Good day, ladies and gentlemen, and Welcome to the NVE conference call on 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. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, today's conference may be recorded. I would now like to turn the call over to Mr. Daniel Baker, President and CEO. Sir, you may begin.
Good afternoon, welcome to our conference call for the quarter ended December 31st, 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 in the past hour following the close of market. Links to 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, 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 Form 10-K for the year ended March 31st, 2018. The company undertakes no obligation to update forward-looking statements we may make. We're pleased to report strong earnings of $0.71 per share despite a 32% increase in R&D expense, which included smart sensor development and product launches the past quarter. I'll cover smart sensors in a few minutes, first, Curt will cover the details of our financial results. Curt?
Thanks, Daniel. Total revenue for the third quarter decreased 15% due to a 7% decrease in product sales and a 69% decrease in Contract R&D. The decrease in product sales from the prior year quarter was primarily due to a decrease in custom anti-tamper product sales, which are primarily for military markets with timing that can fluctuate. We have, however, received additional anti-tamper orders, we currently believe sales will pick up starting next quarter. The decrease in Contract R&D revenue for the third quarter of fiscal 2019 was due to the completion of certain contracts. Gross margin increased to 81% from 77% last year due to a more profitable revenue mix. Total expenses increased 20% for the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 due to a 32% increase in R&D, partially offset by a 14% decrease in SG&A.
Daniel will discuss R&D and product development in a few minutes. The decrease in selling general and administrative expense was due to staffing changes. Interest income for the third quarter of fiscal 2019 increased 13% due to rising interest rates, partially offset by a decrease in our securities as we used some of our maturing securities to fund dividends. Our effective tax rate was 18% of net income before taxes for the quarter, compared to 28% in the prior year quarter. The decreased tax rate was due to the full effects of a decrease in the federal tax rates. We currently expect our effective rate to be about 18% for the full fiscal year. After tax, net income for the quarter was $3.42 million, or $0.71 per diluted share, compared to $3.57 million, or $0.74 last year.
Comprehensive income, which includes unrealized gains and losses, increased 8% to $3.52 million for the quarter compared to $3.28 million last year. For the first nine months of the fiscal year, total revenue decreased 5% due to a 57% decrease in Contract R&D. Net income for the first nine months increased 16% to $11.6 million, or $2.40 per diluted share compared to $10 million or $2.07 per share last fiscal year. Comprehensive income increased 19% to $11.7 million in the first nine months compared to $9.8 million last year. Cash flow from operations was $11.7 million in the first nine months compared to $11.3 million last year. Exceptional operating cash flow and modest fixed asset outlays drove strong free cash flow.
Fixed asset purchases were a modest $68,000 in the first nine months compared to $605,000 for the same period last year, and we currently don't expect significant fixed asset purchases in the rest of the fiscal year. In addition to the dollar per share dividend paid in the past quarter, we announced today that our board declared another quarterly dividend of $1 payable February 28th to shareholders of record as of February 4th. I'll turn it over to Daniel to cover the business. Daniel?
Thanks, Curt. I'll cover R&D, strategic new products, and a major technical conference. As previously reported, we demonstrated the feasibility of our biosensor technology with our Department of Agriculture biosensor grant. We will look for additional government agency sponsorships and other partnerships to improve aptamer chemistry to enhance the commercial viability. We're also studying the possibilities for medical applications of the technology, such as exosome detection for cancer diagnosis. Innovative research is key to our future, and our researchers presented two papers at the Joint MMM-Intermag Conference last week in Washington, D.C. The prestigious conference is only convened every three years. One of the papers related to our industry-leading tunneling magnetoresistance, or TMR, technology. The paper was titled "Characterization of Magnesium Oxide-Based Magnetic Tunnel Junctions with Superparamagnetic Free Layers." One of our researchers, Dr. Joe Davies, presented a paper and chaired two technical sessions.
