National Instruments Corp (NATI) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the National Instruments third quarter 2011 earnings conference call. Today's call is being recorded. You may refer to your press packet for the replay dial in number and pass code. With us today are David Hugley, Vice President, General Counsel and Secretary; Alex Davern, Chief Operating Officer; Dr. James Truchard, President, CEO, and Co-Founder; and Pete Zogas, Senior Vice President of Sales and Marketing. For opening remarks I would like to turn it 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 including statements regarding future revenue growth opportunities, our guidance for Q4 revenue operating expense and earnings per share, our potential product releases and success in large accounts. We wish to caution you that such statements are just predictions and that actually 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 annual report on form 10-K filed February 18, 2011, and our most recent quarterly report on form 10-Q filed July 29, 2011. 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 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 for the third quarter are record quarterly revenue, record revenue for our CompactRIO and TXI products and the successful execution of our 2011 investment plan. I am extremely pleased to report continued strong revenue growth and an all time revenue record in Q3. We believe our ability to deliver record revenue despite the rapid decline in the global purchasing manager's index in Q3 is a validation of the strength of our business model and our ability to execute.

In addition, we have made significant progress on growing our large orders, demonstrating that the investment decision to grow system level business paying off. I believe our strategic investments and innovation and customer adoption are key to our future growth and I continue to be optimistic about our position in the industry. In our call today, Alex Davern, our Chief Operating Officer, will review our results. 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 it up for your questions. Alex?

Good afternoon. Q3 was a very successful quarter, and there are some clear positives to take away. First, we had record revenue with very strong year-over-year growth in orders over $20,000. Second we have essentially concluded our 2011 investment plan, and third for the year to date, we have successfully kept our non-GAAP revenue and expense growth in balance. Growing revenue 22% and expenses 23% year to date. Revenue for Q3 was $255 million, up 16% year-over-year, and non-GAAP revenue for Q3 was $271 million up 23% year-over-year. As described in our press release for Q3 we have two adjustments between GAAP and non-GAAP revenue.

The first was for $3 million and relates to the purchase accounting for deferred accounting for our AWR acquisition. This adjustment was included in the guidance we gave for Q3 and will continue for the next several quarters. The second adjustment is a $13 million accrual which we have taken in Q3, related to our GSA contract with the US government. And I terminated this contract in May. This adjustment covers the expected cost to resolve a contract disagreement with the GSA. This dispute was discussed in our form 10-Q's filed in both April and July. From a product point of view, revenue for our traditional instrument control products, which now only represents 6% of revenue, was up 1% year over year in Q3, while revenue for all of our other products was up 24% year-over-year. Backlog increased slightly in Q3 compared to Q2 and our deferred revenue balance increased by $3.2 million sequentially. Now turning to expenses.

As we discussed in our last call, our decision to make significant investments in 2011, coupled with our strategy of recruiting the majority of our engineers as they graduate from universities in June, July and August has resulted in a significant spike in our year-over-year growth of our total expenses in Q3. So in line with our investment plan our non-GAAP operating expenses were up 30% year-over-year in Q3. Overall head count was 6,130, up approximately 650 people or 12% since March and up 18% year-over-year. We believe these investments give us the ability to fully leverage the strategic advances we have made in our LabVIEW, PXI, Data Acquisition and CompactRIO platforms, and are necessary to drive our long term growth.

When we look at the results for the broader time scale of the first nine months of the year, you can see the discipline that we have exercised this year in matching expense growth to revenue growth. Specifically for the first nine months of 2011 non-GAAP revenue is up 22% while non-GAAP operating expenses are up by 23%. As a result for the first nine months we have delivered record non-GAAP operating income of $120 million, up 21% year-over-year. This represents a 16% non-GAAP operating margin, in line with the first nine months of last year. Net income for Q3 was $13 million with fully diluted earnings per share of $0.11. Non-GAAP net income was $31 million with non-GAAP fully diluted earnings per share of $0.26, $0.01 below the mid-point of our guidance.

