National Instruments Corp (NATI) 2010 Q3 法說會逐字稿

Good day everyone, welcome to the National Instruments Q3 2010 earnings conference call. Today's call is being recorded. You may refer to your press packet for the replay dial-in number and passcode. With us today are David Hugley, Vice President, General Counsel and Secretary. Alex Davern, CFO and Senior Vice President, Manufacturing and IT Operations. Dr. James Truchard, President, CEO and Co-Founder. And Pete Zogas, Senior Vice President Sales and Marketing. For opening remarks I'd like to turn the conference over to Mr. David Hugley, Vice President, Corporate Counsel and Secretary. Please go ahead, sir.

Good afternoon. During the course of this conference call we shall make forward looking statements regarding the future financial performance of the Company, including statements regarding our growth opportunity, the global economy, our ability to maintain or increase operating margin, our revenue and earnings per share guidance, and our strategy and future plans. We wish to caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to the documents the Company files regularly with the Securities and Exchange Commission including the Company's most recent quarterly report on Form 10-Q filed August 6, 2010. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements. With that, I will now turn it over to the Chief Executive Officer of National Instruments Corporation, Dr. James Truchard.

Thank you, David. Good afternoon and thank you for joining us. Our key points today are; record quarterly revenue; record revenue for our PXI, Modular Instrument, Our App and CompactRIO products; and record third-quarter operating income. I am extremely pleased with our performance this quarter as we set a new all-time record for quarterly revenue.

We continue to execute on the long-term strategic vision, exercising disciplined expense management, while growing our investments in R&D and a field sales force. I believe these strategic investments in innovation and new product development are what allowed us to achieve our outstanding Q3 results, including the quick return to record quarterly revenue.

I would like to congratulate Alex Davern on his promotion to Chief Operating Officer, as he focuses on enhancing the alignment between our customer face and functions as well as allocating resources to both support our core business and drive system-level sales growth. In our call today Alex will review our financials. Pete Zogas, our Senior Vice President of Sales and Marketing will discuss our business and I will close with a few comments before we open up for your questions. Alec?

Good afternoon. Today we reported Q3 revenue of $220 million which is an increase of 34% year-over-year and a new all-time quarterly record. Net income for Q3 was $28.1 million with fully diluted earnings per share of $0.36. Non-GAAP net income was $32.3 million with non-GAAP fully diluted earnings per share of $0.41. Both GAAP and non-GAAP operating income are records for a third quarter. And operating margins improved significantly year-over-year. Also, during the quarter our backlog increased by approximately $7 million due to the strength of our customer orders. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release. The 34% year-over-year revenue growth our business had momentum in Q3 and there are some clear positives to take away.

First, we had record quarterly revenue. Second, we continue to deliver strong gross margins. And third, we delivered 17% non-GAAP operating margins. From a revenue point of view, our instrument control business saw a 25% year-over-year increase in Q3 while revenue from our virtual instrumentation and graphical system design products grew 34% year-over-year.

Instrument control revenue has made a strong recovery from the very significant declines we saw during the recession. However, in Q3 it was still down 11% over two years since Q3 of 2008. Traditionally, our instrument control revenues have been highly correlated to the overall test and measurement industry. The current trends indicate that the industry continued its recovery in Q3 but has not yet recovered to pre-recession levels. We believe this makes our record quarterly revenue all the more impressive.

Now looking at the income statement in more detail. Non-GAAP gross margin in Q3 was 77%, compared to 75.3% in Q3 2009. This increased gross margin is a tribute to the intense efforts made to improve our operating models during the recession. On the expense side, our non-GAAP operating expenses were up by $4 million sequentially and by 23% year-over-year. The main driver of the sequential increase was a drop in capitalized software during the quarter due to the release of LabVIEW 2010. For the first nine months of the year our revenue was up 31% year-over-year and our non-GAAP operating expenses are up 18%. In line with the plan we detailed at our investor conference at NIWeek.

