National Instruments Corporation (NATI) CEO Eric Starkloff on Q1 2021 Results - Earnings Call Transcript

National Instruments Corporation (NASDAQ:NATI) Q1 2021 Earnings Conference Call April 29, 2021 5:00 PM ET

Company Participants

Marissa Vidaurri - Head, Investor Relations

Eric Starkloff - President and Chief Executive Officer

Karen Rapp - Chief Financial Officer

Conference Call Participants

Joe Cardoso - JPMorgan

John Marchetti - Stifel

Mark Delaney - Goldman Sachs

Rob Mason - Baird

Operator

Good day and thank you for standing by. Welcome to the Q1 2021 National Instruments Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Marissa Vidaurri, Head of Investor Relations. Thank you. Please go ahead.

Marissa Vidaurri

Good afternoon. Thank you for joining our Q1 2021 earnings call. I’m joined today by Eric Starkloff, President and Chief Executive Officer; and Karen Rapp, Chief Financial Officer. We will start with an update on our performance in the first quarter before opening up for your questions.

Our discussion today will include forward-looking statements, including, without limitation, those regarding revenue, earnings, gross margin, operating expenses capital allocation, targets and future business outlook, including supply chain constraints, backlogs and the potential impact of COVID-19 on the company’s business and results of operations. We wish to caution you that such statements are just predictions and that actual events or results may differ materially and could be negatively impacted by numerous factors.

We refer you to the documents that the company files regularly with the Securities and Exchange Commission, including the company’s annual report on Form 10-K filed on February 23, 2021. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements. We assume no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations. A reconciliation of our non-GAAP financial measures disclosed in this call to the most directly comparable GAAP financial measures or related disclosures are contained in our press release and on ni.com/nati. Non-GAAP revenue is defined as GAAP revenue adjusted to exclude the impact of purchase price accounting.

NI management will be hosting meetings at the virtual conferences for Needham & JPMorgan in May, in addition to Baird, Bank of America and Stifel in June. Please visit ni.com/nati for presentation times. We look forward to speaking with you. And mark your calendars, our virtual investor conference is confirmed for Tuesday, August 17.

With that, I will now turn the call over to Chief Executive Officer, Eric Starkloff.

Eric Starkloff

Thanks, Marissa. I really appreciate everyone joining us today. So first, I’m going to discuss progress to our multiyear goals and strategy and provide some color on Q1 results before I hand it over to Karen to dive into the financials. We saw strong momentum in Q1 with numerous highlights across the business. Chief among them were very strong order growth at 19% year-over-year and all-time record orders for first quarter.

Strong momentum in the key applications of focus, validating our long-term strategy, and software is currently up to 22% of our total revenue. Q1 revenue was a record for the first quarter, up 8% year-over-year. Due to broad supply chain constraints across our industry, not all orders were shipped within the quarter, resulting in an increase in backlog. Going forward, we expect this to continue to cause a shift in the timing of our revenue recognition, so we remain confident in our ability to ultimately shift that backlog and optimistic in the continued momentum in our business.

Software is in our DNA, and it’s the driving force behind our growth strategy. As the complexity of our customers’ products continues to grow and scale, many of the manual steps need to be automated by intelligent systems, and software will be critical to their success. I believe we are in the best position to lead a disruptive change in our industry around software and data. And we are prioritizing our investments to achieve this. Our intent is to increase our software revenue to 30% or more of our total revenue by 2025, shifting towards primarily recurring or subscription-based software.

In Q1, software and related services revenue grew to 22% of our total revenue. Another critical component of our strategy is achieving efficiency in our broad-based business in order to allocate resources to higher growth opportunities. At our investor conference last August, we shared a tiered view of our account structure. The top two tiers combined include approximately 2,500 accounts referred to as our focus accounts, which include our customers with highest potential, where we’re looking to most significantly expand our system-level offerings and increase our share of wallet. These customers represented approximately 70% of total Q1 orders. The third tier, which we refer to as our broad-based business, includes over 30,000 accounts where scale and leverage can be achieved through e-commerce and global distribution. These customers represented approximately 30% of our Q1 orders.

