National Instruments Corp (NATI) 2016 Q3 法說會逐字稿

Good day, everyone, and welcome to the National Instruments third 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, Alex Davern, Dr. James Trouchard, President, CEO, and Co-Founder, and John Graff.

For opening remarks I'd like to turn the call over to Mr. David Hugley. Please go ahead, sir.

Good afternoon.

During the course of this conference call we shall make forward looking statements including statements regarding the impact of currency exchange rates and our guidance for revenue and earnings per share for Q4 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 August 1, 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 Q3 are continued revenue growth, strong sales of software and RF products, and creating a company built to last.

In Q3 we saw year over year revenue growth despite the continued impact from foreign currency exchange. We believe the strength of our software position and our ecosystem has allowed us to continue to grow market share. Being able to both measure and generate almost any signal and provide control on the same platform gives us a unique position to address the challenges of the convenience of technology in applications such as industrial, IOT, smart mobile devices, The Get Connected Car and more.

In August I announced my retirement as CEO after 40 years, effective January first. This represents my 83rd quarterly conference call since our IPO in 1995. During that time we have created over $3 billion in value for shareholders and paid out over $600 million in dividends. I believe this illustrates the qualities of a company built to last.

I'm handing over leadership of the company to Alex Davern and a very strong leadership team. I've worked with this team for many years and have complete confidence in their ability to take NI to the next level.

I'm handing over the reigns at a time when we have made significant progress on some very large multi-year investments in both [labs here] and our RF products that are intended to set the company up to deliver continued growth and to help return NI to our operating model. At NI we (inaudible) the software technology preview -- we showed you a glimpse of the outcome of these investments and a significant step in a multi-year advancement of software capabilities.

In our call today, Alex Davern will review our financial results. John Graff 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 Q3 revenue of $306 million, up 2% over Q3 of 2015. Core revenue, which we define as GAAP revenue excluding the impact of our largest customer and the impact of foreign currency exchange, was up 4% year over year in Q3. Orders in total were up 5% year over year in US dollars and our order growth excluding the impact of foreign exchange was 8% year over year.

This was a very encouraging quarter, and we believe we are continuing to gain market share. The increase in backlog in Q3 was as a result of strong demand for several of our new products which we announced NI Week. This initial demand is likely to result in backlog running higher than usual for the next several quarters. Non-GAAP gross margin in Q3 was 76%, up 30 basis points year over year. Total non-GAAP operating expenses were $194 million up 5% year over year.

As we have discussed in prior calls the shifting of NI Week in 2017 to May from August has altered or quarterly pattern of software capitalization and, as a result, the increase in operating expenses year over year was influenced by a $2.5 million drop in capitalized software compared to Q3 in 2015. In our forward-looking guidance for Q4 we estimate that our operating expenses will be approximately flat year over year resulting in a full year increase of approximately 3% year over year.

I am pleased that we saw a significant improvement in our order growth in Q3 and believe NI is the leader in our space. For Q3 net income is $24 million with fully diluted earnings per share of $0.19. Non-GAAP net income for Q3 was $32 million with non-GAAP fully diluted earnings per share of $0.25. Our earnings were negatively impacted by and $800,000 loss in foreign exchange as a result of the volatility of the currency markets in Q3, especially after the (inaudible) vote.

This loss had not been anticipated in our guidance. The reconciliation for GAAP and non-GAAP results is included in our earnings press release.

Now, taking a look at order trends in more detail. For Q3 the value of our total orders was up 5% year over year in U.S. dollars. Included in that total is $5 million in orders received from our largest customer compared to $6 million in Q3 2015. Year-to-date, through Q3, orders from our largest customer were $29 million compared to $19 million for the first three quarters of last year. Q4 of last year was a strong quarter for our largest customer and we received $10 million in orders.

This year ear anticipating a slower quarter from this customer with orders expected to be approximately $4 million, impacting our Q4 growth rate by approximately 2%. Now, breaking down our Q3 order values, excluding our largest, customer we saw 3% year over year decline in our orders with a value below $20,000 reflecting the below average PMI in the declining PC market.

On the system side orders with a value between $20,000 and $100,000 were up 2% year over year and orders with a value over $100,000 were up 34% year over year. Increase in orders over $100,000 in Q3 is encouraging and reflects improvement in the confidence of our customers.

Now, turning to cash management, during the quarter we paid $26 million in dividends. We ended of the quarter with cash and short term investments of $353 million on September 30.

