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National Instruments Corporation (NASDAQ:NATI)

Preliminary Q4 2011 Results Call

January 03, 2012 5:00 pm ET

Executives

David Hugley, Vice President, General Counsel, and Secretary

Dr. James Truchard, President, CEO, and Cofounder

Alex Davern, CFO, COO, and Executive Vice President

Analysts

Mark Douglass – Longbow Research

Anthony Luscri – JPMorgan

William Stein – Credit Suisse First Boston

Operator

Good day everyone and welcome to the National Instruments’ Conference Call. Today’s call is being recorded. On our call today will be David Hugley, General Counsel and Secretary; Alex Davern, Chief Operating Officer; and Dr. James Truchard, Chairman and CEO.

I would now like to turn the conference over to David Hugely. Please go ahead sir.

David Hugley

Good afternoon. In this conference call, we should make forward-looking statements regarding the future financial performance of the company, including statements regarding the following: our preliminary revenue, preliminary earnings per share, preliminary operating expenses, gaining market share and expected investments in our business.

We wish to caution you that such statements are just predictions and 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 for the year ended December 31, 2010 and our quarterly report on Form 10-Q filed October 27, 2011. 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 Operating Officer of National Instruments Corporation, Alex Davern.

Alex Davern

Good afternoon and thank you for joining us today at short notice. Today, I’ll provide a brief update on our business and then Dr. Truchard will close with some comments on our long-term strategy.

Today National Instruments released its preliminary results for the fourth quarter. Revenues are now expected to be 1% below the low end of the company’s guidance given on October 26. We now expect fourth quarter revenue to be approximately $277 million, up 11% year-over-year with non-GAAP revenue expected to be approximately $279 million.

As a result, we currently expect the GAAP fully diluted earnings per share will be in the range of $0.19 to $0.20 per share for Q4 with non-GAAP fully diluted earnings per share expected to be in the range of $0.26 to $0.27 per share.

Now, going into a little more detail on our preliminary revenue, while the company’s year-over-year order growth through our conference call on October 26 was in line with the midpoint of our original expectations, we did see a subsequent drop in the rate of year-over-year order growth.

Sequentially, the company saw the greatest reduction in year-over-year revenue growth in Europe, where revenue growth in U.S. dollars dropped from 25% year-over-year in Q3 to 3% in Q4. In Asia and in the Americas, year-over-year organic revenue growth in Q4 was approximately 10%. Excluding acquisitions, year-over-year revenue growth in the Americas was approximately 20% in Q4.

NI graphical system design products, which represent approximately 95% of the company’s product portfolio, had approximately 14% year-over-year revenue growth in Q4. Sales of NI instrument control products, which represented approximately 5% of NI revenue in the quarter, were down approximately 15% year-over-year in Q4, after being flat year-over-year in Q3.

Given the weak Q4 PMI data especially in Europe and the approximately 15% year-over-year decline we saw in our instrument control revenue, we believe that the overall test and measurement industry weaken considerably in Q4. We believe that that our ability to continue to grow our business despite the weakness of the global PMI, so that we’re finding new business and taking market share. From an order point of view, in Q4 orders over $20,000 grew approximately 10% year-over-year, while orders under $20,000 grew in the low single digits.

For Q4 2011, the company now expects total non-GAAP operating expenses to be approximately $172 million, plus or minus $2 million. This equates to a year-over-year increase of approximately 20%, down from the 30% year-over-year increase the company saw in Q3 2011. Due to the lower than expected profit in Q4, the company currently expects its non-GAAP effective tax rate to be approximately 26% in Q4. With $336 million in cash and cash equivalents at the end of September, the company’s balance sheet remains very strong.

Given the uncertain outlook for the industrial economy, the company is moderating its investment plans for 2012. Going forward, we will be both strategic and prudent in our business planning, managing our expenses carefully while keeping our eyes firmly fixed on long-term growth. The company will provide final results and detailed guidance for Q1 2012 in its Q4 conference call on January 31.

