National Instruments Corp (NATI) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the National Instruments fourth 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 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; Eric Starkloff, Senior Vice President of Sales and Marketing. For opening remarks, I would 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 regarding our future financial performance, including our guidance for our first quarter revenue and earnings-per-share. We wish to caution you that such statements are just predictions, and that actual event 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 Form10-Q filed November 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 for 2013 are: record annual revenue, continued growth in LabVIEW, RF, and CompactRIO products, and good spending discipline. I am pleased to report record annual revenue. Despite difficult conditions in the test and measurement industry, we continued to see the acceptance of our software-based approach.

I am also pleased with our good expense management, with operating expenses down sequentially for the third consecutive quarter. This is a testament to the keen focus of our employees across our Company, and the collective efforts on improving our non-GAAP operating margins toward a goal of 18%. While we remain cautious in the short term, I am optimistic about our long-term position in the industry, due to sustained differentiation we deliver our customers.

In our call today, Alex Davern, our Chief Operating Officer, will review our results, Eric Starkloff, 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. Alex?

Good afternoon, and thank you for joining us today.

Today we reported quarterly revenue of $301 million, approximately flat with Q4 of 2012. For Q4, net income was $32 million, with fully diluted earnings per share of $0.25. And non-GAAP net income for Q4 was $39 million, up 9% year-over-year, with non-GAAP fully diluted earnings per share of $0.31, at the midpoint of our guidance range provided on October 31.

Today, we also reported a new annual revenue record of $1.17 billion, up $29 million or 3% year-over-year. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release. Excluding the impact of our largest customer, revenue from all other customers was up 4% year-over-year for Q4, and was up 6% year-over-year for the full year.

We were disappointed with the finish to the quarter, as December was weaker than expected, especially in the emerging markets. For Q4, our orders were up 4% sequentially. This is below our historical ten year average sequential growth rate for Q4 of approximately 10%. Most of the weakness this quarter was in our larger orders.

Non-GAAP gross margin in Q4 was 76%, up 70 basis points sequentially. Total non-GAAP operating expenses were $177 million, down 3% year-over-year, in Q4. For the full year, our non-GAAP operating expenses were up 4%, and I am pleased at our budget discipline. For Q4, our non-GAAP operating margin was 17%, with non-GAAP operating income of $51 million, up 56% sequentially, and up 12% year-over-year.

Now taking a look at order size. In Q4, we saw 3% year-over-year growth from orders under $20,000, 1% year-over-year growth of orders between $20,000 and $100,000, while orders over $100,000 were down 9% year-over-year. There were two main drivers of the decline in our orders over $100,000. One was the expected decline in orders from our largest customer from $9 million in Q4 of 2012, to $3 million in Q4 of 2013. And the other was an unexpected 40% year-over-year decline in the emerging markets. Excluding orders from our largest customer, orders over $100,000 from the Americas, Europe and East Asia were up 17% in total year-over-year.

Now turning to the balance sheet. The Company announced today an increase in the quarterly dividend from $0.14 to $0.15 per share. Cash and cash equivalents increased by $49 million sequentially to $393 million as of December 31. Cash flow from operations were $170 million for 2013, up 28% year-over-year.

Now I'd like to make some forward-looking statements. While we are pleased to see the recovery in the global PMI, especially in November and December, we continued to see caution from our customers on capital spending, especially in the emerging markets. And this makes us cautious in planning for the first half of 2014. We remain committed to the operating leverage targets we set out at our Investor Conference in August, and we expect our headcount to be essentially flat in 2014.

As a result, we currently expect revenue for Q1 to be in the range of $272 million to $302 million. We currently expect that GAAP fully diluted earnings per share will be in the range of $0.09, to $0.21 for Q1, with non-GAAP fully diluted earnings-per-share expected to be in the rage of $0.15 to $0.27.

As you may remember, our non-GAAP tax rate in Q1 of 2013 was 10%, as a result of the retroactive renewal of the R&D tax credit in January of 2013. For this year, the R&D tax credit has not yet been approved. And as a result, we expect our non-GAAP effective tax rate for Q1 of 2014 to be approximately 24%.

