67796 NVE -MAY-5E-BRDS - NVE Corporation

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PIPER FLIES SOLO: AN INTERVIEW WITH CEO ANDREW DUFF • TODAY’S MILLION-DOLLAR HOMES
TwinCities
BUSINESS MONTHLY
MAY 2004
Can NVE’s
‘Ideal Memory’
Transform the
Computer Chip?
CEO Dan Baker Promises
Faster Computers and Lighter
Cell Phones. Cypress, Agilent
And Motorola Seem to Agree.

Future Memory
NVE’s “spintronics” technology could turn the computermemory
world upside down. Is this hot company for real?
By Tony Carideo
E
ven after more than three years as
president and CEO of NVE Corporation,
Daniel A. Baker still can’t shake the feeling
that he has reached career Nirvana. His
job, he says, is “the opportunity of a lifetime.”
Baker leads a company of 70 employees—most
have technical backgrounds, 10
with Ph.D.s—that is riding a technology
wave that could revolutionize a good
chunk of the electronics industry. With 15
issued patents to support the claim, Eden
Prairie–based NVE appears to be at the
cutting edge of a new form of electronic
memory that has broad applications in the
computer world. It’s called magnetic random
access memory, or MRAM. With
MRAM, data are encoded in electrons’
“spin”—a property of an electron based on
the direction of its rotation (“up” or
“down”) about an axis—rather than its
charge. (The industry term for this technology
is “spintronics.”) The upshot for
consumers and businesses: instant-on
computers and smaller, more reliable cell
phones.
“It’s just such a fabulous technology
and opportunity here,” Baker says. “When
I arrived [in 2001], I couldn’t believe that
there was a company like this, with so low
a profile and such great potential.”
Last year, investors also got wind of that
potential. While there aren’t any equitiesindustry
analysts following it, NVE’s
stock (Nasdaq: NVEC) was one of the
market’s hottest properties in 2003. Going
from $8.60 with hardly any trading at the
beginning of the year to $51.30 by December,
with an average daily volume in
the six figures. The following month, it
climbed into the $60s.
But while NVE’s technology offers
great promise, it also faces big hurdles—
and growing investor debate. Established
technologies that are already baked into
product designs, manufacturing processes,
and pricing can be hard to dislodge.
What’s more, NVE is a mouse among
such elephants as IBM, Hewlett-Packard,
Fujitsu, Toshiba, and German firm Infineon.
Even though the company has what
Baker describes as “watershed” intellectual
property, several of its competitors have
impressive MRAM IP portfolios of their
own, not to mention more resources to put
them to work. What’s more, one investor
who is “shorting” the stock—meaning he
is betting that the shares will trade lower
from recent levels—argues that NVE’s intellectual
property isn’t what it’s cracked
up to be.
Meanwhile, NVE’s share price has declined
since January—as of March 31,
NVEC stood at $47.68. The decline in
price largely reflects the fact that one of
NVE’s license partners, San Jose–based
giant Cypress Semiconductor, has been
slower than expected to get samples of its
spintronics chip into production. Baker’s
task is to make sure that this doesn’t nip
NVE’s potentially glorious future in the
bud.
In the Spin
MRAM has been called the ideal memory,
because it has the potential of combining
onto a single chip the compact nature of
dynamic random access memory
(DRAM), the speed of static random access
memory (SRAM), and the nonvolatility
of flash memory. (See sidebar, page 5.)
Does that sound like so much gobbledygook?
Think of it this way: MRAM has
the potential of being to computer technology
what the DVD was to record players.
With DRAM or SRAM, every time you
shut down your computer all of the data
stored on your machine’s circuits goes
bye-bye, unless you’ve saved it on your
hard drive. The “computerese” for that
phenomenon is “volatility.” Each time you
turn on your computer, all the data stored
on your hard drive must be “rewritten”
back onto your DRAM and SRAM before
you can use your programs. That’s why it
takes so long to get your computer up and
running, and why it’s so awful when it
crashes.
An MRAM memory chip is different.
Each of its cells contains a very thin insulating
layer sandwiched between two magnetic
films. Depending on which way their
electrons are spinning, the magnets can
create magnetic fields that point in the
same direction or in opposite directions.
