National Instruments Corp (NATI) 2014 Q4 法說會逐字稿

Good day everyone, and welcome to the National Instruments fourth-quarter 2014 earnings conference call.

Today's call is being recorded.

(Operator Instructions)

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 Eric Starkloff Executive Vice President of Global Sales and Marketing. For opening remarks, I would 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 statements regarding growth and our opportunity pipeline. Product success in 5G commercialization, and our guidance for first quarter 2015 revenue, and earnings per share.

We wish to caution you that such statements are just [predictions], and 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 10K filed on February 20, 2014, and our Form 10-Q, filed on October 31, 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'll 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 Q4 are: record revenue and profits, strong revenue growth in LabVIEW, PXI, RF, and CompactREO products, and record net cash provided by operating activity. For the full year, we have delivered record revenue in the 57% increase of net income, while our strong growth in PXI expanded our footprint in automated tests.

I am pleased to report record annual revenue in 2014, the 36th year of growth in our 38-year history. As we move through 2014, we have leveraged improved market conditions and have increased new product revenue to accelerate our revenue growth, ending the year with year-over-year revenue growth of 11% in Q4. I am also pleased with the significant operating leverage that we delivered in 2014, which together with our very strong balance sheet allows us to increase the return of cash to our shareholders.

In our call today, Alex Davern, our Chief Operating Officer, will review our results; Eric Starkloff, our Executive Vice President of Global 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 think you for joining us today. 2014 was a year of great progress for NI. Today we reported record quality revenue at $333 million, up 11% over Q4 of last year in US dollar terms, and up 13% year-over-year in constant currency terms.

For Q4, net income $43 million, up 37% year-over-year, with fully diluted earnings per share of $0.34. And non-GAAP net income for Q4 was $51 million, up 33% year-over-year, with non-GAAP quarter diluted earnings per share of $0.40.

In Q4, we were impacted by two items which are not included in our guidance. The first was a tax benefit of $3 million related to the retroactive reinstatement of the R&D tax credit in the United States. And the second was a $1 million loss on foreign-exchange due to be strengthening of the dollar during Q4.

For the full year, we reported a new annual revenue record of $1.24 billion, up $71 million or 6% year-over-year in US dollars, and up 7% year-over-year in constant currency terms. We also reported record annual profits in 2014, with net income of $126 million, up 57% year-over-year, and fully diluted earnings per share $0.989 cents.

Non-GAAP net income for the year was also a new record of $156 million, up 41% year-over-year, with non-GAAP fully diluted earnings per share of $1.22. A reconciliation of our GAAP non-GAAP results is included in our earnings press release.

Non-GAAP gross margin for Q4 was 75.9%, up 10 basis points year-over-year. And for the full year was 75.5%, up 50 basis points year-over-year. We executed very successfully on our leverage plan in 2014, with total non-GAAP operating expenses up 5% year-over-year in Q4, and up 2% for the full year.

As a result, we had record non-GAAP operating income for the quarter and the year. Non-GAAP operating income at $66 million for Q4, up 30% year-over-year, and was $187 million for the full year, up 31% year-over-year. Our non-GAAP operating margin was 20% in Q4 and was 15% for the full year, up from 12% in 2013.

Now taking a look at order size: in Q4 we saw 30% year-over-year growth of total orders, with 5% year-over-year growth in orders under $20,000, 13% year-over-year growth of orders between $20,000 and $100,000, and 36% year-over-year growth for orders over $100,000. The growth of our systems revenue indicates a success we're having competing directly with our traditional test competitors.

For the full year, total orders were up 8%, and deferred revenue increased by $15 million. Revenue from our largest customer was $7 million for Q4, up from $4 million in Q4 last year. And for the full year, revenue from our largest customer was $52 million, up 47% from 2013.

Now turning to capital management, for the year, the Company had a record $195 million in net cash from operating activities, and paid $76 million in dividends. Cash and cash equivalents ended the year at a new record of $471 million.