Our goal is not just research, but practical products. Our strategy is focused on the huge Internet of Things market, particularly the industrial Internet of Things and automotive sub-markets. In the past quarter, we introduced two strategic new products, a smart magnetometer and the smart angle sensor. Smart sensors are key to our Internet of Things strategy. The new sensors are smart because, unlike our legacy sensors, they include analog-to-digital conversion, digital factory calibration, and digital interfaces in the IC. Those features provide simple smart connectivity to the Internet of Things. The first new smart sensor is a versatile magnetometer that can be used as a proximity sensor or a current sensor. The second new product is billed as the world's first tunneling magnetoresistance smart angle sensor. Applications include automotive sensing and advanced robotics for the industrial Internet of Things.
There are demonstrations of the new products on our website and YouTube channel. A demonstration of a prototype mechatronic xylophone player and another demo using a high-speed hobby car motor show the speed and precision of the sensors. We highlighted our smart sensors and automotive applications at the Sensors Midwest trade show in the past quarter. We demonstrated a smart sensor in an automotive application using a windshield washer pump. There's also a video of that demonstration on our website and YouTube channel. On previous calls, we discussed the importance of IATF 16949 conformance to our automotive growth strategy. IATF 16949 is a stringent quality management system standard for the automotive sector. I'm pleased to report that in the past quarter, we earned a letter of conformance in accordance with the automotive certification scheme for IATF 16949.
The letter certifies that NVE has established and applies a quality management system for design and manufacturing of semiconductor magnetic sensors and isolator components for the automotive industry. Turning to space programs. Since our last call, we were awarded a contract to burn in and test our couplers for the Europa Clipper mission. The mission is to look for conditions for life on one of the moons of Jupiter. The contract was for slightly more than $100,000, so it's not huge revenue, but it demonstrates the rugged reliability of our parts and could help expand our military, aerospace, and space business. In addition to the Europa Clipper mission, we recently provided evaluation parts for the NASA Psyche space probe. The Psyche mission is to journey to a unique metal asteroid between Mars and Jupiter and is scheduled to launch in 2022.
The spacecraft's payload will include a magnetometer to study the asteroid's composition. It's a trip to a ferromagnetic world carrying our ferromagnetic parts. I'd like to open the call for questions. Chelsea?
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute after your question has been stated. Thank you. Our first question comes from the line of Jeffrey Bernstein with TD Cowen. Your line is open.
Hey, guys. Just a couple questions. You mentioned in the script, that you were expecting sales to increase next quarter. Is that fiscal Q4, or is that fiscal Q1 of the following year?
Hi, Jeffrey. That would be fiscal Q1 of fiscal year 2020.
Got you. Okay. Then, can you give us a little update about the cardiac rhythm management business and maybe what's going on with your hearing aid customers?
This is Daniel. The cardiac rhythm management business has been, as you know, a challenging business. It's good business for us, but it's been down modestly in recent quarters. As you may know, Abbott reported this morning, and they reported a modest downturn in their cardiac rhythm management business, and they said that was about 5%, and they said that it was in line with the general business. In the near term, we face some challenges, but the long-term demographics remain favorable for CRM as the population ages. Our technology has a strong benefit proposition in CRM, and we're also gaining traction in the broader neurostimulator market. As far as hearing aids, there are some possible changes that hearing aids, as you know, could be deregulated in the next year or so.
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 dispensing inconvenience. This could help expand the market. Again, like CRM, pacemakers, and ICDs, the long-term demographics remain favorable as us baby boomers age, and we're probably going to need pacemakers and hearing aids.
With your existing customer, what's going on with business there?
You're referring to Abbott, Jeffrey?
No, in hearing aids.
Well, hearing aids has been a solid market for us. Our goal is to expand outside of these medical markets with smart sensors, and as I mentioned in the prepared remarks, into the Internet of Things, particularly the industrial Internet of Things and automotive markets, to reduce our dependence on this business. The medical business is stable. It's good business. We have an excellent benefit proposition, but it doesn't have the kind of growth potential that we have in some of the emerging markets. Our goal is to continue to innovate in those medical markets, to continue to provide products that are smaller, lower power, more reliable, and we're doing that. The strategic projects that I mentioned in the prepared remarks, smart sensors, those are more applicable to the Internet of Things and automotive markets.