Now turning to the balance sheet. As of September 30, the Company had $339 million of cash and short-term investments up $22 million from June 30. Also, during the quarter the Company paid $10 million in dividends and used approximately $11 million to repurchase 379,000 shares of the Company's common stock at an average price of $28.87 per share. We also announced today that the Board of Directors approved a quarterly dividend of $0.13 per share, payable on November 29, to shareholders of record on November 8.

Now, I would like to make some forward looking statements. In line with the expectations we laid out in our previous earnings call, turning Q3 to global PMI continued to move towards its long term average of 51.7. For the quarter it averaged 53.5, down from 56.7 in Q2. Moving forward we expect that the global PMI will continue on its path towards its historical mean during Q4. Non-GAAP operating margin in Q3 was 17%. 1% higher than Q3 of 2008. And operating income for Q3 set an all-time record for a third quarter. Similarly, operating margins for the first nine months of 2010 exceeded the same period in 2008.

The record operating profit we have reported for the first nine months together with our guidance for Q4, gives us confidence that we will be able to deliver record annual revenue and record annual operating profit in 2010. As the global PMI takes a logical path and reverts towards its historical mean, we remain confident about NI's revenue growth prospects. Given the relatively low levels of industrial inventories globally, we believe that the industrial economy is well positioned to manage the moderation of the PMI and that NI's positioned to grow revenue through this moderating trend.

We were making significant focused investments in key regions in application areas both in Q4 and in 2011 to support sustained growth for the Company. Thanks to the hard work of all of our employees, we have delivered a rapid recovery in our profitability and assuming 2011 is a normal revenue growth year, we will be targeting only a modest increase in operating margins next year but will instead be investing for topline growth.

In preparing your models for 2011, I would also encourage you to make sure to take account of the historical distributions of our earnings by quarter. Prior to the recent economic turmoil, it was normal for the Company to record 20% or less of its earnings in Q1 and 30% or more in Q4. This is a result of the seasonal, historical seasonal pattern whereby our order volume has grown sequentially in Q4 and dropped sequentially in Q1.

Now, turning to specific guidance for Q4, we currently expect revenue to be in a range of $230 million to $244 million. We also currently expect that GAAP fully diluted earnings per share will be in the range of $0.38 to $0.48 for Q4 with non-GAAP fully diluted earnings per share expected to be in the range of $0.43 to $0.53. As these are forward looking statements, I must caution you that actual revenues and earnings per share could be negatively affected by numerous factors such as any further fluctuations in the global economy, rescheduling of customer orders, expense overruns, affected tax rates and foreign exchange fluctuations.

In summary, we are very pleased to see record revenue and very strong profitability in Q3. Our goals are to invest in sustained revenue growth and to continue to drive towards our 18% non-GAAP operating income target.

I also want to mention that NI will be attending the following conferences. The Sidoti conference in New York on November 16, Credit Suisse Technology Conference on November 30, in Scottsdale, the NASDAQ conference in London on December 7, and the Needham conference in New York on January 13.

We hope to see you there. Now I'll turn it over to Pete Zorgas, Senior Vice President of Sales and Marketing.

Thank you Alex. We were extremely pleased with our ability to set a new all-time high for quarterly revenue. We have continued to grow and evolve our field sales force and R&D to meet the needs of system level opportunities. We increased field sales headcount 16% in the last two years and as a result of the world class execution from our sales teams we saw strong year-over-year growth in all regions.

In US dollars, Europe was up 28%, Asia was up 48%, and the Americas were up 29% year-over-year. We've continued to invest in strategic R&D initiatives, and increased R&D headcount 9% in the last two years and we were pleased to see record revenue for our CompactRIO, PXI, Modular Instruments and RF Products.

