National Instruments Corp (NATI) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to the National Instruments first-quarter 2014 earnings conference call. Today's call is being recorded. You may refer to your press packet for the replay dial-in number and the pass code.

With us today are David Hugley, Vice President, General Counsel, and Secretary; Alex Davern, Chief Operating Officer; Dr. James Truchard, CEO and Co-founder; and Eric Starkloff, Executive Vice President of Sales and Marketing. For opening remarks, I would like to turn the call over to Mr. David Hugley, Vice President and 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 second-quarter revenue, gross margin and earnings per share, as well as our position on the test and measurement market. 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 annual report on Form 10-K filed on February 20, 2014. 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 Chief Executive Officer of National Instruments Corporation, Dr. James Truchard.

Thank you, David. Good afternoon, and thank you for joining us. I'd like to apologize in advance for my voice. In Austin, allergies are bad right now. Our key points today are record orders for the first quarter, Q1 non-GAAP operating income up 16%, and we got into record revenues for Q2. Despite the challenging test and measurement industry, we received record orders for the first quarter, while improving operating margin.

Given the improvements in the investor economy in Q1 and our strong position, we believe we are guiding to an improved operating performance in Q2, and are continued to be optimistic about our long-term position in the industry. I will now turn it over to Alex Davern to review our results. Alec?

Good afternoon, and thank you for joining us today. Today we reported revenue of $285 million for Q1. Orders represented a new first-quarter record. Backlog increased by $7.5 million, and deferred revenue increased by $6 million during the quarter.

For Q1, net income was $19 million, with fully diluted earnings per share of $0.15. And non-GAAP income for Q1 was $26 million, with non-GAAP fully diluted earnings per share of $0.21, at the midpoint of our guidance range. Reconciliation of our GAAP non-GAAP results is included in our earnings press release.

Non-GAAP gross margin in Q1 was 76%, up 30 basis points from Q4. And total non-GAAP operating expenses were $182 million, down 4% year over year. For Q1, our non-GAAP operating margin was 12%, up from 10% in Q1 last year. And non-GAAP operating income of $34 million was up 16% year over year.

On a housekeeping note, you may recall that our tax rate in Q1 of last year was reduced significantly due to the retroactive impact of the renewal of the US R&D tax credit in January of 2013. As a result, the year-over-year increase in our tax rate effectively offset our improved operating margin, resulting in our non-GAAP fully diluted earnings per share of $0.21, matching our EPS in Q1 last year.

Now taking a look at order trends. For Q1, the value of our total orders was up 1% year over year. Included in that total is $12 million in orders received from our largest customer, to which delivery was requested in Q1 this year, as compared to $17 million in Q1 of last year.

As of today, we have received a total of $32 million in orders for 2014 from this customer, as compared to $24 million at this time last year. Revenue from our largest customer was $7 million in Q1, and we expect the remainder of this customer's current orders to be shipped in Q2 and Q3. Excluding this customer, our orders from all other customers were up 3% year over year in Q1.

Now taking a look at Q1 order values excluding our biggest customer. We saw 4% year-over-year growth of our orders with a valuable below $20,000. While orders with a value between $20,000 and $100,000 grew 5% year over year. Orders with a value over $100,000 declined 2% year over year, [as we've been] up 41% year over year in Q1 of last year.

Now turning to cash management. Inventories were down $2 million in Q1, and accounts receivable were essentially flat from December 31. Also during the quarter we paid $19 million in dividends, and our cash and cash equivalents increased by $17 million to a new record of $410 million as of March 31.

Now I'd like to make some forward-looking statements. The improvement in the Global PMI during Q1 gives us increased confidence in the continued recovery of the industrial economy as we move through 2014. This increased confidence, coupled with our continued commitment to deliver on the leverage plan we outlined on our investor conference last year, leads us to expect improved performance in Q2.

As a result, we are guiding for revenue in Q2 to be in the range of $296 million to $324 million. At the midpoint, this represents 5% year-over-year growth. Gross margins are expected to be down approximately 150 basis points sequentially in Q2 due to an expected increase in revenue from our largest customer. We currently expect GAAP fully diluted earnings per share will be in the range of $0.13 to $0.25 for Q2, with non-GAAP fully diluted earnings per share expected to be in the range of $0.19 to $0.31.

Now, these are forward-looking statements. I must caution you that actual revenues, gross margins and earnings could be negatively affected by numerous factors, such as any weakness in the global economy, fluctuations in revenue from our largest customer, expense overruns, manufacturing inefficiencies, foreign exchange fluctuations and effective tax rates.

