Daniel Baker - President and Chief Executive Officer Curt Reynders - Chief Financial Officer.

Charles Haff - Craig Hallum Jeff Bernstein - Cowen Prime.

Good day, ladies and gentlemen, and welcome to the NVE Conference Call and Third Quarter Results. 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] I would now like to introduce your host for today’s conference Mr.

Daniel Baker, President and CEO. Sir, you may begin..

Good afternoon and welcome to our conference call for the quarter ended December 31, 2016, which was the third quarter of fiscal 2017. 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 nine months, I’ll cover the business and we'll open the call to questions. We issued our press release and filed our quarterly report on Form 10-Q in the past hour following the close of the market.

Links to documents are available through the SEC’s website, our website nve.com and on twitter.com/nvecorporation.

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 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 fiscal year ended March 31, 2016.

The Company undertakes no obligation to update forward-looking statements we may make. We’re pleased to report a strong 42% increase in product sales for the quarter which drove a 24% increase in total revenue and 35% increase in net income. Now I’ll ask Curt to cover details of our financial results..

Thanks Dan. As Dan said, total revenue for the third quarter of fiscal 2017 increased 24% year-over-year. The increase was driven by a 42% increase in product sales partially offset by a 65% decrease in contract R&D revenue. This is our second consecutive quarter of year-over-year increases in product sales and total revenue.

We hope to have a third consecutive quarter of year-over-year growth this quarter which is fourth quarter of the fiscal year.

Contract R&D revenue decreased 65% year-over-year due to the completion of certain contracts through we started several new contracts and we currently expect a modest sequential increase in contract R&D revenue in the fourth quarter compared to the third. Dan will discuss new contracts in a few minutes.

Gross margin was 80% of revenue compared to 75% last year, due to more profitable revenue and product sale mixes. Total expenses increased 6% for the third quarter of fiscal 2017 compared to the third quarter of fiscal 2016, due to a 12% increase in R&D expense, partially offset by a 5% decrease in SG&A.

The decrease in selling, general and administrative expense was primarily due to decreased sales commissions. The larger increase in R&D expense in the quarter was due to new projects including developing Internet-of-Things and node sensors that are key to our growth strategy.

Interest income decreased 16% for the third quarter, due to a decrease in marketable securities and a decrease in the average interest rates on our marketable securities. Net income for the third quarter increased 35% to $3.48 million or $0.72 per diluted share compared to $2.58 million or $0.53 per share for the prior year quarter.

Operating margin was 64% and net margin was 47% for the quarter. For the first nine months of fiscal 2017, total revenue decreased less than 1% to $21.5 million. The decrease was due to product sales decrease in the first fiscal quarter relative to the prior year which we have nearly offset the past two quarters of year-over-year growth.

Gross profit margin increased to 78% of revenue for the first nine months of fiscal 2017 compared to 76% for the first nine months of fiscal 2016 due to a more profitable revenue mix. Net income for the first nine months of fiscal 2017 increased 2% to $9.92 million or $2.05 per share compared to $9.69 million or $2 per share last fiscal year.

Fixed asset purchases were less than $50,000 in the quarter and $200,000 for the first nine months. We currently expect fixed asset purchases for the fiscal year to be more in the $287,000 we spent last year as we invest in equipments to support new product development and production.

Finally, our board declared another quarterly dividend of $1 per share or approximately $4.84 million payable on or about February 28 to shareholders record as of January 30. Now I’ll turn it over to Dan for his perspective on our business.

Dan?.

Thanks Curt. I’ll cover new products and contracts and summarize 2016 highlights. As we’ve said before, our growth strategy is new and improved products in the near term particularly for the Internet-of-Things and build new technology for the long term sometime supported by customer sponsored R&D.

First, new products; our development team continued to innovate in the past quarter. We introduced a new angle sensor that records even less magnetic field than our existing angle sensors and that allows smaller less expensive magnets and systems and allows for wider mechanical tolerances.

And our tunneling magnetoresistance or TMR technology enables low-power miniaturization. And these sensors can operate a long time on small batteries or harvested power. Applications include smart meters and connecting motors to Internet-of-Things or smart energy management. We also introduced several new sensors of evaluation kits in the past quarter.

These demonstrate the unique features and benefits of our sensors such as low power and high sensitivity. We sell them but the primary goal isn’t to sell kits, it’s to sell sensors by letting perspective customers try them out to see the benefits for themselves.