The main reconciling item with guidance was a $700,000 foreign exchange loss primarily related to the rapid fall of the Euro at the end of September. Our reconciliation of our GAAP and non-GAAP results is included in our earnings press release. As we look to finish out 2011, I would like to take a moment to reflect on our execution through the last five years. Despite the worst recession in modern history and the recent collapse of the global PMI, National Instruments has delivered strong revenue and operating income growth during the last five years.

We have also stayed true to our long-term strategy over the last five years, increasing our R&D personnel by approximately 70%, our field sales force by 90%, our orders greater than $20,000 by over 140%, and releasing hundreds of new products that have expanded our ability to serve customers in a diversity of new application areas. Key to enabling this performance has been our expanded gross margins. Over the last five years on a year to date basis, we have expanded our non-GAAP gross margins by approximately 350 basis points, which has allowed us to deliver a good profit growth while making the strategic investments necessary to sustain the long-term growth of the Company.

Now turning to the balance sheet. Inventory declined by $9 million during the quarter and our cash and short-term securities increased by $16 million to $336 million as of September 30, 2011. Now I would like to make some forward-looking statements. With the global PMI dipping below 50 in September, we did see the significant decline in Q3 that we had anticipated when giving guidance. Looking forward, we anticipate continued further weakness in industrial economy in Q4 and as a result we are taking a conservative approach to guidance for Q4. That means an 8% sequential non-GAAP revenue growth at the mid-point. This is below the historical seasonal average for Q4. From the expense side we have essentially concluded our 2011 investment plan, and we will see the pace of new hiring slow dramatically in Q4. As we look out to 2012, we have become more cautious, and we anticipate limited personnel additions in 2012.

Turning to specific guidance for Q4, we currently expect revenue for Q4 to be a new all time record and to be in the range of $280 million to $300 million. In Q4 we expect non-GAAP revenue, which excludes the impact of acquisition accounting on deferred revenue, to be in the range of $282 million to $302 million. With this guidance we expect to deliver annual revenue of over $1 billion. This would be a new milestone for NI and a significant step toward our goal of reaching $2 billion in revenue by 2016.

Given that we are closing out our 2011 investment plan, we expect to see a very modest increase in non-GAAP operating expenses in Q4. Looking out to 2012, our objective will be to grow revenues faster than expenses, and we believe we will be able to achieve this goal, if we are able to deliver year-over-year revenue growth in the high single digit range or better. We currently expect that GAAP fully diluted earnings per share for Q4 will be in the range of $0.22 to $0.30 per share, with non-GAAP fully diluted earnings per share expected to be in the range of $0.29 to $0.37. These are forward-looking statements and I must caution you that actual revenues and earnings could be negatively affected by numerous factors such as any further weakness in the global economy, rescheduling of customer orders, expense overruns, manufacturing inefficiencies, effective tax rates and foreign exchange fluctuations.

In summary we are very pleased with our strong performance this year and believe we are well positioned to achieve our growth goals. Now I will turn it over to Pete Zogas, Senior Vice President of Sales and Marketing.

Thank you, Alex. We were extremely pleased with our strong year-over-year revenue growth and our ability to set a new all-time high for quarterly revenue. We believe our performance is a testament to the strength of our business model and validates the investments we have made in growing our field sales force and R&D personnel. Since September, 2010, we have increased field sales head count and R&D head count by 23%. We believe these investments will allow us to continue to deliver world class products as well as give us the expertise in the field to further penetrate large accounts.

InQ3 our orders over $20,000 grew 31% year-over-year while our orders under $20,000 grew 10% year-over-year. Our average order size reached an all-time high of approximately $4,600. 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 50 new products and delivered more than 200 technical sessions to a record crowd of approximately 3,300 engineers and scientists. We released LabVIEW 2011, which incorporates numerous user requested features from our passionate user base that accelerates their productivity while continuing to allow users to innovate on a stable platform for mission critical applications. When customers buy LabVIEW they are plugging into a vast ecosystem of NI and third party add ons available through the LabVIEW tools network as well as the ability to interact with almost any hardware device through the more than 10,000 available instrument drivers.