These directions determine whether a cell
stores a “0” or “1” of computer data. A
small amount of electricity switches the
polarity of each cell, depending on the data
being stored. Because MRAM encodes
those zeroes and ones this way, it doesn’t
lose the data when the computer is turned
off. That could mean better data integrity,
smaller equipment footprints, and more re-

CEO Daniel Baker’s charge is to deliver on the promise that
investors believe magnetic random access memory holds—a belief
embodied in his firm’s lofty stock valuation.
liable technology.
Immediate applications
include an entire
new generation of cell
phones that can be
smaller, lighter, and
more sophisticated than
the current technology,
which must employ all three
existing types of memory.
With MRAM, all that could be
made much simpler. The hot new
term in the mobile industry is “a
cell phone on a chip.” It’s a
concept that envisions
Dick Tracy
wristwatch–style
cell phones complete with voice recognition;
cell phones in MP3 players, which allow users to
download and e-mail music over wireless networks;
and smaller PDAs and cell phones coupled with global
positioning satellite technology, that track everything
from your dog’s whereabouts to the precise location of
product shipments.
But the mother lode for MRAM is in computing.
Some developers believe that there will come a day
when they can cram at least as much storage onto an
MRAM chip as they now have on DRAM (the chief
form of computer memory), without DRAM’s disadvantages.
In the past two years, the electronics industry trade
press has embraced MRAM technology. If—and that’s
the operative word here—this type of memory replaces
“We needed to get to
market with our core
technology to show
we knew how to run
a business.”
existing memory architecture in electronic devices,
current estimates of the size of the market for
MRAM technology exceed $40 billion a year.
Memory Strategies International, a Texas-based
memory-industry research firm, estimates that the
cell phone memory segment could make up almost
$9 billion of that total.
Fifteen years after its founding, NVE may finally
be ready to cash in on that promise.
PHOTOGRAPH BY MAKI/STRUNC PHOTOGRAPHY
Let’s Get Smaller
NVE was started in 1989 as Non-Volatile Electronics
by James A. Daughton, who worked on
early applications of NVE’s current technology
as vice president of Honeywell’s Solid
State Development Center. Daughton has
been pursuing the dream of using magnetism
to encode data for more than 20 years.

He conceptualized the idea while at Honeywell,
working with Art Pohm, a now-retired
professor of electrical engineering at
Iowa State University.
“Back then, Honeywell was focusing its
efforts on developing circuitry for the
aerospace and defense industries,”
Daughton recalls. “We were working in 1-
micron increments, which is huge by today’s
standards.” A human hair, as a point
of reference, is about 80 microns in diameter.
Since the early days of Daughton’s research,
however, high technology has
shrunk exponentially. Now nanometers—a
unit of measure equal to 1 billionth of a
meter—or, in some cases, angstroms, are
the relevant units of measurement. One
micron is 1,000 nanometers, or 10,000
angstroms.
Daughton left Honeywell and started his
company with the idea of piggybacking on
Honeywell’s efforts. “My initial intention
was to let Honeywell develop [MRAM],”
he says. “I left with the rights to commercial
development of the technology, while
Honeywell retained the right to military
and avionics [applications]. So I was just
going to ride along.”
Honeywell continued to work on
MRAM technology along with NVE, but
it then began to focus on “radiation-hardened”
MRAM to withstand space environments.
It was a direction NVE didn’t wish
to take, and Daughton and Pohm (who remains
an advisor to the company) pushed
forward with their own MRAM research.
They won several awards from the Small
Business Administration under its Small
Business Innovation Research program to
fund the development of couplers (which
transmit data) and sensors (for high-precision
data-acquisition), as well as spintronics
technology.
The result: NVE’s patents—many of
fundamental importance to the MRAM industry—started
to pile up. Meanwhile,
some industry giants were leaping into the
fray, with companies such as Motorola
and IBM also accumulating dozens of
MRAM-related patents.
Baker entered the story in 2001. Taking
over as CEO from Daughton (now chief
technology officer), Baker has a solid résumé
that includes a Ph.D. in engineering,
a University of Minnesota MBA, and a
stint as president and CEO of Printware,
an Eagan-based maker of computerized
pre-press equipment for the printing industry.
He also was the director of research at
Minntech, a Plymouth-based manufacturer
of medical devices, sterilants, and water
purification products.
“We knew we needed to do two things,”
Baker recalls. “Get to market with some of
our core technology to show we knew
how to run a business, and establish strategic
relationships with companies that had
the financial muscle to accomplish things
that we didn’t have the capital to pursue.”