In Q3 our orders over $20,000 grew 50% year-over-year and our average order size reached an all-time high of approximately $4,000. This success reflects the enhancements we have made in our product and service offerings, the excellence of our network of integrators, and our outstanding sales teams.

At our annual NI Week User Conference in August we announced more than 40 new products and delivered more than 200 technical sessions to a record crowd of more than 3,000 engineers and scientists. We were particularly excited to mark more than 25 years of LabVIEW software development with the release of LabVIEW 2010, which among many new features delivers faster code execution. When customers buy LabVIEW they are plugging into a vast ecosystem of developers who share code and best practices. A marketplace of add-ons and access to support for more than 10,000 different types of hardware devices. LabVIEW 2010 strengthens the rich LabVIEW ecosystems providing thousands of developers the opportunity to expand the platform and enhance the significant differentiation of our product portfolio.

As we continue to expand our software offering, we see a significant opportunity as engineers are turning towards softer centric test systems because their products and as a result their test systems are evolving faster than ever. And as evidence of the growing role of modular softer defied test systems, we saw strong year-over-year growth in our PXI Modular Instruments this quarter With our RF and FlexRIO products experiencing record revenue.

In Q3 we released the industry's first PXI vector network analyzer or VNA which represents a significant milestone for test engineers who need performance and price optimized VNA measurements. The 6 gigahertz PXI VNA is the latest result of our investments in the RF market and expands the PXI platform into new areas. This year at NIWeek we brought together our worldwide sales organization to learn about new products and meet with key customers and alliance partners, and the sales organization was excited by the new application areas for our RF products. The VNA was the 48th PXI Modular National Instrument's has released this year and builds upon our offering of more than 400 PXI products in 13 years invested in supporting a PXI based approach to automated design, validation and production test. Our outstanding success in the area of PXI Modular Instruments has promoted an accelerated shift in the approach to automated test applications away from Legacy Box Instruments and towards softer defined modular instruments

Traditional box instruments can't offer the same level of synchronization, system level software integration, and reduced factory footprint and power consumption and are no longer competitive in many automated test applications. The biggest companies in the test industry, including Agilent, Teradyne and Rohde and Schwarz have joined the PXI systems alliance and we believe that their endorsement validates our softer based approach to automated tests and will help convert more customers to our view on PXI Modular Instrumentation

An example of the customer who saw significant benefits using our modular instruments was Texas Instruments. We developed a PXI based system for testing power management semiconductor devices. Using the NI platform, they were able to convert a lengthy manual test process into a highly automated one. Reducing the test cycle from weeks to days while increasing reliability, repeatability and maintainability.

We also saw modular instruments success in many other application areas. For example, one customer was able to cut development time by 75% on a test system for HDMI video. Another customer standardized on NI hardware and software to develop a green energy test solution for solar inverters. Using the NI platform they were able to develop a complete solution, covering test needs from PCB test to the packing station of the final product.

In Q3, our data acquisition products experienced strong year-over-year growth. Led by our USB, Wireless, ethernet and C-Series based devices. We also introduced a PXI Express fiber optical sensor interrogator that can take physical measurements, like temperature and strain using a standard optical fiber in place of copper wire. Which allows us to address new applications in extreme environments and take measurements over long distances.

Our distributed I/O products also saw large year-over-year growth, achieving record quarterly revenue. Our CompactRIO products saw record revenue this quarter and drove this growth. The CompactRIO platform has been a key investment area and we are pleased to see success in many diverse industries including energy, oil and gas, biomedical, automotive and transportation.

One example of this success was at the University of Leeds where they used CompactRIO and LabVIEW to test a novel device they developed which can help improve the blood flow output of a diseased heart. Since there is a long waiting waiting list for heart transplants, this device could help improve the quality of life of patients while they wait for a transplant. The team chose CompactRIO to test the device because it offered a rugged and reliable platform to conduct prolonged testing which previously required bulky equipment or other complex solutions.

