National Instruments Corporation (NASDAQ:NATI) Q1 2016 Preliminary Earnings Guidance Call April 4, 2016 5:00 PM ET
David Hugley - VP Counsel and Secretary
Alex Davern - COO
Dr. James Truchard - President, CEO and Co-Founder
Rob Mason - Robert W. Baird
Patrick Newton - Stifel Nicolaus
Good day, everyone, and welcome to the National Instruments’ Q1 2016 Preliminary Announcement Call. Today’s call is being recorded. You may refer to your press packet for the replay dial-in number and passcode. With us today are David Hugley, Vice President Counsel and Secretary; Alex Davern, Chief Operating Officer; and Dr. James Truchard, the President, CEO and Co-Founder.
For opening remarks, I would like to turn the call over to Mr. David Hugley, Vice President, General Counsel and Secretary. Please go ahead, sir.
Good afternoon. During the course of this conference call, we shall make forward-looking statements, including statements regarding our estimated results for the first quarter of 2016, driving profitability and gaining market share. We wish to caution you that such statements are just predictions and that actually 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 Annual Report on Form 10-K filed February 19, 2016. These documents contained in indentifying important factors that could cause our actual results to differ materially from those contained in our forward-looking statements. After the prepared remarks, Dr. Truchard our CEO and Alex Davern will take your questions.
With that, I will now turn it over to the Chief Operating Officer of National Instruments Corporation, Alex Davern.
Good afternoon. And thank you for joining us today. In our earnings call in January, we anticipated an improvement in our year-over-year revenue growth in Q1. Unfortunately we saw further weakness in the industrial economy with Q1 having the lowest global PMI in three years. Additionally, we saw a marked slowdown in our semiconductor accounts as a part of the wireless supply chain. This weakness resulted in a weaker end of quarter in March than we had expected. And as a result, we announced today that we now expect our revenues in Q1 to be applications $288 million, slightly under the low end of our previous guidance, which was $290 million.
Revenue was essentially flat year-over-year in U.S. dollars with core revenue growth of applications 4% year-over-year. As a reminder, we define core revenue as GAAP revenue excluding the impact of our largest customer and the impact of foreign currency exchange. The impact of currency on revenue this quarter was applications 5.7% which is higher than 4% we had originally estimated. The weakness during the quarter was most pronounced in the Americas with revenue down applications 5% year-over-year, while in EMEA revenues were down applications 2% year-over-year. Revenue growth in Asia was strong at applications 8% year-over-year.
While the PMI in the U.S. improved in March, it was a negative territory for most of Q1 and we did see general weakness across industries. However, the main unexpected challenge in the Americas came as a result of our orders over $100,000 in that region, falling by applications 25% year-over-year in Q1. The primary driver of this decline was an $8 million year-over-year decline from three semiconductor accounts, which are part of the wireless supply chain. This represented a 90% year-over-year drop in revenue from these three customers in Q1. The customers reduced spending following lower estimates for wireless components and smartphones shipments.
In Europe we saw an approximately 2% year-over-year decline in revenue in U.S. dollar terms and an 8% increase in local currency terms. Business in Europe continues to be generally weak despite the slightly positive PMIs, and we did see some impact from Easter moving into Q1. In Asia, we saw strong growth in China and Southeast Asia while Japan and Korea continues to be weak. Revenue from instrument controlled products was particularly challenged in this quarter and was down by double digits year-over-year. This decline is consistent with the current guidance and revenue results we’ve seen from other test companies and gives us confidence that we’re continuing to gain market share.
In summary, we currently expect revenue for Q1 to be approximately $288 million, essentially flat year-over-year in U.S. dollar terms with core revenue growth of approximately 4% year-over-year. We currently expect the GAAP fully diluted earnings per share will be in the range of $0.06 to $0.07 per share for Q1 with non-GAAP fully diluted earnings per share expected to be in the range of $0.14 to $0.15 per share. We will provide guidance for Q2 when we will issue our Q1 earnings on April of 28th. These are forward-looking statements, I must caution you that these are early estimates and actual revenues and earnings will only be available once we’ve completed our financial close process. Please see our recent 10-K filings with the SEC for a list of relevance risk factors.
