National Instruments Corp (NATI) 2016 Q2 法說會逐字稿

Good day everybody. Welcome to the National Instruments second quarter 2016 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 Council and Secretary, Alex Davern, Chief Operating Officer and Chief Financial Officer, Dr. James Trouchard, President and CEO and Co-Founder, John Graff, Vice President 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.

Good afternoon. During the course of this conference call we shall make forward looking statements including statements regarding the impact of currency exchange rate and our guidance for revenue and earnings per share for the third quarter of 2016. 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 quarterly report on form 10-Q filed on May 2, 2016. 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 Trouchard.

Thank you, David. Good afternoon and thank you for joining us. Our key points for Q2 are revenue growth, improved growth margins and continued success in next generation 5G wireless research. In Q2 we saw revenue growth despite the decline in the global PMI and continued impacts from foreign currency exchange. I am confident in our business model and in our ability to drive long-term success for NI and our shareholder.

The depth of our software position and the strength of our ecosystem allow us to continue to grow market share in a tested measurement market. Being able to measure or generate almost any signal and provide control with the same platform gives us a unique capability to foster the ecosystem required to address the challenges of the convergence of technologies in applications such as the industrial internet of things, smart mobile devices and the connected car.

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 Q2 revenue of $306 million, up 1.4% from Q2 of 2015. Core revenue which we defined as GAAP revenue excluding the impact of our largest customer and the impact of foreign currency exchange was up 3% year-over-year in Q2. Orders in total were up 2% year-over-year and given the decline into global PMI to Q2 in the lowest quarterly average since 2012, we are pleased to have exceeded the midpoint of the revenue guidance range. Non-GAAP gross margin in Q2 was 76%, up 110 basis points sequentially.

Total non-GAAP operating expenses were $194 million, up 5% year-over-year. Increase in expense year-over-year was influenced by a $2 million drop in capitalized software compared to Q2 of 2015. Our non-GAAP operating margin was 13%, up 380 basis points sequentially. I am pleased that we returned to revenue growth in Q2 and believe we are positioning NI to be the leader in our space. For Q2 net income was $20 million with fully diluted earnings per share of $0.15 cents.

Non-GAAP net income for Q2 was $29 million with non-GAAP fully diluted earnings per share of $0.23. Our earnings were negatively impacted by $1.3 million or $0.01 per share, loss on foreign exchange as a result of the volatility of currency markets in Q2 especially after the Brexit vote. This loss had not been anticipated in our guidance. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release. Looking at order trends, for Q2 the value of our total orders was up 2% year-over-year.

Included in that total is $18 million in orders received from our largest customer compared to $10 million in Q2 of 2015. Now breaking down our order values excluding our largest customer. We saw a 3% year-over-year decline and our orders with a value below $20,000 in line with a weakening PMI and a declining PC market. On the systems side, orders with a value between $20,000 and $100,000 were up 8% year-over-year, and orders with a value over $100,000 decreased 12% year-over-year. Turning to cash management. During the quarter we paid $26 million in dividends and we ended the quarter with cash and short-term investments of $340 million at June 30th.

Now I would like to make some forward-looking statements. Given current trends we are assuming in our guidance that the global PMI will continue to be weak in Q3 and as a result we are guiding for total revenue in Q3 to be in the range of $291 million to $321 million, up 2% year-over-year at the midpoint. We currently expect GAAP fully diluted earnings per share will be $0.11 to $0.27 for Q3, with non-GAAP fully diluted earnings per share expected to be in the range of $0.18 to $0.34.

We are expecting our non-GAAP effective tax rate to be approximately 17% in Q3 and 23% in Q4. In Q3 we expect the rate to be positively impacted by the release of tax reserves related to prior years. For 2017 we are expecting our non-GAAP effective tax rate to be in the range of 18% to 20%. On other housekeeping items we estimate that given the current exchange rates the drag in our revenue from currency head winds should be approximately 3% year-over-year in Q3.

In summary, while Q2 was challenging due to a number of factors including currency and a weak PMI, we continue to execute well and we remain committed to increasing our net income this year. 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 further weakness in global economies, fluctuations in revenue from our largest customer, foreign exchange fluctuations, expense over runs, manufacturing inefficiencies, adverse effect of price changes and effective tax rates. We will be hosting our annual investor conference as part of NI week next week and we look forward to seeing you there. With that, I will turn it over to John Graff, Vice President of Marketing.