Given the significant improvement in the Company's operating performance, and its financial position during 2014, the Board of Directors has determined that it is appropriate to increase the rate of our return of cash to shareholders, and therefore has increased the company's quarterly dividend payments from $0.15 per share to $0.19 per share. 2015 will mark the 12th consecutive year of dividends for National Instruments.

Now I'd like to make some forward-looking statements. While we were pleased to see the global PMI continue to indicate future growth in the industrial economy, the potential impact on our customers of the recent volatility in the global financial markets, especially the currency markets, makes us cautious in planning for the first half of 2015.

We're focused on execution, and we remain committed to the operating leverage targets we set out in our investment conference in August. As you look to Q1, we expect to see a significant headwind to our US dollar revenue growth, due to the impact of the strengthening of the US dollar, especially in Europe and Japan.

Currently, we are projecting that the strengthening of the US dollar will reduce our year-over-year US dollar revenue growth by approximately 500 basis points in Q1. Meaning that we expect to see our constant currency growth be five percentage points higher than the US dollar revenue growth. This estimate is based on current exchange rates and can change as exchange rates fluctuate over the rest of the quarter.

Given the currency volatility, we are being cautions in our Outlook for Q1. As a result, we currently expect revenue for Q1 to be in the range of $280 million, to $310 million. At the midpoint, this represents 4% year-over-year revenue growth in US dollars, and approximately 9% year-over-year revenue growth in constant currency.

We currently expect a GAAP fully diluted earnings per share will be in the range of $0.11 to $0.23 for Q1, with non-GAAP fully diluted earnings per share expected to be in the range of $0.17 to $0.29. Included in our guidance is an expected loss of foreign-exchange of $3 million, or $0.2 per share for Q1. As a result of revaluing our receivables at the new exchange rates. If exchange rates stabilize at the current levels, then we would not expect this impact to repay in Q2.

As these 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, expense overruns, manufacturing inefficiencies, effective tax rates, foreign exchange fluctuations, and the effective price increases.

In summary, 2014 was a year of great progress for NI. We were able to deliver record revenue, record profit, and record cash flow from operating activities. While we continue to gain market share. Our goals for 2015 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, turn it over to Eric Starkloff, Executive Vice President of Global Sales and Marketing.

Thank you, Alex, and good afternoon.

I was very pleased with this quarter, with our ability to achieve strong bookings growth, leading to record revenue and a strong finish to 2014. Growth in 2014 was driven by a strong new product revenue, and we believe we saw the benefits from the investments we made to accelerate R&D over the past several years.

We also continue to maintain a strong opportunity pipeline, and strengthen our customer relationships, as we leverage the investments we made in our field sales channel. We saw broad-based growth in Q4. Geographically, by industry, and across our major product line.

On a regional basis, we saw year-over-year revenue for the quarter up 5% in the Americas, up 8% in Europe, and up 24% in East Asia. Emerging markets return to growth and was up 11% year-over-year. A very good performance, especially in local currency, despite facing challenges in the geopolitical landscape, and recent currency fluctuations.

We did see some weakness in two industry sectors, aerospace and defense, due primarily to a compare against strong growth in Q4 last year, and energy, which has been adversely affected by the recent decline in oil prices. While lower oil prices create a near-term headwind for customers in oil exploration and production, these applications account for only a few percent points of our total revenue, while the vast majority of our customers will ultimately see benefit from lower energy prices.

Now, turning to our product results. Our growth in Q4 was driven by record revenue from new products, and record quarterly revenue in software, academic products, data acquisition, and CompactRIO, as well as very strong growth in our PXI and RF products.

Record software revenue was bolstered by strong sales of new enterprise license agreements, which continue to be a strong driver of adoption of our software tools and major accounts. In addition to enterprise-level adoption, broad-based LabVIEW usage continued to expand, with very strong growth in LabVIEW adoption and renewal rates near an all-time high.

