National Instruments' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.30.14 | About: National Instruments (NATI)

National Instruments Corporation (NASDAQ:NATI)

Q4 2013 Earnings Conference Call

January 30, 2014 05:00 PM ET

Executives

David Hugley - VP, General Counsel and Secretary

Alex Davern - Chief Operating Officer

Dr. James Truchard - President, CEO and Co-founder

Eric Starkloff - SVP of Sales and Marketing

Analysts

Paul Knight - Janney Capital Markets

Richard Eastman - Robert Baird

Operator

Good day everyone and welcome to the National Instruments’ Fourth Quarter 2013 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, Vice President, General Counsel and Secretary; Alex Davern, Chief Operating Officer; Dr. James Truchard, President, CEO and Co-founder; and Eric Starkloff, Senior Vice President of Sales and Marketing.

For opening remarks, I would like to turn the call over to Mr. David Hugely, Vice President, General Counsel and Secretary. Please go ahead, sir.

David Hugley

Good afternoon. During the course of this conference call, we shall make forward-looking statements regarding our future financial performance, including our guidance for our first quarter revenue and earnings per share. We wish to caution you that such statements are just prediction 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 November 1, 2013. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements.

With that, I will now turn it over to the Chief Executive Officer of National Instruments Corporation, Dr. James Truchard.

Dr. James Truchard

Thank you, David. Good afternoon and thank you for joining us. Our key points for 2013 are record annual revenue, continued growth in LabVIEW, RF and CompactRIO products and good spending discipline. I am pleased to report record annual revenue, despite difficult conditions in the test and measurement industry, we continue to see the acceptance of our software based approach. I am also pleased with our good expense management with operating expenses down sequentially for the third consecutive quarter.

This is a testament to the keen focus of our employees across our company and their collective efforts on improving our non-GAAP operating margins toward a goal of 18%. While we remain cautious in the short-term, I'm optimistic about our long-term position in the industry through the sustained differentiation we deliver to our customers.

In our call today, Alex Davern, our Chief Operating Officer will review our results, Eric Starkloff, our Senior Vice President in Sales and Marketing will discuss our business and I will close with a few comments before we open up for your questions. Alex?

Alex Davern

Good afternoon and thank you for joining us today. Today, we reported quarterly revenue of $301 million, approximately flat with Q4 of 2012.

For Q4, net income was $32 million with fully diluted earnings per share of $0.25 and non-GAAP net income for Q4 was $39 million, up 9% year-over-year with non-GAAP fully diluted earnings per share of $0.31, at the midpoint of our guidance range provided on October 31st. Today, we also reported a new annual revenue record of $1.17 billion of $29 million or 3%. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

Excluding the impact of our largest customer, revenue from all other customers was up 4% year-over-year for Q4 and was up 6% year-over-year for the full year. We were disappointed with the finish to the quarter as December was weaker than expected especially in the emerging markets. For Q4, our orders were up 4% sequentially. This is below our historical ten year average, sequential growth rate for Q4 of approximately 10%. Most of the weakness this quarter was in our larger orders.

Non-GAAP gross margin in Q4 was 76%, up 70 basis points sequentially. Total non-GAAP operating expenses were $177 million down 3% year-over-year in Q4. For the full year our non-GAAP operating expenses were up 4% and I am pleased with our budget discipline. For Q4 our non-GAAP operating margin was 17% with non-GAAP operating income of $51 million up 56% sequentially and up 12% year-over-year.

Now taking a look at order size. In Q4 we saw 3% year-over-year growth from orders under $20,000, 1% year-over-year growth for orders between $20,000 and $100,000 while orders over $100,000 were down 9% year-over-year. There were two main drivers of the decline in our orders over $100,000. One was the expected decline in orders from our largest customer from $9 million in Q4 of 2012 to $3 million in Q4 of 2013. And the other was an unexpected 40% year-over-year decline in the emerging markets. Excluding orders from our largest customer, orders over $100,000 from the Americas, Europe and East Asia were up 17% in total year-over-year.

