National Instruments Corp (NATI) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the National Instruments third-quarter 2013 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, Chief Operating Officer; Dr. James Truchard, President, CEO, and Co-Founder; and Pete Zogas, Senior Vice President of Sales. For opening remarks, I'd like to turn the call over to Mr. David Hugley, Vice President, General Counsel, and Secretary. Please go ahead, sir.

Good afternoon. During the course of this conference call we shall make forward-looking statements, including our guidance for our fourth quarter revenue, operating expenses, and earnings per share. 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 1, 2013. 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 are -- Q3 revenue of $289 million; strong revenue growth in RF and CompactRIO products; and continued spending discipline in Q3.

Revenue for Q3 came in at $289 million comparable with Q3 a year ago and above the midpoint of our guidance. I am pleased with our continued spending discipline during the quarter, with operating expenses down sequentially for the second consecutive quarter. This is a testament to the keen focus of our employees across the Company and our collective efforts on improving our non-GAAP operating margins toward our goal of 18%.

In our call today, Alec Davern, our Chief Operating Officer, will review our results; Pete Zogas, our Senior Vice President of Sales, will discuss our business; and I will close with a few comments before we open up for your questions. Alec?

Good afternoon, and thank you for joining us today. Today we reported revenue of $289 million, $9 million above the midpoint of the guidance we gave on July 29.

As you can see in the presentation accompanying this webcast, in Q3 of 2012 we recognized $27 million in revenue from our largest customer, which was our largest sales quarter to this customer. This compare had a significant impact on our overall revenue growth this quarter as we recognized $4 million in revenue from this customer in Q3 this year. As a result, our total revenue was relatively flat year over year in Q3, while revenue excluding our largest customer grew 8% year over year.

For Q3 net income was $16 million, with fully diluted earnings per share of $0.13. Non-GAAP net income for Q3 was $24 million, with non-GAAP fully diluted earnings per share of $0.19, $0.03 above the midpoint of our guidance range. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

From a regional point of view, revenue was up 9% year over year in the Americas, up 7% in Europe, and up 24% in the emerging markets. However, revenue was down 27% year over year in east Asia, as the vast majority of revenue from our largest customer is recognized in this region. Additionally, we saw a significant negative impact from the decline and devalue of the yen, with orders from Japan in Q3 being down 20% year over year in US dollars.

Non-GAAP gross margin in Q3 was 75.1%, up 240 basis points from Q2, due primarily to a change in customer mix. Total non-GAAP operating expenses were $184 million, down approximately $1 million sequentially.

The year-over-year growth in our non-GAAP operating expenses was 3% in Q3, and I am pleased with the continued budget discipline throughout the Company. For Q3, our non-GAAP operating margin was 11.3%, with non-GAAP operating income of $33 million, up 8% sequentially.

Now, taking a look at trends by order size. In Q3, we saw a 2% year-over-year increase in the value of our total orders. Breaking that down, we saw 2% year-over-year growth of our orders with a value below $20,000.

Orders between $20,000 and $100,000 were approximately flat, while orders over $100,000 were up 8% year over year. Excluding our largest customer, our total orders would have been up by 8% year over year, and orders over $100,000 would have been up by 48% year over year.

Now, turning to cash management. Inventories declined by $6 million as we continued to adjust our production schedules. In addition, we paid $18 million in dividends during the quarter. Cash and short-term investments increased by $21 million in Q3 to $344 million as of September 30.

In summary, Q3 was a difficult quarter for the test and measurement industry. These challenges were exacerbated by the budget process in the United States and the large year-over-year fall in the value of the yen. Despite these challenges, we believe NI was able to continue to gain market share.

Now, I'd like to make some forward-looking statements. While we are pleased to see the global PMI increase to an average of 51 in Q3, we remain cautious about the industrial economy. For Q4, we currently expect revenue to be in the range of $291 million to $321 million, with revenue from our largest customer expected to be below $5 million. At the midpoint, this represents a sequential revenue increase of 6%, which is below our normal historical average revenue increase.

While we currently expect to see a relatively normal sequential order growth in Q4, our intent is to increase backlog this quarter to help us better manage the mix of orders in 2014. We currently expect total non-GAAP operating expenses in Q4 to be approximately $181 million plus or minus $2 million, with GAAP fully diluted earnings per share to be in the range of $0.19 to $0.31 for Q4, and non-GAAP fully diluted EPS expected to be in the range of $0.25 to $0.37.

Looking out to 2014, we will be focused on improving our operating margins and executing on the operating leverage plan we have laid out for 2014. While the industry is going through some painful quarters, we have taken the actions that we believe are necessary to deliver an improved operating performance next year.