To close, we have built a world class modular instrumentation platform, an outstanding sales force and service offering and a strong alliance partner network, which help us serve an immense diversity and scale of applications. As the pace of innovation increases, we believe the strategic importance of having a broad-based direct sales force of engineers also grows. As these engineers work with our customers to map the capabilities of our platforms to their unique applications. We were very pleased to see our continued investments result in record revenue in Q3 and look forward to continued success. With that I'll turn it over to Dr. T.

Thank you, Pete. I was extremely pleased with our Q3 performance and believe that it demonstrates the strength of our business model and validates the strategic investments we have made. Our long-term focus on technical and operational excellence has helped us to further differentiate ourselves from other players in the markets we serve.

In addition our outstanding performance this quarter, I am pleased to see the many opportunities we have for future growth and the momentum we see in many areas of business. Over the past several years our orders over 20K have more than doubled and we have targeted more of our resources toward high potential application in regional opportunities. The complex nature of system level orders and our interest in aggressively pursuing new opportunities heightened the importance of an efficient organizational structure. I believe our recent announcement that Alex will hit -- take up the post of Chief Operating Officer builds on the way we have been doing business for years and will allow us to expand our system level sales more effectively, optimize integration with target customers, and maximize efficient use of resources.

I am also excited because this step allows me to intensify my focus on product strategy and the long term vision of the Company. As I increase my focus on long term Company direction, I'm pleased with the execution of our vision of redefining instrumentation with our graphical system design approach. We are helping our customers solve some of the world's most significant scientific and engineering challenges through our ability to leverage the latest technologies like multicore processors and FPGAs. And it is exciting to see the significant successes customers are demonstrating using this approach to system design.

NIWeek was an exciting exhibition of these applications and the Annual Graphical System Design Awards were an inspiring presentation of some of the remarkable challenges our customers are solving using the NI platform. This year we had more than 100 submissions from over 20 countries around the world. The application submissions range from developing a wave power research control system to designing a heart rate monitor to reduce risk of fetal mortality. The Green Engineering Award went to Wineman Technology, who used CompactRIO to control the waste heat engine, which eliminates transmission loss and reduces carbon emissions, contributing to the preservation of ever depleting fossil fuel resources and the global climate. The overall winning submission came from Dr. Dennis Hong, Assistant Professor and Director of Robotics and Mechanisms Laboratory at Virginia Tech, who used LabVIEW and CompactRIO to build and develop a vehicle that makes it possible for a blind driver to successfully navigate, control speed, and avoid collision.

In summary, I was extremely pleased with our performance this quarter as we returned to record quarterly revenue. I would like to thank our employees for their commitment to innovation, prudent expense management, unwavering focus on serving our customers. I believe our continued investment in innovation and our field sales force and intense efforts we have made to improve our operating model during the recession have further differentiated National Instruments from other players in the market we serve and will provide a strong foundation to support future growth and profitability. We will now take your questions.

(Operator Instructions)

We'll go first to William Stein with Credit Suisse

Great. Thanks for taking my question. You're pretty clear in the press release that they're going to be perhaps some incremental investments next year. So, we'll see modest fall through on the operating line, but I'm wondering if you can spend a minute to try to quantify that and let us know if you think that 18% is within grasp for next year?

Well, it's Alec here. And thanks for your question. Clearly we've made a tremendous amount of progress back towards 18% for non-GAAP. With the midpoint of our guidance for Q4, we're basically positioning ourselves to have the highest operating profit -- operating margin in the last 10 years and have closed about or will have closed about 90% of the gap between our target and where we were last year, so tremendous, kudos to the Company for pulling that off.

Obviously, as we get closer to the target the rate at which we want to increase operating margins has got to slow down. And we want to turn out attention towards the more valuable long term goal of driving organic revenue growth, and that's what we'll be doing as we move into next year. In terms of exactly how that will play out next year, to a fine point of whether it will hit 18% or not, will obviously clearly depend on the rate of overall revenue growth for next year. We do have increasing, growing confidence in our future prospects and in the prospects for 2011, but it's too early, at this stage, to try to determine the exact operating margin target for next year.