Now turning to the balance sheet, the company announced today an increase in the quarterly dividend from $0.14 to $0.15 per share. Cash and cash equivalents increased by $49 million sequentially to $393 million as of December 31st. Cash flow from operations were $170 million for 2013, up 28% year-over-year.

Now I’d like to make some forward-looking statements. While we’re pleased to see the recovery in the global PMI especially in November and December, we continue to see caution from our customers on capital spending, especially in the emerging markets. This makes us cautious in planning for the first half of 2014. We remain committed to the operating leverage targets we set out at our Investor Conference in August, but we expect our headcount to be essentially flat in 2014. As a result, we currently expect revenue for Q1 to be in the range of $273 million to $302 million. We currently expect the GAAP fully diluted earnings per share will be in the range of $0.09 to $0.21 for Q1 with non-GAAP fully diluted earnings per share expected to be in the range of $0.15 to $0.27.

As you may remember, our non-GAAP tax rate in Q1 of 2013 was 10%. As a result of the retroactive renewal of the R&D tax credit in January of 2013. For this year, the R&D tax credit has not yet been approved. And as a result, we expect our non-GAAP affective tax rate for Q1 of 2014 to be approximately 24%.

So as the mid-point of our guidance, our non-GAAP EPS is flat year-over-year. We are expecting an increase in operating income. And these are forward looking statements (inaudible) actual revenues and earnings could be negatively affected by numerous factors such as any further weakness in the global economy, expense overruns, manufacturing inefficiency, affective tax rates in foreign exchange fluctuations.

In summary, 2013 was a difficult year for customers in the industry, but despite these challenges NI was able to grow revenue and gain market share. Our goals for 2014 are the continued leveraging the investments we have already made to drive sustained revenue growth and to drive toward our long-term, non-GAAP operating margin target of 18%.

With that I will turn it over to Eric Starkloff, Senior Vice President in Sales and Marketing.

Eric Starkloff

Thank you, Alex. And good afternoon. While we continue to face persistent industry headwinds in 2013, we are pleased to set a new all time high for annual revenue. Grabbing our success in 2013 was growth in academic, RF, CompactRIO and CompactDAQ product areas all of which are oriented around our LabVIEW platform. This growth was offset by weakness in instrument control and plug-in data acquisitions.

Difficult revenue compared with our largest customer and weakness in government spending in the U.S. I remained encouraged by the strength of our market activity and opportunity pipeline in Q4 indicating continued strong customer interest in our approach. I also remained very excited about our customers’ ability to use this approach, beside some of the most challenging applications in science and engineering.

Now, taking a closer look at our product areas. (Inaudible) continue to see broad adoption by customers across a range of applications in the industry where it often displays its traditional rack and stack systems. Notable PXI application successes in 2013 include a large aerospace customer that shows NI PXI and signal conditioning with their high channel count structural test application because of its reliability and flexibility to hookup any sensor to any channel. They are also planning to switch their software development tool from a text based programming language to LabVIEW. And Tata Motors, India’s largest automotive company that adopted NI PXI to create a reliable Hardware-in-the-Loop test system, because of its scalability and flexibility. And we are able to build their system in less than two months.

Helping drive PXI success in 2013 was growth and sales of RF products and the very strong adoption of the vector signal transceiver. Setting the vector signal transceiver apart from other available RF instruments in the market is its tight integration with LabVIEW FPGAs, which set the new bar for performance for a fraction of the cost and size of traditional solutions and delivers very high differentiation to our customers.

During 2013, the vector signal transceiver generated more revenue in a single year than any other new hardware device NI has ever launched. The success was broad across customers industries and geography and we saw adoption across a wide range of applications throughout the design cycles.

