National Instruments (NATI) Q1 2016 Results - Earnings Call Transcript

| About: National Instruments (NATI)

National Instruments Corp. (NASDAQ:NATI)

Q1 2016 Earnings Call

April 28, 2016 5:00 pm ET

Executives

David G. Hugley - Secretary, Vice President & General Counsel

James J. Truchard - President, CEO, and Cofounder

Alexander M. Davern - COO, CFO & Executive Vice President

John M. Graff - Vice President-Corporate Marketing

Analysts

Ben Hearnsberger - Stephens, Inc.

Patrick Newton - Stifel, Nicolaus & Co., Inc.

Operator

Good day, everyone, and welcome to the National Instruments First Quarter 2016 Earnings Conference Call. Today's call is being recorded. You may refer to your press packets for the replay dial-in number and passcode.

With us today are David Hugley, Vice President and General Counsel, Alec Davern, COO and CFO; Dr. James Truchard, Co-founder and CEO; and John Graff, Vice President of Marketing.

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

David G. Hugley - Secretary, Vice President & General Counsel

Good afternoon. During the course of this conference call, we shall make forward-looking statements, including statements regarding gaining market share, commitment to our leverage plan, our guidance for revenue and earnings per share for second quarter of 2016, and positioning NI to become the leader in test and measurement. 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 Annual Report on Form 10-K filed February 19, 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 Truchard.

James J. Truchard - President, CEO, and Cofounder

Thank you, David. Good afternoon and thank you for joining us. Our key points for Q1 are; core revenue growth, growth in orders for PXI and modular instrumentation, and the expanded market share.

In Q1, we saw continued core revenue growth despite the decline in global PMI and the slowdown in the wireless supply chain. I remain confident in our business model and our ability to drive long-term success for NI and our shareholders.

The depth of our software position and strength of our ecosystem that allowed us to continued to grow market share in the test and measurement markets. Being able to measure or generate almost any signal and provide control with the same platform gives us a unique position to foster the ecosystem required to address the challenges of the convergence of technology and applications such as industrial, IoT, smart mobile devices and the connected car.

In our call today, Alec Davern, our Chief Operating Officer, will review our financial results, John Graff, our Vice President of Marketing, will discuss our business, and I will close with a few comments before we open up for your questions. Alec?

Alexander M. Davern - COO, CFO & Executive Vice President

Good afternoon and thank you for joining us today. Today, we reported Q1 revenue of $287 million, down 1% from Q1 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 3.4% year-over-year in Q1. As a reminder, a reconciliation of our GAAP and core revenue is included in our earnings press release.

Deferred revenue increased by $4 million in Q1. Non-GAAP gross margin in Q1 was 75%, flat with Q1 last year. Total non-GAAP operating expenses were $190 million, up 2% year-over-year, and our non-GAAP operating margin was 9% compared to 11% in Q1 2015.

While our results for Q1 were below our expectations due to currency exchange fluctuations and weak PMI and weakness in the wireless supply chain, I believe that we continue to gain market share and are positioning NI to become the leader in test and measurement.

For Q1, net income was $9 million, with fully diluted earnings per share of $0.07. Non-GAAP net income for Q1 was $20 million, with non-GAAP fully diluted earnings per share of $0.16. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

Now taking a look at order trends. For Q1, the value of our total orders was down 1% year-over-year. Included in that total is $6 million in orders received from our largest customer compared to $3 million in Q1 of 2015.

Now breaking down our order values, excluding our largest customer. We saw a 2% year-over-year decline in our orders with a value below $20,000, in line with the weakening PMI and a declining PC market. On the systems side, orders with a value of between $20,000 and $100,000 were up 2% year-over-year, and orders with a value over $100,000 decreased 2% year-over-year.

Now turning to cash management. During the quarter, we paid $26 million in dividends and used $4.6 million to repurchase 171,000 shares of NI's common stock at an average price of $27.18 per share. We ended the quarter with cash and short-term investments of $329 million at March 31.

Now, I'd like to make some forward-looking statements. Given the current trends, we are assuming in our guidance that the global PMI will continue to be weak in Q2. And as a result, we're guiding for total revenue in Q2 to be in the range of $287 million to $323 million. Included in our Q2 guidance is an expectation of between $10 million and $15 million in revenue from our largest customer.