Now our nanopower sensor demonstration board for example uses a battery shorted to a circuit board. The sensor is so low powered that the battery doesn’t need to be replaceable and there is no need for an on/off switch. Those kits are also inexpensive less than $20 because they are so simple.

By the way, you can buy them on our website if you looking for special gift for the engineer in your life. There are demonstrations of several of the new kits of our YouTube channel at youtube.com/nvecorporation.

Turning to contracts, on our last call, we talked about being awarded a biosensor grant from the Department of Agriculture being selected for a spintronic contract by the Army and nearing completion on an NIH grant related to hearing aids. So I’ll summarize the status of those three programs.

We continue to work on our Department of Agriculture project to detect salmonella in industry relevant large samples. The goal is to dramatically improve food safety and the objective is to build and test prototype commercial systems. We’re on track for our next major project milestone which is prototype components scheduled for August.

We made good progress in several areas including biosensors, magnetic nanoparticles, aptamers, microfluidic manifolds and corteges and control electronics. We’re working on all of these areas in parallel to get to market as fast as possible.

We presented a paper on salmonella detection at the conference on magnetism and magnetic materials in the past quarter which was a large conference. There are links to the abstract on the R&D Papers and Presentations page of our website and on our Twitter timeline. As hoped, the Army contract was awarded the past quarter.

The project is to develop a monolithic spin-torque microwave dialed spectrograph. The award is for approximately $141,000 in six months. In addition to defense applications, the technology could lead to faster couplers for Internet-of-Things connection, such as - connection such as remote video.

Spin-torque also has the potential to improve the efficiency of spintronic memory, commonly called MRAM. We successfully completed another government project the National Institutes of Health Small Business Innovation Research grant titled Advanced Magnetic Pickup Hearing Aids.

The grant was for advanced magnetic field pickups with the potential to wirelessly link hearing aids to handheld electronic devices, allowing highly personalized and environmentally specific sound filtering and amplification in the software or apps. The project demonstrated the feasibility of such advanced sensors.

There are links to the salmonella detection and hearing aid project summaries from the In the News page of our website and on our Twitter timeline. As we began 2017, we look back on 2016 as a highly productive year.

Business highlights include we won the USDA grant to advance our biosensor technology, we introduced a new type of sensor rotation sensors for energy and resource management, new angle sensors that use even less energy and less magnetic field.

We made significant progress on smart sensor interfaces for the Internet-of-Things and nodes and we signed a five-year partnering agreement - supplier partnering agreement with St. Jude Medical now Abbott Laboratories. Our shareholder value increased significantly in the past year.

Our total shareholder return was 34% compared to 9% for the NASDAQ Industrial Index. The shareholder return was driven by 27% increase in our stock price. For one stretch in the past quarter, our stock reached new 52-week highs in 13 consecutive trading days. We also returned $4 per share in dividends in 2016.

And finally, we pride ourselves on good governance. And in the past year, we were awarded ISS’ highest governance quality score. Now I’d like to open the call for question.

Chelsea?.

Certainly. [Operator Instructions] And our first question comes from the line of Charles Haff with Craig Hallum. Your line is now open..

Hi guys, can you hear me okay?.

Yep. Good afternoon, Charles..

Hi, congratulations on nice performance this quarter. My first question is around gross margin, so you know 80% gross margin this quarter, that’s the best third quarter gross margin that we’ve seen since we’ve been evolving the company in the best quarterly gross margin in two years.

I know that you’ve had kind of new flexible pricing strategy over the last call year, year and a half which we thought was going to possibly impact gross margin based on the previous conversations we’ve had on these calls and that does doesn’t seem to be the case.

So I am wondering if you could of peel this back a little bit, you did note mix you know maybe you can get a little more granular there, just help us to understand how we should be thinking about gross margin going forward? Thanks..

Yeah, Charles, I think in the quarter, product sales mix really had a lot to do with the gross margin there. I think going forward we can expect that to come down a little bit to more in line with maybe the first and second quarter of this fiscal year and more in line with our gross margin of last fiscal year, fiscal year ‘16..

Okay.

So you have higher gross margins on the product sales side, right, Curt?.

Yes, yes..

Okay. So and you know obviously you had a lot of benefit from contract R&D being soft and product sales being stronger than our forecast.

I am wondering you know underneath the product sales side in terms of the semiconductor or the medical segments, did you find that you had strength in one of those segments that helped your mix within the product sales?.