Now turning to our results by industry, our newly combined semiconductor and electronics business reported mid-double-digit year-over-year order growth in Q1 and achieved all-time record quarterly orders for semi electronics combined. 5G strength and the China ecosystem continued to fuel growth particularly through increased adoption of our RF test capability for 5G, including production tests and lab wins at key semiconductor accounts. In addition, the leverage of optimal plus technology as the underlying platform for our new connected life cycle and analytics solution allows us to focus on supporting the needs of our customers throughout their product development flow using software to drive predictive data insights.

We believe we are highly differentiated in this capability. With 5G introducing significant challenges of multi-vendor RF front end and other chipsets interacting with one another, there’s an increased need for more open and flexible approaches to both design and test. Last month, and I joined the open RF consortium, an organization dedicated to creating a 5G ecosystem of functionally interoperable hardware and software. Furthermore, this month, we joined the ATIS Next G Alliance as a founding member. This organization will seek to advance North American mobile technology leadership in 6G over the next decade. We’re honored to have our own Ritu Favre play a leadership role in both of these organizations.

Our transportation business continued to benefit from the recovery in vehicle production, with orders up double digits year-over-year in Q1 and up sequentially again from Q4. And this was an all-time record quarter for transportation orders, showing strong growth after 2 years of challenging headwinds. We believe the continued recovery in vehicle production will fuel increased investment and the key trends of electrification and active safety systems, where we continue to see particularly strong growth. In Q1, we released new software capabilities and expanded instrumentation for our electronics control unit test system, which can accelerate both development and test time by up to 40% over traditional end-of-line testers. And we’re pleased with early customer response in an environment of rising demand in this space.

Order growth remained steady in aerospace, defense and government, up mid-single digits year-over-year in Q1. This has continued to be a solid, growing business over multiple years. It’s a testament to our ability to accelerate system-level value for these customers. In this space, software, services and support are critical sources of differentiation to the customer. Once a government contract, for example, is one, there’s long-term value in hardware and software life cycle support that we are well suited to provide, representing a steady stream of revenue into the future. And we continue to see momentum in so-called new space applications at companies including Virgin Orbit, Blue Origin and many others. This new era of exploration is highly innovative and moving very fast, and it benefits from our software-based approach.

Our portfolio business grew orders double digits year-over-year in the first quarter. This represents the second consecutive quarter of order growth for this business, aligned with our expectations to see a strengthening in our broad-based business, along with an improving economic environment. We believe that in addition to the stronger economy, this improvement is also a result of our strategic investments to enhance our e-commerce channel and ramp our global distribution to increase our reach to broad-based customers. I continue to be optimistic about the long-term growth opportunities for our portfolio business as we hone our focus on the common needs of this customer segment. In the short-term, we’re focused on not only taking advantage of the recent macro recovery, but also proactively increasing demand by improving how we position, package, price and promote our current offerings. We’ve made organizational changes to support these efforts, and our team continues to refine our medium and long-term growth opportunities to increase focus on the value of our software and system standardization. Our execution remains strong and growth a priority on our journey towards our 2023 financial model. We are committed to these goals with a strategic focus and a passion for success.

With that, I’ll turn over the call to our Chief Financial Officer, Karen Rapp, before I close with a few comments.

Karen Rapp

Thanks, Eric, and thanks, everyone, for joining us today. It was an exciting quarter. We continue to see strong momentum in the first quarter with GAAP revenue of $335 million, up 8% year-over-year and a record for a first quarter. Non-GAAP revenue was up 9% year-over-year. The industry-wide supply constraints were slightly more of a headwind than we expected, causing us to end the quarter with revenue just below the midpoint of our guidance. As Eric mentioned, this is a timing issue as the demand was even stronger-than-expected across the business.