Certainly while Q1 was a challenging quarter for our industry, we continued to gain market share and made progress on improving our operating margin. Looking forward, we are working hard to take advantage of the improving conditions in the industrial economy and continue to be committed to our operating leverage targets.

In closing, I would like to mention that National Instruments will be attending the Jefferies conference in Miami on May 6, the Baird conference in Chicago on May 7 and the Bank of America conference in San Francisco on June 3. We look forward to seeing you there. With that, I'll turn it over to Eric Starkloff, Executive Vice President of Global Sales and Marketing.

Thank you, Alex, and good afternoon. While the PM industry remained relatively weak in Q1, we continued to gain market share versus our peers. The caution we saw from our customers at the end of last year appeared to moderate, and we saw improvement in customer demand as we moved through the quarter. I was encouraged by the strength of our marketing activity and customer opportunities during Q1, indicating continued strong customer interest in our approach.

We were pleased with the relative strength of our orders under $20,000, which represents the breadth of markets and applications we serve, and account for roughly half of our revenue. This large volume and broad reach are key to our strength and stability. And growth in the smaller orders also provides the foundation for future system sales.

Looking at software, we saw strong sales of new enterprise agreements and a record number of new users in Q1. These enterprise agreements are site or company-wide licenses which make LabVIEW and other NI software available across the account.

The availability to these engineers and scientists drives increased software revenue, adoption and proficiency with our tools. And software license renewal rates continued to increase in Q1, which we view as a strong indication of the value our customers see in our software.

Our data acquisition products were another bright spot in Q1, led by CompactDAQ sales across a broad range of applications. We had several large automotive deployments of CompactDAQ in Q1 for applications including infotainment testing and brake inspection.

An area where the value of our software and data acquisition products can clearly be seen is in the trend towards big analog data, in which customers acquire large amounts of physical data to drive scientific engineering and business decisions. The IT and computing technologies that have driven the big data revolution in corporate and social networks are also enabling scientists and engineers to leverage those technologies to acquire and analyze vast amounts of analog data, such as vibration, pressure, sound and even radio signals.

Our measurement hardware is used to acquire this analog data and convert it to digital, where our software can analyze and archive it. Our software-defined approach also enables customers to define how the hardware processes and reduces data locally at the source before sending it to the network, providing greater flexibility and reducing system costs. We see continued opportunities to serve our customers with software and hardware to address these applications.

In academic, our my myRIO product has now been sold to over 500 universities worldwide since its release just six months ago. myRIO combines a real-time processor and FPGA into a small student-friendly package for teaching controls, robotics, mechatronics and abetted concepts with LabVIEW.

A new trend in university education is the Massively Open Online Course, or MOOC, in which professors lecture and make their courseware available to a global online audience at little or no cost. NI is working to incorporate hands-on learning by partnering with MOOC from several leading institutions, including Professor Johnson from Rice University, who adopted myDAQ and LabVIEW to teach analog circuits.

And an upcoming MOOC from UC Berkeley that we use LabVIEW and myRIO to teach cyber-physical systems. We plan to continue to be the forefront of this trend as the next generation of scientists and engineers learn using a hands-on approach to system design.

Now turning to our system products, we saw continued adoption and successful system deployment for RF in Q1 across a broad range of customers, industries and geographies. Those wins also span a wide range of applications throughout the design cycle, from initial prototyping to component validation in R&D to end-of-line production tests, all using the same software and hardware platform.

For example, our customers in the semiconductor industry are using our vector signal transceiver product to characterize and test RF power amplifiers. Because the firmware of these instruments is user-programmable through LabVIEW, our customers are able to keep pace with rapidly evolving power amplifier test applications, such as envelope tracking and digital pre-distortion.

We are also seeing success in leading research institutions around the world on prototyping next-generation wireless standards, including fifth generation wireless, or 5G. One example is at Lund University in Sweden, where they are using LabVIEW and our RF hardware to assimilate mobile devices and base stations in an application called Massive MIMO. With more than 100 antennas, this prototype is the largest and most comprehensive of its kind. And the research could significantly impact the definition of 5G networks for the future.

Our unique position in the development of early 5G prototypes also positions NI well to provide software and instrumentation for commercial 5G applications as the technology evolves.

Our opportunity pipeline for PXI remains strong across a broad range of industries and end-user applications. Since pioneering the PXI platform in 1997, NI has led the shift from rack and stack instrumentation to PXI modular instrumentation for applications ranging from basic research to R&D to automated production tests.