We currently expect GAAP fully diluted earnings per share will be in the range of $0.08 to $0.24 for Q1, with non-GAAP fully diluted earnings per share expected to be in the range of $0.16 to $0.32.

On other housekeeping items, we estimate that given current exchange rates the drag in our revenue from currency headwinds should reduce to a negative impact of approximately 3% year-over-year in Q2 and approximately 2% year-over-year in each of Q3 and Q4.

In summary, while Q1 was challenging due to a number of factors, including currency, weakness in the wireless supply chain and a weak PMI, we continue to execute well and we remain committed to the leverage plan we laid out at NIWeek last 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 overruns, manufacturing inefficiencies, adverse effect of price changes and effective tax rates.

I'd also like to mention that I'll be at the Baird Growth Conference in New York on June 9.

With that, I'll turn it over to John Graff, Vice President of Marketing.

John M. Graff - Vice President-Corporate Marketing

Thanks, Alec. In Q1, we continued to be impacted by the challenging economic environment, resulting in revenue performance below our expectations. Despite the strengthening of the dollar, the lowest PMI in three years and weakness in the wireless supply chain, our diverse platform and strong business model enabled us to deliver positive core revenue growth and continued growth in our market share.

Turning to product performance, sales of instrument control products, which are used to connect third-party box instruments to the PC, were down by double-digits year-over-year in Q1. These products have historically been closely correlated to the movement in the global PMI and the worldwide PC market, both of which were weak in Q1.

For data acquisition products, revenue was slightly negative, primarily due to foreign exchange. While most of the data acquisition product portfolio serves a broad base of customers and is closely tied with the PMI and PC trends, we saw revenue growth in key areas to offset some of these effects, namely from system level data acquisition products.

Both PXI and CompactDAQ hardware platforms combine measurement modules with processing and network connectivity that customers in transportation, aerospace and consumer electronics use to prototype and characterize complex designs.

For example, a leading automotive manufacturer standardized on NI PXI data acquisition and software for testing a new infotainment system design, creating and sending real world signals like battery, voice and GPS in their new design. Rather than driving around with the infotainment system installed in a vehicle, the engineering team used NI products to produce and measure signals in a lab to quickly test a wide range of scenarios. With these prototyping systems, engineering teams can quickly iterate on designs, build better products and get to production faster.

For PXI and modular instrumentation products, we saw a year-over-year revenue growth and continued broad adoption of our platform in Q1. As the market shifts from rack and stack to modular systems, we believe we are in a unique position driven by having the largest PXI product portfolio in the industry, a differentiated software position for creating modular systems, a focused sales and support channel that provides significant value to our customers and a strong network of integration partners.

Our growth has been built on the success of our ecosystem comprised of hundreds of thousands of engineers and scientists proficient with NI hardware and software.

Moving to sales of our RF products, we saw a marked slowdown in three major semiconductor accounts with close ties to the wireless supply chain. This weakness resulted in a lower performance in Q1 than we had expected and adversely impacted our RF product sales. That being said, we saw strong adoption of the vector signal transceiver in more broad-based RF applications.

This PXI-based instrument combines the powerful FPGA with high performance RF measurement and generation to serve a wide range of wireless applications. One example comes from the wireless research group at NTT DOCOMO that is using the vector signal transceiver to pro-type a component of 5G technology to enable more users and higher bandwidth.

Takehiro Nakamura of NTT DOCOMO said, "We are in a position to lead the research and elemental technology using NOMA and high frequency. By adopting the VST based 5G wireless rapid prototyping test system, we expect to demonstrate the performance and capabilities of NOMA and higher frequencies early".

Essentially the VST and the NI platform enables our customers and partners to design and build prototypes faster than building a custom design. In fact, in a recent EE Times article, editor, Junko Yoshida said, "The complexity associated with the development of 5G and its prototypes has made NI software-defined radio platform an indispensable tool for both academic researchers and the telecom equipment vendors involved in 5G innovation. NI has now put itself in the unique position in the 5G community".

This sentiment has been validated at recent events like Mobile World Congress in Barcelona and the 5G Summit in Brooklyn, where NI customers like Nokia and Intel have demonstrated the power of our modular approach.

