National Instruments Corporation (NASDAQ:NATI) Q1 2019 Earnings Conference Call April 30, 2019 5:00 PM ET
Marissa Vidaurri – Head of Investor Relations
Alex Davern – Chief Executive Officer
Eric Starkloff – President and Chief Operating Officer
Karen Rapp – Chief Financial Officer
Conference Call Participants
John Marchetti – Stifel
Richard Eastman – Baird
Vijay Bhagavath – Deutsche Bank
Good day ladies and gentlemen, and thank you for standing by. Welcome to National Instruments First Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Now it’s my pleasure to turn the call to Marissa Vidaurri, Head of Investor Relations.
Good afternoon. Thank you for joining our Q1 2019 earnings call. Speakers today are Alex Davern, Chief Executive Officer; Eric Starkloff, President and Chief Operating Officer; and Karen Rapp, Chief Financial Officer. We will start with an update on our business and then take your questions.
During the course of this conference call, we shall make forward-looking statements including statements regarding future growth and profitability, our focus, plans, vision and strategic directions, our customers continuing to innovate, our cash deployment and our guidance for revenue and EPS for Q2.
We wish to caution you that such statements are just predictions and that actual events or results may differ materially and could be negatively affected by numerous factors, including any weakness in global economies, fluctuations in revenue from our large customers, foreign exchange fluctuations, expense overruns, manufacturing inefficiencies, adverse effect of price changes and effective tax rate.
We refer you to the documents the company files regularly with the Securities and Exchange Commission, including the company’s annual report on Form 10-K filed on February 21, 2019. 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 Chief Executive Officer, Alex Davern.
Thank you, Marissa. Good afternoon, everyone and thank you for joining our first quarter conference call. Key financial updates from today are, revenue of $311 million with backlog up $10 million in Q1. Record non-GAAP net income for first quarter up 21% year-over-year, and we repurchased approximately one million shares of common stock at an average price of approximately $45 per share.
I’m proud of our team’s execution in the first quarter despite a weakened industrial economy, especially in Europe. Orders were slightly ahead of our expectations in Q1, but revenue came in below the midpoint of guidance. Backlog increased by $10 million as a result of the timing and mix of orders in Q1. Despite the shortfall in revenue, we achieved the midpoint of our earnings guidance as a result of strong gross margins and the ability to scale our operating expenses.
In Q1 2019, the value of the company’s total orders was up 1% year-over-year, with orders over $20,000 being up 6% year-over-year as we saw continued growth in our system-level business. And orders under $20,000 were down 6% year-over-year, in line with the weakening global PMI and the stronger dollar. Combined the impact of foreign exchange changes and the impact of the changed software revenue-recognition standard, reduced our comparable orders by $12 million year-over-year or 4%.
We’re cautious about revenue growth in the first half of 2019, given the currency and macro concerns, we expect improved conditions in the second half as we left these headwinds, and we expect to see the benefit of early 5G millimeter wave demand. In Q1, we delivered record non-GAAP net income for our first quarter. We’ve been very disciplined in our execution over the last two years. In Q1, non-GAAP net income was up 21% year-over-year and up almost 80% compared to Q1 2017.
In Q1 2017 – sorry, excuse me in 2017 and in 2018, we achieved our financial goals, delivering record revenue and significant operating leverage. Looking out to the rest of 2019, I believe we are well positioned to deliver record revenue and record non-GAAP net income again in 2019.
I’m excited by the the opportunity for NI in the long term, and I’m looking forward to seeing the full impact of the changes we have put in place.
During the last two years, we have established a new core strategic vision to be the leader in software-defined automated tests and automated measurement systems. We have realigned our R&D investments to drive innovation and to take advantage of the major disruptive trends in communications and automotive technology.
We have reoriented our sales team from a geographic focus to an account and applications focus to help facilitate our growth, and we have committed to delivering operating leverage.
While the full impact of these changes will take time to bear fruit, we are pleased to have navigated the recent short-term headwinds and still deliver record profitability in Q1.
To talk through the details of our performance and highlight the 25th anniversary of the industry’s leading user conference, NIWeek, I’d like to turn it over to Eric Starkloff, President and Chief Operating Officer.
Thank you, Alex, and good afternoon. Our core strategic vision continues to provide focus for our business and our employees, and it orients us around the value that we can deliver to our customers. Despite some recent economic headwinds, we know that our customers continue to innovate and our platform helps them stay ahead of their competition. I will now provide some context on our order growth in the quarter by region and by industry and provide a preview of our upcoming NIWeek conference.