Growth in new LabVIEW seats is key to our business, because it provides not only the software license revenue, but also serves as the foundation for long-term customer loyalty, and provides the opportunity to sell measurement and control hardware to new customers.

We continue to expand LabVIEW capability, to better serve embedded systems design, and rapid prototyping applications. We recently announced the LabVIEW communication systems design suite, which addresses a new group of users, enabling them to rapidly prototype communication systems.

This new LabVIEW tool dramatically simplifies and speeds the prototyping process. Empowering designers to focus on wireless innovation instead of complex embedded programming. The initial customer response to this new software tool has been very strong.

Our academic products achieved record revenue in the quarter. Over the last decade, we've had an intense focus on working with academic institutions to provide students with tools that enable hands-on learning.

Our myRIO product continued to see tremendous growth and adoption in university classrooms and labs. MyRIO combines a real-time processor and FPGA into a small student-friendly package for teaching controls, robotics, mechatronics, and embedded concepts with LabVIEW. In just its first year, myRIO has already been sold to over 1000 universities, and we estimate that over 30,000 students worldwide are using it to build systems at their universities.

Our data acquisition products had record quarterly revenue in Q4, helped by improvement in the PC industry. Growth and data acquisition was led by our compact DAG products across a broad range of applications. Our PC-based data acquisition devices also achieved all-time record quarterly revenue.

We continue to build on our leadership in PXI. 2014 proved to be a particularly strong year for our PXI products, with record annual revenue and unit volumes for PXI systems. Cumulatively, we have now shipped more than 150,000 PXI systems.

We believe the strength we have seen in our PXI products is driven by having by far the largest PXI portfolio in the industry, a unique and differentiated software position for creating PXI systems, a focused sales and support channel that provides significant value to our customers, and a very strong network of integration partners trained on NI software and hardware. PXI's low cost and high performance lowers the cost of test versus slower and more expensive traditional instruments.

One example of this is that Continental, one of the world's leading automotive suppliers, who is using our software and PXI products to accelerate testing a variety of automotive electronics components. Our tools make it possible for Continental to drive significant improvement in efficiency, and decrease the total cost of test, to meet intensifying demands in their industry.

Our RF products saw more than 50% year-over-year revenue growth in Q4. While our RF products have been part of our largest application win, they also serve a very broad set of customers and applications.

In addition to production tests of wireless devices, our software-defined platform is also used to prototype and validate a very broad set of wireless components and systems, and this product line's capabilities have now been enhanced and further differentiated with our new LabVIEW communication system design software.

Our CompactRIO product also saw record revenue in Q4. The success was seen across a range of applications. This portion of our business is seeing lift, and significant long-term growth potential, from the emerging trend of the industrial internet of things, where embedded intelligence, networking, and IO, are changing the way our customers do their jobs.

One example is at the London Underground, where they are embedding CompactRIO systems in their subway to predict and prevent failures. This intelligent monitoring system is forecasted to reduce lost customer hours in the London Underground by 39,000 hours each year.

We believe that the investments we made over the last several years to accelerate R&D are paying off, with the successful introduction of new products fueling our growth. For example, our new VirtualBench product combines the functionality of several discrete instruments into a single device that offers integration with both PCs and iPads. VirtualBench has seen a very strong ramp in units and revenue since its release last year, as well as receiving numerous industry awards.

Another new product offering that leverages our platform to reach new customers, is our semiconductor test system, which released in August of 2014. The semiconductor test system is built around standard NI PXI chassis, controllers, modules, and our industry-leading LabVIEW and TestStand software, to serve high-volume production tests of semiconductor chips.

It's based on the same standard products that we sell to the broad test and measurement market. So we get a significant leverage in cost advantages from those economies of scale, that is not achieved with designing unique application-specific testers.

Initial customer response has been very positive, and we are encouraged by the pipeline of opportunities for this new offering. Both VirtualBench and the semiconductor test system were just recognized with Best in Design & Test awards at DesignCon 2015.

