National Instruments Corp (NATI) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the National Instruments Third Quarter 2017 Earnings Call.

Today's call is being recorded. You may refer to your press packet for the replay, dial-in numbers and passcode.

With us today are David Hugley, Vice President and General Counsel; Alex Davern, President and CEO; Eric Starkloff, Executive Vice President Global Sales and Marketing; and Karen Rapp, CFO.

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

Good afternoon. During the course of this conference call, we shall make forward-looking statements, including statements regarding future growth and profitability, future restructuring charges and our guidance for revenue and earnings per share for the fourth quarter.

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 annual report on Form 10-K filed on February 16, 2017, and our quarterly report on Form 10-Q filed on August 1, 2017.

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, Alec Davern.

Good afternoon, and thank you for joining us today.

My key messages today are record revenue and operating income for the third quarter, non-GAAP operating expenses flat year-over-year for the first 9 months and the 28% year-over-year increase in non-GAAP net income for the first 9 months.

I'm pleased with our performance this year. We've delivered record revenue and record profit through Q3, with non-GAAP net income up 28% year-over-year. And we have made significant progress towards our target business model. With strong alignment throughout our organization, we have seen continued success in the key focus areas of semiconductor tests, 5G, electric and connected vehicles and the industrial Internet of Things.

Within semiconductor, we continue to see strong performance from both our PXI platform and our PXI-based semiconductor test system. With consumer demand driving higher performance from connected devices, the associated complexity puts demand on device manufacturers to look outside of traditional test methods to address increasing test time and cost. By leveraging our software-centric platform, semiconductor manufacturers like Analog Devices, IDT, Cirrus Logic and Panasonic are using NI platform to simplify system design, reduce their cost of test and bring new devices to market faster.

As 5G technology transitions from research and prototyping to semiconductor characterization, we are excited about the strong relationships we've built since the initial investment of our 5G lead user team in 2010. Key researchers from leading organizations such as Intel, Lund University, AT&T, Nokia and many more have built their IP on our software-defined radio platform to showcase key 5G milestones that will now inform the characterization, validation and test phases of 5G.

This year, we have seen acceleration in the shift of vehicles from internal combustion to electric drive and from human control to autonomous control. The pressures of new features, time to market and safety have introduced new test challenges for OEM and Tier 1 suppliers. By tightly integrating physical, electrical and RF measurements with LabVIEW programmable FPGAs, our platform has enabled an ecosystem of application experts to address these emerging test challenges.

Coupled with our long-term relationships within these accounts, we believe we have an opportunity to drive growth within new test applications from advanced driver assistance, active safety and electrification.

Turning to the Industrial IoT. We believe the convergence of business process and technology is opening new opportunity for the NI platform to supply the operations data of the Industrial IoT, helping our customers achieve their business outcomes in design, manufacturing and test.

In Q4, we are launching a global seminar codeveloped and comarketed with Intel, HP Enterprise, PTC and others to demonstrate to our respective customers the technology and best practices required to implement the Industrial IoT.

I'll now turn it over to Eric Starkloff to talk more about our products, and the success we are seeing from aligning our product development, marketing and sales teams around key applications, where we provide differentiated value for our customers.

Thank you, Alec, and good afternoon. I'd like to share results from our products and our regions, as well as results from market areas we are focusing on to drive growth.

To begin, let's review our performance by product areas. In application software, following the LabVIEW 2017 and LabVIEW NXG releases at NIWeek, we saw growth in LabVIEW C and continued excitement from our customers about our new capabilities. Our focus on driving adoption at our largest accounts through enterprise agreements, product enhancements to increase usability for new users and new capability to address larger distributed deployments continue to increase both the number of users and the value of LabVIEW to our existing users.

In our PXI product, strong revenue growth across many different applications. With new product releases at NIWeek and over 20 years of product and ecosystem development, PXI continues to be a major disruptor of traditional automated test and automated measurement systems. By providing software continuity, investments made by our customers and partners who use to address new and emerging market opportunities. In particular, RF and wireless has been an area of innovation and growth for PXI.

At Broadcom, for example, an engineer in new product introductions said, "We were able to reduce manufacturing test time of power amplifiers by 5x compared to existing test systems by using NI's vector signal transceiver to implement power server-ing on FPGA."

By combining RF measurement and generation with an open FPGA, our customers have been able to increase test coverage and decrease test time to help bring new chipsets and standards to market faster.