Also, I will be presenting in New York at the Needham Growth Stock Conference on Wednesday of next week and I look forward to seeing you there.

With that, I’ll hand it over to Dr. Truchard.

James Truchard

Thank you, Alex. Despite the slowdown in the industrial economy, our continued growth this quarter has been driven by the success of our long-term investments, especially in the area of modular instruments, PXI, LabVIEW, CompactRIO, and our Academic products.

We are especially pleased with our very strong sales of some of our significant new products we introduced in August at NI Week. We believe our expanded sales force helped drive business in new application areas, in particular I’d like to highlight the strong growth we have seen in areas like mobile devices, energy, life sciences where we have focused dedicated resources.

Even in light of the weaker industrial economy in Q4, we continue to see strong results in these areas, which resulted in record orders for our software, CompactRIO, and RF products. We continue to feel confident about our long-term strategy, our investments and our ability to grow revenue despite the weakness in the industrial economy in Q4.

In closing, we are being very realistic about the outlook for the industrial economy and we’ll be carefully managing expenses across the business in 2012. We continue to be very optimistic about NI’s future and how the diversity of our business differentiating action of our products and the innovation of our people provide great strength to National Instruments during difficult times.

We will leverage the significant investments we made in 2011 that will allow us to deepen our customer relationships and expand our product portfolio to position NI for long-term growth.

With that, we will now open up for your questions.

Question-And-Answer Section

Operator

Thank you. (Operator Instructions) And our first question comes from Mark Douglass with Longbow Research.

Mark Douglass – Longbow Research

Good afternoon, gentlemen.

James Truchard

Hey, Mark, how are you? Happy New Year.

Mark Douglass – Longbow Research

Happy New Year to you all. Alex, Can you go through what, if you have it, rough currency estimate region by region and what the effect that had on the quarter?

Alex Davern

Sure, Mark. Obviously, we don’t have all our final numbers right now; it’s so early in the close process. I think the highlight there probably is in Europe. Sequentially, the impact of currency change between Q3 and Q4 affected our revenues by roughly about $3 million sequentially. And the Americas does not much change and in Asia it’s not significant enough to talk about. So really it was more of a European phenomenon.

Mark Douglass – Longbow Research

Okay. The currency was fairly sizeable in Asia, too, in the third quarter, correct?

Alex Davern

I’m talking about sequentially from Q3 to Q4.

Mark Douglass – Longbow Research

Okay. But overall, it wasn’t just currency; it was volumes in Europe that due in large part missing your expectations?

Alex Davern

Sure, I mean the biggest gap in our expectations from Q4 clearly was in Europe and we saw our rate our growth year-over-year in dollar terms in Europe dropped from 25% in Q3, which is a very strong quarter, down to only 3% in Q4. And we saw particularly significant amount of disruption in November. We did see things improve somewhat in December as the uncertainty in Europe seem to calm down a little bit, but we saw reasonably significant impact on our business in the middle of the quarter.

Mark Douglass – Longbow Research

Okay. That’s helpful. And then finally, can you give any flavor as to any particular end markets in the EU that were particularly hard hit or conversely any that held up?

Alex Davern

Maybe I can give a little bit of color geographically. We saw, as you might expect, relative to let’s say the overall economic performance there, the PMIs of those individual countries in particular, from a geographical point of view, we saw much stronger performance out of Germany and Northern Europe, to see a weaker performance year-over-year revenue growth in Southern Europe, which is probably in line with what you might expect.

From an industry point of view, Europe in general was pretty broad based. I didn’t see any particular industry that in Europe specifically that showed a significant outlying impact. So I’d say it’s more regional within Europe based on the dynamics of their own internal regional economies.

Mark Douglass – Longbow Research

Would you say that communications was just as weak on a relative basis versus any other end market?