So while at the midpoint of guidance, our non-GAAP EPS is flat year-over-year, we are expecting an increase in operating income. As these are forward-looking statements, I must caution you that actual revenues and earnings could be negatively effected by numerous factors, such as any further weakness in the global economy, expense overruns, manufacturing efficiencies, effective tax rates, and foreign exchange fluctuations.

In summary, 2013 was a difficult year for the test and measurement industry. But despite these challenges, NI was able to grow revenue and gain market share. Our goals for 2014 are to continue leveraging the investments we have already made, to drive sustained revenue growth, and to drive toward our long term non-GAAP operating margin target of 18%.

With that, I'll turn it over to Eric Starkloff, Senior Vice President of Sales and Marketing.

Thank you, Alex, and good afternoon.

While we continued to face persistent industry headwinds in 2013, we are pleased to set a new all-time high for annual revenue. Driving our success in 2013 was: growth in academic, RF, CompactRIO, and CompactDAQ product areas, all of which are oriented around our LabVIEW platform. This growth was offset by weakness in instrument control and plug-in data acquisition, difficult revenue compares with our largest customer, and weakness in government spending in the US.

I remained encouraged by the strength of our marketing activity and opportunity pipeline in Q4, indicating continued strong customer interest in our approach. I also remained very excited about our customers' ability to use this approach to solve some of the most challenging applications in science and engineering.

Now, taking a closer look at our product areas. PXI continues to see broad adoption by customers across a range of applications and industries, where it often displaces traditional rack and stack systems. Notable PXI application successes in 2013 include: a large aerospace customer that chose NI PXI and signal conditioning for their high channel count structural test application, because of its reliability and flexibility to hook up any sensor to any channel. They are also planning to switch their software development tool for a text-based programming language to LabVIEW. And Tata Motors, India's largest automotive company, that adopted NI PXI to create a reliable, hardware in the loop test system, because of its scalability and flexibility. And were able to build their system in less than two months.

Helping drive PXI's success in 2013 was growth in sales of RF products, and the very strong adoption of the vector signal transceiver. Setting the vector signal transceiver apart from other available RF instruments in the market, is its tight integration with LabVIEW FPGA, which sets a new bar for performance for a fraction of the cost and size of traditional solutions, and delivers very high differentiation to our customers.

During 2013, the vector signal transceiver generated more revenue in a single year than any other new hardware device NI has ever launched. This success was broad across customers, industries, and geographies, and we saw adoption across a wide range of applications throughout the design cycle, from component validation to end-of-line production tests.

For example, the vector signal transceiver was chosen over traditional box alternatives, at a [wide LAN] power amplifier characterization lab because NI's solution helped significantly reduce test times, and lower costs. In the research institutions around the world, our prototyping upcoming wireless standards and creating systems such as wireless channel emulators, using the vector signal transceiver because it provides an unprecedented level of user customization through LabVIEW.

Sales into embedded monitoring and control applications also continued to be a growth driver for our business in 2013. Our customers continue to recognize the value of a standard software and hardware platform for rapidly developing intelligent embedded monitoring and control systems, versus doing custom designs.

Our CompactRIO hardware product continued to see strong revenue growth, setting new Q4 and annual revenue records. Growth was driven by new design wins, and continued deployments in applications in aerospace and defense and energy. We also saw strong early success of our latest CompactRIO controller, which we released at NI Week 2013. This controller incorporates key technologies, including Linux and ARM, and has been the fastest ramping CompactRIO controller in the product's history.

Our data acquisition products finished 2013 with revenue relatively flat compared to 2012. While our plug-in data acquisition revenue was down, effected by the continued weakness of the PC market, our USB and Ethernet CompactDAQ products saw revenue growth, and set an all-time revenue record in 2013. Customers in industries such as transportation and infrastructure chose our data acquisition products because of their precision, flexibility, and the ability to distribute a more modular and intelligent data acquisition system, whole [feature] sensors, and signals.

Data acquisition highlights from 2013 include: a customer in the energy sector that chose NI CompactDAQs to replace a previous solution for portable diagnostics on rotating machinery because it provided additional flexibility to match sensor connectivity, and software analysis to their specific requirements, and a customer who built a water tunnel to test under water vehicles chose ethernet NI CompactDAQ chassis because of its distributed nature and ability to synchronize multiple chassis for high speed vibration measurements.