In Q1, total orders were up 1% year-over-year in U.S. dollars after the impact from foreign exchange and software accounting that Alex mentioned. From a regional perspective, our EMEIA region was adversely impacted by a weakening PMI and a foreign exchange headwind contributing to orders being down 5% in U.S. dollars in Q1.
Our Americas region saw growth with orders up 3% year-over-year. The software accounting change reduced order growth in Americas by 5% in Q1. We believe the multiyear growth trajectory of our Americas region is attributed to our targeted investments in our sales team evolution and the deep relationships we are building directly with our customers in key accounts.
The APAC region reported orders up 4% year-over-year, and we’re pleased to see a rebound in China in Q1 after softness in Q4 2018.
Now turning to industry performance. In semiconductor, we continue to see strong double-digit year-over-year growth in orders, a proof point for our strategy to build system-level offerings targeted at focus growth industries. Our customers continue to adopt our semiconductor test offering across characterization, validation and production tests. We are seeing strong traction in the validation and production tests of sub-6 GHz 5G and working closely with strategic customers as they plan for the automated validation and production tests of millimeter wave 5G later this year.
In our transportation business, orders declined slightly year-over-year in Q1. The business was impacted by the overall softness of the automotive industry. While the overall production rate of automobiles weakened, our automotive customers continued to shift investment to new technology to stay ahead of their competition. Using the NI platform, customers are addressing fast-growing technologies such as electric and hybrid powertrains and autonomous vehicles, and we continue to see strong growth in these applications.
Our aerospace defense government orders grew low-single digits year-over-year in Q1. Our platform continues to add significant value to this industry, which benefits from our software-centric modular approach, as it helps these customers meet their needs for highly customized and long life-cycle systems. Much of our success in this industry is being driven by strong software adoption and growth of our RF and software-defined radio products.
With respect to our broad portfolio of customers in all other industries, which represents approximately half of our business, orders were down slightly year-over-year. Historically, this part of our business has been more affected by broad economic trends as represented in the industries such as the PMI. We do believe that stability in this broad set of customers demonstrates the broad applicability and impact of our continued product innovation.
For example, in the first quarter, we continued to see strong growth in the adoption of NI software with software seat growth up 13% year-over-year in Q1. This adoption was driven by the continued update of new LabVIEW capability as well as the new software products we’ve released over the past two years, such as our system-like – systems management software. Now I would like to share a preview of NIWeek 2019, the 25th anniversary of our annual user conference and the premier customer event in our industry.
Thousands of engineers and technology leaders will arrive in Austin next month to learn how to solve the challenges they face in bringing new technologies to market at an ever-increasing pace. At this year’s NIWeek keynotes, you will hear directly from leading semiconductor, automotive and aerospace companies about the business impact they are experiencing due to the adoption of our platform. We’ll also launch new products for 5G testing, electric vehicle validation, software for managing highly distributed test systems and will demonstrate how we are using artificial intelligence and data analytics to more effectively monitor critical industrial assets. NIWeek is the best forum to see firsthand how the NI platform enables some of the most impactful engineering applications and scientific advances.
In summary, we know the innovation from our customers must continue, and our platform is a critical component to their success. We remain confident in our vision and strategy and our ability to deliver record revenue and record profitability in 2019. Now I’d like to turn it over to Karen Rapp, our Chief Financial Officer, for the financial update.
Thank you, Eric. I’m pleased with our earnings performance in Q1. With NI’s increased scalability and culture of operational efficiency, we were able to deliver 21% year-over-year increase in non-GAAP net income on flat revenue. We believe our strong gross margins remain a testament to the value of our brand and the benefits our platform provides to our customers. In Q1, we returned almost $80 million to shareholders through dividends and stock buyback.
For Q1, revenue was $311 million with backlog up $10 million. Non-GAAP gross margin in Q1 was 78%. Our Q1 non-GAAP operating margin was 14%, up 170 basis points from a year ago. The company reported Q1 GAAP net income of $23 million or $0.17 per share, Q1 non-GAAP net income was $40 million and an increase of almost 80% over the last two years. Non-GAAP earnings per share were $0.30, up 20% year-over-year.
