NVE Corporation (NVEC)

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NVE Technology Makes Hearing Aids, Pacemakers Work Better
Thursday June 21, 7:00 pm ET
Marilyn Much

Until recently, hearing aid wearers had to manually switch modes on their devices when they used a cell phone.

Now, thanks to sensors made by NVE Corp. (NasdaqCM:NVEC - News), hearing aids can automatically switch modes when the wearer is talking on a cell phone.

NVE's sensors pick up data while using a technology called spintronics. This method relies on the spin of electrons rather than the electrical charge by electrons to acquire, transmit and store information.

NVE has been supplying Starkey Laboratories with custom designed sensors for its hearing aids since 2004. Starkey uses the sensors in some models. They replace electromechanical sensors in Starkey's devices.

Sound Source

The NVE sensors in Starkey's hearing aids are used to determine the source of sound. They can pick up small, stray magnetic fields from a cell phone. The sensors can also be used to automatically switch the settings in a hearing aid for "seamless transition" between ambient sound and the sound from an electronic device like a cell phone, says NVE's Chief Executive Daniel Baker.

He points to another plus: Using NVE's sensors, Starkey can make smaller, less obtrusive hearing aids.

The initial 2004 order for the sensors was valued at more than $100,000. Since then, Starkey has become an important customer, says Baker, without giving details.

NVE's sensors are used in other medical devices besides hearing aids.

Another important customer is St. Jude Medical (NYSE:STJ - News), Baker says.

NVE began supplying St. Jude with custom sensors for use in pacemakers made by its Cardiac Rhythm Management unit in 2001. The initial orders were valued at more than $200,000. The next year, St. Jude expanded the use of NVE's sensors with orders of $1.2 million.

More recently, on Jan. 3, 2006, NVE inked a two-year supplier partnering pact with St. Jude's Cardiac Rhythm Management unit to supply spintronic sensors for medical devices. The pact sets purchase forecasts and inventory requirements, and supplies other terms and conditions.

St. Jude uses NVE's sensors in devices such as cardiac pacemakers and implantable cardioverter defibrillators, or ICDs.

Pacemakers and ICDs are programmed with data. Also, data can be recovered or downloaded from them. NVE's sensors are used to establish "a telemetry link" between these devices and the physician, says Baker.

"We think St. Jude's use of our spintronic sensors validates the reliability of our technology because implanted life-support medical devices are one of the most demanding applications for any technology," he said.

The increased use of NVE's sensors in medical gear comes at a time when NVE's management has focused on upping its product sales.

"There's been a natural evolution of this company," said analyst Steven Crowley of Craig-Hallum Capital Group. "It used to be a company that was driven by contract research and development."

A large part of NVE's contract R&D work was for the government. Much of that work was for military applications and serves as good business model for NVE, says Baker.

For one, it's let NVE develop technology that can be commercialized. And NVE typically has the rights to the resulting intellectual property. The company licenses its spintronic magnetic random access memory (MRAM) technology. MRAM combines the speed, density and performance of chips.

"In recent years we have been emphasizing product sales," said Baker. "And our product sales have been very successful."

In fiscal 2007 ended in March, NVE's product sales were up more than fivefold from fiscal 2003.

Sales from products are overtaking those from contract R&D. In 2007, products accounted for 88% of total revenue. That's up from only 26% in fiscal 2003.

NVE's product business is "lucrative" and carries high margins, said analyst Crowley.

In the fourth quarter, NVE's operating margin was 42%, and its gross margin was 66%.

These high margins are a clear indication there's high value in NVE's products, he says.

The company's success with its products has helped lift its financial performance. In the fiscal 2007 fourth quarter, earnings more than doubled from the prior year to 33 cents a share. Sales rose 31% to $4.6 million. Product sales rose 50% to $4.2 million. Contract R&D sales slipped to $372,911 from $684,892.

Watchers expect the company to keep the momentum. Analysts polled by Thomson Financial see 2008 earnings rising 30% from last year.

"The big growth driver has been product sales," said Baker. They've more than offset the decline in contract R&D revenue. "Our product sales have been strong across the board."

Medical product sales have become more important, he adds.

Advantages

In terms of products, NVE's competitive advantages include miniaturization, speed and precision, says Baker. The company is constantly working on improving those advantages.

NVE's lineup also includes couplers that transmit data. They're widely used in factory automation. They provide reliable digital communications between various electronic subsystems in factories. For instance, its couplers are used to send data between robots and central controllers at high speeds.

The company has added new couplers to its mix. In the past year, it began selling a new IsoLoop 700S series of spintronic couplers that transmit up to two channels of data at up to 150 million bits per second.

NVE's new couplers are smaller and faster, Baker says.

Baker aims to expand NVE's products into new areas such as the automotive market.

"Similar to how the company's sensors are utilized to detect position and speed in factory applications, the technology is able to acquire information in critical automotive applications in a very precise and reliable manner," Crowley wrote in a report.