National Instruments Corp (NATI) 2015 Q1 法說會逐字稿

Good day everyone, and welcome to the National Instruments Q1 2015 earnings call. (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 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 statements regarding our opportunity pipeline, success in 5G commercialization and our guidance for second quarter 2015 revenue 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 annual report on Form 10-K filed on February 19, 2015. 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 today are record revenue for first quarter, continued broad adoption of PXI and very strong growth in revenues from RF products and continued success in 5G research and prototyping.

In Q1 we delivered record revenue for first quarter. Put together with our disciplined expense management has allowed us to maintain double-digit non-GAAP operating margins despite the recent surge in the U.S. dollar. The strength of our business model has allowed us to generate strong cash flow and deliver a dividend of $0.19 for the quarter. While we continue to adapt to the impact of the U.S. dollar on our revenue and gross margins, I am optimistic about our long-term position in the industry and our ability to gain market share. The differentiation we delivered to our customers through platform base design helps engineers and scientist simplify problems and reduce cost while scaling and adapting to rapidly changing demands.

In our call today, Alex Davern, our Chief Operating Officer will review our financial 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 thank you for joining us today. Today we reported record revenue for our first quarter of $289 million a 2% year-over-year increase in U.S. dollar terms and an 8% year-over-year increase in constant currency terms. Obviously we are disappointed with the effect that the strengthening of the U.S. dollar had on our revenue and profit performance both from a year-over-year perspective and relative to our guidance. From a year-over-year the 6% year-over-year impact to revenue growth from the strengthening of the U.S. dollar amounted to a headwind of approximately $17 million and was one of the more severe currency impacts we have seen since our IPO in 1995. The impact of currency on our revenue and gross margin was greater than we had anticipated when giving guidance as a result of the continuing strengthening of the U.S. dollar in February and March. I will discuss the local currency pricing adjustments we have recently made in the guidance section of my remarks.

In U.S. dollar terms revenue is up 3% in the Americas, down 4% in Europe, up 5% in east Asia and up 6% in the emerging markets. In constant currency terms revenue was up in all regions. It was up 4% in the Americas, up 10% in Europe, up 7% in east Asia and up 19% in the emerging markets. For Q1 net income was $15 million with fully diluted earnings per share of $0.12 and non-GAAP net income for Q1 was $23 million with non-GAAP fully diluted earnings per share of $0.18, $0.05 below the midpoint of our guidance range. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

Non-GAAP gross margin in Q1 was 75% and while still strong was down 120 basis points from Q1 last year primarily due to the stronger dollar. Total non-GAAP operating expenses were $186 million up 2% year-over-year. For Q1 our non-GAAP operating margin was 11% down from 12% in Q1 last year and non-GAAP operating income was $31 million down 10% year-over-year.

Now taking a look at order trends. For Q1 the value of our total orders was down 1% year-over-year, included in that total is $3 million in orders received from our largest customer compared to $12 million in Q1 last year. Excluding this customer our orders from all other customers were up 2% year-over-year in U.S. dollar terms in Q1. Now breaking down our Q1 order values excluding our largest customer in U.S. dollar terms. We saw a 5% year-over-year decline in our orders with a value below $20,000 while orders with a value between $20,000 and $100,000 decline 4% year-over-year. Orders with a value over $100,000 grew 37% year-over-year. Adding some color to this data we saw challenges in our long standing broad based businesses of software, data acquisition and instrument control as a result of the U.S. dollar strength and the lengthening of the PC replacement cycle.

Now turning to cash management. Inventories were up $5 million in Q1 and account receivables were down $11 million from December 31. During the quarter we used $24 million to pay dividend and $25 million for acquisition. Our cash and short-term investments totaled $443 million as of March 31.

Now I would like to make some forward-looking statements. For context I would like to give an update on two items; expected revenue from our largest customer and our business response to the strengthening of the U.S. dollar during Q1. Regarding our largest customer, year-to-date we have received a total of $6 million in orders from this customer compared to $32 million when we released earnings at this time last year. We continue to be very actively engaged with this customer in multiple new application, but we now expect a down year in revenue from this customer for 2015.