And now I'd like to make some forward-looking statements. Given current trends we are assuming in our guidance that the global PMI will continue to be below average in Q4 and as a result we are guiding for total revenue in Q4 to be in the range of $323 million to $353 million. We currently expect GAAP fully diluted earnings per share will be in the range of $0.23 to $0.37 for Q4 with non-GAAP, fully diluted earnings per share expected to be in the range of $0.31 to $0.45.

On other housekeeping items we estimate that given the current exchange rates of drag on our revenue from currency head winds will be approximately 2% year over year in Q4. In summary, we continue to execute well in Q3. We are encouraged by the improvement in our order growth and we remain committed to driving net income growth this year.

As these are forward-looking statements I must caution you that our 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 affect to price changes, and effective tax rates.

I'm looking forward to taking on the CEO role at NI effective January first. As Dr. Trouchard mentioned earlier we have a very strong leadership team in place and I'm confident we can build on the tremendous achievements of NI over the last 40 years.

With that I'll turn it over to John Graff.

Thank you, Alex.

For Q3 we were encouraged by growth in a top industrial economy. While we still felt the impacts of foreign currency exchange and a weak global PMI we saw strong performance in our large orders in software, recovered orders for RF products, and strong growth in our Asia Pacific region.

On a regional basis we saw year over year revenue up 12% in Asia Pacific, up 3% for the Americas and up approximately 1% for EMEA. In August we hosted our annual NI Week conference, with over 5,000 people in attendance, NI Week has served as a forum for key customers, industry thought leaders and many of the brightest minds in science and engineering to discuss industry trends, share best practices and learn about NI technology. NI Week also serves as a launch pad for many of our major product lines.

For LabVIEW 2016 we introduced a host usability enhancements, including the new channel wires, which dramatically improved productivity using both development and trouble shooting. In addition to new features for LabVIEW we also unveiled an upcoming evolution in the NI software platform. The software technology preview highlighted new ways to visualize measurements, new interactive learning, integrated data management and productivity enhancements that will help both new and experienced users.

The preview of this multi-year investment in our software platform showed technology elements that will expand the number of customers we can serve by enhancing our coverage of the engineering design flow from interactive measurements to automation, data visualization and web development. Along with new software, we unveiled many new hardware products, including the industry's highest precision PXI source measure unit, for characterization and tests of low power integrated circuits and a new PXI digital pattern instrument to expand the range of devices under test that can be addressed by a semiconductor test system.

Additionally we introduced a second generation PXI vector signal transceiver. With the introduction of the original vector signal transceiver in 2012, we moved RF system design from iterative hardware development into software by combining a powerful open FPGA and a high performance RF front end, which resulted in one of the most successful products in NI history. The second generation instrument improves on the first generation in many ways, including increased speed and bandwidth, smaller footprint and a more powerful FPGA.

Turning to performance in Q3, starting with data acquisition products revenue was slightly negative year over year reflecting weakness in the PMI and the continued decline of PC sales. That being said, sales within automotive and transportation saw year over year growth driven by applications focused on validation and characterization of smarter vehicles.

Turning to PXI, in Q3 we continued to build on our leadership with year over year growth in revenue for modular instruments. Despite relatively weakness in the TM market, indicated by declining revenue from our instrument control products, we believe the strength of our PXI product portfolio and leadership for nearly two decades of investment in PXI serve us well as we continue to disrupt traditional rack and stack model.

With the increasing complexity of new products and new designs, like 5G, there's an increasing need for automation throughout the research, design, and manufacturing process. In RF and wireless NI continued to execute on our strategy to serve the entire wireless value chain, from wireless prototyping to manufacturing tests.

In wireless prototyping we continued to drive strong revenue growth of software defined radio products through our software centric approach using LabVIEW communications system design suite. Wireless innovators in industry and academia have used the NI platform to demonstrate groundbreaking 5G technology like massive mimo and millimeter wave channel sounding.

At NI Week, technology leaders at the University of Bristol, Nokia Networks and others demonstrated how they used our platform of high performance hardware, open FPGA and flexible software to quickly iterate on designs, experiment with new protocols and help bring these technologies mainstream faster. Within embedded products we saw a year over year growth in sales of CompactRIO driven primarily by new products.

These products, released in the last year, have added new performance points for processing and control to provide more sensing and intelligence in the harsh conditions required by the industrial Internet of Things. At Oak Ridge National Labs, researchers have built a smart control system capable of handling the challenges of bringing renewables on to the modern power grid.

Given the intermittent or uncertain nature of renewables, like wind and solar, plugging those resources could cause instability. By creating an open framework based on LabVIEW and CompactRIO, the team at Oak Ridge National Labs has enabled researchers to experiment and iterate on new control algorithms that compensate for renewable energy sources and help speed up the pace of discovery.