Now an update on our capital allocation strategy. Our cash balance remains strong at $480 million at the end of Q1. Our trailing 12 months cash flow from operations was $277 million, up 27% year-over-year and representing approximately 20% of revenue. During the first quarter, we paid $33 million in dividend and repurchased approximately 1 million shares of our outstanding common stock, returning approximately $80 million to our shareholders. The NI Board of Directors approved a dividend of $0.25 per share to shareholders of record on May 13, 2019.
Over the last 12 months, our dividends represent approximately 53% of free cash flow, which we believe underscores their sustainability. Through yesterday, our orders for April are up low-single digit year-over-year and our guidance assumes that our backlog will increase again in Q2 as we continue our strategy of growing more system sales.
For second quarter 2019, we remain cautious due to economic uncertainties. We currently expect total revenues to be in the range of $326 million to $356 million. We expect GAAP fully diluted earnings per share will be in the range of $0.16 to $0.30 for Q2 with non-GAAP fully diluted earnings per share expected to be in the range of $0.28 to $0.42.
At the midpoint of our guidance, non-GAAP net income will be up over 10% for the first half of 2019, ahead of the leverage plan we communicated at our Investor Conference last year. With the forward-looking statements, I must caution you that our actual revenues and earnings could be negatively affected by numerous factors.
In summary, in Q1, we delivered a 21% year-over-year increase in non-GAAP net income on flat revenue, thanks to our increased scalability and strong culture of operational efficiency. We remain committed to delivering long-term shareholder value and focused on the key industries, where we believe our platform is best suited to take advantage of major technology disruptions.
With that, I will now turn it over to Alex for some closing comments.
Thank you, Karen. We are confident in our strategy and our positioning NI for long-term growth. With record profitability and the strong balance sheet, we are well positioned to continue investment in our differentiated software-defined platform. I believe we have made great progress over the last two years, delivering innovative new products to drive value for our customers, improving results for our shareholders, securing new growth opportunities for our partners and creating outstanding career opportunities for our employees.
I’d like to thank our employees for their hard work and operational excellence as we continue our hard journey to be the leader in software-defined automated test and automated measurement systems. I welcome you to join us at NIWeek for our Investor Conference on May 21. We will now open up for your questions.
[Operator Instructions] And our first question is from John Marchetti with Stifel. Your line is open.
Hi, thanks very much. I wanted to go back to a comment that you made in, sort of, your earlier remarks about the expectation for your sort of improvement in the second half. And how much of that may be is tied to specific programs, whether it’s around 5G or something like that? And how much of that is maybe your expectation for either an improving your economic backdrop? Or if we should see sort of PMI improving here? Just trying to get a sense of how much of that is geared towards some specific verticals versus how much of that maybe is more sort of an expectation for a general economic improvement?
Very good question, John. It isa mix. Certainly, last couple of quarters, we’ve seen declining PMI, tougher certainly exchange rates situation and those I think will pass from a headwind point of view as we go into Q3 into Q4, that’s my expectation. We had a tough Q4 because of that and a relatively challenging Q1 despite having orders ahead of our expectations. So I think as we get later in the year that will become a benefit for us.
And then as we look from a specific vertical opportunity, we clearly see the investments that are being made in 5G, and we’re excited by the traction we’re gaining. Obviously, a lot of the early stage investments are being made at a stage of the engineering cycle where we don’t participate quite as much. But as these move – technologies move in a high-volume production tests, later in 2019 into 2020, we see an opportunity for optimism there.
And then maybe just as a follow-up to that, if you can just spend a moment on sort of your automotive group, that has been an area that obviously had been an area of strength for a number of quarters for you. Certainly, we all are aware of kind of what those headline unit numbers have been doing. But it seems like you were fairly disassociated for that for a while. Are we at a point maybe where customers have caught up a little bit? And now you’re a little bit more tied to end unit demand? Or is there something else there that we need to account for?
I think there’s – the whole automotive industry, as you well know John, is going through a real transition at this point in time. There’s been a very definite significant investment in electrification and also in the autonomy investments that are going on right now. We are seeing – as you see the headlines, a lot of the automotive companies are seeing a lot of profit pressure. And as a result, they are shifting spend from more of their legacy investments to try to fund the new technology investments.
We obviously participate quite significantly in some of those legacy areas. and so that transition is going to take a period of time until the growth, which we’re still seeing very strong growth in these new technology areas, is sufficient to offset that headwind. And some of the other things I point to when we look at some of the semiconductor bellwethers that are proximate to our market companies like TI, ADI, NXP. The impact that they are seeing in the timeframe, I think, it’s pretty aligned with some of the shorter-term challenges we’re seeing in that space.