In our Data Acquisition products, PC plug-in products were flat year-over-year, due in part to continued flat to declining PC sales, while our modular Data Acquisition systems, including CompactDAQ, saw strong year-over-year revenue growth. With multiple new modules and TSN, or Time Sensitive Network-based distributed synchronization, CompactDAQ enables customers in industries such as automotive, aerospace and research to more easily build accurate distributed measurement systems and reduce the time spent on expensive, low-value activity like wiring and system setup.

Our CompactRIO product also saw year-over-year revenue growth in Q3. By providing high performance measurement, FPGA processing and intelligent networking at the edge, CompactRIO helps our customers bring the Industrial IoT to life. By equipping industrial assets with sensing, processing and network communication, our customers gain access to critical data that drives outcomes like efficiency, safety and reliability.

Now looking at order size. We had strong year-over-year growth in revenue from orders over $20,000, demonstrating our focus and alignment on driving systems business and more opportunity in our larger accounts. Orders under $20,000 also saw modest growth.

From a regional perspective, we saw year-over-year revenue growth in all 3 regions, led by double-digit growth in our APAC region.

We are also pleased to see continued strong growth in our revenue with Alliance Partners. We believe the NI platform is incredibly well-suited to enable and capitalize on the market disruption created by demanding new semi-sector technology, 5G prototyping and tests, connected and electric vehicles and the industrial IoT.

Key to our success for decades has been our strong grasp of customer challenges gained through direct selling and a strong connection between our sales teams and our product and company strategy. Building on that, we have been evolving our sales organization to address the opportunity in these key application areas. By applying a more deliberate approach to sales coverage of our large customer base, deploying our highest value resources to customers and geographies where we expect the greatest return and decreasing our cost of sale in our high volume transactions, we believe we can deepen our relationship with our customers and increase our share within these target areas.

I want to conclude by recognizing the hard work of our R&D, sales and marketing teams to both deliver on the near-term success of our customers and our business, while also evolving and focusing their effort to align around our future growth opportunities.

I will now turn it over to Karen Rapp for the financial update.

Thank you, Eric. Today, we reported Q3 revenue of $321 million, a record for the third quarter.

In Q3, revenue was up 5% year-over-year and we believe this represents a share gain in the test and measurement market. Core revenue, which we define as GAAP revenue excluding the impact of our largest customer and the impact of foreign currency exchange, was also up 5% year-over-year.

The impact of foreign currency was minimal in third quarter and the revenue from our largest customer was flat year-over-year.

Within our operational results, non-GAAP gross margin in Q3 was 75%. Total non-GAAP operating expenses were $190 million, down 2% year-over-year.

Our non-GAAP operating margin increased by 290 basis points year-over-year to 15.4%, demonstrating continued commitment to our new operating model and disciplined expense management.

We reported net income of $33 million, with fully diluted earnings per share of $0.25. Non-GAAP net income was $42 million or $0.32 per share, which represents a 30% year-over-year increase. Included in our GAAP net income is $1 million of restructuring charges.

Year-to-date, non-GAAP net income is $104 million, up 28%, with operating expenses flat year-over-year.

A reconciliation of our 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 $8 million in orders received from our largest customer as compared to $5 million in Q3 2016.

Now breaking down our Q3 order value. Orders with a value below $20,000 were up 1% in the third quarter. As an indicator of the strength of our systems business, we saw all orders over $20,000 up 8% year-over-year. Orders with a value between $20,000 and $100,000 were up 8% year-over-year, and orders with a value over $100,000 were up 9% year-over-year. We believe the continued systems order growth is indicative of the value our customers see in our innovative platform.

As Eric mentioned, the catalyst to our sales transformation has been the evolution of our business into more system sales opportunities. This deliberate sales channel investment will help to optimize our direct customer relationships to support our growth goals.

Moving to the balance sheet and capital management. During the quarter, we paid $27 million in dividends, continuing our history of returning value to shareholders. We ended the quarter with cash and short-term investments of $385 million at September 30, 2017, and the NI Board of Directors have approved a quarterly dividend of $0.21 per share.

Now I would like to make some forward-looking statements. Included in our guidance for Q4 2017 is approximately $4 million in revenue from our largest customer.

Given our historic seasonality trends, we currently expect total revenue in Q4 to be in the range of $331 million to $361 million. The midpoint of this range represents a new record revenue for a fourth quarter.

We expect GAAP fully diluted earnings per share will be in the range of $0.27 to $0.41 for Q4 with non-GAAP fully diluted earnings per share expected to be in the range of $0.34 to $0.48. Included in our Q4 2017 GAAP earnings per share guidance is approximately $1 million of restructuring charges.