NVE’s technology could put the firm into
a potentially huge market: nanotech.
So far, Baker has delivered. In its most
recent quarter ended December 31, 2003,
NVE reported $577,000 in earnings on
$3.1 million in revenues, which were up
33 percent over last year. Earnings were
up 162 percent year over year. The company’s
revenue-producing businesses include
magnetic-based sensors and data
couplers. NVE’s tiny sensors, which incorporate
spintronics, are used to position
pneumatic cylinders and robotic arms, to
sense the speed and position of bearings
and electric motor shafts, and in overcurrent
and short circuit detection, to name
just a few applications. NVE’s 21,362-
square-foot facility is capable of producing
up to 40 million such devices per year,
going to market through a worldwide network
of sales representatives and distributors.
“We believe that we have some watershed
patents, and that our intellectual
$51.77
NVEC
Jan. '04 Apr. '04
$37.20
(3/15)
$66.80
(1/16)
$47.68
property is much broader than the applications
being developed by our partners,”
Baker says.
His optimism isn’t without foundation.
A key factor behind MRAM’s promise is
that it allows engineers to cram much,
much more circuitry into a very, very
small space. That could allow NVE to be
part of a potentially huge industry—really
small technology.
The Next Next Big
Thing?
Some in the investment community have
termed nanotechnology “the new Internet.”
(Indeed, one of the hot new books in
the technology space is The Next Big
Thing is Really Small, by Minneapolis
nanotech consultants Deb Newberry and
Jack Uldrich. Uldrich was deputy director
of the Minnesota Office of Strategic and
Long-Range Planning under former Governor
Jesse Ventura.) The “nano” in nanotechnology
is short for nanometer.
What’s more, the technology involved
here often is measured in atoms. A conductive
layer in one of NVE’s sensors is
only 12 atoms thick.
NVE is “on everybody’s nanotech list,”
says Clint Morrison, an analyst at Piper
Jaffray in Minneapolis who has covered
the local technology industry for more
than 20 years. “It’s really tough to invest
in this area. You’re often dealing with
companies like IBM and Motorola. And
here you have a pure play in that space.”
As for MRAM, “the technology is real,”
asserts Morrison (who owns no NVE
stock). Indeed, he says that MRAM “could
be the holy grail of the next generation of
memory. The question now is, can it be
commercialized?”
There’s another question: Can NVE be
the one to commercialize it?
A year after its founding, the company
began notching its belt with a who’s who
of strategic partners, licensees, media attention,
and more government backing.
These include contracts from the U.S.
Army, the U.S. Air Force Research Laboratory,
and the Defense Sciences Office of
the Defense Advanced Research Projects
Agency, as well as grants from the National
Science Foundation. Meanwhile, spintronics
technology has been featured in an
array of esoteric engineering and sciencerelated
trade publications, and was the
cover story in the June 2002 issue of Scientific
American.
While this sort of attention is nice, it’s
the company’s license agreements with the
likes of Motorola, Cypress, Agilent Technologies,
and Union Semiconductor Technology
that could take this story to the
bank.
In late 2000, NVE cleared away any lin-

Memory is Made of These
• Dynamic random access memory
(DRAM). The predominant form of
semiconductor memory used in the
electronics industry today. It typically stores
bits of information as an amount of electrical
charge in a storage cell.
• Static RAM (SRAM). “Static” means that
the memory retains its contents as long as
electricity is applied—unlike DRAM, which
needs to be “rewritten” or “refreshed” many
times per second. Faster and more
expensive than DRAM, SRAM is used by the
most speed-critical parts of a computer, such
as cache memory. But while SRAM is faster,
it is less dense than DRAM, and thus takes
up more space.
• Flash. A non-RAM form of memory used for
easy and fast information storage. Applications
include digital cameras, personal digital
assistants, and PC cards. Flash memory is
slow to “write” data, and wears out over time.
• Magnetic RAM (MRAM). A still-nascent
memory technology that encodes information
via the spin of magnetized electrons. Early
applications are expected to include cell
phones. MRAM has the potential to be as
fast as an SRAM chip and as high-density as
DRAM, according to proponents. But its main
advantage over SRAM and DRAM is
nonvolatility—it retains information even
when the electronic device is off. Its
advantages over flash are faster write times
and greater durability.
—Gene Rebeck
that payday comes.