At the heart of all of these products is LabVIEW, which delivered modest growth for software and services revenue in 2013, and a new annual revenue record. Contributing to the success of software this quarter, was record new users from enterprise agreements, which is a program aimed to increase LabVIEW adoption and proficiency across a customer's site or business. This year we also saw a record number of customers trained to become proficient in LabVIEW, and a record number of LabVIEW instrument driver downloads. Together, we believe this validates the growing base of proficient LabVIEW users across applications that use both NI, as well as third-party instrumentation.

On the other hand, revenue from our instrument control hardware products, which accounted for about 4% of revenue in 2013, declined 13% compared with 2012. Our instrument control hardware products are used to control box instruments from other vendors, and are most closely connected to their business cycles. The decline in our instrument control hardware product is an indicator of the continued weakness in the test and measurement industry in 2013.

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. And the continued adoption of our academic products, helped lead to a new annual record for academic revenue. Successes for 2013 include: shipping our 40,000th myDAQ device in Q4, as massive open online courses, sometimes referred to as MOOCs, at major universities like Tsinghua University, Georgia Tech, and Rice University selected LabVIEW and NI myDAQ as the platform to help their students do engineering, and NI myRIO, which has seen tremendous success since its release in August 2013.

Over 300 universities are currently evaluating myRIO for use in their curriculum. And the University of Virginia, which selected the vector signal transceiver and AWR designed software for RF courses and labs because of its flexibility and tight integration between RF simulation and test. In addition to fueling revenue growth, these academic successes also help ensure that graduating engineers around the world are transitioning to industry with knowledge, experience, and proficiency in using a platform-based approach with LabVIEW.

In summary, while we did not meet our own revenue growth expectations, we were pleased to deliver record annual revenue in 2013, given the head winds in test and measurement. We saw continued strong customer interest and adoption of our new products, and our goal is to drive revenue growth and market share gains in 2014.

With that, I'll turn it back over to Dr. T for some closing statements.

Thank you, Eric. While 2013 proved to be a challenging year for our industry, we continued to advance our software-based approach for test and measurement in 2013 while maintaining good spending discipline. I'm especially proud that during this period we were named among Fortune Magazine's 100 Best Places to Work for the 15th consecutive year, and that culture of innovation remains as strong as ever.

Despite recent headwinds, I am optimistic about our long term position in our industry. Over the past several years, we have built on the platform of LabVIEW and modular hardware to address applications in both test and measurement, as well as an embedded monitoring and control applications. The strength and power of our integrated approach can be clearly seen in big analog data applications in which customers acquire large amounts of physical data such as vibration, pressure, and temperature across highly distributed networks of systems.

One of our customers is solving this challenge by deploying hundreds of CompactRIO units to monitor power generation assets across multiple facilities. CompactRIO acquires and sends data to the cloud for storage and analysis. The large data sets are then analyzed with NI software to predict potential maintenance problems and help prevent costly shut downs.

This application also relied heavily on the unique measurement and control capability of our LabVIEW RIO architecture, which combines LabVIEW and NI hardware that are programmable by LabVIEW FPGA. The LabVIEW RIO architecture provides our customers and partners with the ability to define and optimize the firmware of their test and embedded systems to match the specific requirements of their applications.

This technology enables users to quickly iterate on their designs, and implement updates to the deployed hardware if their requirements change, resulting in faster test times, and more efficient control. This highly differentiated approach to solving some of the world's most challenging measurement and control applications helps create sustainable leverage, loyalty, and differentiation.

In 2013, NI delivered on our 35th year of revenue growth in a tough test and measurement industry. At the same time, we focused on leveraging the resources we currently have to improve our operating margin in Q4. I want to thank our employees for their concerted efforts to simplify processes, drive productivity, and focus on innovation.

As we look out to 2014, I am focused on developing our high performance management team in our quest to reach our goal of $2 billion in annual revenue. I believe we made the investments necessary to build on a highly differentiated platform, and capitalize on our long term growth opportunities in RF, embedded and broad-based test applications. We are redefining so customers can use our tools to be more productive, and I believe we can continue to create sustainable differentiation for NI, our customers, partners, suppliers, and shareholders.