I'm proud of the progress we have made in improving our operating performance this year, with the midpoint of guidance providing for a 31% year-over-year increase in non-GAAP fully diluted earnings per share. We remain committed to our operating leverage plan for 2018.

In summary, we're encouraged by the continued strong order growth in Q3 and the value we offer our customers through our innovative platform. I also continue to be impressed with our employees as we deepen our customer intimacy and remain focused on our growth and profitability goals this year and into 2018.

As these are forward-looking statements, I must caution you that our actual revenues, expenses and earnings could be negatively affected by numerous factors, such as any weakness in global economy, fluctuation in revenue from our largest customer, foreign exchange fluctuations, expense overruns, manufacturing inefficiencies, adverse effect of price changes and effective tax rate.

We will be participating at the Baird Industrial Conference and Stifel Growth Conference in Chicago as well as the Credit Suisse Conference in Scottsdale in November. We look forward to seeing you there.

With that, I'll turn it back over to Alex for some closing comments.

Thank you, Karen. In this year of change for NI, I'm proud of our execution toward our growth and profitability goals. In 2017, we have expanded our platform with highly differentiated products. We have built deeper customer relationships with our most important customers and partners, and we have optimized our sales channel to more efficiently serve our broad base. These efforts have yielded record revenue and record profit through the first 3 quarters.

I'll finish by expressing my appreciation for the focus and dedication of our employees. Through your efforts, we are well positioned to drive impact in our target application areas and achieve the growth and profit that will provide the investment for our future.

Thank you, and we will now open up for your questions.

(Operator Instructions) Our first question comes from the line of Vijay Bhagavath from Deutsche Bank.

What is the key catalyst, I mean, Alex, Karen, in your view that could drive upside to your own internal targets on the top line? And how I mean is, if you could call out any specific test use case or a product team that we could kind of follow and think about in terms of potential drivers to upside to your own target as we head into fiscal '18? And I have a follow on.

Sure. Looking at 2018, Vijay, I appreciate the question. Obviously, we're only giving guidance for Q4 of '17. But when we look at into next year, I'm very pleased that we've had tremendous success in delivering record revenue and profitability this year, and have closed a significant portion of the gap between our target profitability and where we have been historically. We're going to be very focused on executing against our committed leverage model next year. And obviously, while we're not giving any guidance for 2018, there are some things that are shaping up favorably both from the broad macro dynamic, from a currency point of view and then product traction as well, both across our software platform, our PXI Data Acquisition products, our CompactRIO products and then with the focus in the sales channel on ensuring we continue to drive market share gains in our systems business. So I think, there's a number of factors that are quite positive as we look into next year. And we will be in a position to talk more about that in January.

Perfect. A quick follow-on for Karen. As we head towards year end, helpful for us to get any modeling guidelines for the new year. How should we think of margin metrics for fiscal '18?

Vijay, thanks for the question. For margin, you can take a look at our historic gross margin trends and project that into the future at similar types of rates, always staying within the operating model that we've committed to and published. So that should give you some guidance for that.

Our next question comes from the line of Patrick Newton from Stifel.

I guess first, my traditional housekeeping, if I could get your headcount in the quarter and also your average order size?

Patrick. this is Karen. That's for me. Headcount ended at just over 7,400 people. We are flat sequentially. And from an average order size, looking at around $5,900. Again, flat to last quarter.

Perfect. And I guess that it seems like you're well on pace to hit that metric of -- previous metric of low single-digit declines in headcount for the full year. I guess, as we think about that translate into OpEx, would it be reasonable, similar (inaudible) in the third quarter year-over-year to think that the fourth quarter year-over-year could see a decline in absolute OpEx?

We're looking at a number, Patrick, that is probably less than 1% year-over-year for the fourth quarter.

And that's 1% decline or growth?

Growth.

Okay. And then...

If you just -- (inaudible) just I know you know this, but in Q3 we obviously had the shift at NI week, last year was in Q3 and this year was in Q2. So that had some impact in the third quarter. Obviously, we talked about that in Q2 as well, so...

Yes, okay. And then I guess, either for Alec or Eric, if we think about the early drop of the 3GPP standard testing this year, does that pull forward any type of time frame for us to see meaningful 5G revenue maybe outside of research and characterization? Or should we think of inflection for NATI in 5G around the full release 15 in mid-2018? Or perhaps, even think about inflection differently? Just trying to get an idea.

