Good day, and welcome to the NVE conference call on Q2 results. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press * 1 1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, President and CEO, Mr. Dan Baker. Please go ahead.
Good afternoon, and welcome to our conference call for the quarter ended September 30, 2022. This call is being webcast live and being recorded. A replay will be available through our website, nve.com. I'm joined by our CFO, Joe Schmitz. After my opening comments, Joe will present a financial review, then I'll cover the business and new products. We'll open the call to questions. We issued our press release with quarterly results and filed our quarterly report on Form 10-Q in the past hour following the close of market. Links to the press release and 10-Q 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 future stock repurchases and dividend payments, our dependence on critical suppliers and packaging vendors, and risks related to the COVID-19 pandemic and supply chain disruptions, as well as the 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, 2022. Actual results could materially differ from the information provided, and we undertake no obligation to update forward-looking statements we may make. We're pleased to report a record-shattering quarter.
Net income for the quarter increased 67% to $6.09 million, or $1.26 per diluted share, driven by a 57% revenue increase. Revenue and earnings were the highest ever by far. Joe will cover the details. Joe?
Thanks, Dan. As Dan said, total revenue for the most recent quarter increased 57% to a record-setting $10.7 million compared to $6.82 million for the prior year quarter. The increase was due to a 59% increase in product sales and a 5% increase in contract R&D revenue. The large product sales increase was primarily due to increased purchases by existing customers, along with the addition of some new customers. We did acquire some new customers from traditional semiconductor companies with our superior products and shorter lead time. Sales increased in most of our markets and product lines. Anti-tamper products for the defense sector were especially strong, which enabled us to overcome some weakness in the medical device market.
Improvements in our supply chain execution allowed for increased product shipments, although shortages remain a headwind and a continuing risk. Investments last year in equipment and added personnel in key production areas helped us achieve the record shipments. We began investing in production capacity early in the pandemic when some companies were pulling back. We continue to use our strong balance sheet to purchase equipment to increase our capacity, and we're expanding our production space for the second time this year to make room for new equipment. We expect to invest about $1 million or more in additional production and test equipment for the rest of the fiscal year. Expenses for the quarter decreased 7% from the prior year due to a 5% decrease in R&D and a 10% decrease in SG&A.
The decreases were primarily due to the reallocation of resources to revenue-generating activities. As a result of increased revenue, strong margins, and expense controls, our operating margin increased from 60% to 67.3%, a 730 basis point improvement. Interest income for the Q2 of fiscal 2023 increased 9.9% due to an increase in our available-for-sale securities and an increase in their interest rate. In the past two quarters, as investments matured, we were in a position to roll over nearly $19 million in our available-for-sale securities to capture increased market yields.
Driven by increased revenue and decreased expenses, net income for the quarter increased 67% to $6.09 million, or $1.26 per diluted share, compared to $3.65 million or $0.75 per diluted share for the prior year quarter. For the first six months of fiscal 2023, total revenue increased 29% to $18.1 million from $14 million for the first six months of the prior year. The increase was due to a 29% increase in product sales and a 19% increase in contract R&D revenue. Net income for the first six months increased 42% to $10.2 million or $2.12 per diluted share from $7.23 million or $1.49 per diluted share for the first half of 2022.
Turning to cash flow, during the first half of the fiscal year, we increased raw material inventory by $337,000 and work in process inventory by $474,000 to mitigate some of the supply chain shortages we've experienced. Capital expenditures were just $24,500 in the first half of the year. As I said earlier in this call, we're planning to deploy additional production equipment that we've had on order for a while in the second half of the fiscal year. These investments could result in capital expenditures in the range of $1 million or more. We paid a $1 dividend per share in the past quarter, as we have for every quarter for the past seven years.
For the first time since we started paying dividends in 2015, earnings more than covered the dividend for both the quarter and 6-month periods. We see this as an important milestone. Today, we announced that our board declared another quarterly dividend of $1 per share, payable November 30 to shareholders of record as of October 31. Now I'll turn it back to Dan to cover the business.
Thanks, Joe. I'll cover product development, product certifications, and governance. On product development, in the past quarter, we expanded our line of DC-to-DC converter products. DC-to-DC converters transmit power without a direct electrical connection. These products are useful in a number of industrial and automotive applications, including interfaces to next-generation power switches such as silicon carbide power transistors. Silicon carbide has been described as a new gold rush, and such systems could revolutionize power control and energy storage. There is a new demonstration showing the simplicity of using our DC-to-DC converters, Spintronic isolators, and silicon carbide transistors for power control in the videos section of our website as well as our social media sites. Part of the challenge we face as a small company is validating the exceptional reliability and toughness of our parts.