When customers use LabVIEW combined with the modular hardware approach with NI Data Acquisition, CompactRIO and PXI, they are able to quickly integrate system components and do their jobs faster, better and at a lower cost. As we continue to expand our software offering, the trend towards buffer-based test systems presents NI with significant opportunity. During the quarter we saw strong year-over-year growth in our PXI modular instruments with our RF and FlexRIO products experiencing record revenue.

In Q3 we released the industry's first 14 gigahertz RF vector signal analyzer in the PXI form factor. This release represents a significant milestone by offering best in class performance in RF at a fraction of the cost of traditional instrumentation, and is the latest result of our investments in RF products. Our continuous introduction of new products into RF has resulted in a 53% year over year growth in PXI RF products in Q3. We also are successfully integrating the talented teams from our acquisitions of AWR and Phase Matrix, while at the same time making progress in the ability of our sales force to sell large systems in RF.

While we believe our rapid growth rate demonstrates our disruptive presence in RF, we continue to see a tremendous opportunity to grow with our PXI RF offering and the price performance advantages it offers over rack and stack instruments. A customer that has had success with our new vector signal analyzer and PXI modular is ST-Ericsson, a global leader in integrated circuit design for mobile phones. A critical process in their new product development is the validation of communication protocols used in next generation mobile devices. ST-Ericsson used our new 14GHz, RF-VSA to deliver test performance ten times faster while reducing system costs by one-third compared to the previous box solution.

In Q3 our data acquisition products experienced strong year-over-year order growth lead by our USB wireless ethernet NC series based devices. During the quarter we announced three new single slot CompactDAQ chassis that give engineers and scientists the portability of a data logger with the performance and flexibility of modular measurements. Our distributed IO products saw strong year-over-year growth, achieving record quarterly revenue. This growth was led by our CompactRIO products which grew by 50% in the past year. This quarter NI announced an expansion of the reconfigurable IO products with the addition of the highest performance and first multi core CompactRIO system as well as the smallest single board RIO devices. The multi core CompactRIO system based on the x86 architecture from Intel brings the RIO platform into a new performance category to meet the most demanding needs of our customer applications.

Combined with LabVIEW, NI RIO technology delivers value to our customers by simplifying development cycles, shortening time to market when designing advanced control monitoring and test systems. One use case that demonstrates success with single board RIO and LabVIEW is Saara Embedded Systems, an integrated service and solution provider in embedded technologies. They created a rugged and flexible embedded power monitoring system that has reduced energy consumption at large facilities by up to 15%.

The NI platform allowed Saara Embedded Systems to rapidly prototype their design while saving six months of development. The success of customers like this give us great excitement about our RIO products and the growth opportunity it presents. To close, we were very pleased to see our continued investment result in record revenue in Q3. We believe this illustrates our strong position due to our differentiated product offering, our world class direct sales and services organization and our strong alliance partner network. With that I will turn it over to Dr. T.

Thank you, Pete. I am extremely pleased with our execution this year. We balanced revenue and expense growth while driving innovation and executing toward our long-term vision. For over 25 years, our vision has been for software to be at the center stage for how instrumentation is built. Moore's Law continues to hold true. With our LabVIEW software we are well positioned to deliver the performance benefits for test and measurement applications well into the future. LabVIEW is unique in how it combines multi core and FPGA processing capabilities in a single platform delivering tremendous performance capabilities to our customers.

