Good day, ladies and gentlemen, and welcome to the NVE conference call on Second Quarter Fiscal 2018. 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 As a reminder, today's conference call may be recorded. I would now like to turn the call over to Dan Baker,
call for the quarter ended September 30, 2017, the second quarter of fiscal 2018. As always, I'm joined by Kurt Reinders, 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, Kurt will present a financial review of the quarter in half. 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 Q in the past hour following the close of market. Links to documents are available through the SEC's website, our website, nv.com, and on twitter.com/nveecorporation. 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 our reliance on several large customers for a significant percentage of revenue, risks and uncertainties related to the economic environments and the industries we see serve risks and uncertainties related to future sales and revenue 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, 2017. The company undertakes no obligation to update forward looking statements we may make. We're pleased to result we're pleased to report solid earnings for the quarter with net income of $0.65 per share despite an expected decline in revenue from a strong year ago
Thanks, Dan. As Dan mentioned, 2nd quarter total revenue decreased 4% to $7,000,000 compared to a strong year ago partially offset by a 25 The decrease in product sales was due in part to order timing between the first quarter 2nd quarter. The increase in R&D revenue was due to new contracts. Gross margin was an especially strong 81% of revenue compared to 76% last year due to increased gross profit margins on both product sales and contract research and development. Gross profit increased to $5,640,000 in the quarter.
Total expenses increased 24% for the second quarter of fiscal 2018 compared to the prior year quarter due to a 1% increase in SG and A expense and a 34% increase in R and D expense. The large increase in R and D expense for the quarter was due to new projects including developing Internet of Things and node sensors that are key to our growth strategy and are expected to provide due to a decrease in interest bearing marketable securities and a decrease in the average interest rates on those securities. Net income for the quarter decreased 4 percent to $3,160,000 or $0.65 per diluted share compared to $3,310,000 or $0.68 last year. Net margin for the quarter was 45%. Comprehensive income, which includes unrealized gains and losses from our marketable securities increased 4% over the prior For the 1st 6 months of fiscal 2018, total revenue increased 4% to $14,600,000, The increase was due to a 5 Net income for the 1st 6 months of fiscal 2018 increased slightly to $6,460,000 or $1.33 per share compared to $6,440,000 or $1.33 per share last fiscal year.
Fixed asset purchases were $526,000 for the first half of the year, primarily for more efficient production equipment halfway through the year, that's already slightly more than the 5 20 $1000 we spent last year. It's still a modest investment considering the revenue we generate with our machinery and equipment assets, and we expect our total fixed asset purchases for the full fiscal year to be less than $1,000,000. Cash provided by operating activities increased 29 of fiscal 2018 compared to $5,670,000 for the prior year period. In addition to the dividend paid in the of a dollar per share payable November 30 to shareholders of record as of October 30. Now I'll turn
it over to Dan to cover business and governance. Dan? Thanks, Kirk. Now I'll cover new product development, our automotive strategy, R and D contracts, and governance. As Curt noted, we had significant R and D expenditures in the past quarter, and we're happy to report some impressive results of that R and D.
In the past quarter, we introduced 3 new products: a high sensitivity magnetic switch, high field magnetic sensors, and a new fields present in MRI imaging. This can help implement MRI tolerant medical devices and MRI tolerance and safety is increasingly important. Industrial applications include motor sensors and high current sensing for smart grids. And finally, the new angle sensor uses what's called a full bridge configuration which allows direct replacement semiconductor sensors, providing larger output signals and lower power. There are demonstration of most of our new products on our website at nv.com/videos and our YouTube channel at youtube/nve Corporation.
The video section of our website is popular and is a great way to show our product unique features and benefits. We upgraded the section in the past quarter with a new layout and a new server to make the videos more accessible and easier to search. In addition to product introductions, we met a significant smart sensor development milestone in the past quarter. Smart sensors provide plug and play functionality enabling our customers to deploy pervasive sensors quickly and cost effectively. Forecasts are for a huge increase in sensors in the coming years.