Thank you, Alex. In Q2 we delivered revenue growth despite a challenging economic environment and we are encouraged by the performance of our core platform. With NI week quickly approaching we are excited about our opportunity to bring even more capability to our customers through new hardware and software releases and to host some of the world's largest technology companies as they demonstrate how the NI platform help them solve their hardest engineering challenges.

Next week we will hear from engineers at Audi about automotive radar, researchers at the University of Bristol regarding 5G communication and from leadership at Hewlett-Packard enterprise about a collaboration with NI that adds high performance processing and measurement into their IOT systems at the edge. With hundreds of technical presentations, thousands of engineers in attendance and representation from the press and investor community we have an exciting week planned celebrating innovation and technology.

Now let's turn to product performance. Data acquisition products were adversely impacted by weakness in both PC sales and the lower PMI. However, within data acquisition we saw strength in sales to electro mechanical and electrical power simulation and test systems. An example of electro mechanical test system comes from an academic lab using NI hardware and software to simulate and test different load scenarios on an electrical grid.

Because the NI platform can tie models and algorithms directly to IO, students and researchers see physical results faster and quickly iterate on software design. Moving prototyping and tests of these control systems into the software realm can drastically reduce development time and increase test coverage beyond the most common test scenarios. This helps enable manufacturers to drive out bugs and release more robust systems which is absolutely critical for many industries including transportation and infrastructure.

For PXI and modular instrumentation products we saw continued adoption of our platform in Q2 and continued to grow our footprint in RF. The proliferation of smart devices has challenged the test organizations responsible for characterizing and testing these complex devices. We believe we are in a unique position driven by having an ecosystem of the industry's most flexible software design environment, over 600 PXI modules, over 1,000 integration partners and 10,000 instrument drivers.

Additionally, we recently passed five million downloads from our tools network. This ecosystem supported by a focused sales and support channel amplifies the individual efforts of our customers and helps ensure that they can meet the characterization and testing demands created by smart, connected devices. At NI week we will be showing the results of a tremendous amount of work by our development teams with new products that further expand the measurement capabilities of PXI.

We will be introducing the industries highest precision, PXI, SMU with revolutionary source adapt technology for characterization and test of low power integrated circuits. We will also demonstrate a new digital pattern instrument for a higher level digital starting point of smart device tests that brings more digital capabilities to our robust analog measurement offering and expands the range of devices under the tests that can be addressed by our semi-conductor test system.

Additionally, we will be showing the next generation vector signal transceiver. With the introduction of the original vector signal transceiver in 2012, we've moved RF system design from iterative hardware development into software. The software design paradigm helps accelerate the pace of innovation and has helped enable engineers in semi-conductor test, aerospace and consumer electronics. This NI week we will be showcasing the second generation VST that improves on the first generation in nearly every way including increased speed and bandwidth, smaller footprint and a more powerful FBGA.

When we introduced the new VST, Ulga (inaudible), Program Manager for Communications Test and Measurement Practice at (inaudible) said, "The second generation VST demonstrates NI's continued empowerment of engineers with software designed instrumentation to stay ahead of the complex and rapidly changing wireless technologies and requirements with the most innovative RF test measurement and prototyping solutions in the market." At NI week expect to see multiple exciting applications from early access customers of the next generation VST including an automotive radar application from Audi engineers who are using the new VST to emulate a wide range of driving scenarios to find bugs in this safety critical system.

Turning to sales of CompactRIO and other embedded products, in Q2 we saw encouraging revenue growth despite continued weakness in sales to oil and gas customers. In fact, we celebrated shipping our 1-millionth C-series module. Since 2004, this platform has enabled advanced monitoring, control and prototyping applications through modular measurement hardware, a robust real time operating system and an open FBGA. One application example comes from a customer in Singapore retrofitting existing industrial stamping machines with CompactRIO.

In this system, CompactRIO measures vibrations and signals from the machines to calculate if thresholds have been exceeded. This data can be used to make real-time decisions to stop the machine for safety or product quality issues. Additionally, relevant trend data can be forwarded to the enterprise level to inform preventative maintenance measures. This application highlights how outfitting existing assets with sensing, intelligence and connectivity helps manufacturers improve up time, yield and safety. Now for software, at NI week we will introduce LabVIEW 2016 with improvements that will further enable our users to connect with the latest hardware, integrate more of their system design into software and extract more value from in depth data analysis.