Regarding the recent surge in the U.S. dollar, as many of you are aware approximately two-thirds of our revenue is recognize in currencies other than the U.S. dollar with a heavy concentration in the euro. We have a natural hedge of approximately 50%. Over the decades we have built a business model that has managed through a lot of currency volatility to deliver sustainable strong gross margin. Our core strategy for sustainability managing the impact of currency volatility relies on strong product differentiation to enable us to adjust local currency pricing quarterly to help mitigate the currency impact for which we don't have a natural hedge. Over the 20 years since our IPO this strategy has generally allowed us to mitigate the unhedged portion of any currency movements through pricing with a delay of approximately one quarter. In Q1 however the rapid strengthening of the U.S. dollar after we had made our pricing adjustments in January resulted in a greater than anticipated adverse impact on our revenue, gross margin and operating income. As a result in early April we continued to execute on our long-term strategy by adjusting local currency prices.

Now looking to specific revenue guidance for Q2 starting with our largest customer. Given the orders received to date we are expecting revenue from this customer to decline from $20 million in Q2 last year to between $5 million and $10 million in Q2 of this year. Reducing our year-over-year revenue growth in U.S. dollars by approximately 4%. As a result we are guiding for total revenue in Q2 to be in a range of $290 million to $320 million. At the midpoint this represents a 2% year-over-year decline in U.S. dollar terms and 5% year-over-year growth in constant currency terms. We expect GAAP fully diluted earnings per share will be in the range of $0.14 to $0.26 for Q2. With non-GAAP fully diluted earnings per share expected to be in the range of $0.20 to $0.32.

In summary, while Q1 was a challenging quarter due to the rapid strengthening of the U.S. dollar and the weak PC market, we continue to execute well and maintain good spending discipline. We expect to continue to experience a drag in our revenue from currency headwinds and lower orders from our largest customer through Q3. However entering Q4 we expect to have more favorable compares on both factors, which should allow the strength of our broad based business to show through. Looking forward, we are working hard to take advantage of our existing investments and continue to be committed to our long-term operating leverage targets. As these are forward-looking statements, I must caution you that our actual revenues and earnings could be negatively effected by numerous factors such as any weakness in the global economy, fluctuation in revenue from our largest customer, expense overruns, manufacturing inefficiencies, foreign exchange fluctuations adverse effect to price changes and effective tax rates.

In closing, I would like to mention that National Instruments will be attending the Baird conference in Chicago on May 7, the Jefferies conference in Miami and the Oppenheimer conference in New York on May 13th, and the Stephens conference in New York on June 2. We look forward to seeing you there. With that, I will turn it over to Eric Starkloff, Executive Vice President of Global Sales and Marketing.

Thank you, Alex, and good afternoon. I was pleased with our ability to deliver 8% revenue growth year-over-year and positive growth in each of our regions on a constant currency basis. We had record first quarter revenue for our PXI products and saw very strong revenue growth in RF. In Q1 we began the roll out of new tools for opportunity management and collaboration across our sales organization. The roll out has gone smoothly and we continue to maintain a strong opportunity pipeline both in quality and quantity indicating continued strong customer interest in our products and platform base approach.

We did see some weakness in two industry sectors, aerospace and defense and energy. Energy in particular has been weak as it is adversely effected by the recent decline in oil prices. We expect to continue to see headwinds in the energy industry as long as oil prices remain low. We saw strength in our sales for the semiconductor industry attributable to the successful release of our semiconductor test system which is built around standard NI PXI chassis, controllers and modules combined with LabVIEW (Inaudible) software to serve high volume production test of semiconductor chips. Because it is based on the same standard products that we sell to the broad test and measurement market we get significant leverage and cost advantages from these economies of scale. Early customer response has been strong and we are encouraged by the pipeline of opportunity. For example on semiconductor Belgium using an IPXI and our semiconductor test system to test high end imagine sensors with unprecedented test performance while providing flexibility for their future needs.

Looking at our products. PXI and RF had very strong sales in Q1. As Alex mentioned, we saw a decline on a dollar basis in our broad based software and data acquisition products as the result of the strengthening of the U.S. dollar and the lengthening of the PC upgrade cycling. Our instrument control products which connect third party box instrument to the PC saw a significant year-over-year decline indicating relative weakness in the test and measurement industry. The combination of strength in our PXI sales and weakness in instrument control suggests that the market is continuing to shift from traditional rack-and-stack instruments to PXI and National Instruments continues to lead that shift.