The milestone was releasing an a milestone often called tape out. Making a simple interface requires making a complex IC, including analog to digital conversion, digital signal processing and mathematics calculations. The IC represents the culmination of a lot of hard work and ingenuity nearest, scientists and contractors. We expect the first wafers this quarter. We need to test and characterize them combine them with our sensors and characterize the finished parts.
Target markets are sensor rich systems like factories and cars. As we've said before, Automotive Electronics is an excellent growth market for electronic content of cars is projected to increase rapidly, particularly with the advent of hybrid electric and self driving vehicles. Our sensors and couplers have important advantages compared to conventional electronics in the automotive market. They are smaller, more precise, more rugged, and lower power. And with the new smart sensor interface I just described, they'll be smarter too.
I'm pleased to report that in the past quarter, our was certified standard. We're preparing for the next step, which is IATF 16949 certification, which will help establish our credibility in We have a new private label partnership with a company with a strong automotive market position. One of our challenges to growth is the limited distribution inherent with being a small, smaller company. The new partnership gives our partner our innovative products and gives us their strong distribution, sales support, and brand awareness. In the past quarter, we expanded the products under the partnership, which now covers about a half dozen products.
Each part needed a strong business case and had to pass rigorous product qualification tests. Our partner committed significant resource to marketing and sales collaterals. Revenues are still modest, but we continue to see this partnership as a strategic growth driver. Turning to contract R and D. In late September, we were awarded a research contract from the U.
S. Navy Naval C Systems command for Circular Technology for full integration at the monolithic microwave integrated circuit level. A microwave circulator is an Ultra miniature signal router. The project will demonstrate the feasibility of a monolithic microwave integrated circuit also called an MMIC or a mimic to make microwave isolators and circulators that will be significantly smaller than conventional devices. In addition to military applications, their potential commercial applications such 5G cellular infrastructure.
The winning proposal was based on innovative ideas by the Principal Investigator dot or Joe Davies and the rest of our R and D team. The contract is for approximately $125,000 6 months through March 2018. The past quarter for our department of agriculture biosensor grant. We've completed some, but not all of the prototype components, and we hope to finish which is live pathogen testing on schedule by next August. The project is also a bit over budget as we committed additional resources but this is a strategic program and our primary consideration is time to market.
Prototype components include biosensors, magnetic nano particles, aptamers, microfluidic manifolds, cartridges and Control electronics. Moving on to 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've been holding annual say on pay votes and our shareholders selected continuation of annual votes. After the shareholder vote, our Board of Directors determined to continue 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 for this fiscal year was ratified. Details of the shareholder votes were reported on a Form 8 K we filed with the SEC see the day after the meeting. In addition to the formal items of business at the meeting, we had hands on new product demonstrations including a Blueberry powered sensor, a low power coupler, a rotational sensor, and high sensitivity magnetic switch. Video showing 2 of those demonstrations is on our website and YouTube channel.
Now I'd like to open the call for questions. Victor?
Time. Questions. And our first question comes from the line of Jeff Bernstein from Cowen. You may begin.
Hi, good afternoon guys.
Hi, Jeff.
Just a couple of questions for you. Could you give us an update on the med device market in general and the Abbott, cardiac rhythm and management in particular?
Yes. So, as you probably know, CRM has been under pressure, for example, Abbott, formerly St. Jude, reported earlier today and they reported the calendar Q3 CRM cardiac rhythm management sales were down 12%. But they also reported that, one of the things that had impacted that was MR labeling FDA approval of MR labeling for pacemakers and ICDs. And they were able to report those approvals one as recently as last month.
And then also long term, the demographics are favorable as the population ages. And our technology has a strong benefit proposition for medical devices and CRM in particular. We're also gaining traction in addition to CRM in the broader neurostimulator market. So we see it as very important market and encouraging in the long term, and despite the short term challenges.
That's great. Any update on the hearing aid developments?