Just to talk about that a little bit, I guess at CES, Infineon had a display on sensors, and they talked about having 20 magnetic and light pressure sensors in every automobile, Hall sensors, GMR and, I guess, AMR sensors. What do you think your opportunity is in terms of number of potential sensors in an automobile?
We think there's a tremendous amount of potential in the automotive market. The sensor content is growing rapidly, driven by innovations such as hybrid electric vehicles and autonomous vehicles and automated driving systems, and those need sensors. We're targeting some particular areas, rotation sensors, angle sensors, and current sensors, where we have an especially strong benefit proposition, and we're doing it with smart sensors and newer technologies than the ones that you mentioned. As I highlighted in the prepared remarks, Tunneling Magnetoresistance, or TMR, which has a number of advantages, lower power, more precision. The angle sensor that I mentioned that we launched in the past quarter is the world's first Tunneling Magnetoresistance smart angle sensor. We see excellent potential. I'm not sure we could come up with an exact number, but we're targeting lots of sensors in lots of cars.
We see it as an excellent market as cars become more and more automated, and sensors become more and more important.
Great. Thanks. I'll get back in the queue and let someone ask a question.
Thanks, Jeffrey.
Thank you. As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your telephone keypad. Again, that's star one for questions. We'll pause one moment for further questions. We do have a follow-up question from Jeffrey Bernstein with TD Cowen. Your line is open.
All right. If no one else is going to step up. Yeah. You mentioned the USDA project for food safety and looking for additional funding, et cetera. Can you just sort of clarify what's going on with that project and deliverables, et cetera, on the food safety side, any other details you can give about the future applications?
Certainly. The main message is that we met the critical goal of scaling our biosensor technology to large samples for industrial use, which was the goal of that USDA project. We demonstrated that we can look at lots of fluid and find that metaphorical needle in a haystack, that bacteria that could make people sick in a large sample of rinse water, say, from fresh vegetables. That's a very important area and an area of focus for the USDA, and for food safety. Our folks overcame some big challenges, such as hundreds of sensor interconnects, the microfluidics. We have some challenges with the aptamers, which are not, as you know, those really aren't our part of the project, but we believe that they're solvable. We're looking at some exciting new opportunities to deploy the technology in medical applications, such as exosomes for cancer diagnosis.
It's powerful technology, we're determined to get it commercialized.
Do you have any idea when you might have commercial revenue from a food safety standpoint or from medical?
It's hard to give an exact timeframe. We're working on it as fast as we can. The project runs in parallel with multiple items to reduce the time that it takes to get to market. We have smart, fast, talented people who are committed to this area and to this project. We hope to have some news about it in future calls.
Okay. Just to change gears a little bit, can you talk a little bit about distribution? I guess you had a semiconductor partner that was reselling six of your products, the last update that I knew of. What's going on with that relationship? I think you had added another distributor, and one in the Far East. Maybe you can just cover those.
Yes. The private label partnership, six might have been the last report. We had two new products that we launched under their brand in the past quarter, and they've released now, well, that would be eight products. It hasn't produced huge sales yet, but both we and our partner are working to ramp up sales. It's an important line for them, it's important partnership for us, and it opens up, in the long term, new markets such as automotive. They're a leading supplier of semiconductors in the automotive market. We see that as a very important partnership, and particularly for getting into markets like automotive, that are notoriously insular. It helps us get at risk-averse customers who may not be familiar with NVE, and just because of our scale, we don't always have the support or the local presence that larger companies have.