Finally, the CompactRIO controller released in August 2013, based on the Xilinx Znyq All programmable SoC, has continued very strong adoption. And has been the fastest-growing CompactRIO controller we have ever introduced.

In summary, I was very pleased with record revenue for the year and in Q4, and with accelerating growth through the years, we've realized the payback from investments we've made in R&D, marketing, and sales over the past several years. While the recent strengthening of the dollar will have an impact on our revenue growth in US dollar terms as Alex noted, I am pleased to see continued growth in our opportunity pipeline around the world, which reflects the differentiation we offer to our customers.

With that, I will turn it back over to Dr. Truchard for some closing statements.

Thank you, Eric.

I'm pleased with our performance in 2014, with record revenue, significant improvement in our profitability, and strong growth for our PXI footprint and automated test. Our employees continue to drive innovation through new products that enable our customers to solve some of the world's toughest engineering challenges. I take great pride in seeing how our customers are using our software and the hardware to improve everyday life.

For many years, we have been serving applications, now considered part of the growing trend of the industrial Internet of things. The elements driving and enabling this trend include sensing, data analysis, data fusion, intelligent control, and connecting disparate systems and data sets.

These have been areas (inaudible) for NI for decades, and we will continue to be at the forefront of this trend. Our CompactRIO products, for example, represent an ideal platform for adding intelligence and connectivity to industrial devices to realize the promise of industrial Internet of things.

We're also at the leading edge of research and prototyping of 5G wireless systems. Just last month, I delivered a keynote address at the IEEE Globecom conference, where leading researchers and scientists from around the world were in attendance to discuss 5G research, and ideas to address the capacity crunch we're facing with communication networks. A 5G technologies and standards continue to evolve, we believe our products will be an integral part of the industry's commercialization efforts.

During my keynote, I launched our new LabVIEW communication system design suite, which helps engineers develop communication systems, including areas such as 5G wireless. This is a version of LabVIEW targeted specifically at communications design process, and two, to meet the needs of those developing novel solutions for new communication systems. The reception among our lead users has been strong, and that I am excited to the impact it provides our customers.

We have built and continue to run our Company for long-term sustainable growth. Over the course of several decades, we have successfully managed the business through various economic and currency cycles, and are prepared to navigate the recent currency fluctuations.

Our strategy has been to build platforms that leverage commercial technology, to increase performance, and lower cost. This effectively [can shrink] the markets we target, while also providing an opportunity to grow our own business through differentiated products with high gross margins. The record performance of our PXI products in 2014 is an example of this strategy.

In closing, I want to thank our employees for their concerted efforts to deliver innovative new products, value, and improved productivity to our customers, and I am pleased to be able to deliver on an operating leverage goal, and deliver record annual revenue. As we continue to expand our product portfolio, to address more demanding application requirements, I am confident that we have built the foundation to drive long-term growth and profitability of the Company.

Also, I will be presenting at the Stifel conference in San Francisco on February 9. I look forward to seeing you there. Thank you. We will now take your questions.

Thank you, Sir.

(Operator Instructions)

Patrick Newton, Stifel.

Great, thank you for to give my call. This is [Robert's Stenof] on for Patrick today. First I have a couple of questions on the guidance you kind of specifically -- relating to the FX headwinds.

So, I understand if you come with a 500 basis point impact to revenue. Just thoughts on how that impacts expenses? Is there any kind of offset or natural hedging that you see in your cost structure that you can just sort of make some of that, that impact up -- or so I guess that my question is, so what should we expect the impact to operating expenses and costs of goods to be due to the strong dollar?

Robert, very good question. Well, over the last number of years, we've built a pretty diverse global footprint for National Instruments, so our current estimate is we have roughly 50% natural hedge, at the expense and gross margin, our cost of goods total line, against the shift in the dollar.