Great Expectations
For all the minuteness of NVE’s products
(and its relatively small revenues), investors
have been willing to pay big dollars
for its shares. Even though NVE’s
stock price has slipped from a 52-week
high of $69.69 down to the mid-$40s, its
shares are trading at more than 18 times
sales—and 126 times projected full-year
earnings for the fiscal year that ended in
March.
It was inevitable that such valuations
would attract short-sellers—investors who
borrow stock from other investors in
hopes that the stock will drop in price, allowing
them to buy it in the open market,
return the borrowed stock at its original
price, and pocket the difference. In mid-
March, Manuel Asensio, a New York–
based analyst, launched an attack on the
company’s valuation, arguing that a combination
of high insider sales and what he
contends is low-value intellectual property
suggests that the stock is wildly overvalued.
Indeed, insiders have been selling—
with Baker and Daughton selling or announcing
the sale of stock worth more
than $14 million. Baker defends these
moves, which took place primarily in December
2003 and January of this year, noting
that he still has more than 70,000 in
vested options that he could sell, but
hasn’t.
“I have retained significant [equity] interest
and exposure to the company’s stock
price,” Baker says. As for NVE’s technology,
“We believe we have valuable intellectual
property,” he says. “We have constantly
improved and added to our intellectual
property portfolio. The standard isn’t based
just on the intellectual property Motorola
licensed in 1995. We’ve continued to add
to that portfolio. We believe we have one
of the best IP portfolios in the industry.”
One of the big factors driving NVE’s
skyrocketing stock price was the deal it
signed in April 2002 with Cypress. In exchange
for NVE’s intellectual property and
17 percent ownership of the company, Cypress
pumped $6.2 million in capital into
NVE. That investment bootstrapped
NVE’s stock from the over-the-counter
bulletin boards to the much more widely
traded Nasdaq, greatly increasing the company’s
liquidity and broadening the regulatory
eligibility for investors. But the really
big news was Cypress’ plans to produce an
MRAM computer memory chip by March
2004 and then manufacture chips at the Silicon
Valley firm’s Bloomington facility.
But in January, word got out that Cypress
was encountering delays in getting
chip production on line. Cypress had said
only that it hoped to have samples by the
end of March. Meanwhile, bulls and bears
have whiplashed NVE’s stock, pushing it
down to the high $30s one day, only to
have it bounce back, often as much as $4
to $5 per share, the next. (See stock chart.)
In a story that seems to evolve by the
minute, Cypress indicated on March 19
that it had produced the chip—not, perhaps,
in a full production form, but at least
NVE suddenly became a hot stock in
2003. That has made the firm a target
for short-sellers —and naysayers.
gering licensing complications with Honeywell
in exchange for a payment to NVE
of more than $1 million. In the fall of
2001, NVE granted nonexclusive rights to
some of its coupler technology to Agilent
Technologies for upwards of $1 million in
fees and advance payments in the first
year of the agreement, along with future
payments based on sales of the Agilent
products covered by the agreement.
At this point, NVE’s big-money bet is
with Illinois-based Motorola, which owns
about 5 percent of NVE. This relationship
dates to 1995, when Motorola licensed the
company’s MRAM technology for the development
of new cell phone technology.
Last October, Motorola announced that it
had produced its first samples of MRAM
chips—well ahead of a joint venture between
IBM and Infineon. Motorola has targeted
pilot production for late 2004. If Motorola
uses NVE’s technology, the Minnesota
firm would earn a 1 percent royalty
on the sales of the chip.
But the big payday for the company will
come with licenses from other manufacturers
that step through the door after the
technology has been proven. That is, if
on a proof-of-concept basis. No specific
date was given for when actual production
would begin. Nonetheless, the news
caused the stock price to jump again.
Cypress aside, Baker emphasizes that
NVE’s Motorola relationship is still another
powerful component of the NVE story,
and that the Cypress project is focused on
only one type of computer memory. He
suggests, in other words, that there will be
other opportunities for his firm’s MRAM
technology.
“A lot of the valuation [of our stock] is
based on the quality of our intellectual
property and the tremendous potential of
MRAM to revolutionize an industry,”
Baker says. “We believe we have the intellectual
property and technology that
makes us the current leader in the practical
use of MRAM. Those kinds of things
come along very rarely.” ■
Tony Carideo (tony@carideogroup.com)
is president of The Carideo Group, a Minneapolis-based
integrated corporate communications
company. His firm does not
represent NVE.
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