Alex Davern

The market for something like communications is so interconnected globally. Perhaps, I can give you some color industry-wise on a global level that might be more relevant. In terms of the global industry areas, we saw some continued weakness in the semiconductor space, although we did see some growth there, it was much weaker than we’ve seen earlier in the year. Aerospace and defense was another area that was weak in Q4. On the positive side, we saw strong growth in energy, in life sciences, in mobile devices, and in the automotive areas.

Operator

(Operator Instructions) We will go next to Anthony Luscri with JPMorgan.

Anthony Luscri – JPMorgan

Hi, thanks for taking the question.

James Truchard

Hey, Anthony, Happy New Year.

Anthony Luscri – JPMorgan

Happy New Year. I see that your expense growth did not pull back in the fourth quarter, even though weakness started November. Looking ahead, are you able to put on the brakes in the first half of 2012?

Alex Davern

Anthony, Alex here. So we’ve obviously gotten cautious going into Q4. When we gave guidance in October, I was very specific that we’re concerned about Europe and we guided to a sequential revenue growth number at the midpoint that was below the seasonal average. In hindsight, I didn’t anticipate the scale of disruption that might have been caused in Europe and we’re pretty more cautious enough.

From a spending point of view, I think we’d already indicated we were shifting our stance in the October call. If our preliminary numbers come out to be final, then we’ll see a slight decline in total operating expenses at the non-GAAP level from Q3 to Q4. We also will see a significant reduction in the growth of head count in the fourth quarter.

Looking out into next year, we’ll give more specific guidance at the end of the month and we released financials for Q4 and guidance for Q1, but I’d anticipate total operating expenses in Q1 being flat to slightly down at the non-GAAP level from Q4.

Anthony Luscri – JPMorgan

Okay, thanks for that. And then as a follow-up, in terms of, when you first started, a few of the weakness, you mentioned November, what is in the order trend since that time period, the things kind of fall off of cliff and flatten out or is it in somewhat of recovery through the fourth quarter time frame?

Alex Davern

Well, I certainly wouldn’t characterize it as falling off the cliff. Obviously Q4 for is here is an all time record quarter at $279 million in revenue; it’s 12% year-over-year revenue growth. And obviously we capped a new milestone for NI in this time period too of exceeding $1 billion in revenue at a new all time annual record from a revenue point of view.

So I definitely wouldn’t characterize it as falling off the cliff, but certainly we did see some significant, I think, disruptions to the economic process in Europe, particularly as I said in November. And broadly, November was a tough month. It’s also coincided with the recent trough in the global PMI in November. December was better. And I’m certainly somewhat encouraged to see that the global PMI for December at about 50% again, although it’s led by the U.S., with the rest of the world being below 50%. So I’d characterize it was quite weak in the middle of the quarter and some tone of improvement as we got towards the end.

Anthony Luscri – JPMorgan

Okay, thanks. And I guess the last question would be, do you expect any spillover effects from the weakness that you saw in Europe? You mentioned that communications and the global market, but do you expect other regions also exhibit weakness similar to Europe in the fourth quarter time frame?

Alex Davern

Do you mean in the first quarter time frame?

Anthony Luscri – JPMorgan

Well, do you expect Asia and Americas to feel spillover effects from Europe and…

Alex Davern

Well, perhaps I maybe address it a little bit by looking at what happened in Q4 for each region and then we can talk briefly about Q1. For the Americas, we actually saw organic growth rate for the non-GAAP point of view improve from Q3 to Q4. We went from 7% revenue growth in the Americas in Q3 to 10% in Q4. And while it’s moving in the opposite direction to Europe, it’s quite consistent with what we saw at the PMIs as they recovered in the Americas in the latter part of Q4.

In Asia, we had 10% revenue growth for Q4, but that’s on top of a really tough compare. We grew 37% in Q4 last year. So Asia is up almost 50% for us over the last two years and continuing I think excellent execution in that region. We did see some moderation in growth in Asia as we saw the PMIs in Japan and Chine, Korea, Taiwan turn negative in Q4, but there did seem to be in those recent data indications that December was a slightly better month for the industrial economy in Asia.