And obviously there's two impacts on the dollar here in Q1, not only of the year-over-year impact on revenue and expenses, but we do expect similar a little bit to what we saw in Q4, that on revaluation receivables, that will see couple-of-penny hit below the operating income line in Q1. That should, depending on how exchange rates work out, if exchange rates stabilize, we would not expect that to repeat in Q2.

Got you. Great, appreciate that.

And then, there's Dr. Truchard kind of talking about some general wireless test trends. So one of your wireless test competitors reported earnings this morning, and mentioned that they had seen the wireless test market contract about 50% during the year. I just want to get your thoughts on that assessment of what is going on in the market, and thoughts on how you see 2015 shaping up from a growth in the competitive perspective and wireless test.

We see a great opportunity in wireless overall, and Dr. Truchard may want to pinch in here look at well, we look at this as a broad $6 billon market. We're very happy with our results in our RF and wireless business in 2014. As Eric mentioned in his comments, we saw very strong growth in RF and wireless in the fourth quarter.

Obviously we had a very good success with our largest customer in 2014. So we feel really well positioned. And our strategy in these marketplaces is to leverage broad technology and apply it to a multitude of different markets, and Dr. Truchard can elicit a little bit maybe on the broader strategic and (multiple speakers) disruptions.

Sure, if you look at the big picture, basically, we work from a platform point of view, where we integrate both what we're trying to in design and prototyping as we're doing in 5G, and then test. This means that our products serve a much broader base than just test. And this means we get economies of scale, a platform-based approach lets keep up with the latest technology. And we won't be surprised if we see downward trend -- further downward trend in the cost of test for our customers.

Great. I appreciate the color.

So in the short terms, part of our strategy is, we're successful the market will shrink.

Got you, got you.

(Operator Instructions)

Richard Eastman, Robert W. Baird.

Yes, good afternoon.

Hey Rick, how are you doing?

Excellent. Alex, if you would maybe comment about the orders from the large customer in the fourth quarter, what those look like.

And then also, I know you're not going to get me real close here but what would -- how would you model the outlook from this large customer in 2015 relative to the $52 million of business that you booked with them and shipped in 2014?

So, I'll give you a specific number at first. We had the revenue, I believe, in the call and the script itself, but the order number was $8 million in Q4, compared to $3 million in Q4 the prior year.

Okay.

Do you need the full-year number as well, or did you probably already had that too?

You know, I think I have the order number. Yes, I have the order number for -- I can just add this in.

Okay. No problem.

But the how does the outlook look? Obviously, you don't have a great deal in backlog here with that customer. You didn't at this time last year either.

But is there a reason to assume that that business can be stable. You know, this is more about test utilization, I suppose -- tester utilization. But, how would you model this large customer, or think about them for 2015?

Well, this is our fourth year where this has been a more than $10 million customer for NI. Very good growth for us in 2014. We really value this customer, we have a tremendously good relationship with them. We are servicing a broad range of applications, and we continue to put the effort out to ensure that we are delivering value to this customer at every opportunity.

So I think we're pretty well positioned. Having said that all give you answer that my sales team would give me to that question, which is I'll know more in a few months time. So, as we said this time last year, this is a competitive environment that business to that customer, and we'll know a lot more about our ultimate likely revenue what we're reporting results three months from now.

Just as a reminder, you have your big comps there from a revenue standpoint in the second and third quarter?

That is correct.

Yes, okay. And then just a -- Alex, or maybe Dr. Truchard, could you just give me a perspective, when I look at the orders under $20,000 that's kind of been -- I guess 5% growth is as good as it's been for four straight quarters or more. But how mature is the market for this -- more the transactional business in your mind?

And also does that less than $20,000 orders, does that kind of skew towards the US, where I would expect with industrial production having been where it's at, that that number would be a bit stronger?

Our orders there are -- the business we have with customers, we try to move it upscale to higher volume systems. We may start with GPIB interface, to what time we move them to PXI system, where the average order size goes up substantially. So, that is one of our goals, and there will be a general trend as we go forward.