In Q3 we saw strong sales of software, including enterprise license agreements. This has continued to be a strong driver of adoption of our software tools and major, and we are seeing the impact as well in further adoption of the rest of our platform in customers that have previously purchased an enterprise agreement.

In addition to sales of enterprise level software, we have seen increases in training usage at these accounts, creating mover users and increasing the proficiency of existing users will help our ecosystem continue to grow and thrive. This morning's announcement of Qualcomm's intent to purchase NXP is a good example of the convergence in technology across mobile, communications, automotive, processing, (inaudible) and more.

Qualcomm, NXP and Prescale, that was purchased by NXP last year, have been longstanding NI customers and we have very strong relationships with them across the globe. Our platform with its inherent flexibility, driven by software and FPGAs, is uniquely positioned to take advantage of this technology convergence.

As our world becomes safer, more efficient and more connected the engineers tasked with designing and testing these technologies will need the tools and community to help bring these visions to life. At NI Week our customers demonstrated ways to use the NI platform to bring ideas to market faster than their competition and solve some of the hardest problems in science and engineering.

Before I turn it over to Dr. T for some closing thoughts, let me mention that we will be at a number of conferences in November and December, including the Stephens conference, Baird Industrial conference, Stifel Midwest conference, NASDAQ conference and the Credit Suisse Technology conference. Dr. T.

Thank you, John. Given the challenging economic environment, I am encouraged by our revenue growth and our strong performance in (inaudible) in Q3. I was also executed to see the host of new products unveiled at NI Week and how our customers are using them to solve their engineering and business challenges. When we founded National 40 years ago we recognized computers would play a major role in test and measurement applications.

Or LabVIEW product was developed with the goal of doing for test and measurements what the spreadsheet did for financial analysis. When combined with hardware, users could not only analyze and present their data, but they could also replace traditional instruments with what we doll virtual instruments. Like many other industries that have been revolutionized by software, science and engineering has benefited from the productivity improvements provided by LabVIEW's software based approach.

This software based approach is especially exciting as we enter into the era of big data. In the test and measurement, we speak of big analog data. Significant investment is going to into industry to make big data valuable. This same technology can be applied to big analog data that our customers, scientists and engineers work with.

Over the last decade, NI has spear headed the development of LabVIEW's use for both development and testing cyber physical systems, better known the name Internet of Things. I am confident in NI's ability to integrate both physical measurements and wireless technologies, which will create a unique and differentiated position for NI.

For example, at NI Week Audi demonstrated how they were using NI software and the new PXI vector signal transceiver for characterization of their automotive radar by using the DST and NI software to emulate the input signals of the control system they can virtually drive millions of miles (inaudible) in this safety critical system. By moving more development into software engineers can characterize more complex systems by correlating measurements across many instruments.

They can drive more efficiency by visualizing and analyzing trends and the can prototype quickly to help them bring new products to life faster. As a photo illustration of the broad reach and impact we are having on the engineering and science, I recently attended the National Academy of Engineering's annual meeting. Topics included many engineering and scientific challenges in areas like global climate change, space travel, and particle physics.

In many cases the solutions to these grand challenges and many others in the future will be the convergence to physical, sensing and actuation with in-line processing and network communication. I was proud to see the role that the NI platform was already playing in these and many other applications.

Since founding National Instruments 40 years ago I have constantly taken steps to ensure NI is a company built to last and will flourish after my leadership. Over the last decade, I believe we've made the long-term strategy investments necessary to set NI up for growth for decades to come.

I believe the strong platform-based product offering and ecosystem we have today coupled with significance progress in key areas, including RF, (inaudible) and software, which we showcased at NI Week, puts NI in a strategically differentiated position. I am confident that Alex, with the help of our employees around the globe, will continue to drive success for all our stakeholders. Finally, I want to close by thanking everyone that has made NI a great place to work.

Our culture of openness, innovation and curiosity has been personally inspiring to me. Over four decades I have interacted with incredibly smart people but -- from both NI and from our community that share strong vision for transforming the world by advancing engineering and scientific discovery. I am excited for what the future holds for our company. I will be speaking at the Credit Suisse conference on December first.

With that we will now take your questions.

Thank you. (Operator Instructions). One moment for questions. And our first question comes from the line of Patrick Newton with Stifel. Your questions, please.

Good afternoon. Thank you for taking my questions. I guess just, I'll start with my typical housekeeping questions. Number of employees. In the question and your average orders.

Hi, Patrick, how are you? Number of employees leading the quarter was about 7,600. And the average order size, $5,440, 7.5% year over year.

I'm sorry, $5,040, did you say?

$5,440.

