National Instruments Corp (NATI) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the National Instruments second-quarter 2015 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, General Counsel and Secretary, Dr. James Truchard, President and CEO, Alex Davern, COO and CFO, John Graff, VP of 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 position in the industry, ability to gain market share, 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 February 19, 2015 and most recent quarterly report on Form 10-Q filed May 1, 2015. These documents contain and identify important factors that 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 improved gross margin and operating margin as we adjust to the dollar's strength, record non-GAAP operating income for the second quarter and continued brought up adoption of PXI and very strong growth in the revenue from RF products.

In Q2, we reported record non-GAAP operating income for a second quarter, as we continue to adjust to the US dollar's recent strength. This, together with disciplined expense management, has allowed us to increase our non-GAAP operating margin year-over-year in Q2.

The strength of our business model has allowed us to recover from the currency driven decline that we saw in our Q1 operating margins and brings our non-GAAP operating margin for the first half of the year to 13%, flat year-over-year. I am optimistic about our long-term positioning in the industry and our ability to gain market share. The differentiation we deliver to our customers through platform based design helps engineers and scientists simplify problems and reduce costs, while scaling and adapting to rapidly changing demand.

In our call today, Alex Davern, our Chief Operating Officer, will review our financial results. John Graff, our Vice President of 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 revenue of $302 million, a 4% sequential increase. From a year-over-year perspective, revenue was down 3% in US dollar terms and was up 3% year-over-year in constant currency terms.

In US dollar terms, revenue was up 6% in the Americas, flat in Europe, down 13% in East Asia, and down 24% in the emerging markets. In constant currency terms, revenue was up 9% in the Americas, up 14% in Europe, down 11% in East Asia, and down 19% in the emerging markets. The decline in revenue in East Asia is primarily related to our largest customer.

To help investors better understand the underlying trends in the business, we have added an additional slide to the investor presentation which shows the comparison of the global PMI to revenue, excluding foreign exchange effects and the impact of sales to our largest customer.

Non-GAAP gross margin in Q2 was 75.7%, up 80 basis points from Q1. Total non-GAAP operating expenses were $184 million, down 4% year-over-year, primarily due to the impact of the stronger dollar. For Q2, our non-GAAP operating margin was 15%, up 130 basis points from last year. The strength of our business model allowed us to adjust to the strong dollar and a weak global PMI during Q2. As a result, we delivered 6% year-to-year growth in non-GAAP operating income, despite the revenue decline.

The significant year-over-year improvement in non-GAAP operating margin that we delivered in Q2 has allowed our operating margin to recover from Q1 and end the first half with our non-GAAP operating margins flat with last year. Our non-GAAP effective tax rate in Q2 was 28%, compared to 25% last year.

For Q2, net income was $25 million, with fully diluted earnings per share of $0.19, and non-GAAP net income for Q2 was $32 million, with non-GAAP fully diluted earnings per share of $0.25. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

Now taking a look at order trends, for Q2, the value of our total orders was down 6% year-over-year. Included in that total is $10 million in orders received from our largest customer, compared to $27 million in Q2 last year. Excluding this customer, our orders from all other customers were down 1% year-over-year in US dollar terms.

Now breaking down our Q2 orders, excluding our largest customer, in US dollar terms, we saw a 2% year-over-year decline in our orders with a value below $20,000, while orders with a value between $20,000 and $100,000 declined 5% year-over-year. Orders with a value over $100,000 grew 9% year-over-year.

Now turning to cash management, during the quarter, we paid $25 million in dividends and used $8.5 million to repurchase 288,000 shares of NI's common stock at an average price of $29.67 per share. Our cash and short-term investments totaled $423 million as of June 30.

Now I'd like to make some forward-looking statements. We are expecting revenue from our largest customer to decline from $17 million in Q3 last year to approximately $5 million in Q3 of this year, reducing our year-over-year revenue growth in US dollars in Q3 by approximately 4%. For Q4, we expect revenue from our largest customer to be approximately $4 million.

As a result, we are guiding for total revenue in Q3 to be in the range of $299 million to $320 million. At the mid-point, this represents a 3% year-over-year decline in US dollar terms and 4% year-over-year growth in constant currency terms.

We currently expect GAAP fully diluted earnings per share will be in the range of $0.14 to $0.26 for Q3, with non-GAAP fully diluted earnings per share expected to be in the range of $0.20 to $0.32. Included in our guidance is an expectation of a non-GAAP effective tax rate of approximately 28.5% for the full year of 2015. Looking out to 2016, we currently expect our non-GAAP effective tax rate to be in the range of 21% to 23%.