Yes, and really, it's been a trend for the last 10 years or so, that the proportion of our revenue coming from larger systems sales has been steadily growing over the course of that last decade. As we've been disrupting these higher-end markets, shrinking those markets and turning that into a high gross margin business for NI.

One comment I'll make, Rick, is that when I look at our revenue growth just in the most recent quarter with the companies in GNN that have either published or given guidance in our revenue growth is five or six X the average. But unfortunately the average is pretty low, so there has not been a lot of growth in the overall volume in the test business across the globe.

And I think that's partially reflected in the factor and caused by the fact that, although industrial production has improved in recent times, we're only now getting back to new aggregate total increase in output in industrial up in the global economy. I would like to see global industrial production see some sustained rise over the peaks that we had in 2007, and I think that would be good for the whole industry. Until we see that, I think volumes in the total industry are going to be somewhat constrained.

Just to add, as Alex mentioned in his prepared remarks, that real strong growth in the system business is indicative particularly of the share that we're gaining in the traditional markets, we believe.

And can I just, instead of punching back in in two minutes, can I just ask a third question?

You may.

Alex, do you expect that the business model, the leverage model, that you've published, does that hold with currency -- will that hold with currency?

At this point in time, based on rates where they are today, our expectations, that question the answer is yes.

Okay.

Now, I wouldn't want to tell you that that is infinitely flexible. If we see incremental significant, very significant moves in foreign-exchange, that may not be the case. So there's a limit to that, but based on where we stand right now, our attention is to execute, as I said in the prepared remarks, against the leverage plan that we laid out in August.

Because you had some natural hedge,as you pointed out earlier on 50% of your cost, so --?

Well, the way I look at it, Rick, and you followed the stock probably as long or longer than anybody. But if you look at our gross margin chart over time, we have proven that we have the ability to -- highly differentiated products especially on the software domain. We have some flexibility on pricing. And international markets that we've used as an offset to the unhedged portion of our business risk. It is not perfect.

Okay.

That is a strategy that we've been able to largely successfully deploy in prior cycles.

Got you.

Okay, excellent, well thank you.

Thank you.

Patrick Newton, Stifil.

Great, it's Rob again, thanks for our follow up. Couple of just housekeeping, as I'm kind of looking through my notes here. What was the employee count for the quarter?

So we were right about 7100, Rob, essentially flat with last year.

Okay. And average order size in a quarter?

Good question. Just give me a second here. If you've got another question you can throw it out at me while I'm looking.

Sure. So I guess if we think about industry growth projections in general for 2015, kind of what the rates we are seeing, low single -- low-to-mid single digits, PXIs can traditionally outpace the broader market, I just wanted to gauge you thoughts on full-year growth. I know this may be a little early, but, is it sort of a low double digits, something that is reasonable, or I guess what your thoughts are this point in time?

It will obviously be somewhat impacted by the macro, Robert. So I wouldn't want to try to guide in this time frame for a full 2015. We'll see how one plays out and the kind of go from there.

We do however fundamentally, and have seen fundamentally for well over a decade now the ability of the PXI position that we brought to market to be highly disruptive and we are very focused on continuing to drive significant incremental value to our customers in that platform. And we hope certainly that customers will continue to value that and allow us to gain marketshare.

Great appreciate that.

I'm sorry, can I provide the answer to your question?

Yes.

About $5,430 which I believe is a new all-time high.

Okay. Great. I appreciate you taking my questions, and good luck.

(inaudible) Robert, and thank you very much.

No problem.

Thank you, and at this time I am not showing any further questions, so I would like turn the call back to management for any closing comments.

Thank you very much for your time today, we will talk to you in April.

Thank you Sir. Ladies and gentlemen, thank you for participating in today's conference this does conclude today's program. You may all disconnect. Everyone have a wonderful day.