Additionally, our software-defined radio products, also focused RF prototyping, saw considerable year-over-year revenue growth in Q1. We believe the same combination of RF measurements with powerful open FPGA and system design software solidifies our lead in prototyping in advance research for next generation communications technology and positions us well as these technologies evolve and go mainstream.

Sales of CompactRIO and other embedded products showed signs of stabilizing. While these products continue to be adversely impacted by reduced spending in oil and gas exploration, we saw growth in new high performance CompactRIO systems in advanced manufacturing applications that help offset this decline. At the Embedded World Technical Conference in Nuremberg, we highlighted how the NI platform is ideally suited to take advantage of ubiquitous connectivity and add to analytics that are needed for the industrial Internet of Things.

The smarter hyper-connected world requires devices and infrastructure to outfit manufacturing machines, transportation systems and the electrical grid with embedded sensing, processing, control, and analysis capabilities. Combining the latest in FPGA and application processor technology with NI software enables our customers to integrate more sensing, more analysis and more control into these industrial Internet of Things systems without having to build a system from scratch. This higher level starting point multiplies the productivity of these design teams and helps bring the industrial IoT to life faster.

For software, we saw revenue growth in the enterprise agreements targeted at large user accounts. One example of the efficiency from site-wide software adoption comes from ABB, a global leader in power and automation technologies. With test facilities around the world producing millions of data points, ABB engineers were spending large amounts of time on low-return tests, like locally managing data sets or running duplicate tests.

With access to software and training through the enterprise agreement, engineers proficient with NI software tools could easily access structured data from any site and avoid wasting efforts on redundant tests.

In summary, we felt the impacts of a challenging economic environment in Q1 and still managed to deliver positive core revenue growth. Our platform-based approach provides our users with a foundation of software and hardware to solve their challenges as they test, measure and control complex systems in a smarter connected world.

Finally, I would like to mention that I will be at the Oppenheimer Industrial Conference in New York on May, 11, the Stephens Roadshow on May 12 in Boston, and that we will be hosting our Investor Day at NIWeek in Austin, Texas on August 2. You can find more information on our investor relations page at ni.com.

With that, I will turn it back over to Dr. T for some closing statements.

James J. Truchard - President, CEO, and Cofounder

Thank you, John. Although Q1 proved to be more challenging than we expected, I believe we took market share from our competition as we continued to outperform them. As I have said many times before, NI is a company built to last and I am confident that we have the platform and the people to drive long-term success for NI and our stakeholders.

Over the last four decades, we have heavily invested in our platform of modular hardware and system design software to enable our customers and partners to solve thousands of engineering challenges and yield many scientific discoveries. From understanding about the beginnings of our universe, meeting the production to demands of IoT and prototyping next generation wireless communications systems, these challenges push the limits of measurement, analysis and control.

With the abstraction afforded by LabVIEW and NI platforms, we have leveraged billions of dollars invested in technology trends like Moore's Law and Internet of Things to increase performance, drive down cost of prototyping and tests and help our users push the limits of their unique boundaries.

We believe this platform based approach is ideal for innovating on cutting edge designs. As the problems become less defined, the design tools must be more flexible, and 5G in particular represents one of the most complex design problems today. 5G promises higher bandwidth, lower latency and more coverage to connect people, and thanks to data processing and decision making, to fulfill the demands of the connected world ever linked in the wireless communication chain must be optimized.

Researchers from industry and academia are raising the prototype and iterate on designs for new modulation schemes, parallel data transmission, beam forming and dynamic spectrum allocation to fulfill the vision of 5G communication. By using NI software defined hardware, researchers at Nokia have been able to demonstrate new capabilities like achieving more than 10 gigabits data rates over the air. Flexible software design tools and extensive modular hardware portfolio help ensure that users like the team at Nokia can bring theoretical designs and models to real life implementation faster.

I want to remind you that NIWeek is coming up. This August, we will be highlighting how the convergence of technology across communication, transportation and manufacturing will disrupt in test, measurement and control applications. We will also unveil new products that we believe will give us the opportunities to further demonstrate the advantages of our platform.

I would also like to thank our employees for maintaining our focus on growth and profitability by helping to bring new technology to the NI platform, our employees are core to ensuring our ecosystem continues to grow and thrive.