While we are disappointed with the step back in Q1, we remain committed to leveraging our investments and deepening our customer relationships to drive solid profitability and gain market share.
With that, Dr. Truchard and I will now take your questions.
Thank you, Sir [Operator Instructions]. Our first question comes from the line of Rob Mason of Robert W. Baird, your question please.
Yes, good afternoon. Alex, could you just frame for us again the size of the wireless supply chain or maybe wireless semiconductor companies as a percent of your revenue? I seem to recall semiconductors kind of in the low-double-digit range but am I thinking about that correctly?
Rob, thanks for your question. I would put overall semiconductors a little bit lower than that, put them in the high single-digit type of range for us overall. What was a surprise for us in this particular quarter to a little disappointed with the step back is the rate at which those involved in that Wireless Supply Chain reduced their older volume in Q1, that was not what we anticipated coming into this quarter. Now we did see continued good penetration and success in opportunities with semiconductor customers outside of that particular supply chain.
One of your competitors also recently commented similarly last week and also had maybe some not so optimistic expectations here in the short term for that same kind of customer set. Just given the rapid falloff and it sounds like that was in the latter part of the quarter should we think that that probably depends on new product cycle for it to recover, maybe new model introductions or from some of the wireless handset players?
Yes I think you are right. We've seen also that commentary last week and others earlier in the quarter expressing similar concerns, so I think the general consensus for certainly the Wireless Supply Chain there from a semiconductor point of view is probably continued weakness for at least into Q2. I think there is generally the commentary about lack of visibility into that part of the business by some of our competitors over the course of the last few months and I would be in trying to echo that. I would try to put into a perspective overall when we look at our performance we were slightly positive up a 0.5% I believe in dollar terms year-over-year in Q4. And we had anticipated an improvement in our revenue growth coming into Q1 hoping to have easier comparison from a foreign exchange point of view which somewhat played out but not the completely, at here in Q1 we were seeing our revenue down about 0.5% or 1%. So our performance sequentially isn’t that different but the acceleration we were hoping to see in Q1 unfortunately did not materialize.
Thank you. [Operator Instructions] Our next question comes from the line of Patrick Newton of Stifel. Your line is open.
Yes, Alex, Dr. T, thank you for taking my questions. I guess just to kind of put a finer point on the revenues shortfall, if we take the 6% miss from the midpoint, can you help us bucket the rough contribution from wireless, from industrial embedded and then from non-wireless test?
Patrick thanks for your question. I mean obviously we are a little bit early in the quarter close process to give you a huge amount of specifics I will just kind of echo what we said in the call Patrick three of our top accounts in that wireless semiconductor company is in the Wireless Supply Chain. We are off about $8 million which is the bulk of that gap. We did end up taking about a $4 million relative bid on FX and foreign exchange more than we anticipated in the revenue those are the two biggest buckets. And the majority I would generally put down to, so we did see the weakest global PMI in three years in Q1 and I'd put the rest into that general kind of weakness bucket.
I guess if we on the wireless side, we had component companies talking to weakness in the supply chain last quarter. Do you think that NATI's softness is a like effect to what they were seeing previously or has the business environment weakened even further since you reported in January?
I think it's a lag effect that I think as we look at where we were at the end of January. I think we were still dealing with the same companies it may not have filtered down through those companies through the engineers or director level people we were dealing with that their capital spending may have been delayed, and that may have taken a loss of transmitted self down through the layers of our customers and that's why we're seeing the slight lag I don’t personally believe that this point it's some new stimulus that's driving that outcome.
Just with the 90% year-over-year decline, you seem comfortable that you are gaining market share, yet that's pretty exacerbated downtick. What gives you that level of comfort?
So let me just be really fair and make sure my commentary was clear that 90% decline I'm talking about three of our semiconductor companies that are in the wireless supply chain, those three companies dropped their orders to us year-over-year by 90% and I think that's a reflection of an instruction through those companies to reduce capital spending. We don’t see any indication from our relationships and opportunities, and we have were displaced in any competitive sense and I would tell you those three companies I believe our relationship with those customers was better than it has been in the history of National Instruments. When I look at our overall view on gaining market share with core growth in the 4% range and I think when we look at some of the recent announcements in the industry and guidance very confident that we are showing a significant delta in overall revenue performance with some of the mainstream players.