In the first quarter, customer demand was higher than our typical seasonality, with record orders for our first quarter, up 19% year-over-year, following a strong Q4. We believe this demonstrates the success of our strategy to provide higher-level solutions for our customers through systems and software. We’ve historically broken out our order growth above and below $20,000. As we transition to distribution, this split is no longer meaningful as many distributors consolidate their orders to us. Going forward, we will use the customer tiering lens, referenced by Eric, to share color into our business.

A historic trend of our orders using this lens will be posted to ni.com/nati. For Q1 orders, for our broad-based business were up 14% year-over-year, led by success in our digital channel and global distribution initiatives, while also benefiting from the continued macro recovery. Our focus accounts continue to see strength with orders up 21% year-over-year as we continue to better align resources to high-growth opportunities. Positive year-over-year order growth was reported across all regions in the first quarter. In the Americas, orders were up 8% year-over-year. Orders in EMEA were up 2% year-over-year, and orders in APAC were up 51% year-over-year. The strength in APAC was evident across the region as our local sales team continues to pivot to new opportunities and create new customer relationships.

Non-GAAP gross margin in Q1 was 75.3%. We continue to see about 70 basis points of impact from additional costs related to COVID. That began in Q2 of last year, and we expect those costs to continue through 2021. Services has been an accretive growth area for us, and we will continue to focus on monetizing the services and expertise we provide to drive high-value system sales. Our intent is to maintain our gross margins, demonstrating the value customers place on the high level of software in our offerings. We reported Q1 GAAP net income of $4.5 million and diluted earnings per share of $0.03. Q1 non-GAAP net income was $42 million and diluted non-GAAP earnings per share was $0.32, just above the midpoint of our guidance and an increase of 23% year-over-year.

Our balance sheet remains strong. We ended the quarter with $299 million in cash and short-term investments. For Q1, our cash flow from operations was $30 million, representing 9% of revenue even in a supply-constrained environment. We continue with a balanced approach to capital allocation with priorities clear and unchanged. We plan to continue to invest in innovation and technology to disrupt our space through systems and enterprise software. Dividends remain a priority. In Q1, we paid $36 million in dividends. The NI Board of Directors approved a dividend of $0.27 per share payable on June 1, 2021, to stockholders of record on May 10, 2021.

We view our strong cash position as not only a way to provide returns for our shareholders through dividends and opportunistic share repurchase, but also for inorganic investments for long-term growth. Our M&A funnel is focused on opportunities aligned to our strategy where we can leverage additional technology across the business and acquire industry-specific technology or expertise, both serving as strategic accelerators to help us achieve our 2023 financial model faster. We’re pleased with the efficiency and progress of the OptimalPlus integration. The acquisition continues to accelerate our opportunity in enterprise-level product analytic, and it’s the foundation to building out the rest of our platform.

Now shifting to guidance for Q2 2021, we are encouraged by the strength in demand as we begin the second quarter. For the second quarter of 2021, we currently expect GAAP revenue to be in the range of $304 million to $334 million. We expect total non-GAAP revenue, which adjusts for the impact of purchase price accounting to be in the range of $305 million to $335 million. At the midpoint, this represents 6% year-over-year revenue growth versus Q2 2020. Similar to Q1, we expect our customer demand to exceed our revenue guidance. Due to supply chain constraints, we expect to grow backlog in the range of $40 million to $50 million in Q2.

We estimate our order growth to be in the range of 20% to 25% year-over-year in Q2 and continuing the momentum from Q1. We expect Q2 GAAP and non-GAAP operating expenses to be approximately the same percent of revenue as Q1. We expect GAAP diluted earnings per share will be in the range of minus $0.02 to $0.12 for Q2, with non-GAAP diluted earnings per share expected to be in the range of $0.21 to $0.35. Our strong results this quarter are a testament to the hard work and adaptability of all our employees globally. I believe this is also indicative of the stability provided by our broad customer base and industry diversity, the value customers see in our innovative platform, in the strength of our operational efficiency.