On a housekeeping note, I would like to remind you that in Q3 of last year, we released a $14 million tax reserve related to the completion of an IRS audit. This had the impact of increasing our EPS in Q3 of last year by $0.11 per share. Please keep this in mind when doing any year-over-year comparisons.

So in summary, while Q2 was a challenging quarter due to the strength of the US dollar and the sequential decline in the global PMI, with June posting the lowest PMI in two years, we continue to execute well, significantly improving our profitability and position ourselves for future growth. While we will continue to experience a drag on our revenue from currency headwinds and from our largest customer in Q3, 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. As these are forward-looking statements, I must caution you that actual revenues and earnings could be negatively affected by numerous factors, such as any weakness in global economies, fluctuations in revenue from our largest customer, foreign exchange fluctuations, expense overruns, manufacturing inefficiencies, adverse effect to price changes and effective tax rates.

I'd also like to mention that we'll be hosting our annual investor conference as part of NI Week on August 4. Some of the topics I will be covered are our planned realignment of our geographic region starting in Q3, the evolution of our long-term operating model, and a review of expected future tax rates.

We look forward to seeing you there. With that, I'll turn it over to John Graff, Vice President of Marketing.

Thank you, Alex.

We were pleased to see year-over-year revenue growth in constant currency across many areas of our business, despite difficult revenue compares, due to the strong dollar and timing of orders from our largest customer. We saw continued adoption of our broad-based products, including software, data acquisition and PXI, and our RF products again saw very strong year-over-year revenue growth.

Despite the headwinds of top line growth, our increased focus on efficiency across the Company helped drive record Q2 non-GAAP operating income. Our opportunity pipeline remains strong, indicating continued strong customer interest in our products and platform-based approach.

Looking at products, our broad-based software and data acquisition products saw modest year-over-year growth in constant currency. These product areas have historically been closely correlated to the movement in the global PMI and the worldwide PC market, which both weakend in Q2.

Our instrument control products, which are used to connect third-party box instruments to the PC, were down significantly year-over-year, indicating relative weakness in the broader T&M market. Instrument control now represents less than 4% of our revenue.

We saw continued broad adoption in Q2 of our PXI platform products, driven by having the largest PXI product portfolio in the industry, unique and differentiated software 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 hardware and software.

Last year at NI Week, we launched the NI semiconductor test system, or STS. Built on the NI platform of PXI, LabVIEW, and TestStand, it has already helped semiconductor companies reduce their cost to test and decrease time-to-market.

One example is at Cirrus Logic, a leader in precision audio and signal processing ICs. Cirrus recently selected STS for their production tests, after concluding an internal performance benchmark comparing our platform against some of the most popular ATE platforms on the market. Cirrus reported STS to be significantly faster than the other ATE systems and that it met all of their other operational and system cost requirements.

Our RF products had another very strong quarter of year-over-year revenue growth in Q2. While our RF products have been central to many of our largest application wins, we again saw success from a very broad set of customer applications. In addition to production tests of wireless devices, our software defined platform is also used to prototype and validate a broad set of wireless components and systems from semiconductor tests to middleware applications, to 5G, wireless research and prototyping.

Growth in RF continues to be driven by our new generation of FPGA-based RF instruments. These products were a focus of our increased investments in R&D over the past several years and provide significant differentiation and internal technology leverage for NI. Our RF product development will continue to exploit our unique software-based architecture, and we are excited about new RF products announcing at NI Week that we believe will continue to drive out paced market growth.

We are very excited about this year's NI Week, which kicks off in Austin next Tuesday. As always, we'll launch exciting new products and highlight customer success stories. We're expecting over 3,000 customers to join us this year in Austin to see our new products, learn about industry trends, get trained by product experts, and network with their peers and industry thought leaders.

Following Dr. Trushard's keynote on Tuesday, we'll begin our investor conference. This year's conference will focus on our commitment to growth by serving more customer needs through the expansion of our platform capabilities. Key NI leaders will be taking a deeper dive into the opportunities in automated tests in embedded systems, highlighting both near-term and long-term trends, such as the industrial Internet of Things and big analog data, that will help fuel growth for NI.

I will moderate a customer panel during launch, which will include leaders from Kaboom, Duke Energy and Nokia. This will give attendees an opportunity to hear from our customers firsthand, with a focus on the business benefits of our platform through faster time-to-market cost savings and increased competitiveness. We look forward to seeing you next week.