And then maybe if I could just ask one last one and then I’ll jump out of the queue here. Is there a difference by geography in terms of how those order sizes skew? I’m just trying I guess to get a sense of, if certain geographies are a little bit more weighted towards your sub-$20,000 order size versus other geographies, maybe you’re seeing more on the 20% or greater side?
Yes. John, this is Eric. I mean, in general as you’ve seen across all the geographies, we had a shift that’s been happening over a number of years now towards the larger orders. That’s now approximately 60% of our business, and it continues to be a growth driver. It’s going faster than the rest of the business in every region. Now as we’ve said before, we tend to characterize the under $20,000 business as more impacted by the general economic indices. So if you look into Q1, the weakness in Europe, in particular, did affect that under $20,000 business, and so that broader base business more clearly based on the weakness in European economy, and you saw that really weak European PMI.
And just one last one, John. Just you look at that mix obviously from all-in-reporting number, orders over $20,000 were up 6%. But as Eric mentioned in his remarks, the change in software accounting last year, kind of created a bit of an artificial impact there. So that brought down the growth rate of our large orders as we reported to 6%, it would’ve been 3% higher on an apples-to-apples basis.
Got it, thanks very much.
And our next question is from Richard Eastman with Baird. Your line is open.
Yes, good afternoon. Thank you. Alex, just to follow up on the software accounting change. Did that impact the Americas business? And also, is that also what we’re seeing in the maintenance software revenue that declined sequentially? Because I guess what I’m looking at is the Americas business declined 16% quarter-to-quarter, typically it’s 1/2 that at best. And I’m curious, if the software accounting impacted that number or Americas – maybe the backlog applied to the Americas? Or if you follow me.
Yes. Part of it is [indiscernible]. So first of all, [indiscernible] the software accounting change impact was the highest in the Americas. And so that I get it, if you make apples-to-apples comparison in order growth, it was high-single digits in the Americas.
Okay, that’s a year-over-year number? Correct?
That’s – sorry, that’s a year-over-year number, that’s correct, over Q1, and it affects – as you said, it affected the Q1 software maintenance, a lot of that revenue gets recognized in that time, Rick, so those two things are connected.
Okay. So okay. So aside if we pull that out, again I’m kind of looking at the revenue by geography, and it would appear to me that EMEIA maybe came a little bit short of midpoint or just sat a plan and then also the Americas looked short. But most of the Americas shortfall might have been more related to this software accounting change then?
It’s a combination of the software and the backlog, both had affect on the order growth number.
Okay. Okay. And when you look at EMEIA, again, the weakness there, I guess, maybe you suggested it was more PMI-driven that’s what we saw the weakest number. Is there any particular market there? I mean did auto – for instance, automotive was that softer in EMEIA? Or any particular end market that you can point to versus the PMI?
Yes. So I’ll break it down in a couple of ways. So if we look, I think, it was about 3% impact in EMEIA from currency. And then Rick, you follow us for long time. So you know this really, really well. But PMI of 44% in Germany is definitely a troubling data point for our business. And certainly, that’s heavily automotive. I can’t put an exact number because the automotive supply chain Germany is so deep and pervasive but that is definitely a significant factor in that.
Yes, yes, okay. And then could I just ask like I think, Alex, you were mentioning kind of 5G business, when we get around production tests. It’s going to start to help us maybe later this year but certainly in 2020. I’m guessing some of the orders, the larger orders might have that kind of a shipping timing. And do we see that kind of 5G business – is that going to impact like the STS business and the semiconductor piece? Is that what we should look for that?
Just a short answer is all relevant, first of...
I may know your business reasonably well but there’s a lot of moving pieces here.
No problem. Just on the first point what we found those orders in the quarter are products the customer wants to take the delivery of in the quarter, so everything we’re talking about there is products the customer wants delivery of in Q1. In terms of orders for millimeter wave production tests that will deliver in Q4 and maybe next year, those aren’t accounted in the order volume at this point, Rick, just to be clear.
When we look forward definitely from a 5G point of view, it will have its most material impact on our semiconductor focused efforts. So STS is critical to that and that is a platform that we will be leveraging to ensure that we really take advantage of the investments we’re making in the millimeter wave technology. Eric mentioned earlier on in his comments about NIWeek. This will be a crucial launch and we’re more so excited to seeing you down NIWeek, you’ll see that in person. And if you’re able to hear from some of our large customers, how they intend to leverage our platform for 5G production test, I think that will be a very, very interesting and help to get context around it.