From component validations to end of line production pack. For example, the vector signal transceiver was chosen over traditional box alternative at a wireline power amplifier characterization lab, because NI solution helped significantly reduce test times and lower cost.

In research institutions around the world our prototyping upcoming wireless standards and creating systems such as wireless channel emulator using the vector signal transceiver because it provides an unprecedented level of user customization through LabVIEW.

Sales into embedded monitoring and control applications also continued to be a growth driver for our business in 2013. Our customers continue to recognize the value of a standard software and hardware platform for rapidly developing intelligent embedded monitoring and control systems versus doing custom design.

Our CompactRIO hardware product continued to see strong revenue growth, setting new Q4 and annual revenue records. Growth was driven by new design win and continued deployments in application, in aerospace, defense, and energy.

We also saw strong early success of our latest CompactRIO controller which we released in NIWeek 2013. This controller incorporates key technologies including Linux and ARM and has been the fastest ramping CompactRIO controller in the product’s history.

Our data acquisition products finished 2013 with revenue relatively flat compared to 2012. While our plug-in data acquisition revenue was down, affected by the continued weakness of the PC market, our USB and Ethernet CompactDAQ product saw revenue growth and set an all time revenue record in 2013.

Customers and industries such as transportation and infrastructure chose our data acquisition product because of their precision, flexibility and the ability to distribute a more modular and intelligent data acquisition system bolstered to sensors and signals.

Data acquisition highlights from 2013 include a customer in the energy sector that chose NI CompactDAQ to replace the previous solution for portable diagnostics on rotating machinery because it provided additional flexibility to match sensor connectivity and software analysis to their specific requirements. And the customer who built the water tunnel to test underwater vehicle, chose Ethernet NI CompactDAQ chassis, because of its distributed nature and ability to synchronize multiple chassis for high speed vibration measurement.

At the heart of all of these products is LabVIEW, which delivered modest growth for software and services revenue in 2013 and a new annual revenue record. Contributing to the success of software this quarter was record new users from enterprise agreements, which is a program aimed to increase LabVIEW adoption and proficiency across the customer site or business.

This year, we also saw a record number of customers trained to become proficient in LabVIEW and a record number of LabVIEW instrument driver downloads. Together we believe this validates the growing base of proficient LabVIEW users across applications that use both NI as well as third-party instrumentation.

On the other hand, revenue from our instrument control hardware product which accounted for about 4% of revenue in 2013 declined 13% compared with 2012. Our instrument controlled hardware products are used to control box instruments from other vendors and are mostly connected to their business cycle. The decline in our instrument controlled hardware product is an indicator of the continued weakness in the test and measurement industry in 2013.

Over the past decade, we've had an intense focus on working with academic institutions to provide students with tools that enable hands-on learning. And the continued adoption of our academic product help lead to a new annual record for academic revenue.

Success for 2013 include shipping our 40,000th myDAQ device in Q4 as Massive Open Online Courses sometimes referred to as MOOCs as major universities like Tsinghua University, Georgia Tech and Rice University, proactive LabVIEW and NI myDAQ as the platform to help their students do engineering; and NI myRIO which has seen tremendous success since its release in August 2013.

Over 300 universities are currently evaluating myRIO for using in their curriculum. And the University of Virginia which selected the Vector Signal Transceiver and AWR design software for RF courses in labs because of its flexibility and tight integration between RF stimulation and test. In addition to fueling revenue growth, these academic successes also help ensure that graduating engineers around the world are transitioning to industry with knowledge, experience and proficiency in using a platform-based approach with LabVIEW.

In summary, while we did not meet our own revenue growth expectations, we were pleased to deliver record annual revenue in 2013 given the headwinds in test and measurement. We saw continued strong customer interest and adoption of our new products and our goal is to drive revenue growth and market share gain in 2014.

With that I’ll turn it back over to Dr. T for some closing statements.