As we look forward, we remain committed to our long-term financial model targets and believe our goal of delivering a compound annual growth rate of 9% revenue growth with 20% operating margin by 2023 is achievable. We will continue to align resources to what we believe are higher growth opportunities, while working to reduce costs in pursuit of our long-term financial model. And we believe our strong balance sheet puts us in a position of strength to capitalize on inorganic investments to help accelerate growth.

Now I’d like to turn the call back over to Eric for some closing comments.

Eric Starkloff

Thanks, Karen. We remain confident in our ability to accelerate growth through continued execution of our strategy and meeting or exceeding our long-term financial model. Strength in orders across the business reinforces that our focus is sound, and our technology remains critical to customer success. Our focus has been to transform our business for scale and to reach our full potential in the market. Innovation continues to be a top priority, with R&D investments aligned to expanding our systems and enterprise software capabilities. Last year, though challenging, provided us an opportunity to innovate in the ways we interact with our customers.

This year, we’ll build upon our digital-first strategy with NI Connect, a virtual event, providing high-quality targeted content with an engaging online experience to serve all of our customers and to attract new ones. This event is scheduled for July 2021 and will replace our usual in-person user conference, NIWeek this year. The pandemic also proved our ability to remain highly productive in a remote working environment. Included in our corporate impact strategy is a focus to create a more diverse and inclusive workforce. Creating a more flexible working environment will open up new avenues to recruit and retain talent. With access to a larger pool of candidates globally, I believe we can engage with the more diverse backgrounds and experiences, allowing us to reach our highest potential.

As we look ahead, I’m inspired by our opportunities and believe our strong foundation will help us achieve our long-term growth ambitions. Our strengthening business gives me increased confidence in our ability to deliver on our long-term goals with continued focus on sustainable growth and profitability to create value for all of our stakeholders. And I want to recognize all of our global employees for their perseverance, execution and dedication, not only to support our customers, but to support one another. I see immense opportunity in our future, and I look forward to the opportunity to work alongside all of you to make that happen.

And with that, we’ll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Samik Chatterjee with JPMorgan. Your line is open.

Joe Cardoso

Hi. This is actually Joe Cardoso on. I guess my first question is relative to the supply constraints that you guys are seeing. Are there any particular areas in the portfolio where you have actual leverage? And then on that same topic, are you seeing any impact from the components environment on your margin?

Eric Starkloff

Sorry, can you repeat the second part of that? Your line wasn’t that clear.

Joe Cardoso

Hi, is this better?

Karen Rapp

Yes.

Eric Starkloff

Yes.

Joe Cardoso

Yes, sorry. My second part of the question was just on whether you’re seeing any impact from the component environment on your margins?

Karen Rapp

On margins. Sure.

Eric Starkloff

The first part, I don’t know if you caught it, Karen. The first part was about if there’s particular parts of the supply. It’s pretty broad-based. The component shortages exist across a pretty broad part of our portfolio is how I’d characterize it.

Karen Rapp

Yes, exactly. And from a margin perspective, so what we’re seeing is besides lead times pushing out on some of these components, we are also seeing price increases. However, that’s been built into our Q2 guidance. And overall, as Eric said, right, it’s – we are maybe chasing 10%-ish, 10% to 15% of our components. So, it’s not a significant piece that’s going to swing the gross margin from where we are today significantly.

Joe Cardoso

Got it. And then my follow-up actually a little bit more general. Yesterday, Qualcomm spoke about opportunity relative to millimeter wave adoption in China, which [indiscernible]. Just curious to hear what are your thoughts around the topic, maybe what you are hearing, and maybe if you can kind of put in a realistic time line on that opportunity to materialize?