With 30 years and over 10,000 person years of development LabVIEW is the enabling technology at the core of our platform. In 2016 we are both expanding the number of customers we can serve and increasing our share of complex design by adding features that improve the development experience for veteran programmers and new ways to gain proficiency in LabVIEW for those just starting.

In addition to new features developed by NI we are also excited to unveil the latest tools developed by our ecosystem of partners. One example from our partner In Thought, will enable tighter inter operation of Python in the LabVIEW development environment. Python is an open sourced tool used across a wide variety of applications including machine learning, natural language processing and security. And this new tool from In Thought demonstrates the strength of a LabVIEW open ecosystem. With LabVIEW and Python close together engineers can use the tools and IP that best match their application needs.

We have demonstrated how our the (inaudible) platform and extensive ecosystem position us to serve a broad variety of customers and applications. A key channel for reaching both the broad base and the larger complex applications is our partners. In Q2 our partner channel saw double-digit revenue growth.

The strength of our partner program enables us to make the focused investment in sales and support resources to better serve larger customer accounts, especially multi-nationally, so that they can take full advantage of the expanded capabilities of our platforms.

To close, we are looking forward to a busy and exciting NI week. As always we will launch exciting new products and highlight customer success stories. We are expecting over 3,000 customers to join us this year in Austin to see our new products and learn about industry trends and get trained by the product experts and network with their peers and industry thought leaders. Following keynotes by Dr. T and Executive Vice President Eric (inaudible) on Tuesday, we will 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 software, automated test, data acquisition and embedded systems highlighting both near term and long-term trends such as 5G communications, the industrial internet of things and the Connected Car.

I will moderate a customer panel during lunch that will include leaders from Intel, the University of Bristol, Flow Serve corporation and a key LabVIEW champion. This will give attendees an opportunity to hear from our customers firsthand with the focus on the business benefits of our platform (inaudible) 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.

Thank you, John. Given the economic conditions I am encouraged by our performance in Q2. Our platform in the ecosystem that continues to provide our customers with the solutions for the toughest challenges and provides us with a unique position within our industry. Over the last 40 years we have leveraged the most powerful trends in technology to bring new capabilities to test and measurement.

Beginning with GBIB instrument control we brought the power of the PC to test and measurement by connecting the instrumentation to software, measurements became data that can be processed and automated to improve insight and increase yield and reduce errors. With this data centric view of the world we introduced LabVIEW with a goal to do for test and measurement what the spread sheet did for financial analysis.

The spread sheet transformed financial analysis by bringing manual calculation, data trending and report generation into the PC. Calculations that would have been difficult with a calculator could now be solved with a few key strokes and trends that would have been impossible to spot on pen and paper could easily be visualized and extrapolated. In the 30 years since the introduction of LabVIEW, we have similarly transformed how engineers take measurements and interact with data from lab automation of a single instrument to grid monitoring systems with thousands of measurements to helping cutting edge technology like product G communication.

LabVIEW has scaled and evolved, addressed our world engineering challenges. Today trends like 5G, the Connective Car, Smart Grid and the Internet of Things are driving the world to become more software centric. As the hardware of these systems converge into devices with more sensing, computing and connecting technology, the software will be what creates value.

For example the Connected Car will include measurements from thousands of on board sensors, real-time systems processing and control a vehicle of systems and connectivity to infrastructure. Therefore, the operation of system, for example whether it is an entertainment system or autonomous vehicle control will be defined by the underling algorithm. This means the majority of the investment in prototyping and test of these systems will be in software.

This is particularly true in the emerging technologies like 5G communications. Given that the available spectrum is limited, and the laws of physics are constant, the benefits of more through put, lower latency and more supported devices will come from new transmission schemes and different network (inaudible). This research phase is highly iterative and many researchers in industry and academia have standardized on the NI platform of modular IO, open LPGA and lab use system design software.

At the University of Bristol researchers have used NI software defined radio and LabVIEW communication system design to prove the viability of (inaudible) as a candidate technology for 5G. By starting with a software designed platform they were able to move between theory and the real world prototyping as their research progressed. In their prototype system, the team demonstrated a record 22 times more spectral efficiency than 4G communications.