Okay. Wonderful. And I guess just looking at 5G, there seems to be a push by the ecosystem to bring the technology to market. It seems at an accelerated space. We had Verizon discussing commercial pilot programs in 2017 on their recent earnings call. If we think about National Instruments wireless portfolio can you help us understand what is wireless contributing to the revenue portfolio currently and then if we can compare and contrast 5G relative to 4G from a market entry or product portfolio perspective? Can you talk about the differences between the two?

Sure, Patrick, I'll comment perhaps on the first part and, Dr. T, if you'd care to comment on the second. From a financial point of view we haven't broken the overall wireless revenues at this point, from our point of view. I can tell you we had record orders for our RF product portfolio in Q3, which we're very pleased with the growth in that area. I believe that it's a strong avenue for future growth for National Instruments.

We've chosen not to break it out at this point for competitive reasons but we believe this will be a key driver of the business going forward. From a 4G versus 5G point of view, certainly at this stage the development of the standard, we really did not play a role in that for 3G our 4G, and it's been a deliberate effort by the company to get ahead of that cycle coming into 5G to ensure that we can play a critical role in enabling the innovators in this area to be able to prototype their algorithm design and prototype their scheme much more rapidly than was possible in the past and I'll turn it over to Dr. Trouchard to share his comments on that.

Sure. I just spoke a few weeks ago at the 5G conference (inaudible) and many of the leaders in this field were there. It does appear that it is advancing at a real good clip. There's a lot of ideas and capabilities being looked at each -- if you look at the big picture, there are three basic vectors people are working on.

One is the data rates. We all want to get our videos faster. We don't want our neighbors interfering with our videos. Response times for things like autonomous vehicles will require much faster response times as well as smart machines. And then, of course, we talk about billions of Internet of Things, things at really low power that can stay online for years. So those are kind of the three vectors we see and each one of those will add a dimension and need a certain kind of technology to be really valuable.

That's helpful. Shipping your orders over $100,000 up 34% year over year, can you comment a little bit about what end markets or applications are driving that? And was there any type of snap back on the wireless side post a shortfall earlier this year?

Patrick, this is John. Let me start in terms of industry cover. We don't have it explicitly broken down by order range, but I can tell you that we did see strong growth in the semiconductor market in Q3.

Earlier this year we had talked about focus weakness in the wireless supply chain. We saw that come back some in Q3 but, again, we saw kind of broad base success in semiconductor. We continue to see strong adoption of the FGS semiconductor test system. Obviously that helps drive some larger orders. Go ahead.

Just some color on that, Patrick, I look and I fundamentally believe when you look at NI that most important metric is that core order growth, so US dollar growth when you adjust for currency and at 8% year over year in Q3, I'm really encouraged by that. That's the best rate of growth we've seen in that core business or core order growth since Q4 of 2014.

Before we encountered these issues from the currency and oil and gas and energy and so on so I'm encouraged by that. Strong software growth is pretty encouraging, record orders for RF is pretty encouraging and I think, in general, the 34% growth that we saw in orders over $100K is a sign I think of improving confidence in our customer base. So that's a tone that certainly I have picked up in my discussions.

Off setting that a little bit in Q4, you know, we're gonna have more head wind from our largest customer. It was one percentage point (inaudible) growth in Q3 and it'll be at two percentage points (inaudible) in Q4. Q4 last year was the strongest Q4 we've ever seen for that large customer so we don't anticipate that repeating here in Q4 and backlog will be a bit of a challenge. But looking into next year we'll be very focused on expansion for 2017 to drive leverage and I think that core order growth is probably the most important and encouraging number we see as we talk through the results for Q3.

I appreciate the details there. Last question for me is, with the transition -- and congratulations to you, by the way, Alex, and Dr. T, I guess, different reasons, congratulations to you. But with the transition forthcoming it's cleaver that this stamp Dr. Trouchard has made on the company. As we look forward, Alex, what changes? What's different? What's the same? And what stamp do you hope to leave as the CEO of National Instruments.

So you put me on the spot with the Chairman, Patrick.

It's a little awkward, but what can I do?

We've obviously had this discussion for a long time, so clearly the objective is to build on the tremendous strength we have as a company with our talented people, our technology. As Dr. Trouchard talked in his remarks we've been making multi-year investments in the area of our applications software to broaden our future user base and make our technology, especially the (inaudible) much more approachable moving forward. So we'll want to build that, we'll want to build on the multi-year investments we've made in RF.

You know, as I look to the last couple years it's been challenging, very heavily, because of currency. I think we see a turn in that now as we lap those impacts. I see the opportunity for the real power and strength of our platform to show through in top-line revenue growth and profitability growth, and I feel grateful to have the opportunity to make the transition at this time.