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

Thank you, John.

Despite the challenges from the strong US dollar and weakening PMI during Q2, I was pleased with our ability to maintain strong gross margins and deliver record Q2 non-GAAP operating income. Our ability to maintain high gross margins in the face of these headwinds is a testament to the strength of our product platform and the compelling benefits we provide our customers.

Our approach throughout history has been to disrupt and grow in applications where our software-centric platform offers tremendous value, cost, and productivity benefits to our customers. We believe our success in the most challenging 5G prototyping applications is a prime example of how our software and FPGA-based approach enable NI to address the long tail of unique applications which are poorly served by the traditional approach of vendor-defined hardware.

I also believe NI's uniquely positioned to empower our tests and embedded customers to benefit from the macro trends of the industrial Internet of Things and big analog data. While industry pundits have talked about the emerging trends for years, the foundational technologies underpinning these trends are now in place, from ubiquitous network technology to low power distributed processing and vast storage and processing capability in the cloud.

It's the data, however, that provides the currency to fully leverage the power of these technologies. Our customers can use our hardware and software to produce, collect, and store vast amounts of analog and digital data, and our software defined approach allows them to define exactly how the data is consumed and utilized from the pins of the FPGA to the cloud and every step in between.

We believe this level of control and access to data offers incredible opportunity for tests in embedded system designers to not only use big analog data for advanced post processing, but to allow their systems to learn, adapt, and improve in real time.

For example, the power plant asset manager can monitor the condition of his machines in real time to predict failures before they occur. The engineer responsible for power distribution can monitor grid stability, and the plant designer can compare real world data to simulations to improve performance of the entire plant system.

As devices become more intelligent and connected, it also creates new requirements for tests, and I believe we are particularly well-suited to win this wave of new test opportunities. I will explore these topics in more depth in my keynote next Tuesday at NI Week.

During the week, we will also introduce exciting products for PXI, wireless test and embedded systems, and the latest extension to our software platform. I'm excited this year to share our new products and to hear about the amazing ways that our customers and partners are using our products to solve many of the world's greatest engineering challenges. I hope you are able to join us.

In closing, I want to thank our employees for their concerted efforts to deliver innovative new products to drive our growth, while maintaining expenses as we continue toward our long-term profitability goals. I am confident that we are building the new product pipeline, channel and operational excellence to drive the long-term growth and profitability of the Company.

Thank you. We will now take your questions.

(Operator Instructions)

Ben Hearnsberger, Stephens.

Great. Thank you very much.

I wanted to ask about the leverage scenarios that you painted for 2015. Clearly, some of this leverage is being muted by FX, although we did see some improvement this quarter. Is it too early for you guys to say or look out on FY16 and give us some color around once we get past this FX environment, whether we can see these leverage scenarios play out?

It's a good question, Ben.

Specifically on Q2, we're glad to see the spicy FX variability, and as we've built in natural hedges over the years to be able to deliver record operating income in the second quarter and a significant improvement in operating margin Q2 this year over Q2 of last year. Looking to the investor conference next week, we will be directly tackling this issue and will hang out our plan for operating leverage for 2016 and discussing the longer term evolution of our business model. So this will be our front and center topic for next Tuesday.

Okay. Great. We'll look for that then. And my follow-up, I know your large customer orders ebb and flow, but is there any way to give us a sense or give us some early color around how to think about your opportunity within this customer in 2016?

So great question. I wish I could give you more specification on it. But we've served and continue to serve a large number of applications for this customer. I believe we are very well-positioned and have delivered a lot of value.

Obviously, it's been somewhat volatile and it heavily depends on their technology cycle. So I think we're really well positioned, but it's way too early at this point to get specific on expectations for 2016. Realistically, it's more likely in January or even potentially April of next year.

Got it. But nothing's fundamentally changed in terms of the opportunity within this customer?

I think our position with the customer is as strong as I think it's ever been.

Okay. Great. Thank you, gentlemen.

Patrick Newton, Stifel.

Good afternoon. Thank you for taking my questions.

I have to ask my typical housekeeping question, which is the number of employees exiting the quarter and also your average order size.

Number of employees was 7,209. It's up about 1% year-over-year. And the average order size is $5,150, roughly. That was about down 5% year-over-year, mainly due to the large customer.

Walking through some of your key product lines, you talked about strong RF demand. You talked about PXI growth in the quarter and then you gave us some offsetting factors, which I believe what was called out was your instrument controls business. I'm trying to triangulate all those revenue drivers and with the 3% year-over-year decline, was your industrial embedded business down in the quarter?