Meaning more devices per base station. This convergence of technology has also created a new opportunity for collaboration. As the challenges from the informational technology becomes linked with the challenges of operational technology through the vision of the Internet of Things, IT providers must consider the analog domain. Our new collaboration with HPE and announcement of the Edge Line converged IOT system addresses the challenges of two converging worlds.

The industrial grade edge line includes up to 64 cores of Intel (inaudible) processing and 4 PXI slots for adding PXI instrumentation or LPGA co-processing at the edge. This collaboration strengthens our ecosystem and opens up more measurement processing and decision making capabilities to both NI and Hewlett-Packard enterprise customers to drive better engineering, scientific and business outcomes.

With 40 years of connecting analog measurements to processing, we have a unique opportunity to support engineers and scientists with a software defined platform that scales with the iterative design process of this converged world. I will explore these topics in more depth in my keynote next Tuesday at NI week. During the week we will also introduce exciting new products for PXI, wireless task, embedded systems and the latest expansion of our software platform. I am excited this year to share our new products and hear about our amazing ways our customers are using our platform 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 hard work to deliver innovative new products to drive our growth while managing expenses as we continue to our long-term profitability goals. I am confident that we are building a new product pipeline channel and operational excellence to drive the long term growth and profitability of the Company. I look forward to seeing you at NI week. We will now take your questions.

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

Yes, Good afternoon. Alex, could you just speak for a second to the large customer revenue in the second quarter?

Sure. I'd be happy to, Rick. We had revenue in Q2 of $14 million from the largest customer compared to about $9 million, I believe, in Q2 of last year. As we look out to Q3, which might be your next question, our expectation is between $5 million and $10 million in revenue in Q3.

Okay. And the rest of the $18 million of orders, did some of that ship then in Q2? And then, if the second quarter orders were $18 million, so some of that shipped in Q2, the rest will carry forward? Is that correct?

Obviously, the bulk of that shipped in Q2 and some of the revenue will (inaudible) Q3.

And then when you look at the business geographically and I was trying to quickly sift through this, but it looks like perhaps the Americas and Europe didn't show the seasonality that historically they would have. If you look at your total revenue, geographically, where were we a bit short here relative to plan, or at least a high end of plan for the second quarter?

We came in slightly ahead of the midpoint of guidance, Rick, for Q2. 306 versus 305. When we look at it from a local currency point of view, couple of issues that I think are worth noting. In AMEA we are still seeing close to 6 percentage points impact from currency as we come through year-over-year. We are seeing strong growth in APAC. This is somewhat helped by the fact that essentially all of the revenue from our largest customer is recognized from an accounting point of view in the APAC. That's just a little insight on that. Q2 was a tough quarter and a couple things at play there. Number one, it was out toughest compare with last year. We have significantly easier compare in Q3 in the Americas as we saw the impact of the effects and oil crisis hit the Americas last year. So when we look at that, that was an issue.

The second area was within the (inaudible) part of the Americas we saw a significant impact from lower oil prices and a direct impact of that was significantly lower spending in the academic space in that region which had a negative impact too.

As we look to Q3, I think given the PMI in the US in particular, and in the month of June in particular, actually, and a significantly easier compare in Q3, we are expecting to see a better performance from the Americas in the third quarter.

I see. Okay. And just the last question very quickly and maybe I will direct this at John, but you had mentioned the 2016 LabVIEW version is being released here. Can you characterize how major of a release this is? Is this next generation LabVIEW?

I will say, Rick, first, we hope to see you next week and you will get a lot more of the details. One of the areas we will focus on next week is software. LabVIEW 2016 continues our kind of annual release cycle. Every year what we talk about internally is we are giving our customers the best version of LabVIEW that has ever existed. There are some exciting features in technology and we'll talk some about that, and give you an outlook of where we see our software platform going in the future.

Yes. I think you'll get more of an insight into the future of LabVIEW next week then maybe at most NI weeks for the last quite number of years.

Excellent. Thank you very much.

Thank you very much, Rick.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to Mr. James Trouchard for closing remarks.

Thank you for joining us today. We look forward to seeing you at NI week, next week.

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