We see this trend continuing as more customers and vendors recognize the value that this modular software-defined platform brings to test applications. And believe it presents opportunity for NI to gain additional market share in the 85% of the test and measurement industry that is still served by the traditional instrument approach.

With over 17 years of investment, by far the largest portfolio of modules available and highly differentiated technologies like our LabVIEW RIO architecture, NI is at the forefront of delivering the benefits of PXI to engineers and scientists worldwide.

Turning to our embedded monitoring and control products, we saw order growth in application areas including industrial, life sciences and semiconductor automation. Strength in those areas was offset by a difficult year-over-year comparison in condition monitoring and machine control applications, where customers made several large deployments in Q1 of last year. We were especially pleased with the strong adoption of the new CompactRIO controller we released at NI Week last August, which leverages the latest FPGA technology and NI Linux Real-Time.

In summary, I am pleased with the growth we saw in Q1 for our orders under $20,000, which represent the broad diversity of markets and applications that we serve. And I'm encouraged by the strength of our opportunity pipeline for PXI and CompactRIO-based system opportunities.

As the leader of PXI and software- defined instrumentation, I believe we are very well-positioned to benefit from the improved conditions in the near-term, and for long-term sustainable growth. With that, I will turn it back over to Doctor T for some closing statements.

Thank you, Eric. While Q1 remained challenging for our [uncon industry], we delivered record [audits] for our first quarter, while improving our operating margin. I am optimistic about our opportunity and the long-term position in the industry.

I am particularly excited about the growing trends for big analog data. This trend touches every part of our business because it's so broad in nature. I believe we are just at the front end of big analog data trends, and that the growing appetite for real-world data that drives science, engineering and business decisions can serve as a long-term driver of our business.

In closing, I want to thank our employees for their concerted effort to deliver innovative new products, value and improved productivity to our customers. I am confident in the operational improvements that we are making to drive margins, and that our long-term model will allow us to efficiently and profitably continue to innovate and drive long-term sustainable growth. Thank you. We will now take your questions.

(Operator Instructions)

Paul Knight with Janney Capital Markets.

Hi, guys. This is actually Bryan Kipp on behalf of Paul. Can you guys hear me?

Yes, Bryan, go ahead.

Just a quick question. You cited strength in the second half, partially here in the second quarter -- sorry, my apologies -- partially because of the strength of the first quarter from PMI numbers. We saw the same kind of dynamic and maybe even stronger dynamic US and China in the back half of last year. It doesn't seem to be pulled through.

Is that something that you -- it's what is giving you conviction for 2Q and beyond? Is it a six- to nine-month lag of bookings through order recognition? What is the dynamic going on there, just so we can look at how 1Q should track for the remainder of the year?

Sure, Bryan. We've obviously pioneered the use of PMI as a way to look at this whole industry. Because as Eric said, we serve a very broad base of customers in many industries across many geographies. I've been watching this for a very long time, and generally you tend to see the PMI lag with a varying of one to two to three quarters, depending on the broad-based level of confidence in the economy in general.

So we started to see that, obviously, improve a lot in October. We certainly saw that continue in the second -- in the first quarter. And certainly the initial data we see here for flash PMIs in April indicate that Q2 is starting off with reasonable strength as well. We expect to see those positive trends pass through into orders and revenue as we move through the year. Certainly that is included in our guidance for the second quarter.

But when I look at the overall trends that are emerging, I see an improved PMI. Internally, we see an improved opportunity pipeline, with our customers engaging with the salespeople. As Eric said, we've seen an increase in the value of our broad-based orders that tends to be a leading indicator.

Also we have easier compares. Q1 last year was our toughest compare for the year. We grew about 10%, and so we had much easier compares for large orders as we go into the rest of the year.

And another [almost] I would say is that our instrument control products, which tend to be a bellwether of the overall industry for the traditional test players and ourselves, has seen an improved performance in terms of relative growth. It was very weak towards the back half of last year. It also has easier compares, but it's trending towards the positive number. And that's another element that gives us confidence that we will see strength build as we head towards the second half.

Appreciate it. A follow-up on the wireless side. I know you guys alluded to some demand there in the semiconductor and wireless side for the 5G conversion. There has also been a lot of investment -- or at least for Vodafone, their Project Spring. And I know China Mobile has come out and mentioned some stuff that they want to, I think, spend upwards of $8 billion to roll out full 4G in China this year.

Are you seeing any incrementals from that? And if not, do you expect it going forward? Just additional color on that and maybe broader China, as well. I'd appreciate it.

