I wanted to ask a few question on the biosensors.

I'm not quite clear yet on when the US Department of Agriculture will be finished with the biosensors for detecting food contaminants.

When will that be finished?.

So you mean when will the project be finished the phase one project so that is the deadline is the end of June we hope to have it finished sooner than that..

Okay good, that's fair..

Sometimes it depends on the definition of finished. We've done most of the -- well all of the laboratory work all of the testing we're pleased with the results, we'd like to see the report reviewed and in many cases those types of project reports will become public..

Right.

You had mentioned on the last conference call that it might take quite some time after that is finished before you begin to actually sell to the food company but given the tremendous cost to any food company [indiscernible] my last problem, why wouldn’t that be quicker than what you mentioned last time?.

Well, we hope that we’ll be quicker and as you eluded to there is a lot of interest in improving food safety for economic reasons, for health reasons, and we offer solution to that. So we think we’re very well positioned. We have a product that’s technology, that’s been demonstrated and should be in demand.

I sometimes think take a while to deploy, we’re working on specific plan and we want to make that process as fast as humanly possible. So our team is in that regard just to make sure that we have our ducks in a row and we’re well prepared for commercialization. And I think they’re doing a very good job on that..

On biological weapons you’ve been working with the part on those grid reduction agencies, through the tech biological weapons.

How is that [indiscernible] They provided some funding for that also?.

So we’re received funding from several government agencies for biological threat reduction and biowarfare detection. So, that’s one that’s a little bit harder to comment on.

It's not something that we expect to have by huge revenue impact, it's obviously worth we’re proud of to the extent that we can do our parts to protect our service people from terrible threats and in many cases billion population.

And the technology as we talked about in conjuncture with USDA and the food safety, the technology is applicable to other application, the more commercial applications and that’s where we’ve been focusing our commercialization efforts are on food safety and on longer term clinical diagnostics for medical tests where we could detect pathogen at lower levels than can be detected with conventional medical test and that can allow faster diagnosis of disease and detection of lower level of disease.

So we’re very excited about the technology for its near-term and long-term potential..

And lastly wild guess my part.

Will the same people be able to detect explosives that someone might carry to aboard an airline site?.

We have looked at possible applications for detecting chemical -- trace chemical element and the devices in theory can detect very low levels of chemicals and that could be used to make the artificial nephron if you.

That’s not an area that we’re focusing on in the near-term there are lots of applications with the technology and what we’re trying to do is focus our resources on making sure we’re successful in key markets.

The key markets that we’ve identified has the nearest term potential and where there is the most pressure to have a better solutions you alluded to is food safety..

Thank you. And at this time, I am showing no further questions. I’d like to turn the call back over to Mr. Baker for any closing remarks..

Well, thank you. We are pleased to report a sequential increase in quarterly product sales, solid financial results in year, strategic product development and significant dividends and share repurchases. We’ve positioned NVE for a bright future, based on the Internet of Things.

We look forward to reporting first quarter results in July, and to our Annual Meeting, tentatively in August. Thank you for participating in the call..

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may now disconnect..