Thank you. Our next question comes from the line of Rob Mason of Robert W. Baird. Your question please.
Thank you. I just wanted to follow up on your operating expense performance in the quarter and the EPS performance. So $0.06 to $0.07 is a little bit below the low end of your range on just maybe a $2 million revenue miss. Is that a function of FX hurting you more, a function of the orders falling off late in the quarter limiting your ability to respond on the expense side? And then maybe as an extension of that, obviously you want to leverage your existing investment, stick to the expense plan that you've laid out, and clearly headcount growth is one lever you can directly control. But I'm just curious, as you think about your business for the remainder of the year, what maybe some of the other either pressures and/or benefits you might see in the operating expense line, maybe a comment on just what inflationary pressures look like given where the employment levels are right now?
I would say the competition of all those factors. Obviously the EPS estimate we put right now is very preliminary, we are only into the second business day of the quarter process, so I would just make that comment. In terms of looking at some of the factors you mentioned currency certainly is a factor seeing a drop off in the business late in the quarter as you mentioned is also a factor in terms of responsiveness. As we look at the rest of the year, and as we reassess our revenue expectations based on the results for Q1, we are very focused on the leverage plan that we laid out last August that we have been operating on for last several years. And are attentive to we look at our budget to target that as our guidepost of what we would like to achieve for the full fiscal year of 2016. And we will be going through that process over the next several weeks and we will update you on that when we give guidance for Q2 at the end of the month in the Q1 earnings call.
Thank you. Our next question comes from Patrick Newton of Stifel. Your line is open.
All right, two more, if I may, just to dovetail off the last question. Just a different way to ask the OpEx question is so you are reiterating the leverage plan but you did put out a new target goal of 15% to 20% in any cycle, I think backing into your preannouncement you're right around 8% to 9% op margin in the current quarter. Should we think that that 15% low end through a cycle is at risk at all or are you pretty confident that you can operate the Company back to that target low end during this time of the year?
So we look at Q1, Q1 is historically have been the lowest operating margin quarter of the year and typically that -- we have seen an increase in Q2 and higher in Q3 than Q1 and certainly in Q4, that’s been a history. As we looked our planning for the rest of this year, we will be targeting in our re-budget process to execute against the leverage plan we laid out. And as we said early on we will be comfortable to giving an update on that intension as we release results at the end of the month.
Okay and then just a last one for me is we talked about the preannouncement from a competitor and one of the quotes is they said that changes in wireless and restrain test investments, especially given smartphone market saturation, what is impacting then. I'm curious if you agree with that statement. Earlier you said that there's a lack of visibility into Q2 but if there's a structural change in wireless could this be more of a challenge for a longer period than just a quarter or two?
Well, I think I would characterize maybe two different things. One, when we look at the semi-conductor companies we are talking about here, I think they saw a significantly reduction in the order volume for devices for a period of time, and that’s probably some adjustment and that’s well I think no one in the industry. When we look at our opportunity especially when we look at our opportunity in RF and wireless in general, we see the RF test market as a very broad multi-billion dollar market. Certainly the wireless device test is an interesting space where we have been very successful in pushing high-volume production tests and that will continue to be an area where the device manufacturers themselves and the component suppliers will be very focused on lowering their cost and that tends to be where we drive the greatest amount of value for our customers. So we will be playing that advantage very hard as we move forward. And then in the broader overall RF test market, we see a significant amount of opportunity for us to grow on scale overtime. So we view that as a definite growth opportunity as we look forward.
Thank you. At this time I would like to turn the call back over to Mr. Davern for any closing statements.
Thank you very much for joining us today. And we appreciate your time and we look forward to talking to again on April 28th. Thank you.
Thank you, sir. And thank you ladies and gentlemen for your participation. That does conclude National Instrument's Q1 2016 preliminary announcement call. You may disconnect your lines at this time. Have a wonderful day.
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