Daniel Baker - President & CEO Curt Reynders - CFO.

Jeff Bernstein - Cowen.

Good day, ladies and gentlemen, and welcome to the NVE Conference Call on the 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 will follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded.

I would now like to introduce your host for today's conference, Daniel Baker, President and CEO. Mr.Baker, you may begin..

Good afternoon and welcome to our conference call for the quarter ended September 30, 2018. 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'll cover business items, and we'll open the call to questions. We issued our press release and filed our quarterly report on Form 10-Q on Monday earlier than planned due to an administrative error by a service provider. We also filed a Form 10-Q/A to amend the incomplete original filing.

Links to all of the documents are available through the SEC's website, our website, and our Twitter timeline.

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 uncertainties related to future sales and revenue, uncertainties related to the impact of federal tax reform, risks related to changes in tariffs and other trade barriers, as well as the risk factors listed from time-to-time in our filings with the SEC including our 10-K for the year ended March 31.

The company undertakes no obligation to update forward-looking statements we may make. We're pleased to report a strong increase in product sales, a 35% increase in net income, and record earnings of $0.88 per share, up from $0.65 last year. Curt will cover the details of our financial results.

Curt?.

Thanks, Dan. Total revenue for the second quarter increased 7% to $7.51 million compared to $7 million for the year ago quarter driven by a 10% increase in product sales to $7.05 million, up from $6.39 million last year. The increase in product sales was due to new customers plus increased purchases by existing customers.

Contract R&D revenue decreased 26% due to the completion of contracts. Contract R&D is a small percentage of our revenue and as we've said before, much of it is for custom, spintronic, anti-tamper sensors where revenue can fluctuate with contract timing.

Gross margin increased to a record 82% of revenue due to a more profitable revenue mix driven by product sales growth. Total expenses decreased 2% due to a decrease in R&D expense partially offset by an increase in SG&A. The increase in SG&A was primarily due to a $52,000 increase in stock-based compensation.

Stock-based compensation was entirely automatic stock options granted our Directors on their re-election to our Board. The number of options granted was unchanged and the increase in stock-based compensation was due to a large increase in our stock price in the past year, as well as an increase in the Black-Scholes calculated stock volatility.

As discussed in our proxy statement, we don't overpay our directors or officers. Interest income increased 14% for the quarter due to higher bond yields. The increase was despite a decrease in our marketable securities as we use some of our maturing securities to fund dividends.

Pre-tax income increased 13% and pre-tax margin increased to 70% for the quarter compared to 66% last year. Our effective tax rate decreased to approximately 18% compared to 32% in the prior year quarter. The decrease was primarily due to the decrease in the federal rates. We currently expect our effective rate to be about 18% for the full fiscal year.

After tax net income for the most recent quarter increased 35% to a record $4.28 million or $0.88 per diluted share compared to $3.16 million or $0.65 a share last year. The large increase in profits was primarily due to an increase in product sales and a decrease in tax rates.

Net margin for the quarter increased to a record 57% of revenue compared to 45% last year, which is among the best returns on revenue in the industry. Comprehensive income, which includes a $51,000 unrealized gain on our available-for-sale securities increased 37% to $4.33 million for the quarter compared to $3.17 million last year.

Despite a tough compare for the first quarter of the fiscal year, total revenue increased slightly for the first two quarters to $14.61 million versus $14.60 million for the prior year. A 5% increase in product sales in the first half of this fiscal year more than offset a 48% decrease in contract R&D.

Net income for the first half increased 27% to $8.23 million or $1.70 per share compared to $6.46 million or $1.33 per share last fiscal year. Cash flow from operations was $8.27 million in the first half compared to $7.32 million last year. Exceptional operating cash flow and modest fixed asset purchases drove strong free cash flow.

Fixed asset purchases were a modest $38,000 in the first half, and we expect fixed asset purchases for the full fiscal year to be less than the $605,000 we spent last year.

In addition to the dividend paid in the past quarter, we announced that our Board declared another quarterly dividend of $1 per share payable November 30 to shareholders of record as of October 29. Now, I'll turn it over to Dan to cover the business.

Dan?.

Thanks, Curt. I'll cover R&D and new products, and the trade show that just wrapped up. On our Department of Agriculture biosensor grant, we have successfully built prototypes of most of the components including biosensors, magnetic nanoparticles, electronics, and microfluidics.