As a closing note, I will be attending the Stifel Conference on February 10 in San Francisco, and I'll look forward to seeing you there. We will now take your questions.

(Operator Instructions)

And our first question comes from the line of Paul Knight of Janney Capital Markets. Your line is now open.

Hello, Paul, how are you?

Good evening. Why the wide range on the Q4, excuse me, the Q1 guidance, is it $0.15 to $0.27 a share?

Paul, it's Alex here. So we've used a revenue range of about $15 million plus and minus the midpoint for about the last year or so. So it's just consistent with that, and it flows down through the income statement that way.

And in your guiding to a 24% tax rate for the full year in operating margins, did you say would be up year over year in 2014?

Talking specifically about the first quarter, Paul, we're just giving guidance for Q1. The non-GAAP effective tax rate is the guidance for the full year, but also obviously for the first quarter. And, the point I want to make here is that we had a very big tax benefit last year in Q1.

While at the midpoint of our guidance, the EPS and non-GAAP level is flat year over year, from an operating income point of view, it's up maybe to the midpoint it assumes up double digit as the result of a 14% increase in the tax rate.

So you might remember last year, the President signed the RD tax credit into law in January 2013. So we ended up taking five quarters of that benefit because it was retroactive to January 1, 2012. So we took five quarters of that benefit in the first quarter of last year.

And then last, I guess, on orders. The large customer, not as large in this quarter. But I guess the tone was okay on all but that large customer?

Broad-based business, we were satisfied with the results. We did see obviously ahead of the emerging markets, especially in December, that was not expected.

We continued to deliver a lot of value to our largest customer and will be continuing to compete for business there as we go forward. We'll be in a better position to give an update on that in April.

Okay. Thanks.

Thanks, Paul.

And our next question comes from the line of Patrick Newton with Stifel. Your line is now open.

Thanks for taking my call. This is Robert [Dusen] on for Patrick today.

So I have a quick question. Last quarter, there was talk of trying to increase backlog in fourth quarter to better manage the seasonality of order flow going forward. I wonder if could you quantify what that impact was in the current quarter, and if that was embedded into the guidance for first quarter?

Sure, Robert. When we looked coming into Q4, we've seen some positive signs with the PMI, et cetera. We were, as I said on the call, a little surprised by the weakness in the emerging markets.

And our bias was if we were able to make the midpoint of our numbers,or beat it slightly, we would look to increase backlog. Obviously, we didn't get the opportunity to do that in Q4 because orders were a little weaker than we anticipated.

Right, okay. Great. Thanks for that. And then, so I guess the last is a couple of housekeeping. Can you tell me what the average order size was in the quarter, and then how many employees there were exiting?

Yes, sure. The average order size was around $5,100, approximately.

Exiting number of employees is 7,114. That's up about 3% year over year, and it's been down slightly since March.

Great, thank you for that. I'll get back in queue.

Thank you.

And our next question comes from Mark Moskowitz with JPMorgan. Your line is now open.

This is actually Mike Kim for Mark. Hello, guys. A couple questions here.

First, you talked about the large orders and what impacted that. Could you actually talk about the growth in orders less than $20,000? Historically, we've understood that to be correlated tightly with the macro; and anything you're seeing there would be helpful.

Yes, that's a good question, Mike. Obviously, our orders are over $100,000.

As we report those and show the trend line over time, you can see that those tend to have a greater degree of volatility, And they historically have over a long period of time.

Orders under $20,000 tend to be more of a broad base, and I do think more relevant as a macro indicator.

Certainly, we're pleased to see them continue to show some growth. We're happy to see the PMIs in November and December improve.

And we'll see how that plays out as we move forward, but we do view that as an encouraging sign.

Great. And then secondly, you guys have done a good job with OpEx here in keeping a tight lid on that.

What would have to change in terms of the business outlook for you guys to start increasing spending there again?

Well, we're very committed to the leverage plan that we laid out at the Investor Conference in August. We're committed to driving operating leverages to get the opportunity in 2014 and moving forward.

And so we will execute against that operating leverage plan that we laid out. It's also copied in our Investors Logs that go with the call on the Web. So we're committed to improving operating margin as we move forward.

Exactly. Our focus now is leveraging those resources that we brought onboard, and really taking advantage of our position in the marketplace.