As these are forward-looking statements, 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, US federal budget and debt issues, rescheduling of customer orders, expense overruns, manufacturing inefficiencies, foreign exchange fluctuations, and effective tax rates. I'd also like to mention that I will be attending the Janney Capital Markets Industrial Conference in New York on December 5, and the Needham Growth Conference in New York on January 14.

With that, I'll turn it over to Pete Zogas, Senior Vice President of Sales.

Thank you, Alec. Despite the tough industry conditions we faced in Q3, we were pleased with the strong revenue growth in several key product areas, including academic, RF, CompactRIO and CompactDAQ. Our previous investment in our sales force continues to pay off as our customer opportunity pipeline remains strong in Q3.

At this year's NIWeek, we introduced exciting new products and delivered more than 240 technical sessions to a record crowd of nearly 4,000 engineers and scientists, an 8% increase over last year. NIWeek illustrates our commitment to customer success, serving as a catalyst for high-value technical and business discussions, connecting thought leaders across the industry.

Among the new products introduced during NIWeek were -- LabVIEW 2013, with more community add-on products, support for latest mobile platforms and new sample projects for customers; new software extensions for the vector signal transceiver to make it easier for customers with little to no FPGA experience to access its benefits; a new CompactRIO controller that integrates state-of-the-art technologies for significantly improved performance; the NI CompactDAQ rugged chassis, designed for remote measurements in extreme environments; and myRIO, a new, embedded design device for students to rapidly design sophisticated engineering systems more quickly and affordably. We are excited about the expanded capabilities and new opportunities from these key new products.

Our PXI products faced a very difficult compare in Q3 due to our largest customer that Alec discussed earlier. However, we continued to see strong growth in RF leading to a new Q3 record in RF revenue.

Our strength in RF was driven by a very strong adoption of the vector signal transceiver that we launched in August last year. The vector signal transceiver is proving to be a highly disruptive product that realizes NI's vision by providing users with the ability to design the firmware of the instrument through LabVIEW and ultimately helps reduce the cost of tests for our customers.

Recent successes for the vector signal transceiver include Hit Tight, a designer and manufacturer of RF chips generated significant cost savings and increased their test through-put by 30 times by replacing their previous rack and stack test system with the vector signal transceiver for their complex MIMO test application. A mobile communication company was able to improve their test time by 25% because they switched their traditional test solution to the vector signal transceiver.

Engineers in aerospace and defense selected the vector signal transceiver for a military radio test application because of its flexibility and customization through LabVIEW FPGA. And, leading research institutions continue to adopt the vector signal transceiver for research in RF test and characterization, because they can target its FPGA with LabVIEW to help them accelerate their research.

Sales of our CompactRIO products continued to see strong growth and a new Q3 revenue record driven by energy, aerospace and defense, and machine control system applications. Success for CompactRIO in Q3 include a major medical device manufacturer who selected CompactRIO for their laser eye surgery application, and one of the nation's largest power utilities started their deployment of CompactRIO to monitor their power generation assets across multiple plants.

At the heart of both the vector signal transceiver and CompactRIO is the LabVIEW RIO architecture, which combines LabVIEW and NI hardware that is programmable by LabVIEW FPGA. It provides our customers and partners with the unique ability to define and optimize the firmware of their test and embedded systems to match the specific requirements of their application.

This technology enables users to quickly iterate on their designs and implement updates to the deployed hardware, if the requirements change. Because data is processed locally on the hardware, test and control loop execution can see dramatic speed increases, resulting in faster test times and more efficient control.

Sales of our data acquisition products grew year over year in Q3 despite continued declines in the global PC market. LabVIEW 2013, along with newly released CompactDAQ products, are enabling customers within industries such as automotive, transportation, infrastructure, and industrial machinery to build cost-optimized, distributed, and flexible monitoring systems that can be deployed in remote or harsh environments.

Revenue from our instrument control products, which accounted for about 4% of revenue in Q3 declined 12% year over year. Our instrument control products are primarily used to control boxed instruments from other vendors and are most closely connected to their business cycles. The decline in our instrument control products indicate a continued weakness in the test and measurement industry in Q3.

Over the past decade, we have had an intense focus on working with academic institutions to provide students with tools that enable hands-on learning. A few years ago, we introduced NI myDAQ, a portable device for students to do engineering anywhere and any time. To date, NI myDAQ has been standardized across 600 universities worldwide.

At this year's NIWeek, we released NI myRIO, which lets students learn on the same graphical system design they will use in industry. Like CompactRIO and the vector signal transceiver, myRIO leverages the LabVIEW RIO architecture so students can get hands-on experience programming FPGAs.

The continued adoption of our academic products help lead to a new Q3 record for academic revenue. During the quarter, major universities in emerging countries including Armenia and Mexico adopted NI tools across courses for controls, mechatronics, and RF communications.