At NI Week in August, we celebrated a number of exciting customer applications highlighted by the annual graphical system design achievement awards which showcase the most innovative products based on NI software and hardware. This year we received 130 submissions from 20 countries ranging from a milk refrigeration system for use in rural India to a robot that combined great mobility of wheels on flat ground with legs on rough terrain. The overall winning submission came from Max Planck Institute of Quantum Optics who used LabVIEW and FlexRIO to build a powerful and versatile custom instrument to implement feedback control, for systems as small as a single atom interacting with a single photon. In addition to the winners solving industry challenges of today, NI technology now is being used to solve some of the most challenging engineering challenges of tomorrow in academic institutions across the globe.

In renewable energy, for example, innovations through graphical system design comes from Virginia Tech who was recently named the overall winner of the Eco Car, a three-year collegiate vehicle engineering competition sponsored by the US Department of Energy and General Motors using NI technology. The Virginia Tech team successfully built an extended range electric vehicle that incorporated a hybrid control strategy to optimize for fuel efficiency, achieving approximately 82 miles per gallon equivalent.

And in RF and communication research this quarter NI released a new teaching platform called the Universal Software Radio Peripheral to train the next generation of engineers on communication system designs, software [dependent] radio and digital signal processing. This new educational platform functions as a scalable solution for communications, experimentation, research and rapid prototyping. Leading institutions such as Stanford have adopted the platform because for the first time ever, students have affordable access to high frequency signals earlier in their academic career.

Now I would like to highlight the particularly strong growth of our CompactRIO and PXI based RF product sales. Each exhibiting greater than 50% year-over-year growth in Q3. The success of these product initiatives show the value of the investments we have made. One way we are poised to take advantage of RF is through the successful integration of the AWR and Phase Matrix acquisitions, which brings to NI strong expertise from these talented teams. We believe these acquisitions enhance our product portfolio and our ability to serve customers throughout the RF product development cycle and will accelerate the deployment of RF and wireless technologies to significantly improve customer productivity through increased connectivity between design, validation and production test functions. In summary, I was extremely pleased with our performance this quarter as we delivered record quarterly revenues, stayed true to our long term vision, and responsibly managed our business.

We have invested in our business this year through hiring talented employees, returning $36 million in dividends to shareholders and acquiring strategic companies that will allow us to expand our positions in the coming years. While the future economic weaknesses impact our short-term profitability, we see it as an important investment for our long-term goal of reaching $2 billion in revenue by 2016. I would like to thank our customers for their commitment to innovation and our employees for their effort in taking our Company vision and shaping a bright future for National Instruments. The daily commitment of our employees to innovation has further differentiated National Instruments from other players in the markets we serve, and we will provide a strong foundation to support future growth and profitability. We will now take your questions.

Thank you. (Operator Instructions). Our first question comes from Anthony Luscri with JPMorgan.

Hi, thanks for taking the question.

Hi, Anthony. How are you?

Hi. I was wondering if you could dig into your $2 billion revenue target in 2016. Can you talk about the drivers that underpin that target and the puts and takes there?

Yes, maybe a historical reference may be useful to why, as we talked about this targeted NI Week as well. Between 2003 when the economy stabilized after the last recession and 2008 we were able to successfully double the size of the Company and improve our profitability as we went along that journey and in that time frame. As we look out to the next five years we believe we have done an excellent job of identifying significant opportunity for National Instruments. We have also obviously been very persistent in investing to meet that opportunity, and so we believe it is a realistic goal for us to pursue as we go forward. And perhaps Dr. Truchard would care to comment in terms of his view of the long term opportunity for the Company.

Sure. In the tested measurement space, we in many ways, especially for high performance testing and validation and production tests, have redefined a market place, and now module instrumentation is really the standard way for doing high performance tests. So this has enabled large opportunities across a broad class of applications. And then in the second space, in the industrial embedded space, using the same software technology, we are able to expand as we like to say for the first time in history, you can have advanced measurements in the same system that you have advanced control. And this creates highly differentiated positions in that space, industrial embedded, where in the past it may have needed custom design.

So that $2 billion, that excludes any sort of acquisition impacts, or -- ?