We ran into some challenges with the aptamer system, and we're looking for solutions but we demonstrated the scalability of our technology from the laboratory scale devices we did before. We're also in the early stages of studying the possibilities for medical applications such as exosome detection for cancer diagnosis.

In the past quarter, we received orders and shipped couplers for the Europa Clipper Mission. The mission is to look for conditions for life on one of the moons of Jupiter.

The launch is probably at least four years away but the Chairman of the House Commerce, Justice & Science Sub-Committee called it vitality important, and we're proud to be part of such a demanding and important mission.

Turning to new products; in the past quarter we introduced a Smart Magnetometer plus several low power parts, low power magnetic switches, and a new tunneling magnetoresistance isolator. The lower power magnetic switches are the result of efforts to continue to extend our competitive advantages in this case to reduce the energy used even more.

Low power is one of the core benefits of spintronics and low power is important for the Internet of Things because it allows devices to run on batteries or harvested power.

We can demonstrate these parts with a button self-soldered onto a circuit board; there is no need for a power switch, replaceable or rechargeable battery; so we can put live demos in our sample kits. There is a video of a sample kit on our website and YouTube channel.

We launched tunneling magnetoresistance or TMR couplers earlier in the year; they are the only parts of their type and expand our TMR product line. TMR couplers are lower powered than our venerable GMR couplers and they are designed as gateways to the Internet of Things. Smart sensors are another key to our Internet of Things strategy.

The new magnetometer is smart because unlike existing sensors, it includes analog to digital conversion, digital factory calibration and digital interfaces in the IC. Integrating those features provide simple smart connectivity to the Internet of Things. The virtual magnetometer can be used as a proximity sensor or current sensor.

We promoted the new smart magnetometer and other sensors at the Sensors Midwest Trade Show outside Chicago yesterday and today. We demonstrated the new smart magnetometer and the automotive application of motors controlled simulation using a windshield washer pump. We also previewed a new smart angle sensor and our TMR angle sensors.

There are pictures and videos on our website, YouTube channel and Twitter timeline. Finally, I'll cover corporate governance. Our annual shareholders meeting was last quarter. For good corporate practice, our entire Board of Directors stands for election every year and each of our Directors was overwhelmingly re-elected.

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 we filed with the SEC the day after the meeting. In addition to the formal items of business at the meeting, we had hands-on product demonstrations highlighting the precision, size and smarts of our products. Now, I'd like to open the call for questions.

David?.

[Operator Instructions] Our first question comes from Jeff Bernstein with Cowen..

So, just wanted to see if we could get a little bit more detail; you talked about the product revenue growth being driven by existing customers and new customers.

Could we get just a little bit more detail on maybe some industry breakdown etcetera, maybe you talk about CRM or any progress you're making in automotive etcetera?.

Certainly. So, I think the strong markets were our industrial control Internet of Things market; the medical device market is -- probably I describe it as stable. As you probably know, Abbott, for example, reported today a slight decline in rhythm management revenue.

Long-term the demographics remained favorable for CRM but there are short-term challenges, but fortunately some of our other products, the new products that we have for angle sensors, for some -- we got some modest sales from our private label partnership, and some of the new Internet of Things products have been building..

I know we've talked about the hearing aid market before and maybe you could touch on that.

And I was curious on kind of a forward-looking basis, I guess Bose won the right to sell an OTC hearing aid even though I don't think the FDA has completely addressed the whole idea of -- kind of a non-prescription product, but just what are your thoughts here?.

Well, there appear to be changes coming as you know in the hearing aid market. But an expansion of the hearing aid market such as over-the-counter or private label hearing aids could certainly help us if it expands the market, and if we can provide components for those hearing aids and we're certainly looking at that.

Proponents of lower cost and over-the-counter hearing aids point out that many people who need hearing aids don't have them because of the expense or the dispensing inconvenience needing an audiologist, so these new categories could expand the market..

And your current business, how is that faring right now?.

The current hearing aid business you mean?.

Yes..

That's been a strong stable business that has been growing, albeit perhaps modestly. The demographics are favorable as baby boomers age and need hearing aids, and there is more and more technology being put into hearing aids.

The hearing aid companies are doing some amazing work and making hearing aids more seamless, more natural, and easier to use, and we're part of that. So, we continue to see a growth in the technology that goes into hearing aids as well as a growth in the market itself, the number of people who have hearing aids..