Dr. James Truchard

Thank you, Eric. While 2013 proved to be a challenging year for our industry, we continued to advance our software based approach for test and measurement in 2013 while maintaining good spending discipline. I am especially proud that during this period we remained among fortune magazine’s 100 best places to work for the 15th consecutive year and our culture of innovation remains as strong as ever.

Despite recent headwinds, I am optimistic about our long-term position in our industry. Over the past several years, we have built on our platform of LabVIEW and modular hardware to address applications in both test and measurement as well as in embedded monitoring and control applications. The strength and power of our integrated approach in clearly being in big analog data applications in which customers acquire large amounts of physical data such as such as vibration, pressure and temperature across highly distributed networks and systems. One of our customers is solving this challenge by deploying hundreds of CompactRIO units to monitor power generation assets across multiple facilities.

CompactRIO acquires and sends data to the cloud for storage and analysis. The large data sets are then analyzed with NI software to predict potential maintenance problems and help prevent costly shutdowns. This application also relies heavily on the unique management and control capabilities of our LabVIEW RIO architecture, which combines LabVIEW and NI hardware programmable by LabVIEW FPGA.

The LabVIEW RIO architecture provides our customers and partners with the ability to define and optimize firmware of their test in embedded systems to match the specific requirements of their applications. This technology enables users to quickly iterate on their designs and implement updates to the deployed hardware if their requirements change, resulting in faster test times and more efficient control.

This highly differentiated approach is solving some of the world’s most challenging management control applications, thus creates sustainable leverage, loyalty and differentiation. In 2013, NI delivered on the 35th year of revenue growth in the top test and measurement industry. At the same time, we focused on leveraging the resources. We currently have to improve our operating margin in Q4. I want to our employees for their consorted efforts to simplify processes, drive productivity and focus on innovation.

As we look out to 2014, I am focused on developing our high performance management team in our quest to reach our goal of $2 billion in annual revenue. I believe we make investments necessary to build on a highly differentiated platform and capitalize on our long term growth opportunities in our embedded and broad based test applications.

We are redefining our testaments and use our tools to be more productive. And I believe we can continue to create sustainable differentiation for NI, our customers, partners, suppliers and shareholders.

As a closing note, I will be attending the Stifel conference on February 10th in San Francisco and I look forward to seeing you there.

We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Paul Knight from Janney Capital Markets. Your line is now open.

Eric Starkloff

Hey Paul, how are you?

Paul Knight - Janney Capital Markets

Hey, good evening. The wide range on the Q4, excuse me the Q1 guidance of -- is it $0.15 to $0.27 a share?

Alex Davern

Hey Paul, it’s Alex. So, we used the revenue range of about 15 million plus or minus the mid-point for about the last year or so, so it’s just consistent with that and then, flows down through the income statement that way.

Paul Knight - Janney Capital Markets

And then you are guiding to a 24% tax rate for the full year and operating margins, did you say would be up year-over-year in 2014?

Alex Davern

Still in news, but talking specifically about the first quarter Paul, we’ve just given guidance for Q1. The non-GAAP effective tax rate is the guidance for the full but also obviously for the first quarter. And what I want to make here is that we had a very big tax benefit last year in Q1 while at the midpoint of our guidance the EPS at non-GAAP level is flat year-over-year. From an operating income point of view it’s up -- at least the midpoint assumes up double-digit as a result of a 14% increase in the tax rate. You might remember last year President signed the R&D tax credit into Jan ’13. So, we ended up taking five quarters of that benefit. So that was retroactive to January 1 of 2012. So we do have five quarters of that benefit in the first quarter of last year.

Paul Knight - Janney Capital Markets

And then lastly, I guess on orders, the large customer not as large in this quarter but I guess the tone was okay on all but that large customer?

Alex Davern

I mean broad base business, we were satisfied with the results. We did see obviously a hit in the emerging markets especially in December that was not expected. We continue to deliver a lot of value to our largest customer and we will be continuing to compete for business there as we go forward. We will be in a better position to give you an update on that in April.