Great, thanks. And then last question for me, what is the competitive environment in wireless tests like currently?

Are there any incumbents or vendors such as Teradyne, that are responding with more aggressive pricing?

Yes, I'll take that. This is Eric.

Yes, certainly when you talk about wireless tests, specifically the wi-fi and Taylor testing part of that mobile device testing. We're a relatively small player there, and we view ourselves as one of disrupters that is ultimately bringing down the cost of tests in that part of marketplace.

So that's a pretty competitive area, and I think we are one of the disrupters.

When I talk about the RF marketplace, it includes that but also other parts of the opportunity as well. So I view it as a pretty broad market.

Wi-fi, and wireless testing is part, MIL/Aero testing, infrastructure, those markets have less competitive dynamics than the one that we just talked about.

And our platform-based approach has enabled us to compete with a standard platform with higher performance typically and a very attractive price. So we've been able to provide excellent benefit to these customers.

Thank you.

Thanks, Mike.

And our next question comes from the line of Richard Eastman with Robert Baird. Your line is now open.

Just one follow-up here. On the first quarter, given the midpoint of the revenue guide, basically revenue flat year over year. So the presumption would be that Op Expense in that -- in the first quarter at least would be flat year over year or just down.

In other words, any growth expected sequentially in operating expense given the wide range on the revenue line?

Yes, sure. If we look at it from a midpoint of view, thinking about it in those terms, Rick, revenue obviously would be flat year over year at the midpoint.

There's a big jump in the tax rate, as we talked about earlier on; so we are anticipating a double-digit increase in operating income.

And we are anticipating that our operating expenses will be down year over year in the first quarter, similar to the situation in Q4. Sequentially, you'll see it from Q4 of 2012 to Q1 of 2013, operating expenses went up; and we do anticipate that being the same case again this year.

But from a year-over-year point of view, we do anticipate operating expenses being down year over year in Q1.

Okay. And as you follow that model out through the year, I understand what the target is for the full year. But as you start the year, obviously, you're pretty cautious.

So presumably, our Op Expense stays pretty tight in terms of spending until we get, call it, midyear and we see what happens with the growth outlook -- sales growth outlook for the second half. How do you play that quarter to quarter is maybe the question?

We'll look at it as we go through the quarter. And I would reference you back to the plan we've laid out from a leverage point of view is a full year number, so we'll be managing to that number.

There are [full] seasonal events that will, both from a marketing and other point of view, that will drive our operating expenses up in Q2 and Q3; and that's part of our planning.

But from a year-over-year point of view, we're certainly intending to start the first quarter out down year over year. Maybe, we'll see how my caution turns out to be relative to what happens in Q1.

But I was the CFO at NI back in 1998, so I try to learn some lessons as time goes on.

Okay. All right. And then could you just repeat, maybe just run through it a little bit quickly for me.

But this large customer, was there any revenue recognized in the fourth quarter? Were there any orders? Is there any backlog entering the first quarter?

So the revenue recognized was $4 million, and it's there in the press release. We've anticipated orders from this customer in Q4, when gave guidance of under $5 million, and that's where we were.

Okay.

So this has not typically been a large quarter for that particular customer.

Okay. All right.

And then in terms of the geographic, I just want to make sure I understand. You had mentioned the weakness in orders in emerging markets, and I saw the down 14%, I guess, in local currency.

Can you just indicate, is that all RF business? Or what end markets were the large orders weak in the emerging markets?

So overall, in our large order, orders over $100,000 in the emerging markets, which tends to be frankly more of a year-end phenomena in those particular spaces. That tends to be one of the strongest months for that particular region tends to be in December. Those large orders this year were down 40% year over year.

Overall, our revenue in the emerging markets were down 20%, and it's across a lot of different application spaces -- heavily, frankly, influenced by government funding. And so I really frankly put that decline down to some of this turmoil that we've seen in the emerging markets over the last few months.

Okay. All right. Very good.

Thanks very much.

Yes, thank you.

(Operator Instructions)

Operator, are there any more questions? If not, we will close.

I am not showing any more questions at this time.

Okay. Thank you for your time.

Dr. Truchard will be presenting at the Stifel Conference, as he said. Aand we will talk to you in April.

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