So it’s not clear to me at all at this point that we will see the kind of collapsing PMI that we saw in Europe in the latter part of ‘11, but that is about to happen in Asia. That does not appear to be apparent.

Operator

And we’ll go next to William Stein with Credit Suisse.

William Stein – Credit Suisse First Boston

Hi, good afternoon.

Alex Davern

Hi, Will.

William Stein – Credit Suisse First Boston

Hi. So it looks like we have the linearity question down and end markets have been addressed a little bit. But one of the important points I think is to address whether you think this is coming more from your traditional test and measurement end markets or when you highlight these industrial end markets in Europe, whether you’re really talking about test and measurement in industrial end markets or if you’re in fact talking about industrial process control, which is another kind of bigger maybe somewhat emerging part of your business. Can you comment on that?

Alex Davern

Let’s maybe take it at the product level from a global point of view, might be an easier way to answer it. If you break it down into number of areas, certainly the weakest area for our business in Q4 was instrument control business. And as you know, typically that’s where we sell a device that’s used to control a box instrument sold by another vendor.

That tends to be the part of our business that’s most closely connected to the economic cycle. That business was essentially flat in Q3; it’d grown quite well in the first half of 2011 and then turned quite negative in the fourth quarter, down 15% year-over-year. That’s certainly an indicator for the overall T&M space.

We continue to see good growth in our software business as we talked in the call. And then when you break the rest of the industry down, our serial product line continued their very good growth in Q4, that’s a product area most directly targeted our industrial embedded space. So that would have been an outperformer in the quarter. It’s an area where we have a very disruptive solution with an opportunity to serve quite a large market.

But I think I would characterize it as overall I think the T&M space saw some definite weakness from our point of view in Q4 with Europe being the most obvious location where that manifests itself.

William Stein – Credit Suisse First Boston

Dr. Truchard, I’d like to hear a comment in terms of his view on the different market spaces.

James Truchard

Certainly test and measurement market was the most directly affected as evidenced by our instrument control sales, on the industrial side we were quite excited about our continued good growth, especially CompactRIO, where we once again saw really nice growth. So basically, we’d say the bigger factor was test and measurement.

William Stein – Credit Suisse First Boston

That’s helpful guys. Thank you. A couple of quick follow-ups, if I can. Is any of this at all related to the recent acquisitions, Phase Matrix and AWR, any issues integrating any update you can give us there? And then also an update on the competition in the PXI market if you can, you have a relatively new entrant there and I wonder if they are disrupting the market in any way at all?

Alex Davern

Okay, starting with the acquisitions, we’re seeing good success in the integration. These two acquisitions had different goals. One of them was technology for our hardware, the Phase Matrix acquisition, that’s gone well. We’re on line to develop new products, obviously these will take some time, but certainly that’s gone well. Second case, AWR, we’ve identified key areas that we have in common that we can work and we’re in the process of integrating those. So that looks good.

In terms of specific numbers, well, the combination that we guided to roughly $10 million in revenue contribution in Q4, we came in right on line with that guidance.

(Inaudible) to the PXI market back in September of ‘10, certainly we viewed all along that a broader expansion of the PXI market was really good for the market space overall. We’ve continued to see growth in our PXI business in Q4 of ‘11; we feel really good about our disruptive position there.

And when we look at the position of our growth in PXI in Q4 versus the decline in our instrument control business in Q4, I think it’s pretty clear to us that our PXI business continue to gain market share relative to traditional instruments in the fourth quarter. And I don’t see any reason that that pattern will change going forward.

William Stein – Credit Suisse First Boston

Great, thanks guys.

Operator

(Operator Instructions) And there are no further questions in the queue. At this time, I’d like to turn the call back over to the speakers for any additional or closing remarks.

Alex Davern

Thank you very much for joining us today. As I said, I will be in New York at the Needham Growth Conference next week on Wednesday. We look forward to seeing you there.

Operator

That does conclude today’s conference. Thank you for your participation.

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