Paul Knight - Janney Capital Markets

Okay, thanks.

Alex Davern

Thanks Paul.

Operator

And our next question comes from the line of Patrick Newton with Stifel. Your line is now open.

Unidentified Analyst

Hi thanks for taking my call. This is Robert (inaudible) for Patrick today. So I kind of have a quick question, last quarter there was talk of increased backlog in fourth quarter to better manage kind of a seasonality of order flow going forward, I wonder if you could quantify what that impact was in the current quarter and if that was kind of embedded into guidance for first quarter?

Alex Davern

Sure Robert. When we look at, coming into Q4, we've seen some positive signs in the PMI et cetera. We were as I said on the call, less surprised for the weakness in the emerging markets. Our bias was that we were able to, based upon our numbers with each value we would look to increase backlog. We didn't get the opportunity to do that in Q4 because orders were little weaker than we anticipated.

Unidentified Analyst

Right. Okay, great. And then so I guess just last kind of a couple of housekeeping. Can you tell me what the average order size was in the quarter and then how many employees that were exiting?

Dr. James Truchard

Yeah sure, the growth size is around $5,100 approximately. Exiting number of employees is 7,114. That's up about 3% year-over-year. That's been down slightly since March.

Unidentified Analyst

Great. Thank you for that. I'll get back in queue.

Dr. James Truchard

Thank you.

Operator

And our next question comes from Mark Moskowitz with JPMorgan. Your line is now open.

Unidentified Analyst

Hi, this is actually Mike [Tan] for Mark. Hi guys.

Dr. James Truchard

Hi Mike.

Eric Starkloff

Hi Mike.

Unidentified Analyst

A couple of questions here; first, you talked about the large orders and the -- what impacted that. Could you actually talk about the growth in orders less than 20K, historically that's kind of we've understood that to be correlated tightly with a macro and anything you're seeing there would be helpful?

Dr. James Truchard

Yeah, it's a good question Mike. I mean obviously our orders are over 100K as we report those and show the timeline overtime. You can see those tend to have a greater degree of volatility than they historically have over a long period of time. Orders under 20K tend to be more of a broad-based and I do think more relevant as a macro indicator.

Certainly, we're pleased to see them continued to show some growth. We're happy to see the PMIs in November and December improve. And we’ll see how that plays out as we move forward. We do view that as an encouraging sign.

Unidentified Analyst

Great. And then secondly you guys have done a good job with OpEx here and keeping that tight lead on that. What have to change in terms of the business outlook for you guys to start increasing spending there again?

Dr. James Truchard

We’re very committed to the leverage plan that we laid out at the investor conference in August. We’re committed to driving operating leverage as we get the opportunity in 2014 and moving forward. And so we will execute against that operating leverage plan that we laid out, [posted] copies in our investor slides, go to the column on the web. So we’re committed to improving operating margin as we move forward.

Alex Davern

Exactly, so our focus now is leveraging those resources that we’ve brought on board and really taking advantage of our position in marketplace.

Unidentified Analyst

Great, thanks. And then last question for me, what is the competitive environment in wireless test currently? Are there any incumbent stores, vendors such as paradigm that are responding with more aggressive pricing?

Eric Starkloff

Yeah, I’ll take that. This is Eric. Yeah certainly, when you talk about wireless test specifically the Wi-Fi and things like testing part of that mobile device testing, we’re relatively small player there and we view ourselves as one of the disrupters that is ultimately bringing down the cost of test in that part of the marketplace. So that’s the pretty competitive area and I think we are one of the disrupters.

When I talk about the RF marketplace, it includes that, but also other parts of the opportunity as well. So I view it as a pretty broad market. Wi-Fi and wireless testing, [miller, radar testing], infrastructure those markets have sort of less competitive dynamics than the one that we just talked about.

Unidentified Analyst

Thank you.