Okay. So, just a follow-up to that is when you look at the growth that you experienced in the last year and you look out to next quarter and next year and you're investing for more growth. Are you seeing more opportunities in the traditional test business or are you seeing more opportunity in the industrial process control and related industries?

Well, actually it's both because on the test side we've reached scale and critical mass of our PXI systems, where now they are considered a main standard and the way to do high-performance, lower power, very cost effective test solutions. And then on the industrial embedded side, we've been very successful with our CompactRIO platform across a wide spectrum, so we seek success on both sides.

Great. Thank you.

We'll hear now from Mark Douglass with Longbow Research

Good afternoon everyone.

Hi Mark, how are you?

Fine. We can go back to the margins, just a little bit, looking at gross margins have they ticked down a little bit the past couple of quarters? Anything in there particular that would be driving the little decline in gross margin there versus the big increase in revenues, is it pricing, higher costs, freight, anything like that?

Sure, Mark, let me jump in there. Normally if you go back, the last couple years have been a little unusual, if you look at the trend prior to the start of the great recession it's pretty typical for us to see a margin decline sequentially in Q3, on the back of two things. One, it tends to be a slower quarter for closing larger software volume license agreements. And two, Europe as a percentage of our revenue tends to fall in Q3 with the summer season in Europe, and they have the higher gross margins on a regional level. We anticipate margins ticking back up here in Q4 from a gross margin point of view.

Yes. That's certainly implied in your guidance.

Yes, that's what we expect to see in Q4.

Right.

It's more of a seasonal phenomenon

Right. Well then speaking of Europe, can you dig down a little bit more into what -- I was a little surprised at how strong Europe was? I don't know if you were. But, what are your thoughts there, anything in particular occurring. Are they just really just loving PXI, what do think is going on in Europe? What I would think would be a seasonally slow quarter.

Tremendous execution by the European team. And the overall PMIs in Europe remain pretty strong. We've had solid execution on the platform, and Pete may want to comment a bit more on our trends in Europe.

I'll echo the solid performance of the team over there and we continue to see opportunity both in the test side and the embedded side so I think it was just a result of solid execution.

Okay. Thank you.

Anthony Luscri with JP Morgan. has our next question.

Hello. Thanks for taking the question.

Hello Anthony, how are you?

Good how are you, Alex? How are you with your new position?

Learning

Very good. On that note can you provide a little more color on your sales force buildout strategy and how that is impacting the large deal sizes? Are we seeing the impact already or do we expect that more to be a 2011 phenomena?

As we reported, our orders over $20,000 which we used as a proxy for this complex system level business. We reported record revenue and so we anticipated this several years ago and we've been investing heavily in our customer facing field operations. And we're seeing both the short-term results from that in Q3, as well as setting ourselves up for the sales cycles which do tend to take more than a quarter to close.

I think were very happy we made that decision a number of years ago. It's allowed us to gain market share. And it's a strategy we'll be supporting as we go forward.

Is the where most of the further investment will be going in 2011?

It will be balanced between both R&D and the field. I'd say would be the two primary recipients of this increased investment and it's very logical, at this point, for us having come back almost to our operating income target, to shift towards, as I said earlier on, the more valuable task of driving long-term organic revenue growth. With the opportunity we have in front of us now I think we would be remiss in not being aggressive to move forward to capture that.

One thing, as you focus on the specialty areas you discover gaps in the product portfolio and that creates an urgency to close those gaps and that's the kind of thing we'll be doing in R&D.

Okay, thanks for that. One last question for me. Your DSOs were flat in the quarter and typically, I'm sorry, they were up in the quarter and typically they are down during the third quarter timeframe. Is that -- can you comment on order linearity or impact from large orders or was it due to some of the comments you made around gross margin patterns in the third quarter?