So in hearing aid, some of the, some of the longer term developments are an expansion of the market such as over the counter private label hearing aids. And that could help us if it expands the market, proponents of over the counter hearing aids point out that a large population that could use hearing aids, but don't because of the expense or the, dispensing them of getting a hearing aid. And then there are also personal sound application products sometimes called the PSAP And that could also be a market for us, although it's somewhat less attractive than true hearing aids because it's more price sensitive. But we continue to see this as an excellent market. We have a strong benefit proposition with low power and small size.
And we have significant developments underway to extend those advantages to make our devices even smaller and even lower power. So our folks are working on some really amazing things on reducing power consumption to just tiny little trickles, which will extend battery life, which is of course important in hearing aids.
And, did I hear you say that you thought you were going to get the auto automotive quality certification this quarter. Is that right?
Our hope is this fiscal year. So that would be, that would be the end of the, the end of the March quarter by March 31st. And that's a goal it's not entirely up to us. We want to be very well prepared. There's a lot of systems that need to be rigorously audited.
And, we've been working on that. Our quality team in particular has been working very hard on that. We think we're going to be well prepared. But it's also up to the certifying agencies. So, that's the goal though, is this fiscal year.
Great. And, last one's one, and I'll hand it over. You talked about the smart sensor tape out. And could you just expand on that a little bit? Is this there's some integration of an MCU or something or some memory with your sensors or what is it exactly that's on the semiconductor?
Yes, exactly. It's a very complex IC. So it has, analog to digital conversion. So we take the analog signal, the voltage signals that come from our sensors, convert them to digital data so that the rest of the processing chip, the digital signal processing chip can understand the data. There's digital signal processing such as digital filtering and mathematical calculations.
So For example, for angle sensors, we have our analog sensors, which we've talked about here before, have, what are called quadrature outputs. So there's one output that's proportional to the sine of the angle and one that's proportional to the cosine of the angle. So, as many of us are now, we're calling from trigonometry. If you divide the sign by the cosign, you get the tangent. And then if you take the inverse tangent, the arc tangent, you end up with the angle.
And this chip does all that. It's amazing what it does. It's a very complicated chip, but the advantage is that it makes the interface to our customers' integrated circuits and microprocessors very simple. So rather than having to, interpret analog voltages and make these calculations, we will provide a digital signal that is proportional that basically is the angle in the case of an angle sensor. So that was, that's the paradox of a simple interface requires making a complex IC.
Got you. So is this the kind of part that could be on like a pole tip of a telephone pole that gets pulled every once in a while? It tells you if it's leaning over. Super low power, that kind of thing?
That sort of thing, exactly. So the internet of things and the angle is a very common sensor need, rotation and angle. So, in your example, and I'm not familiar with that one specifically, But my guess would be there isn't an awful lot of power available. So one of the advantages of our sensors is they run off of very low power and they can use harvested power, such as solar power or thermal gradients. And so they're ideally suited for the internet of things for distributed sensing where there's not always a plug around.
And our next question comes from the line of Lucas Badanovsky from Craig
Hey, Dan. This is Lucas Baranowski on for Charles Half here at Craig Hallum. Just was hoping you could provide us some updates on 1 or 2 of your other R and D projects. You mentioned on your last call that you were very close to trading MRAM feasibility under your contract with the army. Do you have any news for us there?
So, the army contract, was relating to spend momentum or spend in torque. Devices, which are also very useful for MRAM. And the final report hasn't been made public yet, but we did complete the research contract with the army. And we successfully rated, the feasibility of a spin torque structure called the spin torque microwave diode spectrograph. So There are military uses and other uses.
And the underlying technology, as you alluded to, is also used in advanced MRAM. So, we believe it's an important milestone, we'll post the report, we'll certainly try to post the report when the army makes it public. They haven't yet.
Okay. That's helpful. And then I know, one of the other callers asked about hearing aids and I believe you're in phase 2 of a contract with the NIH to develop technology that would link hearing aids to smartphones. Do you have any new milestones to report?