In summary, we are pleased to see strong customer engagement, despite continued industry and economic headwinds, and are excited about new opportunities for our products released at NIWeek. With that, I will turn it back over to Dr. T.

Thank you, Pete. At NIWeek we talked about how over the past decade our world has increasingly become a large programmable system, from our cars to phones to household appliances. This trend has been described as Industry 4.0, the Network of Things, or a Programmable World. We believe it is creating an increased demand for cyber-physical systems where sophisticated, intelligent systems communicate with each other across the digital and physical world.

In response, our customers must adjust to the increased challenges of the exponential growth of data as well as the growing complexity of designing and testing these systems. The result is a greater need for our customers to leverage our common platform to manage complexity, drive faster innovation, and increase productivity.

We have seen the role of platforms continually transform the technology industry from the standard PC platform displacing disparate computing applications to mobile operating systems like Android or iOS that are creating common platforms for mobile devices. We believe NI's role in equipping engineers and scientists with tools through a software-based platform will help our customers meet the emerging complexity from cyber-physical systems.

With innovations in the LabVIEW RIO architecture, we are now leveraging the R&D investments we made in our CompactRIO products to harness the power of the FPGA for both test and embedded applications. This leverage gives us scale and cost benefits, and increasingly differentiates NI from our peers. Our combined platform of software and hardware offers us a unique ability to benefit from the rapid advancements of FPGA technology and provide unparalleled capabilities to test and control the cyber-physical world.

Over the past few quarters, I talked about the importance of effectively managing our costs to sustainably scale our business for long term, and our employees continue to better align our spending with the weaker industry. While we remain disciplined in our cost management in Q3, I keep challenging our organization to find ways to drive operational efficiency and improve non-GAAP operating margins toward our goal of 18%.

In summary, while there's still uncertainty in our industry, I believe we have made the investments needed to continue to grow our business and believe we are now positioned to realize the return on these investments. I want to thank our employees for their concerted effort to simplify processes, drive productivity, and focus on innovation. I am confident that we are now redefining how our customers can use our tools to be more productive. And I believe we have the resources necessary to create sustainable differentiation for NI and our customers, partners, suppliers, and shareholders.

We will now take your questions.

(Operator Instructions)

Patrick Newton, Stifel.

Congratulations and thank you for taking my questions. Starting with Alex, in your prepared remarks you stated that you intend to increase backlog in 4Q to better manage large orders. I make three assumptions from the statement. One, is that your December quarter revenue guidance could have easily been higher. Two, that whatever backlog is built should help dampen 1Q seasonality. Three, that perhaps you've secured some material volume design wins in 2014, likely from your largest customer.

I guess my question is, are these assumptions correct? Could you help us quantify how much you intend to increase backlog?

So let me start off, Patrick, that I'm not going to confirm any of your conclusions, but let me tell you what the message I'm trying to send with that statement. Number one, obviously, we are guiding to a revenue number that's below our historical seasonal average. Number two, right now, we don't see any reason why our order volume won't match the normal seasonal pattern, and as a result we intend to be biased towards meeting the expectations from a profit point of view but also building backlog in this quarter. The extent and scale of that will remain to be seen. I'll add to that when I get to December 31.

The purpose of that is to allow us more flexibility in managing revenues, as the overall mix of large orders as part of our business profile is evolving. In terms of revenue expectations with our largest customer, really we're only guiding to Q4 at this point in time. We'll be in a better position, perhaps, to talk about that at the earnings call in January.

All right. Thank you for that. I guess that dovetails nicely into the second question, which is, if I run the midpoint of your guidance, I calculate an implied gross margin of 76% or higher. Is that fair, ballpark for the gross margin? As these large orders start to evolve, and I would assume contribute more to revenue in 2014, how should we think about your gross margin profile in the coming quarters?

Yes, sure. I think your math is in definitely in the right general direction. We do expect a modest improvement in gross margins sequentially in Q4, driven by an improvement in, obviously, overall utilization and revenue. Then as geographic mix, because we tend to see stronger mix of revenue from Europe in the fourth quarter, which always helps our gross margins. In terms of looking forward, if we do a compare between 2012 and 2013, as an example, our overall margins would be down a little over 100 basis points this year. The bulk of that will come from the gross margin on the lower margin RF business we talked about with our largest customer in Q2. Then, about 40 to 50 basis points from the introduction of our new Penang manufacturing facility that we opened in Q4, late Q4 of last year.