As far as distribution, as you mentioned, we've added distribution, particularly in Asia, and that's going very well. There's interest in, particularly for the industrial Internet of Things, for industrial automation. In China, Taiwan, Korea, there are a number of prospects that we're working with, some of them with our new products, our new smart sensors, some with our traditional products, to automate factories and to make more efficient manufacturing. We're pleased with our distributors. They tend to be a specialized distributor. They know our products very well. They know their industry very well. They're not the huge worldwide distributors that are mostly buying and reselling and not adding a lot of expertise or value that way. We have value-added distributors that are technically savvy and have invested a lot of time and effort in learning our products.
I guess you have a new, but veteran head of sales. Can you just talk about what he's doing since he's returned?
Well, I'm not sure exactly who you're referring to, but we do have a very talented sales manager, Max Skerke, who knows our products inside out and was promoted, well, I guess about one year ago, to Sales Manager. He's been traveling Sensors Midwest, which I mentioned, some of those distributors that I mentioned, visiting them. He really exemplifies what the strength is of NVE, which is folks who are committed to leading a spintronic revolution, who know our products very well, and can come up with ways of helping our customers solve their problems. We're very pleased with the team we have on board. We've added several other people. The large increase in R&D also reflects the addition of personnel. We have a very talented group of people here. I admit to being biased, but it is just amazing to see what our people can do.
The latest smart sensors are an example of that talent and that ability to get excellent products, get them built, and get them sold.
I know you guys don't do things lightly, so maybe could you delve a little bit more into the decision on the ramp of R&D?
A lot of it is to support smart sensors. Smart sensors, they're not just a new paradigm for customers. They're a new paradigm for us because they're all digital. We adjust some of our traditional products to get them extremely precise, we do that with lasers. We actually cut them and shape them. With these products, we're doing it digitally. Our testing is digital. Our parts now have calibration memories in them. We've invested in new testers, in new, what are called handlers, which are the electromechanical things that move our parts around to get them built automatically. Of course, we don't just sell industrial automation, we use it here. We've invested in that. Our products have embedded software, which means they're running on software, not just electronics.
We have people who can write software and do it very efficiently and make sure that the products work under any conceivable circumstance. We also have development kits and evaluation kits. These are software-based products that we'll hook up to computers and allow our customers to modify or look inside the sensor, if you will. I know you follow us a little bit on YouTube, so you may have already seen some of the demonstrations of that. Those are new products for us, those types of evaluation kits and boards. Those are software-based products based on PCs. They hook up to USB ports. Those are things that we need to do to get into this market and to be a leader in this market, and we committed to do that.
We've hired the people, we built the infrastructure, we bought the equipment, and now we have the products.
Got you. That's great. Any update on the spin-torque microwave isolators and circulators?
I keep hoping that the Army will make the final report public, but they haven't. It's been, when was that? Last year that we completed a research contract with the Army that successfully demonstrated the feasibility of a spin- torque microwave diode spectrograph. Of course, there are military uses for it. The technology could lead to an increase in coupler speed, and that could help us with the Internet of Things. It's exciting technology. It's longer term, and there's not an awful lot we can talk about specifically because it was a military program. It's amazing the speeds that our guys were able to demonstrate, the number of bits that go through it.
Is there some kind of exclusivity or something, or could you pursue commercial products without the government's okay or et cetera?
We can pursue commercial products. There are some restrictions that usually don't come into play on the technology when it's funded by the military. Part of the reason that this was a small business contract with the Army, and part of the reason they do it is to build American industry and to help us hire people and do all those things that have a sort of a global benefit. The specific military applications, those are up to the Army to deploy.
Sure. Got you. All right. Thanks very much.
Thank you, Jeffrey.
Thank you. I'm showing no further questions at this time. I'd now like to turn the call back to Mr. Daniel Baker for closing remarks.
Well, thank you, and thanks, Jeffrey, for the questions. We were pleased to report strong earnings and cash flow, successful Smart Sensor product launches, and IATF conformance. We look forward to speaking with you again in early May to discuss fourth quarter and 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. You may all disconnect. Everyone, have a great day.