Definitely we had a good quarter in the medical area as you know that tends to be a little bit higher gross margin. But really we saw some uptick in many different areas of our business..

Okay.

And you feel like that that’s kind of sustainable this mix that you benefit that you’ve had for a little while, I know you are saying that maybe you should be more like the first half gross margin but in terms of kind of that sub-mix within product sales, do you feel like you have pretty good visibility at least for say the next six months or so?.

Yeah, I think so. I think for the next six months, it should look similar. As I mentioned earlier, I don’t expect the margins to be quite as good as they were prior quarter..

Okay. And then just getting back to the pricing side, can you just refresh my memory in terms of kind of some of these flexible pricing changes that you made over the last year and half or so and kind of where have you been and where do you kind of stand today in terms of kind of pricing.

I realize you don’t want to get too granular for competitive reasons but just help us understand where you are coming out from or where you’re at from a pricing standpoint and where you’re at now?.

Right, so in general our pricing strategies tend to be more aggressive particularly in price sensitive market.

So Asia and China in particular is a very price competitive market but it’s also very fast growing market with a lot of activity in our key target markets which include industrial control and factory automation, Internet-of-Things and medical instrument, so that’s been an area where we’ve been aggressively pursuing lower prices.

And then there are other segments where we’ve looked at it and said, we can be more aggressive there. These are strategy markets for us. Our costs have over the years comes down, thanks to efficiencies and the new processes and more efficient equipment that we’ve deployed over the years. So we have more rooms to do that.

We have the capacity to take on the additional product sales and be able to ship the products, it doesn’t do us any good to win more business and then not be able to deliver. But we feel we have adequate capacity. We feel that we have a very competitive cost structure.

And we feel that there are strategic opportunities in certain markets and verticals where aggressive pricing can generate sales. And we're seeing that strategy bear fruit and you're seeing some of that in the strong product sales growth in the most recent quarter..

Okay, thanks for that color Dan.

So on geographic impacts to gross margin and could I assume that maybe your mix from Asia and China was a little bit lower this quarter or was that geographic mix pretty consistent where it's been the past few quarters?.

Yeah, I think it was a little bit lower in Asia this past quarter than in prior quarters..

Okay great..

Look at that….

And then on SG&A, so SG&A was down 5% better than where we were expecting even though product sales were higher than our estimates, and you’ve mentioned on the prepared remarks that lower sales commission was one of the reasons for SG&A being lower this quarter, but since you had higher product sales, I would think that you tend to pay out higher sales commission.

So could you just help me understand this a little bit better?.

Yeah, our commissions aren’t generally a flat percentage, and they can vary with product as well as region..

Okay, could you help me understand or explain that a little bit more, because I'm trying to maybe like what regions have less sales commissions or because it just seems like those two factors are kind of counterintuitive.

I'm just trying to figure out how to model SG&A going forward if you're expecting higher sequential product sales?.

Yeah, I think going forward I would look at SG&A to be similar to what it was in the third quarter..

On a dollar basis?.

Yes..

Okay, that's very helpful, thank you.

Then my last question if I could squeeze one more in, in terms of the semiconductor segment product sales I know that's been a headwind for you for a little while, did you have any thoughts on how that how the semiconductor customers perform for you this quarter and if you have any outlook for that over the next say one to two quarters? Thanks..

Thanks Charles. I think our subjective feel is that the semiconductor industry seems to be improving. It's been as you know a tough couple of years in the semiconductor industry. It looks like 2016 calendar, 2016 finished fairly strong the numbers aren’t all tally yet.

And a lot of experts are forecasting modest growth in 2017 which is following declining or at best flattish years the past couple of years. So that's a broad brush. The segments that we see I think we're seeing strength in certain areas the Internet-of-Things, we're seeing some renewed strength in factory automation and industrial control.

And as Curt mentioned, we've seen some strength in medical devices as well. So obviously that's subject to change and it's sometimes difficult to predict, but I think overall I'd have to say that we're more optimistic going into 2017..

Okay great. Thanks for the color guys..

Thank you..

Thank you. [Operator Instructions] And we have a question from the line of Jeff Bernstein with Cowen Prime. Your line is now open..

Yeah, hi guys..

Hi Jeff..

Just couple of questions on any updates on design wins or you know sort of pace of evaluations going on in some of the other areas that you’ve guys have targeted like the - some of the power applications you’ve talked about potential and hybrid vehicles and in power supplies and things.