Throughout our history our company and platform has weathered many economic and currency cycles while remaining committed to our 100-year plan. As we look to future, we remain committed to strengthening our platform and our unique position within our industry, ensuring that we solve the hardest challenges in the engineering and science, create rewarding carriers for employees and provide value to our shareholders.

Before we answer questions, I would like to mention that I will be in San Francisco for the Bank of America Merrill Lynch Conference on June 2 and the Stifle Conference on June 6. Thank you. We will now take your questions.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Ben Hearnsberger of Stephens Incorporated. Your line is now open. Please go ahead.

Ben Hearnsberger - Stephens, Inc.

Hey. Thanks for taking my question. I had a question on your semi customers. Clearly, the spigot turned off in 1Q, but what you're hearing from those customers on how the rest of the year should play out?

Alexander M. Davern - COO, CFO & Executive Vice President

Hey, Ben. It's Alec. Thanks for the question. As we said on the call, on the 4 of April, we saw in general some good broad-based performance in the non-wireless supply chain part of the semi market. In the wireless supply chain, we noted three customers in particular where orders were down 90% year-over-year and had a big impact on us on the Americas. When we looked at that at the time, and I think our view continues to be the same, we don't anticipate a snapback here in Q2. Q3 and Q4 remains to be seen, but our expectation at this point is one of caution with those particular customers.

Ben Hearnsberger - Stephens, Inc.

Okay. And then, looking at your EBIT margins in the first half of the year, they're down – or looking at your kind of 2Q implied EBIT margin combined with what you did in 1Q, you're down on a year-over-year basis on some slight revenue growth. If you guys are flat on the top line for the year, would you expect to be able to grow margins this year or should we expect this higher run-rate of expenses to continue?

Alexander M. Davern - COO, CFO & Executive Vice President

Well, obviously, in response to some of the setback we saw in the first quarter and I think it's pretty broadly telegraphed at this point whether it's durable goods orders or the PMI or GDP data that there was definitely a slowdown in the industrial economy in the U.S., in particular in Q1. We have to and have reassessed our expectations for the year and have gone through a process to revise our spending plans and our head count plans for the year.

So at this point, we're continuing to target the leverage plan we laid out at NIWeek last year. And to answer your specific question, the implication of that leverage plan is with zero revenue growth, we would have zero expense growth, and EBIT margins would be relatively flat. That's the implication of that plan.

Now, it's a plan that's relative to revenue. We're obviously going to push hard to try to drive some revenue growth this year. It will be impacted by what we see in terms of the broader macro in the second half, but we're going to try to manage as close to that leverage plan as we can for the full year.

Ben Hearnsberger - Stephens, Inc.

Thank you.

Alexander M. Davern - COO, CFO & Executive Vice President

Thank you, Ben.

Operator

Thank you. Our next question comes from the line of Patrick Newton of Stifel. Your line is now open. Please go ahead.

Patrick Newton - Stifel, Nicolaus & Co., Inc.

Hi, good afternoon, Dr. T, Alec and John. I guess multiple housekeeping questions. Can I get your employee head count exiting the quarter, average order size and expectation of the full year tax rate?

Alexander M. Davern - COO, CFO & Executive Vice President

Sure, Patrick. The employee head count was 7,450 at the end of March, flat sequentially. And looking out for the rest of the year, our intent at this point, Patrick, is to finish the year out with head count flat to perhaps very slightly down. So that's our intent at this point. Average order size was $5,030. That's up about 2% year-over-year. And then our expectation for the tax rate remains 20% for the full year. There might be a little bit of variability that that might be a little higher in Q2, a little lower in Q3. So there might be some timing issues with that, but for the full year we're continuing to target 20%

Patrick Newton - Stifel, Nicolaus & Co., Inc.

Great. And then I guess on the guidance front, if we look at the constant currency guidance, it looks like you're pointing to 4% core growth at the midpoint in the June quarter. Given your commentary on PMI, and just as you sit here today, do you think that core growth rate accelerates or decelerates or remains relatively flat through the remainder of the calendar year?

Alexander M. Davern - COO, CFO & Executive Vice President

Given that we just missed our first quarter in 4.5 years or so, I'm a little reluctant to go too far out into the second half. But what we see right now, we believe everything we know at this stage is built into our guidance for Q2 and be very happy to kind of update our views on the second half when we get to the investor conference at NIWeek in August.