Eric Starkloff

Yes. I am going to try to answer. You did break up a little bit, but I heard the reference to Qualcomm and really about 5G millimeter wave in particular. So, let me just comment on that. So 5G, as I briefly mentioned, continues to be a pretty significant growth driver, primarily in our semi-electronics business. So, that’s a contributor to the strong double – mid-double digit growth that we saw in Q1. And we anticipate it to continue to be a driver throughout 2021. Now of course, as we said before, that’s both sub-6 gigahertz, and to your question, millimeter wave. We expect sub-6 gigahertz to continue to be a growth driver this year, and that’s globally. But that’s certainly a big part of the very, very strong growth that we saw in APAC, including China. And then millimeter wave, we expect that the back half of this year to become a stronger growth driver as we see more broad millimeter wave adoption. And again, that will be global, but we are quite pleased with some of the semiconductor business in general in Asia.

Joe Cardoso

Thank you. I appreciate the color.

Eric Starkloff

Okay, thank you.

Operator

Our next question is from the line of John Marchetti with Stifel. Your line is open.

John Marchetti

Thank you very much. Just maybe following up a little bit on the supply issues. Just curious if you can give us any color as to whether or not it got worse, a little better as we are going through the quarter. Obviously, you are indicating a fairly significant impact here in Q2. Just any sense that you can give us in terms of how this likely plays out over the next several quarters, and if you think this is something that you are going to be dealing with likely throughout the full year?

Karen Rapp

Yes. Thanks, John. This is Karen. Hi. It definitely got worse throughout Q1 versus what we saw coming into the quarter with more and more part constraints than what we had expected, which is leading to what you are seeing for Q2. What it’s caused is our lead times, as you know, have been really short, right? We shipped in a few days to maybe a couple of weeks historically on some of our larger systems. But we are starting to see our lead times expand. We think, by the end of Q3, we will be at kind of 4-week to 5-week lead times on average because we expect Q2 to continue to be tough and then Q3 to be maybe the peak of this taking us to those 4-week to 5-week lead times. Clearly, that’s still very competitive in our space when you are looking at lead times around that level, but we do expect, based on our current visibility, to continue to see that tightness through Q3. I am hoping it starts turning around by then, and we will see it come back to a more favorable position in Q4.

John Marchetti

Got it. And then maybe as a follow-up there, on the other side of it, do you have customers now that are then placing orders earlier? I mean, again, even with the 4-week to 5-week lead time, that hasn’t stretched out too much for you. But do you have increased visibility as a result of this? Do you see customers coming in there? And then, you mentioned auto, obviously continues to get a little better for you. Do you worry that some of these constraints that we have seen across the auto industry start to weigh on that business as we are getting into the second half?

Karen Rapp

We are starting to see customers place their orders earlier. Our sales team is knocking on doors saying, “Hey, get it in sooner rather than later.” The more visibility we get earlier in the quarter, the more likelihood is we can get it out the door in the quarter. So, starting to see a little bit more of that. One thing maybe to keep in mind, which is maybe a little unique in our business, is that our backlog tends to ship, right? We don’t have the issue where there is double ordering or lots of cancellations, that type of thing, especially when you are talking, even when we get to a 4-week lead time, right, by the time you place the order we are getting it to you pretty quickly there. And with it tending to be a capital purchase for our customers, that makes it a little stickier too, which is nice. From a transportation perspective, I am actually excited about the transportation rebound. So, I love what we are seeing in terms of market predictions, 14% growth in vehicle production, 21% growth for electronic systems for this year. All of that’s going to feed through to us. And as they get more visibility to timing on when their factories are running when they need that, all of that will feed through for visibility for us as well. That’s an industry that’s good about getting their orders in early, too. So that’s helpful.

Eric Starkloff

Yes. Just to add a little color, John. Yes, I will just add a little bit of color to that because I think, yes, as Karen said, the demand picture has been really good. Obviously, 19% order growth in Q1, and we anticipate something like 20% to 25% year-over-year order growth in Q2. And even though that increase in lead time has an effect on timing, we are confident we will ultimately get the business. And as she said, it’s still highly competitive compared to expectations of customers and what most of our peers are delivering from a lead time point of view. So, that’s why we have the confidence that, that will be a timing issue that we will manage through, but ultimately get that business.