Our goal as we are starting forward is based on organic growth. I mean, there may be some acquisitions along the way, but we don't have any anticipated acquisitions as part of our thinking.

We are constantly looking for complimentary technology. But our core vision is to grow organically based on the strategy for this virtual instrumentation.

Okay. Thanks. And then a follow-up would be in terms of new market opportunity. You mentioned 53% year-over-year growth in RF. And I wanted to dig a little bit more into that. Are you gaining penetration in the development side, or is this more production or is it both? Can you provide a little context around that number?

Yes, this is Pete. We are seeing RF in a very broad perspective of applications. Wireless is pretty much everywhere, and so our customers are doing everything from validating designs to production level tests. Our government sector is using RF products for signal intelligence, applications. So RF is very important and a growth opportunity just because the wide adoption of wireless technology everywhere. But it is a broad-based play for us and not a vertical segment.

And when we look at the broad market for RF technology, it is a very large market. We are a relatively small player in this large market. Believe we have a very disruptive technology. We think that positions us well for future growth.

Okay. Thank you.

And our next question comes from William Stein with Credit Suisse.

Thanks, guys. A few questions. On the M&A that was completed, what was the incremental revenue that you saw from those two transactions in the quarter on a non-GAAP basis?

Sure Will, it's Alex here. I think we guided in the Q2 call to about $9.5 million in revenue sequentially and it came in right at that level. So it is about 4% roughly growth relative to the acquisitions. I think from an all in we were a non-GAAP of $23 million. Looking at that organic I believe it would be $19 million.

Okay, great. And then maybe digging a little bit more to the M&A, any comments on early successes with customers or successes in integration where you are seeing kind of customer acceptance or customer enthusiasm around these products being acquired by NI?

I will start with the last question. Customer enthusiasm has been quite high. We have seen very good acceptance by our customer base across the board. On the side of integration, it has gone very well. We have been very compatible, and it is really helped build a strong expertise in this area, so we are very pleased with these acquisitions at this point.

Maybe one more if I can slip in a question on end markets. Any comment on strength or weakness by end market would be really helpful.

I guess adding a little bit of color to that, we saw quite a bit of growth in everything around mobile devices. Smart devices as you know is growing rapidly and presenting quite an opportunity, and we are seeing some realization of that opportunity there. Energy accounts everywhere from optimization of energy usage to all of the alternatives and the tracking that is going on, we are seeing application success there. Even in big physics and academic, has been -- we had a fairly strong growth in Q3.

One area we could talk about of weakness I think that would be probably pretty broad based too is in the semi sector, is the one area where we did see a noticeable shift in customer demand, in that particular space. We have seen quite a bit of that from other companies that are also involved in serving that market as well.

Not surprising. Great, thank you.

(Operator Instructions.) Our next question comes from Rob Mason with Robert W. Baird.

Yes, Good afternoon.

Hi, Rob, how are you?

Very good. Alex, if you could, could you frame what level of -- call it fourth quarter global PMI, frame the lower end and upper end of your guidance relative to where you think the PMI might head.

I'm not sure if I wanted to be maybe that specific about an exact range, but let me tell you generally what is concerning me is certainly when we look at the preliminary numbers for October for Europe, That's my point of greatest concern frankly. My personal expectation, or maybe I should put it on the basis on which we are setting guidance is that we will see the average PMI for Q4 be below the average PMI for Q3. So I think it is quite likely that it may average under 50 for the quarter. And That's the assumption that we are building into our guidance.

Okay.

Obviously we are choosing to give guidance that sequential growth below the historical average of Q4 sequential in the last 10 years, and that's a reflection of an expectation of a below average PMI.

So when you said the preliminary numbers for Europe, is that the France, Germany, the PMI -- is that reflective of your own daily ordering take?

(Inaudible - multiple speakers.) There is a preliminary report put out. I believe it was on Monday.

Right.

It covers the Euro zone and the UK.

So this is not necessarily reflective of your daily order rate thus far in October.