Patrick, this is John. We don't give the explicit breakouts. The color we provided on the call was a number of the broad-based product areas, software, data acquisition, our embedded products serve a very broad base.

In constant currency, we're up. In dollar terms, we're down slightly. Instrument control is clearly where we saw the most weakness. And then RF was where we saw the strongest.

Just to calibrate, add a little bit of color on that, Patrick, too. Obviously, the year-over-year decline in revenues essentially, even in dollar terms, mainly coming from the largest customer. Any applications we were serving that customer with last year in Q2 were tests in nature rather than embedded, if that helps.

That is helpful. Okay.

If we think about the decelerating PMI and the industrial market, I think as we've gone through earnings seasons, there's clearly some very challenged trends across the industrial landscape. I'm curious, from National Instruments perspective, with the breadth of your product portfolio, are there any areas that you could highlight for us from a geographic basis, from an in-market perspective, or from an application perspective, where you're seeing some of those pressures or maybe where you're bucking some of those trends?

Maybe I'll start off and let John jump in.

When you look at it from a geographic point of view, obviously, we show some of the bigger headwinds we're in the emerging market countries. That's certainly something I've seen as a common theme running through quite a few earnings press releases, outside of just currency themselves.

And then I'll let John maybe weigh in on the industry side.

If you look at end markets or industries, obviously we're seeing a lot of weakness in the energy segment. And that's to be expected. Change in oil prices that have occurred over this year. Also seeing some weakness in the mobile communications overall.

On the flip side, we're seeing good growth in automotive transportation industry, as well as the mill aero. And in both of those segments, it's actually growth on top of growth last year. So that's part of the balance we are able to see in the broad base of applications that we can serve.

Looking forward, obviously, from a revenue point of view, Patrick, we're expecting things to be fairly stable as we go into Q3. And looking with the success in managing through the currency issue to be guiding to a record operating income for a third quarter in Q3.

Great. One thing that stood out with me was the buyback of shares. It was relatively modest, but I'm curious what drove that repurchase. I think you've been selling on that front since probably 2009. Can you talk a little bit about your appetite for repurchases on a go forward basis?

Sure. Last time we engaged to any kind of significant degree was in, I believe, in 2010. But as we look forward -- we'll talk a little bit about this next week in the investor conference on capital management -- but our priorities remain number one, for dividends, number two, opportunistic stock repurchase, and number three, strategic acquisitions. And as always, we'll be happy to report on repurchases once we report earnings each quarter.

And at the $29.00 level, that was considered an opportunistic share repurchase or -- and the amount just struck me as somewhat small. So was there anything in particular that drove that?

The amounts -- when you're being opportunistic, you're being opportunistic. So I think it's a fair description of our stance in Q2. Obviously, we look at how much stock is available to purchase at a price that we think make sense, and we don't want to be too influential on the market in any one time period.

Great. Thank you for taking my questions.

Thanks, Patrick.

(Operator Instructions)

Richard Eastman, Robert W. Baird.

I want to use one of my two questions here. So I'm going to piggyback onto somebody else's. But you had emerging markets --

That's okay, Rick. We'll forgive you.

I'm not sure why we're trying to save time here. In local currency, this emerging market, I think, John, you spoke to the markets that were stronger or weaker. But in general in the emerging markets, this 19% decline in local currency, is that related to a certain industry sector or just general malaise in spend, or can you put any added color on the emerging market decline there?

Rick, this is John.

I'll start with just one additional comment on color with the industry. Another area, not a significant portion of revenue, but the mining -- the energy, and then as we've seen with commodities, the mining industry. And so there's obviously certain geographies, Australia, very well known. We've seen a significant impact in that regard. So that's one factor.

But it's like the Middle East, Russia. You're going to see that impact. And then it's been, we've seen this before that when government budgets in those countries tend to get constrained, we also tend to see some spillover effect on our academic business in those regions, as they hold on the purse strings.

I see. Okay. And then conversely, with the Americas, again, we'll probably have a little more auto, transportation, mill aero exposure there?

And in general, while saw a weakness in the PMI as we went through the year, it seems to have stabilized in the Americas. We'll see how it plays out going forward in the second half. But certainly, automotive, mill aero, semi are areas of strength in the Americas.

Was this Cobham agreement helpful in Europe? When I look at that local currency, 14%, that's a fantastic number. Did Cobham, did that partnership or agreement kick in?

It did. As we set expectations, I think last quarter, the impact in Q2 as we go through this transition is relatively modest. And we hope to build on that as we move forward.