Dr. James Truchard

That platform-based approach has enabled us to compete on a standard platform with high performance typically and a very attractive price. So we’ve been able to provide excellent benefit to these customers.

Unidentified Analyst

Fine, thank you.

Dr. James Truchard

Thanks Mike.

Eric Starkloff

Thank you, Mike.

Operator

And our next question comes from the line of Richard Eastman with Robert Baird. Your line is now open.

Richard Eastman - Robert Baird

Just one follow-up here on the first quarter given the midpoint of the revenue guide, basically revenue flat year-over-year. So the presumption would be that op expense in the first quarter at least would be flat year-over-year or just down, any growth expected sequentially in operating expense given the wide range on the revenue line?

Dr. James Truchard

Yeah sure, if you look at it from a midpoint view thinking about it [near-term], Rich, revenue obviously will be flat year-over-year to midpoint. There is a big company [tax] that we talked about earlier on, so we are anticipating the double-digit increase in operating income. And we are anticipating that our operating expenses will be down year-over-year in the first quarter similar to the situation in Q4.

Sequentially you will see it from Q4 of ‘12 to Q1 of ‘13, operating expenses went up. We do anticipate that being the same case again this year. But from a year-over-year point of view, we do anticipate operating expenses being down year-over-year in Q1.

Richard Eastman - Robert Baird

Yes, okay. And as you follow that model out through the year, I mean I understand what the target is for the full year. But as you start the year, obviously you are pretty cautious. So presumably, our op expense stays pretty tight in terms of spending until we get call it mid-year and we see what happens with the growth outlook, sales growth outlook for the second half. And how do you play that quarter-to-quarter is maybe the question?

Dr. James Truchard

We’ll look it at as we go through the quarter and I would reference you back to the plan we've laid out from a leverage point of view, it’s a full year number, so we’ll be managing to that number. So then that will, both from a marketing and other point of view that will drive our operating expenses up in Q2 and Q3 and that's part of our planning.

But from a year-over-year point of view, we are certainly intending to start the quarter out, the first quarter down year-over-year, maybe we’ll see how my caution turns out to be relative to what happens in Q1, but I was a CFO back in 1998. So I try to learn some lessons as time goes on.

Richard Eastman - Robert Baird

Okay, right. And then could you just repeat it, let me just went through it a little bit quickly for me, with this large customer, was there any revenue recognized in the fourth quarter, were there any orders, is there any backlog entering the first quarter?

Dr. James Truchard

So the revenue recognized was $4 million and that's there in the press release. We’ve anticipated orders from this customer in Q4, when we gave guidance of under $5 million and that's where we were. So this has not typically been a large quarter for that particular customer.

Richard Eastman - Robert Baird

Okay, all right. And now in terms of the geographic, I just want to make sure I understand, you had mentioned the weakness in orders in emerging markets and I guess I saw down 14% I guess in local currency. Can you just indicate, is that all RF business or where -- what end markets where the large orders weaken the emerging markets?

Dr. James Truchard

Yeah. So overall, our large orders, orders over 100K are in the emerging markets which tends to be frankly more of a year-end phenomenon in those particular spaces that tends to be one of the strongest months for that particular region tends to be in December. Those large orders issue at down 40% year-over-year. Overall our revenue in emerging markets were down 20% and it’s across a lot of different application spaces, heavily frankly influenced by government funding. And I really frankly put that to time down to some of this turmoil that we’re seeing in the emerging markets over the last few months.

Richard Eastman - Robert Baird

Okay. All right, very good. Alright, thanks very much.

Operator

(Operator Instructions).

Alex Davern

Operator any more questions, if not we will close?

Operator

I am not showing any more questions at this time.

Alex Davern

Good. Thank you for your time. Dr. Truchard will be presenting at the Stifel Conference as he said. We will talk to you in April.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. And you may all disconnect. Everyone have a great day.

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