We devoted considerable time and resources to two certifications, Intrinsically Safe certification and VDE certification. We achieved Intrinsically Safe certification in June, and in the past quarter, we received two VDE certifications under the latest standard, known as 0884-17. VDE is a European standard recognized throughout the world. VDE 0884-17 is the gold standard for electrical safety and reliability, and required extensive internal testing, rigorous independent testing, and an on-site factory surveillance audit. We also invested in new test equipment and designed new test electronics to test 100% of our isolators at the required voltage. It's an impressive validation of our technology and manufacturing capabilities, and it's valuable in harsh environments such as power conversion. The certifications include the most rigorous VDE 0884-17 standard known as Reinforced, which means a device can replace two conventional isolators.
The Reinforced standard applies to our unique V-Series isolators, which were introduced in 2014, and still have best-in-class specifications for toughness, including 6 kilovolts isolation voltage, meaning the parts that are just 0.3 of an inch wide can withstand 6 kilovolts for at least a minute. Turning to governance, in August, we held our first in-person annual shareholders meeting since 2019. Each director was reelected, NEO compensation was approved, and the selection of the independent registered public accounting firm was ratified. Details were filed in a current report on Form 8-K the day after the meeting. We're pleased to have a strong independent board of directors with two former public company CEOs, Richard Kramp and James W. Bracke, a former CFO of a public company, Patricia M. Hollister, and an experienced director for a number of successful companies, Terrence W. Glarner.
All of our directors attended the meeting, and all of our directors hold stock or options in the company. We made ownership filings on behalf of our outside directors after the meeting. We had several live hands-on product demonstrations at the annual meeting. If you weren't able to attend, you can see some of our product demonstrations on our website or YouTube channel. Now I'd like to open the call for questions. Sherry?
Thank you. As a reminder, to ask a question, you will need to press * 1 1 on your telephone. Please stand by while we compile the Q&A roster. We do have a question. One moment. That will come from the line of Jeffrey Bernstein with Cowen. Please go ahead.
Hey, Dan and Joe. Congratulations on an amazing quarter. I'm gonna date myself. I sound like Ricky Ricardo from I Love Lucy, but you guys got some explaining to do. Can you go into whatever, you know, amount of detail is possible on, you know, how much of this business is it that hit in the quarter was sort of catch up on shipments you couldn't make previously? You know, how much is from new customers? How much is from stepped up volumes from current customers? And are those for any kind of new additional products or wins there? Just give us a better feel for
Yeah, I think.
The big upside here.
I think that's a very good question. I think we talked about some of our supply chain improvements that we've seen. That did enable us to meet some of our existing back order. I will say that our order flow for the quarter was strong, so I don't think you can say that the cupboard is bare necessarily. I think really how I look at it is we're getting the wafers, we're getting the product in, and we're able to turn it and ship it. I think that is a good news story. Dan made some comments regarding the sales into our defense sector. I would say that the anti-tamper product, I would say some of that was absolutely pull ahead.
We had a vendor who, or a customer who wanted some expedited delivery on some products. I will say we did pull ahead some revenue there. We still have ongoing business with that account too. I think we said in our comments that demand is lumpy. I don't anticipate us repeating that performance next year or next quarter, excuse me. We still have more business with that account. I don't know. Am I answering your question?
Gotcha. Yeah, I guess to really put a point on it, so you know, we had been in the $4 - 7 million kind of quarterly run rate of revenue forever. You know, is there a new run rate here that's $8 million or $9 million? Is you know a lot of this overage kind of a catch up or you know just give us a general feeling for you know what's kind of the go forward revenue you know trajectory.
This is Dan. We see increased business and increased potential, and we're currently expecting to continue strong year-over-year revenue growth. As Joe mentioned, we had some business that can be lumpy, specifically the anti-tamper products, but then also we had some business that was relatively weak in the medical sector. Those offset a little bit, and our interest in our catalog products was very strong. As Joe mentioned, our order flow remains strong. We're optimistic that we can continue strong year-over-year revenue growth. Now, there are some risks, of course, and there's caveats that we face the supply chain headwinds.
We're optimistic that this is business that much of this business is business that we can retain, the business that we've won from competitors, and that we can continue our growth trajectory.
That's great. Dan, can you talk just, are there, you know, there are some product area opportunities that you've had for quite a while, and some of those are, the markets are really moving forward now. You know, the first over-the-counter hearing aids are apparently now in stores and available finally. The FDA regs are out on those. You know, have we gotten some business, additional business in hearing aids or in EVs, you know, or any other new areas?
Right. Of course, as you know, we've been looking at over-the-counter hearing aids and the broader so-called hearables market for many years. It's great to see that the new rules are now taking effect or just taking effect. Realistically, we expect our near-term sales for the OTC market to be much less than the traditional hearing aid market, but that could change. It's been estimated that only 20% of people with hearing problems use hearing aids, so there's a large unserved market. OTC devices could help reach that market by reducing the expense, increasing the dispensing convenience. We have design wins in that space. We also have design wins in the broader hearables space.
We've developed sensors that are compatible with rechargeable batteries that are often used in consumer wearables rather than the disposable batteries generally used in traditional hearing aids. We do see that as an opportunity, although in the near term it might not be a significant contributor to our revenues or sales.