We’ll have a customer panel as part of the conference as well, so you’ll be able to ask questions directly as investors. The other point I want to make, results here in Q1, I’m really pleased to see the team deliver record profitability on flat revenue growth. And I think as we look out to the rest of the year, that should give investors confidence that we are really committed to delivering 80% non-GAAP operating profitability through the cycle. This is kind of the first test of that commitment and I think it’s a very good result.
And just – I just want to cycle back a bit. Your benefit on the 5G is around two things. One is around semi-chip test, around mixed signal or analog or – I mean are you going to play more on the RF chip-side test? Or is your – is NATI’s benefit is going to be more around handset production test? Can you separate the two?
A real focus is on the former. And then later down the cycle, we will certainly be participating, as we have for many years in the ecosystem for testing of all of the various elements and applications around the handset. And these [indiscernible] up front in that domain.
Yes. And then just one last one question and then I’ll get one to Karen here. Is – what was the FTE in the quarter? And what is the plan there for the full year?
Rick, we are relatively flat sequentially from a headcount perspective. You can expect us to stay at about that, down a little bit, continuing through the year.
Okay. Sequentially. Okay. All right, very good thank you.
[Operator Instructions] And our next question is from Vijay Bhagavath with Deutsche Bank. Your line is open.
Two questions. The first is on, you obviously mentioned about the industrial economic indices. I think my question is more in terms of as we head into the back half and into next year, are there any product cycles, specific catalysts that we need to track and monitor because the industrial and economic indices are what they are? And then I have a follow-on.
Yes. I’ll make a comment on that, Vijay. It’s Eric. Yes, and this is – I’ll put in another quick plug for NIWeek in the investor conference. That obviously, is a key launching platform for us for a set of new product initiatives. I gave some color on our preview on a few of those. Clearly, 5G is a big portion of that. And the ramping of 5G millimeter wave in the back half of the year, going into 2020, is a positive element.
Also as we see the shift in automotive that Alex talked about the shift from some of the existing automotive applications that we serve that is a part of our portfolio and the growth of the new elements of automotive where a lot of our customers are shifting their investments into ADAS and autonomy as well as into hybrids and EV vehicles, that’s becoming a bigger portion of our business and we will have product announcements around that area as well.
Yes, perfect. And then the quick follow-on would be – you do have meaningful revenue exposure in Europe and Asia. So my question there is are there any trends or catalysts that are fundamentally different in EMEIA/APAC versus the U.S., so that we get kind of a geographic contrast of once again what we need to monitor in terms of demand trends, U.S. and rest of world.
Yes. I think when we look at our business geographically, it’s very diversified, which is great strength. It’s is relatively uniform, geographically but it does have concentrations, for example, in Taiwan it’s heavy semiconductor. In Germany, it’s very heavy automotive. In Japan, it’s quite heavy automotive. And when you break down all the permutations, this is what we generally refer to things like the PMI [indiscernible] as a proxy for that particular geography’s industrial mix.
And certainly, the downward trend in Europe is quite different than what we’ve seen in the Americas and we’ve seen the performance in the Americas quite significantly better than we did in EMEIA in this particular quarter. So I retain a belief that the broad macro indicators remain valid for looking at our business as well as some of the other industrial semi-companies to really get an insight into the buying behavior of our customers. And then you have tropical changes, and certainly, 5G and the automotive disruptive technologies will be key counters to those traps.
Yes. Perfect. The final question would be for Karen. How should we think of OpEx as percentage of revenues through rest of the year?
Vijay, yes, we’ve been pretty strict with our operating model and our goal is to stay true to what we’ve presented at NIWeek last year. So as we model out revenue growth or as you make assumptions on revenue growth, please refer back to that model and then we’ll be providing more context and color on that in May again at NIWeek. But it’s still our expectation, Alex talked about maintaining the 18% of operating income through the cycle and that’s continuing to be our goal.
Okay, thanks all of you.
And I am not showing any further questions in the queue. I would like to turn the call to Alex Davern for his final remarks.
Thank you for joining us today. If you can’t make that Investor Conference in Austin on August – sorry, on May 21, I encourage you to dial in and listen to the live stream and join as over the web. Thank you.
And ladies and gentlemen, we thank you for participating in today’s conference. This concludes the program, and you may all disconnect. Have a wonderful day.