As we look into 2014, if we're able to drive single digits type revenue growth, we'll see what happens. We'll drive leverage from that Penang operation, so we should see a reduction in that 40 to 50 basis point impact that we saw this year. That should be less next year. We intend to continue to work on driving good margins out of our larger order business. In general, outside of our large customer, we've seen our gross margins be benefited from the evolution of orders over $100,000. That, in general, has allowed us to bring up our gross margins by leveraging that volume. We saw that through 2009, 2010, 2011, 2012, and really outside of Penang and our one large customer, we would have seen very stable to slightly improved gross margins in 2013.

Great. Thank you for the details. Just one last one on the competitive landscape. I'm curious, as you've had success in your RF portfolio, have you seen any noticeable shift reaction from competitors? Also, given the announced spinout to form a very T&M focused competitor, I'm curious how you view this announcement and whether you've already seen any changes in the competitive landscape, or if you anticipate it will result in some competitive changes? Thank you.

Thank you very much. As to that one, we really want to focus our efforts and energy on running our business to the best of our abilities, and really I try to avoid commenting on changes that are happening at competitors. What I will say is that as a disruptor, and as a serial disruptor of multiple markets over multiple decades, we generally always see a reaction at some point from competitors, and that's something we're very used to over multiple decades.

Great. Thank you. Good luck.

(Operator Instructions)

Paul Knight, Janney Capital Market.

This is actually Bryan Kipp on behalf of Paul. Leaving second quarter guidance, coming into third quarter you guys seemed a little tepid. You came into probably one of the strongest, I guess it was the strongest PMI quarter in the last two years. Can you just give me a sense of how things played out for you guys? Did you guys close the quarter stronger than you started, or was it pretty even flow? Just trying to get an understanding of how I should look expect to look at modeling, something like 4Q strong start or maybe with macro indicators?

Bryan, first, I guess it's an indictment of the times that 51 on the PMI is the strongest we've seen in two years. That is true.

I think it is 65, right?

Yes. No, that is definitely true, but it's a little sad. Hopefully, we'll see how that is improved as we go into 2014, but that remains to be seen. Certainly, I would say that tone of business improved somewhat in August and September. I'm reluctant to carry any kind of path of that straightforward because we've got the events we saw in DC this month. Then, we have an expectation that, that's likely to happen again in the spring.

For now, we're certainly glad to see the PMI over 50. I think it's likely to pull back a little bit here in October based on the preliminary Flash numbers that I've seen. We hope to see it gain some sustainable momentum at some point. This real stagnant period for the industrial economy is going to have to change eventually. It's just not clear that it will be Q4.

Thank you. Just a quick follow up, just get an understanding where you guys are. You'd mentioned last time that you would expect to see a significant reduction in headcount in 4Q. Was any of that pulled through into 3Q? And, is that still on track for 4Q?

Very good question, Bryan. Originally, when we set that expectation, we set a commitment to keep our overall headcount flat from the March quarter to the December quarter. We had an anticipation, based on recruiting, that we would see headcount go up in Q3 and then come down in Q4. The way it's played through is we've managed our recruiting start dates et cetera as if overall headcount is flat really from March through September, and we anticipate that we'll now be flat from September through December, which gives us an ending December number which was in line with what we set out when we released results the end of April. Year to date, our headcount is up 3% from December and we expect to finish the year very close to that.

Thank you again.

(Operator Instructions)

Patrick Newton, Stifel.

Alex, one is did your embedded business outgrow your T&M business in the quarter?

As you know, Patrick, it would be difficult for us to measure the embedded business specifically, but when we look at the product lines that are most connected to that business, we did see a good growth in Q3. Given that we had no growth at the aggregate as a company, I'd have to answer your question with a yes.

All right. One last one would be on your framework for spending intentions, last quarter you gave us very straightforward OpEx goals that it looks like you're right on pace to achieve. I'm curious if you can help us as we're looking at 2014, to help us walk through how to think about the framework of your OpEx? Do we just take revenue growth and half it as you've kind of alluded to 50% incremental margins on any revenue growth, or any framework for 2014 would be helpful?

Yes, just as a reminder for those who may not have seen it and it is available, I believe, in our IR slides that are on the web accompanying the conference call. At the Investor conference in August at NIWeek we laid out a real specific set of guidelines on potential revenue scenarios with the related spending intention by National Instruments for 2014, and had a series of scenarios from 0% revenue growth next year to 5% to 10%, et cetera, with a leverage factor that was planned at each level. I'd encourage you to take a look at that. Our spending plan for 2014 and our intention in terms of leverage relative to different revenue scenarios is very much in line with what we laid out at the investor conference in August. We intend to execute against that plan.

Great. Thank you.

Thank you. I'm showing no further questions at this time.

Thank you very much. I'd just like to remind you that I'll be at the Janney Capital Markets Industrial Conference in New York at December 5, and the Needham Growth Conference in New York on January 14. Thank you, and have a good trick-or-treating.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.