Patrick Newton - Stifel, Nicolaus & Co., Inc.

It was worth of try. I guess, longer term, I think it's very clear, especially exiting Mobile World Congress, that National Instruments is very well positioned in 5G, whether it was demonstrations that were done by the likes of Nokia, Ericsson, et cetera. Can you help us understand a timeframe perspective of when 5G revenue could become material, which I guess I would characterize as being call it 10% or more of revenue to National Instruments' P&L?

I think broadly speaking, deployments are being discussed is 2020 or beyond, which means test could be maybe 2018. But is there a window of a year where you say, hey, that's a pretty realistic timeframe for 5G to matter?

Alexander M. Davern - COO, CFO & Executive Vice President

Patrick, thanks. So, maybe I'll ask Dr. T and John to comment. I think we would probably take it in the context. Where we won't comment on when it would be 10% of revenue, but let us give you our thoughts on our position and how the market might evolve.

John M. Graff - Vice President-Corporate Marketing

Yes, Patrick, this is John. I'll start and let Dr. T add on to it. A lot of the commentary you see from industry leaders at the events you mentioned, historically, as reference to 2020, 2022 timeframe, of late there's been talk of some early deployments coming into 2018 timeframe. For us, we see it as significant that really for the first time in the evolution of lots of wireless technologies instead of being a fast follower, we're now at the table, we're playing a role in these advanced research efforts and these leading researchers and academia and in the industry are building prototypes on our platform. So, obviously, that positions us extremely well as they move towards production and the test systems that will follow.

I think another key point I'll add before I turn over to Dr. T is that the ability for us to play a role and a leadership role in 5G today speaks highly to the ability of our platform to test today's wireless technologies. So a lot the coverage and exposure we're getting helps reinforce the ability of our modular hardware and software to serve the growing number of smart, connected and wireless devices. So we see it as something that's helping us through our RF and communications business today.

James J. Truchard - President, CEO, and Cofounder

As John mentioned, we are building a reputation that's based on this area of 5G research and prototyping has really helped us develop technology that will position us well as we go forward. As far as the timelines, obviously, we hear a lot of different numbers sometimes as early 2018 and on to 2022. What we are finding that there are folks trying to be aggressive in this space. There are a lot of ideas being put forward. Obviously, there's a veracious need for more data rate and we're seeing the various vendors really work to try to serve that important need.

Patrick Newton - Stifel, Nicolaus & Co., Inc.

Great. I appreciate the details. And just last one, if I may, is, Alex, if you could talk a little bit about how we should think about the order potential or growth potential of your largest customer this calendar year? You've had some competitors that are targeting the same customers talk about order – I am sorry test reuse and perhaps lack of orders. And I'm curious if you're seeing the same thing or do you still believe that – I mean not to put words in your mouth, but could this end up being a growth year?

Alexander M. Davern - COO, CFO & Executive Vice President

Well, so far, I mean if you look at the midpoint of the guidance that I gave for revenue for our largest customer in Q2, it puts us up a little bit more than 50% year-over-year for the first half of the year with this customer. So, we believe we're very well positioned. Obviously, the notion of reuse, offer of greater operability, is at the heart of the value we brought to this customer all along. So that's been a core part of our strategy is to promote that. We view that as a significant competitive advantage for National Instruments in a way that we can bring very significant value to that customer. So that's together with significantly improved test times through parallelization and other techniques have allowed us to build the reputation and the brand, but with this customer and throughout the space, it has had the impact obviously of shrinking this market quite considerably, but National Instruments has the strategy where we bring lots of value to our customers. And that's one of our advantages that we bring to the customers in a market like this. And I think we feel very, I guess, good about the strength of our relationship with our largest customer in this timeframe.

Patrick Newton - Stifel, Nicolaus & Co., Inc.

Great. Thanks for taking my questions. Good luck.

Alexander M. Davern - COO, CFO & Executive Vice President

Thank you, Patrick.

Operator

Thank you. And I am showing no further questions at this time. I would now like to turn the call over to Dr. James Truchard for closing remarks.

James J. Truchard - President, CEO, and Cofounder

Thank you for joining us. Once again, we look forward to seeing you at the various conferences we mentioned and also at our once again great NIWeek.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This conclude today's program. You may all disconnect. Everyone, have a great day.

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