No. I think are DSO moved up by about one day. I would take that as statistically insignificant, the lower the pattern with the quarter was very similar in linearity to a normal Q3. Q3 tends to be a little bit more back end weighted towards September because of July started the holiday season, tends to make it a little slower, so it followed the typical seasonal pattern, we would expect to see through the third quarter.

Thank you.

Thanks, Anthony.

(Operator Instructions)

We'll go next to Ajit Pai with Stifel Nicolaus.

Yes. Good afternoon and congratulations on a solid quarter and Alec on the promotion. A couple of quick questions. I think the first one is just looking at capacity in terms of manufacturing. You've talked in the past about Hungary being able to take care of about $1 billion of revenue and you're already guiding at the high end of your guidance range, approaching that number. So, can you give us an update as to whether Hungary can produce more than that and also on the Malaysian expansion that you talked about and shared about a couple of years ago?

Yes, sure. I was over in Hungary a couple of weeks ago. We're working on just updating our expectations. Right now the Malaysia building is under design, we anticipate at this point, if nothing changes that we'll start construction in Q2 of next year and anticipate start production in Q3 of 2012. Obviously the Malaysia plant is -- capacity expansion driven need. So, assuming we continue to see an average growth rate in the next eight quarters or six quarters then we'll proceed forward with that. Everything is on track right now for us. To -- deliver a functioning production facility in Q3 of '12.

Got it. And then what is the headcount at the end of the quarter?

Sure. The overall headcount for the Company, I believe, is a little over, was running about 5,200 people.

At the end of June you were 5,403.

No. I believe at the end of September we were a little less than 5,200. Let me come back to you at the end. It was 5,197 in September. I can come back to you with the June number in a second, Ajit.

Okay. Got it. And then, just looking at the orders over $20,000, you talked about it being up 50% this quarter and it was 45% last quarter. Could you give us some color as to what they are of the percentage of overall orders

I'll take this one, Ajit. The business coming from orders over $20,000 represent 43% of the total orders.

Just going back to your question, Ajit, we had 5,103 people at the end of June. So up about 100 people or about 2% sequentially in the quarter. Q3 is a big hiring season for us for engineers. As they graduate out of school so that's pretty typical.

Got it. Thank you so much.

(Operating Instructions)

We'll go next to Chuck Murphy with Sidoti and Company.

Hello. Good afternoon.

Hello Chuck, how are you?

Doing alright. Most of my questions have been answered. I just wanted to make sure I heard something correctly from you earlier, Alec. You said earnings -- the distribution less than 20% for the first quarter?

Well, I just want to make sure people, especially those who are newer to the story, when you look back the expectation I would have, as I look into '11, we have some growing confidence in our future prospects and it's likely to be a lot more normal a seasonal year than we've seen in '09 or '10. Or before '08, for that matter. Back in the '04 through Q3 of '08 timeframe, it was fairly normal for us to see about 20% or slightly less of our EPS in the first quarter and 30% or slightly more in the fourth quarter. I just want to make sure people, when they thinking about the distribution of earnings in Q -- in 2011 just think back to that more normal time. In the distribution that we saw at that stage.

And what would you call a normal distribution for the sales?

I dont have the number right off the top of my head here. But it's typically -- we see a sequential decline in Q4, excuse me, in Q1. So, normally we see a reasonable, good sequential increase in Q4. A mid to high single-digit decline in Q1 and then building from there.

Got you. Okay.

That's been the seasonal pattern we've seen in the past. Obviously, we are not giving guidance for Q1. It's more about the distribution of the consensus within the year.

Okay thank you.

We appear to have no further questions at this time. Ill turn the conference back to our speakers for closing remarks

Thank you very much for joining us today. We look forward to seeing you at some of the IR events we have coming up in the coming months.

That concludes today's conference. Thank you all for joining us.