CompactRIO products saw modest growth in Q1 in local currency impacted by the weak oil and gas market. We continue to see strong adoption and deployment in areas outside of oil and gas. One example is at National Grid in the U.K. where they are using LabVIEW and CompactRIO to provide additional data insight in to the power grid and adapt to the new alternative generation sources coming on to their grid. National Grid is the transmission operator to over 20 million customers in the U.K. and the NI based system allows National Grid to add more intelligence to the power grid. Peter Haigh of National Grid U.K. commented, "The high processing power of CompactRIO allows us to gather and analyze large amounts of data from anywhere on the grid as well as compile and analyze all the data to see grid-wide trends to optimize our investments to meet the energy needs of the next generation."

As mentioned previously sales of our PXI and RF products were particularly strong in Q1. Our position in PXI remains strong as we have by far the largest PXI product portfolio in the industry, an 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.

During Q1 we furthered strengthened this partner network to an agreement with Cobham Wireless formally the Wireless Test Business of Aeroflex, in which NI acquired the PXI RF product line from Cobham. Cobham will migrate to use standard NI PXI products including our vector signal transceiver and Cobham is now NI's global preferred partner for cellular and connectivity test. This partnership combines Cobham strong presence and expertise in these domains with NI's best-in-class product allowing both companies to be more efficient, profitable and competitive in cellular and connectivity applications. We believe this partnership reinforces our strong position in PXI as the industry continues to shift from rack-and-stack boxes to modular software-defined platforms.

Our RF product once again saw very strong year-over-year revenue growth. While our RF products have been central to many of our largest application wins they also serve a very broad set of customers and application. In addition to production test of wireless devices our software-defined platform is also used to prototype and validate a very broad set of wireless components and systems. We recently enhanced and further differentiated our product in RF with our new LabVIEW communication system design suite. Software which dramatically simplifies and speeds the prototyping process. Empowering designers of wireless technology to focus on their innovative algorithms instead of on complex embed programming. This product was a key highlight for us at the Mobile World Congress in Barcelona last month. At this event NI demonstrated real word prototypes of 5G networks and our platform was demonstrated by industry leaders such as Nokia Network and Intel. We believe our long-term investment in our platform has given us the ability to take a strong lead on this key emerging communication technology.

In summary, although unfavorable currency markets had a significant impact on our dollar reported revenue in Q1 I am pleased with our ability to deliver 8% constant currency revenue growth. We have a strong opportunity pipeline for our new product and the differentiation of our platform based offering continues to help us drive growth in the markets we serve. With that, I will turn it back over to Dr. T for some closing statements.

Thank you, Eric. I am pleased with our execution during Q1 in a difficult market. We maintained strong gross margins reinforcing the value our customers see in our product and resulting in strong cash flow despite the challenge from the strengthening of the U.S. dollar. 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 have always exited those cycles in a position of strength. I am confident we will continue that track record. Our focus has always been to provide a software and hardware platform that leverage commercial technology to increase performance and lower costs. This disruption strengthens the markets we target while also providing an opportunity to grow our business through differentiated products with high gross margin. I was especially pleased with our success in RF.

As Eric mentioned in Q1 we saw continued strong growth in RF. We are hitting stride with our new generation of FPGA-Based RF instruments which are fueling much of this growth. These products were a focus of our increased investment in R&D over the past several years, and I am pleased with our continued growth, adoption and penetration in the large RF market. Our products success has lead to better efficiency in R&D and we have increased focus on the areas which we have the most leverage of our differentiated platform. We have found particular strength and growth in the area of software defined radio an unique ability to serve these application through our position with LabVIEW FPGA has lead to our leadership in 5G research and prototype.

Earlier this month I delivered the keynote at the Brooklyn 5G summit on the topic of next generation tools for 5G research. The Brooklyn 5G summit is an invitation only summit that is jointly organized by Nokia Network and NYU Wireless Research Center. It brings together wireless and mobile industry research development leaders in academia, business and government to explore the future of 5G wireless technology. During the event with the help of Nokia we demonstrated the first 5G prototype to achieve 10 gigabits per second peak data rate system over the air, a key milestone to achieve the goals of future 5G network.

I believe our successes such as these in the early stages of 5G technology cycle will lead to tremendous opportunity for us to test 5G products as the technology comes to market in the future. This has been our approach throughout our history to disrupt and grow end markets where our software centric platform offers tremendous value, cost and productivity benefits to our customers. Our success in the most challenging 5G prototyping applications is a prime example of how our software position and FPGA-Based approach enable NI to address the long tail of unique applications which are poorly served by the traditional approach to (Inaudible) defined hardware.