That that contract was also successfully completed. And that's part of our portfolio, that we can offer hearing aid manufacturers is the ability to, to, elegantly connect hearing aids to smartphones and other smart devices. So that could be, good technology for the long term.
Okay. Excellent. And then going back to automotive for a moment, I mean, the you said that revenues were currently modest from that. And I know those are probably slightly lower margin. But your gross margin for the quarter came in at almost 81%.
I mean, so can you tell us maybe what categories of products drove the outperformance on the gross margin line?
Yes, we did have a more favorable product line mix. And as, as Dan mentioned, the, revenue for automotive products was, It hasn't been, it's been fairly modest, I believe, is how we've, we've said so far. Typically, some of the higher margin products would be, related to medical, applications We've also had some more efficient equipment, which has led to more cost effective production and, some improved processes and, and yields. These improvements could be offset though in the future by more aggressive pricing and increased revenue from lower margin, private label partnerships, which, would be automotive type, applications.
Okay. That makes sense. And then one final question here You talked about SmartSensors in your prepared remarks, and you said that you expect with sample prototypes before the end of the fiscal year. I mean, so would you start generating revenue from those next fiscal year then?
Yes. That would be the that would be the hope. We have customers who are interested in this. It's also a product that has automotive applications There are many things that rotate and turn in cars and being able to control that motion very precisely can lead to more efficient cars, safer cars. So, we, we, see a number of applications.
It's a significant research project. And the reason we took we're taking it on and making that investment is because we see potential markets, excellent markets, that we can reach, particularly with Thanks, Lucas.
And I am showing no further questions at this time. I would now like to turn the call back to Mr. Dan Baker. We have one question from the line of Jeff Bernstein from Cowen. You may begin.
Hey, Dan. I just had a quick follow-up. The technologies that you're, that you're developing for the department Agriculture project, obviously applicable to some other things. And you talked about looking into those. Do you have any any details to give us at this point?
And have you learned anything from, where you've gotten to at this point on developing the sub technologies.
Well, I'm glad you asked that, Jeff, because our team has done an amazing job on that. And one of the subassemblies that we're working on that we hope to have, done at least a prototype done this quarter, is the sensor module itself. And that's, that's an amazing, module. It's got a, a dye a Spintronic die with over 1000 sensor elements. And that connects by an intricate circuit board, to other electronics for signal processing electronics.
So part of what we're, what we'll be able to demonstrate is the ability to have a lot of sensors. And for medical applications, that could mean a panel of tests. So, a test, not just for one pathogen, which is what we focused our early efforts on detecting a single pathogen such as Salmonella. But to be able to detect an array of pathogens, a variety of pathogens, so various, bacterial contaminations either for food or for medical devices. So when we when somebody comes in with, flu like symptoms, that could be a variety of, causes and a variety of of, bacteria or viral infection.
So being able to detect what kind of pathogen is, is the problem is an important benefit. And it's one of the benefits that our technology he has is the ability to combine these larger arrays in a very small size. So, hopefully, we'll be able to demonstrate that capability very soon.
Terrific. And I'm sorry, just one more on the cybersecurity front. Any kind of developments going on with the unclonable functions?
We continue to be active in a variety of anti tamper, and some of the contracts and some of the strength that we had in contracts in the most recent quarter, was in that general field. Sometimes we can publicize those. Sometimes we can for obvious reasons. But physical and clonable functions, are, physical structures that can make it very hard to predict and replicate or reverse engineer, cryptography. So that's an important part of our portfolio.
And we're building a wider portfolio with a variety of ways to detect and, and introduce countermeasures to tamper. So as much as we can reasonably talk about on that, we'll try to do
And I am showing no further questions at this time. I would now like to turn the call back to Mr. Dan Baker, President and CEO, for closing remarks.
Well, thank you. If there are no other questions, we were pleased to report solid earnings with significant R and D investments and an important smart sensor milestone. We look forward to speaking with you again in January to discuss 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. Everybody, have a great day.