Gotcha. Okay. Anything to say on the EV side?
On the EV side, we continue to work on the power control end of things, so that would be onboard charging and power control, motor control within electric vehicles. Those DC-to-DC converters and isolators that I mentioned in our prepared remarks address those markets. We see that as an excellent market as well as the broader power control and power conversion market. Electric vehicles take a little longer, but we do have some very intriguing design wins in power conversion for converting DC electricity that might come from windmills or batteries into the AC electricity that we use in our homes. That's a market that we see as having excellent potential.
As I mentioned in the prepared remarks, often those rely on next-generation power transistors, such as silicon carbide transistors. While we don't make power transistors, which has been described as a gold rush, we make the maybe the picks and shovels that go with those transistors in order to control large amounts of power, with relatively simple, small, efficient devices.
Understand. That's great. Then just on the PUFs business, obviously, you said there was some expedited orders that shipped in the quarter and helped. You know, I was curious to see in, I think it was Electronic Design or something, a sort of infomercial article by Analog Devices on their Maxim got a new MOSFET. They shipped ChipDNA PUF, and they talked about the older ring oscillator technology. I think your technology is probably superior to both of those. But I didn't realize it was you know, kind of a big enough market for ADI to really care about.
Can you just size what you think that market is and, you know, what it is that those guys see there and how you might be able to compete?
Yeah. That's a great question. As you know, because you've been following this technology for a long time, and so have we've been innovating in this area. We were involved in PUFs or physical unclonable functions before they were so popular. Now we're starting to see, as you've noted, that there's more and more interest in this area. The interest comes in for device security and for cyber security, which is, of course, very important. We pioneered some of these devices for use in defense systems and to protect defense systems that could fall into unfriendly hands.
They have a number of commercial applications for cybersecurity and for device security, for all kinds of devices that we use every day in our lives. As far as the advantages, we use spintronics for our PUFs, and our approach allows us to use extremely thin materials such as oxide thicknesses that define the uniqueness of the key that's used in the PUF. That means that the deviations or variations in our devices can be smaller than those in semiconductor devices. This means higher entropy. The bottom line is that reverse engineering our PUFs is much more difficult than traditional semiconductor PUFs. That's important in this area because, of course, as soon as it gets reverse engineered, it's no longer of any use.
Understand. That's great. I'll let somebody else ask a question. Thank you.
Thank you. As a reminder, if you have a question, please press the * 1 1 key on your telephone. One moment for our next question. That will come from the line of Irwin Silverberg with Cowen. Please go ahead.
Dan, hi. You answered most of my question when you responded to Jeff about the hearing aid market. Just more specifically, excuse me. Up until, let's say, 6 months ago, there were probably only about 5 or 6 manufacturers of hearing aids. In the last 6 months or so, my sense is, and you see advertisements on the TV of some new entrants anticipating this FDA rule. If I remember correctly, you had 1 particular customer historically in the hearing aid area. I just wonder, how many you're doing business with now and what you anticipate as more people enter this market.
Well, we see that as a segment, hearing aids, as a segment where we have a very convincing benefit proposition, and we have a very strong, perhaps even dominant position for sensors in hearing aids. We can't name, obviously, for confidentiality reasons, we can't name all of our customers. We do make public filings that relate to Sonova, which is one of the biggest hearing aid companies in the world. That's a matter of public record. But it's a segment that we participate in, both with the traditional hearing aid manufacturers and with new hearing aid manufacturers, as I alluded to in the answer to Jeff's question. We do expect, and the FDA has said, that they expect to see new manufacturers enter the market. We see that as an opportunity.
There are different constraints for some of the over-the-counter market. There are different cost constraints, performance points. We also mentioned that I mentioned in my answer to Jeff that we typically or we often see rechargeable batteries, which are higher voltage than the traditional single-cell, disposable batteries that are in legacy and traditional hearing aids. We've adapted our technology to fit with the power supplies that go into those devices. We see it as an excellent long-term market, and we hope to continue to have a very strong presence in that market.
Thank you, Dan.
Thank you.
Thank you. One moment for our next question. That will come from the line of Stanley Keselman with Maxim Group. Please go ahead.
Hi, guys. First, congratulations on earning the dividend. My question has to do, I guess, with the medical devices that you said were slow and specifically with Abbott, what's happening with them?
You mean what's happening with their business or?
I thought you had a contract coming due or renewing.
We do have a contract that is due for renewal at the end of the year. At the beginning of the year, we did sign a one-year extension. We're still in negotiations with them. We hope to finish those negotiations by the end of the year. We're actively engaging with them and trying to get that deal done.
Okay. Well, thank you, and keep up the good work.
Thank you, Stanley.
Thank you. Speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to you for any closing remarks.
Well, thank you. We were pleased to report a record-shattering quarter with 67% increase in earnings. We look forward to speaking with you again at our next earnings call in January.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.