John Marchetti

Got it. Okay. Thank you very much.

Eric Starkloff

Thanks John.

Operator

Our next question is from the line of Mark Delaney with Goldman Sachs. Your line is open.

Mark Delaney

Yes. Good afternoon. Thanks for taking the questions. Starting as well on the topic of the supply chain shortages, could you quantify how much revenue the company wasn’t able to meet in the first quarter that you otherwise would have without the constraints? And then if we think about the first half of the year in total, how much revenue do you think you are unable to fill? And I am trying to better understand what sort of additional revenue opportunity that potentially could be in the second half or perhaps even into early next year that we will be pushing out?

Karen Rapp

Sure. Yes, this is Karen. So, it’s a pretty straightforward bridge between bookings and revenue for us. So, if you got the bookings growth at 19% year-over-year and revenue at 9% year-over-year for non-GAAP, the difference there is the backlog build, primarily. There is some deferred revenue in there, but we typically have historically shipped almost all of our bookings in the quarter. So, you can look at that as the backlog build for the quarter. And longer term, I do expect that to continue to grow a little bit more through Q2, Q3. I talked about the $40 million to $50 million, I think, we will build in Q2. I think, Q3, the current visibility is that, that will get us to kind of the 4-week to 5-week lead times that we are looking at. So, I think it’s going to be tough for the next 5 months or so, and then we will have a clearer picture, even just 3 months from now.

Mark Delaney

Okay. Alright. Thank you for those additional comments. And on this topic, maybe you could go into more depth the steps that NI is taking in order to try and alleviate some of these shortages over the next few quarters. You were at the peak of this problem. But also, are you thinking about changing your procurement or inventory strategy longer term based on some of the learnings of COVID and now more recently, the chip shortages? Thanks.

Karen Rapp

Yes. It’s kind of – there is some fun stuff that we have done despite the tough situation. Other than the brute force that our amazing procurement team is doing to tackle the component issues as they come up, our R&D team across the company got involved to help identify opportunities for where we could redefine products, redesign certain components, substitute where it makes sense for our customers, working with customers to make that happen. So, we have had some real wins in the quarter as a result of that as well. One of the things we are working towards is continuing to have more visibility into orders, and that will enable us to continue to manage our inventory in a proactive way. We are always on a journey to simplify our designs for new products and reuse existing components so that we can leverage inventory from that perspective as well and certainly leveraging stronger relationships with suppliers going forward, but that’s a journey we have been on, and we will continue to be on. Anything you wanted to add to that?

Eric Starkloff

Yes, I was just going to say, I think our team has done remarkably well here. We have had an inventory strategy that put us in actually a good position coming into this. I think there is a difference that we don’t tend to come into a quarter with months and months of backlog or really long lead times like some others in the space. And so that means that we will see this effect maybe more immediately. But frankly, when I look at it from another lens, our inventory strategy, the capabilities of our manufacturing team has kept us at a competitive advantage in terms of what we are actually able to deliver. And so even though it’s been a big change in lead times for us, it’s still at a competitive advantage in most of the spaces we serve. So, our team has done a fantastic job keeping us in that advantageous position.

Mark Delaney

Thank you.

Eric Starkloff

Thanks Mark.

Operator

[Operator Instructions] We have an additional question from Mark Delaney with Goldman Sachs. Your line is open.

Mark Delaney

Thank you for taking the follow-up. I wanted to dig in a little bit more into the Transportation segment, if I could, and nice to see the good order growth that you reported there. And if I recall, the company has some particularly good exposure in some of the autonomous applications. And we have seen a lot of momentum there recently looking at just a couple of examples, you have had Ford and Toyota announced new ADAS systems and continue to see R&D work in full autonomy as well. So, maybe you can talk about what NI is doing more specifically to help customers prepare for these different levels of autonomy, and how do you see that business developing, not just in the near-term, but longer term? Thanks.