In closing, I want to thank our employees for their concerted effort to deliver innovative new products to drive our growth while managing expenses as we continue toward our long-term profitability goals. I am confident that we are building a new product pipeline, channel and operational excellence to drive long-term growth and profitability of the Company. Thank you. We will now take your questions.

Thank you. (Operator Instructions). Our first question comes from Patrick Newton with Stifel. Your line is now open.

Good afternoon, Dr. T, Alex and Eric. I guess just jumping right in if I could get a housekeeping question. The number of employees exiting the quarter and then your average order size.

Sure Patrick. The number of employees exiting the quarter is 7,145. And the average order size was $4,945.

$4,945, okay. And then I guess should we think about headcount now as starting to March back up a little bit with the normal hiring through the back half of the year? I think this is the first time your headcount has grown an a year-over-year basis in about three quarters.

Yes, a modest uptick there, Patrick, part of that was the small acquisition we did in Q1 that we announced a few weeks ago. So I think any headcount change for the year is going to be relatively modest through the rest of the year.

Great. I guess on the acquisition front can you help us understand the revenue contribution from the Cobham deal in Q1 and also what's embed in 2Q guidance?

So in Q1 Patrick, given the transition as we transition the production of these devices and then ultimately as they transition our platform gives the revenue kind of a (Inaudible), so the is no revenue contribution in Q1. They maintain sufficient inventory to be able to manage through the first quarter and the revenue contribution will commence in the second quarter. It is relatively modest in Q2 and then we hope to build from there.

Okay. And then if we look at the -- I guess embed in the June quarter guidance there appears that there is either an aggressive snap-back in your gross margin or flat to maybe even declining OpEx on an absolute basis sequentially just to meet the midpoint of the guidance. Could you walk us through the puts and takes and how we should think about those line items.

Sure. I will tell you how I think of most of the things here. If you look at the way Q1 results came out, we were afforded 2% revenue growth in dollar terms and then we had a 6% FX hit and about 1% decline in revenue growth as a result of our largest customer, which we discussed. That gives you a local currency growth of our base business of about 9%. When you do that math in Q2, the midpoint of guidance is minus two in dollar terms, so slightly bigger foreign exchange hit in Q2, seven points and a bigger impact from our largest customer. So you get back to about 9% local currency growth of bad base business excluding our largest customer. Now when you look at from a guidance midpoint it is 5% sequential increase in revenue which is roughly in line with our historical norm excluded our largest customer. We are expecting some modest sequential improvement in gross margin. And just like the FX has a bigger impact on our top line in Q2 than it did in Q1 it will also have the impact of modestly reducing our expenses in Q2 because of the greater impact of exchange rate. So that's kind of a march down the income segment.

That is very helpful. I guess last line of questioning is on that largest customer you are talking about, one, is you gave us the $3 million order flow in Q1. Could you provide us with revenue? And on the 2Q and 3Q revenue contribution, thank you for the details, but with that down tick year-over-year is it a matter of design cycle for the customer, is it a matter of reuse of prior products, is it a matter of share loss. What is driving that pretty significant down tick?

So your first question Patrick revenue from the largest customer was about $5 million in Q1, and a portion of that will be deferred services revenue essential carry overs from prior years. In general with the largest customer we have a great relationship. We continue to be engaged with them in more new application. And as you know we have helped this customer significantly reduce their test spend over time and that has I think been a great value to them. We know the revenue is going to be lumpy and the cycles are probably most likely be related to transitions to major new standards as they come. And that's going to be something that is going to have on years and off years and our perception at this point is that this year will be a down year.

All right. You talked about the strong wireless demand in your prepared remarks. I guess this one is for Dr. T, Alex or Eric. So you talked about strong wireless demand in the prepared remarks, but we just talked about your largest customer expected to see year-over-year decline in 2015. So can you speak to wireless trends excluding this customer and help us understand the relative size of your overall wireless business.

Sure. Patrick I will take it. This is Eric. As I've mention before it is really helpful to understand our wireless and our RF business is a pretty broad play for us. We do serve wireless production test, that's an important space, but it is quite a bit broader than that. It includes areas of testing (Inaudible) applications, areas like radar, we've introduce products last year that are pretty well vent in that space. And it includes a really growing part of this area we called software defined radio. That's been very successful for us. We highlighted 5G prototyping as a particular area of success and that's a growth area that's part of that RF pie. So the diversity -- and I want to just say what's unique about National Instruments in this space is the nature of our platform based approach is the same core technology components that are serving those various different application spaces of our customers. So we're able to serve these very different spaces with a whole lot of leverage on the investments we make in to the platform and our channel.