Great. Thank you for taking my questions. Good luck.

Thank you.

Thank you. Our next question comes from the line of Nick [Dilac] with Robert W. Baird. Your question, please.

Hi, guys. Appreciate the question. Dr. T, also wanted to congratulate you on your retirement to Chairman from the guys (inaudible). So, hi, I just wanted to start on the Americas. Seasonally we would've expected to see that region up somewhere in the 4% range sequentially and it looks like it was for 15%. Just curious what you're seeing there.

Certainly we are pleased to see improvement in results in Americas. Without a doubt the early part of this year was challenging, especially in Latin America we saw real, real challenging business conditions and Canada and Brazil, where the business was somewhat impacted by the decline in oil prices and some of the reduction activity there.

We also, as John mentioned earlier, we saw a impact on large volume order in the Americas early on in the year due to the contraction of that mobile device that happened throughout Q1 and Q2. We saw much stronger performance in semi and we're encouraged that we're lapping some of the challenges we had in Brazil and Canada and really feel very positive about the improved results in the Americas. We hope to build on that as we move forward.

Sure, okay. Helpful. And then, you know, we kind of touched on the strength of semi. Maybe if we could speak to the other key markets, how they performed in the quarter relative to the overall growth rate, thinking about academic, aerospace defense and automotive or any other areas worth noting.

Sure. As we already mentioned we saw strong growth in semiconductor. We also saw growth in Q3 in transportation and aerospace defense. Areas or verticals where we saw some weakness in Q3 include mobile communications, consumer electronics, academic continued to be weak and this is a continuation of what we've talked about in previous quarters, where it's primarily focused in some specific market, a couple of merging economies.

And then, one other thing I should mention is energy, after seeing pretty significant decline over the last number of quarters, we saw it bottom out in Q3, which hopefully, you know, in terms of compares going forward, but it was roughly flat in Q3.

Okay.

That's clearly a big improvement from this time last year.

All right. That's all for me. Appreciate it, guys.

Thank you very much, Nick.

Thank you. (Operator Instructions). Our next question comes from the line of Ben Hearnsberger with Stephens. Your questions, please.

Hi, thanks for taking my question. I wanted to start on the margin profile of the business. Year-to-date we've grown revenues about a percent adjusted EBITDA margins are down 190 bibs and per the leverage plan I think we would have expected to see kind of flat to slightly improved margins.

What's driven this deviation and can you kind of speak to this plan going forward and whether we should expect to see financials adhering to the plan kind of in the out year.

Yes, sure, Ben. If we look at it this year, the timing of our shipment software capitalization is part of that issue, which has hurt us a little bit on opex here in Q3 and that'll help in Q4. So when we look at it for the full year we're expecting opex overall to be up about 3% for the full year and down from the rate of growth that we saw in Q2, which was up around 5%.

From a full year point of view we do expect, and obviously, the midpoint of guidance we're looking for net income growth at the bottom line and as we look into next year, we feel really confident in our ability to deliver on the leverage plan as advertised at NI Week.

Okay. I've got a much higher level question. When you think about the long-term growth model for this business normalized for the cycle, given that you have some cyclical exposure, what kind of range or number should we think about?

You know, when you look at the history of the company, the last two years with the currency impact have been very difficult and if you look at the growth rate that you see on the very first chart that we have in our investor slides and you look back over that ten, 15, 20 year time frame, our objective as we move forward will be to drive high single digit, low double digit revenue growth on a consistent basis. That will be our core goal.

Would you expect strong growth through, kind of, the 5G up take cycle? Is it that big a growth driver for the company?

We will have to wait and see. The timing, it's a little speculative still, as Dr. Trouchard said. We're seeing an increase in the urgency and interest in large customers in 5G so all signs appear ton that that is moving closer and a little earlier than previously expected.

That certainly reason -- likely to be a boost for the whole T&M market and could create a favorable part of the cycle and certainly want to participate in that.

I also mentioned our role in software, where we talk in terms of big analog data. The fact that so much investment is going into general big data and not analytics, I think that opens up some opportunities for National Instruments as well.

Okay. That's helpful. Thank you.

Thank you, Ben.

Thank you. There are no further questions in queue at this time so now I'd like to hand the conference over back to Dr. James Trouchard, President and Chief Executive Officer and Co-Founder.

Thank you for joining us today. I will look forward to seeing some of you at the Credit Suisse conference in December.

Ladies and gentlemen, thank you for your participation on today's conference. This does include the program and you may all disconnect. Everybody have a wonderful day.