[Operator Instructions] And we do have a follow-up question from Jeff Bernstein with Cowen..

Just curious, you talked about much of the R&D, the contract R&D being related to tamper-proof sensors, lot of news just in the last couple of weeks about a GAO] study of defense electronics being very hackable, and the supermicro server controversy, etcetera.

What are your guys expectations over the next couple of years on this area?.

We continue to see it as an important market, and one where we have unique technology. As you know, we have unique spintronics, inherently non-volatile technology that's very well suited for anti-tamper.

We have physical unclonable functions, sometimes called PUFs which are excellent for cryptography because they are easy to evaluate but hard to predict and replicate.

So, we have excellent technology, it's not a huge part percentage-wise of our business, but it's an important part, we've got an excellent reputation, our guys who work in that area do a fabulous job. They are very innovative, and we're respected in that field. So, we're looking forward to strong business there.

As Curt mentioned in the prepared remarks, it can be somewhat cyclical or lumpy depending on the timing of contracts, but it's business that we see continuing and growing..

So, is all the revenue in contract R&D and is that where to look for it going forward or are there some commercial product-type revenues here already?.

Yes, we're selling commercial products, we're selling anti-tamper sensors right now..

So to the extent that the defense department says, wait a second, we have a real problem here with provenance and with tampering and with all those kinds of things, we should expect that there could be more demand in this area?.

Yes. I mean I'd hate to call that a good thing, but from a business standpoint, we're in a good position to help solve that problem, and as you know, it's a very serious problem.

So, and part of the reason why we do it is because it's our opportunity to do some good and to protect the critical equipment for military and other very sensitive equipment..

And then I was interested to hear you mention exosome detection; the exosome science is very new, and so I'm a little bit curious you were saying for detecting cancer is that to sort of differentiate cancer that is metastasizing or what's your current understanding of what you're looking for here?.

Our part of it, Jeff, would be to detect the exosome so we would be looking at detecting antibody-antigen reactions, that -- those types of reactions which we can tag with magnetic beads. So, it's similar technology to our biosensor technology that we used to detect pathogens or bacteria for example.

And as you know, it's an exciting area for early detection of cancer and exosomes are small cellular particles and they are released early in the disease process, so they can give clues to early detection of a disease which of course could lead to early treatment and better outcomes. So, it's a new area as you correctly pointed out.

The research is in it's early stages, but we're certainly excited about the possibilities there, and the possibilities of applying our technology to such an important area..

Now because these things are there, I think a thousands of the size of a cell; we're talking about the kind of concentrations where the resolutions that you guys can get with your technology are going to be the way to go.

Is that what we should understand?.

We certainly hope so. Being able to detect very small levels of biological materials is one of the great advantages of our technology, and as you know, exosomes are tiny little pieces of cells, they are part of the cell and so there is not a lot of material to work with there. So that's why it's difficult to detect them.

So our goal would be to tag them and to detect very small [indiscernible] in the magnetic fields that these beads would create.

And we believe that that technology of course has shown a significant promise in detecting very low levels, we gave the analogy of detecting a needle in the Mall of America; and so this is a similar problem of detecting very small things in very large volume of fluid..

Lastly, can you just give an update on the spin-torque microwave work that you guys are doing? And it seems like that would probably be aimed at sort of advanced beam-forming antennas or whatever but just -- whatever color you can give on how you're doing there and the progress?.

We're limited in what we can talk about there. The final report hasn't been made public, that was a U.S. Army -- we did a U.S. Army contract which was a matter of public record but the report itself is not.

We did complete the research contract with the army successfully last year and we demonstrated the feasibility of the spin-torque microwave diode spectrograph, and in addition to military uses, the technology could lead to an order of magnitude increase in coupler speed and isolator speed, perhaps to as much as a gigablot [ph] or a billion bits of information per second.

So, that could support emerging Internet of Things application such as remote video monitoring but that's a little bit further out. We hope if the army makes the report public, we hope to be able to post it and give some more details..

[Operator Instructions] And I'm showing no further questions in queue. I'd like to turn the call back over to Daniel Baker for any further remarks..

Well, thank you. We were pleased to report strong product sales, record earnings and a successful smart sensor product launch. We look forward to speaking with you again in January to discuss third quarter results. And 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..