So you talk a little bit about those and then and maybe any progress you're making in the unquenchable references piece?.

Certainly, so in power and hybrid electric vehicles as you know those are important segments for us. We have some good customers in power supplies; our devices allow feedback for power optimization very quickly and with very high accuracy.

And in hybrid electric vehicles, we're continuing to concentrate on controller area network, buses and we've made some headway there.

We're continuing to work on partnerships, and we have some very promising potential partnerships with larger companies that have marketing channels into the automotive industry and we're working on the certifications that would help us make some, gain some serious traction in the automotive market. So we don't have anything specific to report.

I can't give you design wins. But we - I think we continue to make very good progress there. And I think we're going to be very well positioned for the next generation of hybrid electric vehicles with more efficient battery controls and more sophisticated controls and more networking and sensors.

I think we've got an excellent benefit proposition and we've made some good progress on strengthening our distribution network to reach that vertical which is notoriously difficult market to get into..

And just a quick follow-up on that, so if you were going to win some automotive business, I guess you have to be able to show the customer the capacity to be able to meet that kind of demand, so does that imply that we'll see some growth in CapEx in another year or so to support success in that business?.

We've already increased our capacity and we do get that question as to what is our capacity? What will our capacity be in the next few years? And we have good answers for that. We have plenty of capacity now. As you know Jeff, we aren't like commodity semiconductor companies where we have to have a very high utilization rate to be profitable.

We have unique products. We have high value added products and our customers as you imply are often concerned about capacity. And so we've built plenty of capacity. We have expansion plans both in the near term and in the long term.

We have a very near term potential to expand capacity by adding shifts, adding people on particularly on off shift, second shift and many semiconductor companies run 24/7. We used to, we don't need to now, but we have that possibility.

We will be adding more capital equipment as Curt mentioned in our prepared remarks, we plan to spend more this fiscal year than we spent last fiscal year. Beyond that, it's going to depend on forecasts and demand.

But we've removed some of the potential bottlenecks and the things that we would need to add things like test equipment, things like that things that are relatively easy to add and can be added without a lot of lead time or an inordinate expense..

Great.

And without telling me anything you'll have to kill me for can you touch on cloneable references?.

Oh yes. So we continue to work in the general category of anti-tamper and as you know we've done some work on physical on cloneable functions, and those are remarkable devices that can facilitate extremely secure encryption and we've seen examples of the importance of that. We saw a recent example where a U.S.

military drone was captured by China, and one presumed they might have had time to reverse engineer it if they could. So while we can't get too specific. Those are the types of things that has had the Defense Department focusing on anti-tamper.

And we provide some really extraordinary products in that area and we have extraordinary capability with spintronics that really can’t be duplicated with conventional electronics.

So we’re proud of that, it’s for a number of reasons that potential of that it has - the potential that it has in defense applications the potential that it has longer term in commercial applications where things - a number of things that we’d like to secure in our everyday life.

And then we are proud of it just because of the contribution that we can make to our defense - to our country’s defense..

Great.

And then just lastly on the spin-torque memory side, so not being anything commercially being shipped anyone but people are getting a lot closer and have stated plans, is that your understanding right now and just talk a little bit about what your thoughts are around defending your IP there?.

Well we certainly see a lot of potential in MRAMs, spintronic memory and spin-torque memory in particular which is I mentioned in the prepared remarks has the potential to significantly reduce power consumption.

And reducing power consumption in that application has a direct benefit but also the indirect benefit is that it allows the cells to get smaller and denser without having too higher power density because if the bits get smaller, the amount of power per bit has to be dissipate in the smaller area and the aggregative power gets larger.

So we see some excellent potential there. As I mentioned in the prepared remarks, our contracts allow us to fund some of the R&D that relates to that which has some defense and commercial applications as well as applicability of the technology to MRAM.

As far as our intellectual property, as you know we have a very strong intellectual property position and we will - we’re certainly prepared to defend our intellectual property if necessary and we have the resources with the strong balance sheet to do that..

That’s terrific, thanks so much..

Thank you, Jeff..

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back to Mr. Daniel Baker for any closing remarks..

Well, thank you. We’re pleased to report strong growth in revenue and earnings driven by a 42% increase in product sales. We look forward to speaking with you again in early May to report fourth quarter and full fiscal year results. Thank you for participating in the call..

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