Sure. This is Eric. I can comment on that. First, it's to calibrate -- you know, our RF business is quite a broad play for us. It's about a $6 billion market opportunity that we serve that spans from RF used in aerospace applications and radar applications to signal intelligence and spectral monitoring, all the way through wireless R&D, as well as production tests. And so when we talk about that RF opportunity, we really see opportunities for our platform across that whole space.

And again, we are used in the early development of standards, so I mentioned 5G. That's obviously an early lab kind of application today. And then we are also used through the design cycle into the production test of the current generation of wireless standards.

Thank you again. My final one, too, is we saw a -- not only a year-over-year decline in R&D as a percentage of sales. Is that how we should look at it tracking for the rest of the year?

Is it a significant, or -- I think I have that you guys had a 10% decline on a non-GAAP basis. Is it something that you continue to expect going forward? Declines? Or do you think it will start to ramp as revenues start to re-accelerate, if they hit your guidance numbers?

Overall, Bryan, our model for R&D is going to be about 16% of revenue on a non-GAAP basis. We've been a little bit ahead of that for the last several years. We're working to bring that in line.

Having said that, as we're looking at guidance going into the second quarter, we are looking for a modest year-over-year increase in total expenses in Q2. And obviously that's very much in line with the leverage targets we laid out at our Investor Conference last year in August.

Appreciate it.

Thank you, Bryan.

Patrick Newton with Stifel.

Yes, good afternoon, thank you for taking my questions. First, Alex, I was going to ask you how many employees did you have in the quarter? And what was your average order size?

At the end of the quarter, we had 7,129 employees. We're relatively flat with this time last year. And you if had a second question, Patrick, I would ask, would I get the average oversize. Go ahead and ask your second question.

Sure. I just want to make sure I heard you right, that you said your largest customer accounted for $34 million in orders year to date. Is that correct? And then, pertaining to what the orders are for, is that the third application that you were shipping last year? Or is that something new?

So let me just be sure I can be really clear about this. When we look at orders and we talk about orders for the quarter, we really focus it on orders for the customer -- . The timeframe is based on when the customer wants delivery. So when we looked at it in Q1, we had $12 million in orders from our largest customer, where they wanted delivery in Q1. That was compared to $17 million in Q1 of last year.

When we look at it for the total orders received from the customer that we had built for delivery in 2014 for the full year, that was $32 million through yesterday. And this time last year, that was $24 million. So it's up about a third year over year in terms of our business volume with our largest customer.

Now, we also believe, obviously, this customer has a strong interest in reducing their overall test spend by leveraging the innovative and disruptive technologies that we bring to market, by reusing our software-based measurements in multiple generations of their devices, and also driving productivity. So we feel like we've definitely been successful in gaining market share in terms of the spend of that particular customer.

In terms of the applications, we are serving a variety of applications. Obviously, wireless-based applications are a significant portion of that total. Is that clear enough for you?

Yes, that's helpful. If we think about the opportunity at this customer in 2014, given that you have about $32 million in deliveries for the full year, is it fair to say that revenue is probably likely going to be higher than the $35 million that you achieved in 2013, but lower than the $70 million in 2012?

I'm not sure I want to give an exact number at this point. I would say that certainly we are optimistic about our relationship and value we bring to this customer. And then I would say it's unlikely that it's going to cause a negative on our growth this year, than it did last year.

Your question, Patrick, on average order size was $4,840 in Q1.

All right, that's helpful. And then dovetailing off the large customer question and based on the OpEx, you said OpEx should be up on an absolute basis slightly from the year-ago quarter. So there should be a little bit of margin pressure, if I just look at the midpoint of revenue guidance. But it looks nothing like the trough level that you saw back in 2Q of last year. Is that a fair characterization?

On the OpEx piece, I think yes, we're looking at low single-digit increase year over year. Obviously gross margins, while they'll be down sequentially, will be up pretty dramatically from a year-over-year basis. So they will be up close to 200 basis points. Our guidance assumes operating margins and operating income are up reasonably significantly in Q2.

And what's allowing you to ship a greater number of -- to this larger -- or, a greater amount of revenue to this larger customer, and yet not see the same gross margin-type of pressure? Is this the cost-outs that you talked about in the second generation of products and benefiting from the manufacturing facility in Malaysia?

Yes, it's all of those things we talked about last year that -- when we were wrapping up in the first wireless application with this customer last year, it was a brand-new technology just released to market. And obviously we work hard to be as efficient as we can over time. And so that's the key way to look at that question.