No, I'm specifically referring to the PMI data itself.

Sure. How has your daily order rate been in October?

Well, obviously our experience to date is built into guidance. We fully consider that in setting guidance.

Maybe one last question, I may not have made all of the proper adjustments here between the GSA deferred revenue, but it looked like your product revenues -- excuse me, product gross margin, it ticked down year-over-year, and obviously sequentially as well. And I was just curious maybe what was behind that.

Sure, from a --w hen you do the math, from a non-GAAP -- there should be a table in the earnings release, I believe. From a non-GAAP point of view, gross margins were down sequentially, about a full point, about a hundred basis points. Year-over-year they were flat. The drop sequentially is really a number of causes. Number one, we did see some -- probably 20 basis points impact from the combination of the AWR/Phase Matrix acquisition. And number two, we did reduce inventory by about $10 million in the quarter and that's a deliberate decision to make sure we are well balanced as we move forward and that has some negative impact on gross margin. And then you'll notice in Q3 last year, and in most years, we tend to see a reduction in gross margin because we tend to see weakness in relative revenue from Europe in the third quarter. And that tends to be a factor that seasonally brings our margins down in Q3 and tends to bring them up in Q4. And we saw that pattern here again in the third quarter.

You continue to be satisfied with the gross margins on the system level orders then?

Absolutely. I mean I think the best way to look at that is over the last five years as I talked on the call, our orders over $20,000 are up 140%. And they're now at 48% of revenue in Q3 which I believe is probably an all-time high. But our gross margins over that five years are up almost 400 basis points. So I feel very good about our ability to deliver strong gross margin on these larger orders.

Okay. Thank you.

Thanks very much, Rob.

Our next question comes from Mark Douglass with Longbow Research.

Hi, Mark.

Hi, gentlemen. It is Mac Muirhead and I am calling in for Mark. How are you?

Good, good, and yourself?

Doing well, thank you. Let's see, just to hit a little bit on the -- you mentioned you are worried a little about Europe. I was wondering, could you give a little more commentary on possible order patterns in Europe, Asia toward the end of the quarter? If you could that would be helpful, thank you.

Sure I understand the question -- I guess what's share is we had a pretty linear quarter. We had a strong September. Order growth in Europe, Asia and America pretty much reflects the revenue growth that we had in the press release. So there is very little difference, backlog barely moved, it was up slightly in Q3. And then obviously our expectations are what we have seen in October so far is fully baked into our guidance for Q4.

Okay, all right, That's all I have. Thank you.

Thank you very much.

All right.

(Operator Instructions). And we will take a follow-up question from William Stein with Credit Suisse.

Great. Can we just get a view on tax rate, non-GAAP tax rate going forward, Alex? In my model I've traditionally had 20% and I think you haven't posted something that high in a while. What should we think about for that going forward?

The model I am using right now, is that we will see an increase in the non-GAAP tax rate in the fourth quarter. So I think somewhere in the low 20% is probably a good estimate.

All right, thanks.

And we will take a follow-up question from Anthony Luscri with JPMorgan.

Hi, thanks guys. My follow-up is regarding the unfortunate events in Thailand that are going on right now. Can you talk a little about the exposure you may have there in terms of the componentry?

Sure. You know, as we look at these events, it is really tragic to see yet another natural disaster unfold with such a big impact on a country that perhaps isn't best equipped to deal with it. From a practical point of view, we have looked at our own supply chain. We are not aware of any direct impact on our ability to deliver product at this point in time. However, the indirect impact that may manifest itself from an inability of our customers to get supply necessary for them to produce their own devices is really impossible for us to tell. So from a direct impact we don't see anything at this point that we are aware of. Indirect, we will have to see how it plays out as we go through Q4.

Okay, thank you.

(Operator Instructions).

Okay, thank you very much for joining us today. We appreciate your questions and we will talk to you next time.

That does conclude today's call and thank you all for your participation.