[Management View]
NVE Corporation's management acknowledged a 10% YoY revenue decrease, driven by an 11% decline in product sales, partially offset by a 17% increase in contract R&D revenue. Strategic priorities include advancing wafer-level chip scale sensor development and leveraging new fabrication equipment for manufacturing capacity expansion.

[Outlook]
Management projects sequential growth in military order revenue for Q2 and Q3 FY2026, with expectations to return to historical levels in the next fiscal year. Non-defense distributor channels are recovering, indicating positive future prospects.

[Financial Performance]
Revenue decreased by 10% YoY, with net income down 13% to $3.58 million. Gross margin fell to 81% from 86% due to a less profitable product mix. Total expenses decreased by 20%, reflecting reductions in R&D and SG&A expenses.

[Q&A Highlights]
Question 1: Hi, Dan. It's Jeff Bernstein from Silverberg Bernstein Capital. You touched on the weakness in the Puff business in the quarter, and it sounds like the distribution channel business is recovering. Can you give a little bit more color there? What do you think happens with the PUS business in the next couple of quarters? Is there any kind of seasonality that (Line breaks here)
Answer: There's not really seasonality to the Puff business, but there is a certain amount of lumpiness because it's driven by procurement contracts for defense systems. These contracts can be large but unpredictable in timing. We expect growth in this business quarter over quarter sequentially and a return to historical levels next fiscal year. The recovery in distributor sales is encouraging and bodes well for the future.

Question 2: You mentioned the opportunity in replacing rare earth metals with ferrite magnets and your highly sensitive magnetic sensors. Can you talk more about that opportunity and how quickly design wins can convert to business? (Line breaks here)
Answer: Virtually all rare earth magnets come from China, posing supply chain risks. Ferrite magnets, made from iron oxide, are widely available. We provide models for magnetic systems and are working on near-term design wins. Customers can use our engineering models to simulate magnet and sensor positions. We aim for minimal redesign and are receiving more inquiries about ferrite magnets and sensitive sensors.

Question 3: I wanted to ask about the investment in wafer scale packaging. How will incremental revenue correlate to that investment? Is it about creating smaller parts or the US domestic supply chain? (Line breaks here)
Answer: It's both. Smaller parts fit in tight spaces and offer more spatial specificity. We have key equipment deployed and are providing samples and evaluation boards. We're developing high-volume production systems and expect to build capacity through this fiscal year.

Question 4: Can you talk about the end markets for wafer level chip scale parts and whether you have traction in them already? (Line breaks here)
Answer: We've identified medical devices and industrial controls/robotics as key markets. Miniaturization is crucial for implantable medical devices, and precision is important for industrial controls. We're sampling parts to customers in both markets with positive feedback.

Question 5: Have you considered reporting revenue excluding military orders due to their volatility? (Line breaks here)
Answer: We continuously evaluate segment reporting but need consistent auditing and infrastructure to break out revenue and related costs. We aim to provide information to help investors understand our financials. We expect military orders to increase sequentially this quarter and the next.

[Sentiment Analysis]
Analysts' tone was inquisitive and focused on understanding the impact of defense sales volatility and new market opportunities. Management's tone was optimistic about future growth and confident in their strategic initiatives.

[Quarterly Comparison]
| Metric | Q1 FY2026 | Q1 FY2025 |
|-------------------------|-----------|-----------|
| Revenue | -10% | |
| Net Income | $3.58M | $4.1M |
| Gross Margin | 81% | 86% |
| Operating Margin | 62% | |
| Pretax Margin | 70% | |
| Net Margin | 59% | |
| Total Expenses | -20% | |
| R&D Expense | -18% | |
| SG&A Expense | -23% | |
| Operating Cash Flow | $5.19M | |
| Capex | $1.06M | |

[Risks and Concerns]
- Volatility in defense sales due to procurement cycles.
- Dependence on large contracts for physical unclonable functions (PUF) business.
- Potential underutilization of new equipment if incremental sales do not meet expectations.

[Final Takeaway]
NVE Corporation faced a challenging quarter with a 10% YoY revenue decline, primarily due to decreased defense sales. However, the company is optimistic about future growth, driven by advancements in wafer-level chip scale sensors and a recovering non-defense distributor channel. Management's strategic focus on leveraging new fabrication equipment and exploring opportunities in medical and industrial markets positions NVE for potential long-term success. Investors should monitor the company's ability to secure design wins and manage the volatility in defense sales.