Okay. And then just on the order front, we talk about orders here from a percent change standpoint in constant currency. So currency overall was about a 6% hit, correct, in the quarter?

Yes.

And so can I take these reported order changes and just gross them up by currency?

You would be pretty close. I mean, close enough that it would be useful, yes.

On the small ones, you definitely can, because it's a large number of orders.

But if you look at a geographic distribution, I think this should be your key question. That 6%, I think you could apply it to those buckets and be fairly close, Rick.

Close enough. So like your orders under $20,000 probably grew maybe 4% or low single digits. That would be the math.

In local currency, that would be the math, correct.

Okay. Okay. And then, Alex, I've got a question just on the selling and marketing, and maybe more so on the R&D expense, how did the R&D expense quarter to quarter decline by $5 million? Is there a currency impact on R&D and selling and marketing?

So if you look at the, let's take sales and marketing, a simple one, when you look at overall decline and expenses year-over-year, as we talked last quarter, as we went through Q1, we're seeing this steadily strengthening dollar. And we were responding to that. Obviously, we saw an impact on our gross margins as the dollar strengthened through the first quarter. And we were adjusting for that, obviously in Q2, as we said in April.

Similarly, to the effect on revenue, it also has an impact on our expenses. And the vast majority of that year-over-year decline in expenses is directly related to the strengthening of the dollar when we convert our international expenses back into dollars.

Yes, I understand. Is there a -- for instance, could you give us maybe a local currency -- is there an inflation in the selling and marketing, for instance, selling and marketing expenses up in 1% local currency, that type of number?

Overall currency exchange reduced our operating expenses by about $10 million. And in talking last quarter and several quarters before about the natural hedge that we have on currency, and that's part of that natural hedge. That's the way to understand it.

Sequentially, as we had in Q2 of last year related to the timing of our software releases, typically coming into NI Week, we had a reasonably big increase in software capitalization in Q2 from Q1. It was flat compared to Q2 last year. But that has an effect on the geography of R&D spending sequentially. Year-over-year, it netted out. It didn't have an impact. But if you're talking sequential it would.

And a point I'd like to make here, when you look at the performance of the Company in this time frame, with the headwinds we are facing, as we reported for Q1 and Q2, from currency and from our large customer, and obviously, we've given guidance on this now for Q3, you're looking at a number for the full year that approximates roughly $100 million worth of headwinds that we have to overcome in this time frame.

So to be in a position to manage through that and still deliver record operating income for a second quarter and be guiding to record operating income for a third quarter, I think that positions us very well to continue to execute on our leverage plan. And I think shows the real strength of the business model.

And you do get some of that FX benefit, the stronger dollar, at the R&D line, as well, right?

Absolutely.

So some of that sequential decline and certainly year-over-year decline is due to that.

Absolutely. On the revenue side, we take a bigger hit in Q2 than Q1, and we get a bigger benefit on the spending side.

No, I understand. And then just two real quick things. The tax rate then in the second half, you're going to -- you're suggesting it's going to be 30%?

I think it'll be, on a non-GAAP, it'll be a little bit below 30%. 29%, 28.5%, 29%. And I wanted to give guidance for next year so people can understand the context. A couple of changes going on relative to what would've expected perhaps coming into the year.

One, when we look over the last year, you've got the R&D tax code, which hasn't been renewed this year. Second one, obviously early in the year, when you have the dollar strengthening and a reduction in gross margins overseas, we saw some reduction in our profitability overseas, which has an impact of bringing up our average tax rate. And obviously, we adjust for that as we go through the rest of the year.

And then the third one, as we're closing down our Austin-based manufacturing, which we announced a year ago, there is a significant transfer of inventory and assets, which creates a one-time tax expense as those assets leave the United States. Now when we look to next year, obviously we'll see the reverse happen. And we expect to see a significant decline in our non-GAAP effective tax rate for 2016. I'll talk a bit more about the constituent elements of that and perhaps take a look out to 2017 when we talk next week at the investor conference.

Okay. And then just last question. Large customer revenue in the quarter would be what?

It was $9 million.

Okay. So you turned most of that. Okay. All right. Okay, great. Well, thank you.

Thank you very much.

(Operator Instructions)

And I am showing no further questions at this time. I'd like to hand the call back over to Mr. David Hugley for any closing remarks.

Actually, it would be Alex here. Thanks, everybody, for joining us today. Just a reminder, we will be doing an investor conference next week, so we hope you'll join us. Thank you.

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