Sure. I'll take this one. It's Eric, Patrick. Yes. So regarding 5G, as you know we have had at this point a fairly long history in the researching and prototyping side that started back in 2010. So we continue to serve that part of the market, which has been a good business area in our sort of software-defined radio part of our business. And now, as you mentioned, we believe that puts us in a position to start to serve some of the early testing capabilities and validation particularly of early semiconductors. Our time line is still similar to what we've talked about before. We are already engaged with lead users doing early [silicone]. And we expect that to continue through next year. And then commercial rollouts are still beyond that, by and large into 2019, 2020 and beyond. So really, our focus at this point is continuing our prototyping business and setting ourselves up with deep relationships on early testing opportunities in semiconductor space.

Great. Appreciate the comment. And I guess, just one more if I may. Alex, you talked about automotive. You talked about IoT. You talked about 5G. You talked about some traction with substantial number of your product portfolios. It seems like macro trends are very much in your favor. And we started to see your competitors who you've consistently gained share from start to see growth. So if we step back and kind of take that all in, I'm curious why -- if I look at the 5% growth target at the midpoint for the December quarter, how come that growth rate is not accelerating more, especially if we think about an easy comp year-over-year? Are there any key dynamics that were missing or key inflections that are more of a calendar 2018 event?

Not a loaded question at all, Patrick. So a good question, Patrick. When we look at the broader market and we look into 2018 and reflect on our success in 2017 and executing against our core goals to deliver record revenue. The midpoint about 6% core revenue growth and over 30% increase in our non-GAAP net income. As we look into 2018, our goal will be to complete the job on executing against our business model to achieve our revenue target that's we'll be pushing for. And as I said earlier on to Vijay's question, certainly, the macro trends, the currency and our product traction are setting up well for 2018. For Q4, our approach to giving guidance -- Karen's approach to giving guidance is to make sure we're going to hit our goals and what we commit to. So we strictly used historical seasonality to set the guidance expectation for Q4 and that's the logic behind the midpoint of revenue growth for the fourth quarter.

(Operator Instructions) Our next question comes from the line of Richard Eastman from Robert W. Baird.

Just very quickly. Alex, could you kind of speak, or Karen, could you just speak a little bit to Europe and the 1% growth rate there? The comp was fairly easy. And I'm curious what's lagging in Europe?

Yes. Rick, it's Eric. Let me take that one. The 1% is on our full EMEA region. And obviously, there's a few different dynamics happening there. We have parts of that region that are performing very, very well. So Germany is one that stands out. A lot of growth driven there, double-digit growth. It's a lot of automotive business. We highlighted that as one of the verticals that's doing quite well. And then we have other parts of that region that are lagging. So Russia and Arabia have been challenged for probably some obvious [issues]. The U.K. has been a bit challenged and so that's what nets out to that. Now we are encouraged as we look over the last couple of quarters on the strengthening PMI and strengthening economy in that region. We do see opportunity in the business that we have across the EMEA region.

Okay. And then just a couple of key markets, government, academic, mil/aero. Could you just toss a little bit of color on those kind of key end markets for you? Have they started to perk up some?

Yes, I can take that one as well, Rick. Let me start with a couple that we highlighted. So semi has been very strong. So that's a strong double-digit growth in semi. As a reminder, our semi business really consists of both a footprint in the labs where our software and our PXI platform have been used for quite a long time. And that continues to be strong. And then as you've heard from us, we're increasingly also serving the production area of semiconductor through our semiconductor test system. So strong growth in semiconductor. The other strong growth area is in automotive and transportation that we highlighted. So we see a lot of changes in that market place in terms of the needs of testing. Some of the new technologies that are coming in that space that are well aligned for the capabilities of our platform. And we have a long-term relationship with customers in automotive. Those are the stronger one. On the other side, some challenges we had mentioned before over the last couple of quarters that our U.S. government business was softer and that's continued into Q3. So we saw softness in that space and some softness in the academic industry as well.

Okay. Okay. And then, maybe just one last question. Just when you look at the order growth by less than $20,000 order size, how do you feel about that 1%? You said -- is that kind of turned positive here? Is there any feel around inflecting there? Again, PMI, if that's indeed the driver, it probably doesn't get much stronger than it's been. And I'm just curious about that piece of the business.

It's a very good question, Rick. Certainly, I think as we look forward, the underlying metrics that we look to for that business are certainly encouraging as we look forward.

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Alex Davern for any further remarks.

Thank you very much for joining us today and we look forward to seeing you at one of our various investor conferences over the course of the next few months. Thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.