Okay. And just one more, if I may. I don't know if this is best suited for Eric or Alex, but -- or Doctor T. But I'm wondering on the academic business, are you starting to see an acceleration there? I believe through this malaise over the last several quarters, it had held up well, even without a PMI tailwind, and even without your constraints. But I'm curious, with the PMI recovering and with the funding from the Ryan-Murray budget, have you seen any material change or inflection in that business?

And then also, if you could tell us what percentage of revenue academic represents.

Okay, yes, I will take it. I'd say that it has continued to hold up well, our academic business. In particular, I highlighted in the call the success in some of our academic product lines, products that we have built really directed at that area. Those have done quite well, especially those that are now student-owned.

And so that's a really important part of our strategy, because it really broadens the base of students that are proficient with our tools. It's not only a business and revenue opportunity, but it's fully an adoption opportunity for us, as well when we look at it in both contexts. As a percentage of our business --

It's very stable, Patrick. It's about 12%. It can go up and down a little bit from quarter to quarter, depending on the seasonal buying pattern of the academic institutions. But it's very stable.

We have managed to [credit] a full-plant set of products that serve mechanical engineering and biomedical and electrical engineering in a way to really add value, and a hands-on learning process. And now it gives us an opportunity to have hands-on learning in remote classes.

Well, Patrick, thank you.

Thank you.

(Operator Instructions)

Richard Eastman with Robert W Baird.

Just a quick question. On the large orders, if I recall, the way the orders flow into that marketplace, meaning the wireless and also with this large customer, the majority of orders for a year, are they generally in-house by mid-year?

If we look at that specific customer, Rick, generally that has been the case. Not always. But that's not a bad way to think about it.

Okay, all right. So we've got good visibility on the $32 million, and maybe we can step that up. And then again, we've got $32 million of orders year to date. We shipped $7 million in the first quarter, so we've got -- the other $25 million mostly gets recognized in Q2 and Q3. That's what you are suggesting?

Correct.

Okay. And then, can I also just ask, Alex, North America was down about 4%. And sequentially, was down about 7%. Normal seasonality, at least in the North American market, would suggest that would be flat sequentially to maybe up a little bit. Was there a particular market, and I may be thinking aerospace defense, that stayed pretty soft?

When we look at it, last year we had a pretty strong quarter in the Americas in Q1, Rick. We've got a much easier compare as we go into Q2. Certainly there was possibly some pull-in of business in aerospace defense last year in Q1, pre the whole budget shut down. We will see how that plays out. But certainly we have an easier compare there in the second quarter.

But the seasonality from Q4 to Q1 in North America, it looks softer than it normally would. And I'm curious, is there anything that you can attribute to that? Or is it just -- .

Nothing in particular.

Okay. And was the defense market, mil aero-defense market, how did that do in the quarter? Are you seeing any signs of life there?

Actually -- this is Eric. Globally, our aerospace and defense business was up double-digits in the quarter. It did quite well. It was one of the standout successes, along with semiconductor, which has done well. And automotive has continued to be quite strong, as well.

Okay, excellent. And then just a quick question on the -- in the first quarter, the capitalized software was a pretty high number, $7.6 million. Anything unusual there? Or how does that -- how do you expect to capitalize software number to track for the quarter -- for the full calendar year?

It might be slightly higher for the full calendar year than last year. The way I would think about it is, obviously we have a pretty major software product that's getting close to release.

Okay, all right. And then just last question. For the second quarter, when I look at the revenue guide, and I look at it again -- I'm thinking sequentially, trying to just pick up any seasonal trends. But what tags the low-end, which would be about a 4% increase sequentially, versus the high-end, which would be mid-teens?

Obviously, we're looking at our overall forecast, based on pipeline as history and seasonal trends. And bracketing around that to get a reasonable aero bar in setting the overall guidance. The point I would make, Rick, is that we did see our backlog go up by about [$]7.5 million in Q1. Normally, you might see backlog come down in Q1. So that's about 3% of revenue that didn't flow through with the P&L in the first quarter.

Okay, all right. And then, seasonally, again, you're going to pick up maybe a $5 million to $8 million delta on this large order?

You mean on the largest customer?

Yes.

We would, at this point, expect revenue from our largest customer to be bigger in Q2 than it was in Q1.

Right. Okay. Thank you.

All right, Rick, thanks very much. We'll see you next week.

And I'm not showing any further questions at this time. I'd like to turn the conference back over to our host.

Thank you very much for joining us today. Have a good day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.