Great. Thank you for the details. Good luck.

Thanks, Patrick.

(Operator Instructions). Our next question comes from Richard Eastman of Robert W. Baird. Your line is now open.

Yes, good afternoon. Alex, could you just walk through maybe just real briefly the gross margin decline about 140 bips year-over-year. So some of that is going to be currency, but how much of that is mix relative to the large project. I presume large project sales track higher as well as orders.

Rich, Alex here. Most of that impact is really from the currency change. If you look at it from a year-over-year point of view on the revenue line we took a $17 million impact from currency. When we talk about the natural hedge that we have built in our business model the vast, vast majority of that comes at the operating expense level. The vast majority of our cost of goods sold is from components that are priced in dollars. So there's very little natural hedge in the manufacturing or the cost of goods sold portion of the business model. So the vast majority of that decline came directly from currency change. And you'll notice when you look at the detail in the P&L you'll see software versus other products mix and the cost of goods sold has changed. So with 9% increase in our base volume you're seeing an increase of cost of goods sold and then you're seeing the majority of the value we create from that being consumed by the changing exchange rates.

And then again your reference to adjusting prices were possible April 1 should help us out here a little bit sequentially as well.

In our pricing as I said in the call, Rick, you have been around the stock and covering NI for very long time through multiple currency moves so you've seen this before. We change prices generally once a quarter and then price strategy has generally been anchored on the U.S. list price. And (Inaudible) adjusted to keep a relative to ratio to our global pricing in the various different regions to be aligned to that ratio that we have set. And that helps the channel stay efficient. So another thing that helps the channel stay efficient is not to change pricing too frequently and that's why we have settled on the strategy of changing pricing once a quarter. Additionally we typically honor quotes for a period of 30 days post change, so it can take a while before we make a decision to change pricing before that rolls in to the revenue and to the gross margin. And we are anticipating that that will allow us to see a modest improvement in gross margin in Q2 and then we'll see how that plays out in to Q3.

Okay. And then a quick question on the orders, in U.S. dollar terms can you just give any color on the order strength in the greater than $100,000 order. Is that reflective of your wireless business or what industries are kind of driving that?

To give you a broad based statement as you heard me say when you get down into the orders below $20,000 and blow even $100,000 you are dealing with a very large number of high volume orders. Where you're going to see the impact of currency play through pretty directly until we can successful manage a change in pricing. So it has a real direct impact on that super broad base of business. In the orders over $100,000 obviously it is an area that more involves the channel directly and certainly as Eric said we saw tremendous momentum behind our RF business in Q1, strong growth for the PXI platform. They would play a very significant role in the growth in those orders over $100,000. And obviously we broke out the growth between with our largest customer and without. And you can see the success in that category above $100,000 despite the drop in orders from our largest customer the strength of our product position and our channel in this market area was very pronounced in Q1.

Just to add on, it has been a pretty deliberate strategy, Rick, as you know for us to deliver higher value in these system platform that are hardware and software areas like PXI and CompactRIO and CompactDAC and as we deploy systems in RF or high channel count systems or large deployments of CompactRIO for condition monitoring those are the types of systems that fall into the higher order buckets and where we're seeing a lot of growth.

Okay. And then just one last question. I'm curious on BQ obviously it gives you some instant -- an instant position in the 5G space. And being an I presume a value added reseller but can you give us any sense of revenue that this would bring in? I mean is this $10 million of rev or how big of business is this?

Rick, we obviously haven't disclosed the size of the revenues. I would tell you it is pretty modest. It is a relatively small company and good tech and I will ask Dr. T to talk about the strategic value.

Sure. Basically their technology dovetails to our technology very well. They have a deployment platform that (Inaudible) based, they've got infrastructure and software and we have the software or actually the algorithm development for 5G and we have been prototyping these systems on PXI systems. And this gives us a platform that is more able to be deployed in the field for field trials and the like and we view it as very complementary to the position that we have now.

Do they have access to one or two key customers or are they pretty broad based themselves or is that --

I would say a few key customers that is pretty complementary to the ones we've been working with the 5G research. So it looks it is a very good step for us.

Okay, very good. Thank you.

Thank you. That concludes our question-and-answer session. I would now like to turn the call back to Alex Daver for closing remarks.

Thank you for joining us today. We hope to see you at one of our investor conferences in Q2. Good evening.

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