Eric Starkloff

Sure. Absolutely. First of all, yes, we are – as Karen mentioned, we are quite pleased with the results in transportation, excited about the future. The fact that we had an all-time record quarter from an orders point of view, after a couple of years of some more challenging headwinds in that space, I think, was a great indicator. And then as I have indicated before, the ADAS, or active safety systems, and EV have been growing significantly faster than the rest of the space, so that’s continued. I mean those have been really high-growth rates. To your specific question about ADAS, we are essentially building systems with our customers that help to characterize and ensure that the quality of those at various active safety systems in both the labs, primarily in sort of validation labs, and then also in production as well. And that scales from characterizing the sensors themselves to the software that’s used in those autonomy systems through what’s called hardware in the loop. Basically a hardware and software system that simulates the rest of the vehicle so that you can ensure that all the software running that ADAS system, for example, is working correctly. And so to your point, many companies are investing significantly in this space, both the traditional automotive companies as well as many upstart automotive companies that are betting on autonomy and electrification to disrupt the space, and we are seeing really good adoption across both of those types of companies.

Karen Rapp

Yes. What’s kind of really neat in that space for autonomous driving is so much of it relies on simulation and software, that it’s right in our sweet spot because we can bring in that capability to do that automated test for our customers. And so it’s an exciting area of growth for us.

Eric Starkloff

Yes. And I will do one more since it’s an area we are excited about that. One of the things we are working on and you will continue to see us work on this, is really that line between simulation and the real world. When you are developing a system like that, being able to move seamlessly between a completely simulated world and these real-world systems like I described, is very, very important. And like Karen said, that leads – our software-based approach is very, very well suited to that. So, that’s an area that we see as a real growth driver in the years to come.

Mark Delaney

Understood. Thank you.

Eric Starkloff

Thanks Mark.

Operator

And our last question is from the line of Rob Mason with Baird. Your line is open.

Rob Mason

Yes. Good afternoon. We have referenced the creation of some new strategies around the broader-based business, more reliant on indirect distribution. Where are you right now? Where do you think you are right now just in terms of assembling that network and putting the network together?

Eric Starkloff

You mean distribution, Rob, in particular?

Rob Mason

Yes.

Eric Starkloff

Yes. I can take it, yes. Yes, so we have really started accelerating that strategy significantly in the quarter in Q1. And I will just say, our strategy is really on that Tier 3, that broad-based business I described. And it’s both e-commerce and distribution. We saw really good growth ahead of the company growth in e-commerce in Q1, so the investments we have made over the past couple of years are paying dividends in that side of it. And then we have started to sign – you saw announcements around global distribution and started to shift some of that business. Our actual revenue through that distribution channel went from 3% a year ago to about 5% of revenue in the quarter itself. And then the way we are evaluating that is through really, on a couple of different dimensions. One is, ultimately, we think the combination of those strategies makes that a highly profitable part of the business, and we have goals to increase the profitability of that part of the business, and specifically to make sure we are getting the price and value capture through the channel. So, we track that quite closely. And then that we are expanding the number of customers that we can serve because it’s all about scale at that side of the business. So, from those metrics point of view, let’s say, it’s a little bit early days, but the early indicators are positive. And so we are encouraged on the transition. And I will just give another kudos to our team, it’s a big, pretty complex transition to do in a pretty short amount of time. And so there are a lot of hard work by our teams to do that and keep customers – keep the support of our customers through that process. So, we expect that to continue to ramp to this year.

Rob Mason

How do you assess your kind of sell-out visibility within that channel as its come together, sell-through?

Karen Rapp

Yes, currently, Rob, there is no inventory being held at our – in our distribution channel. So, our – when we do those sells, too, it’s clear where the end customer is and who it is at this point.

Rob Mason

Okay. Just one last question, the – as we went through last year and we spoke to the 2023 target operating model, you had expressed some, I guess, optimism around the ability to move towards the SG&A targets, perhaps at a more accelerated pace. How do you feel about those – that pace right now?

Karen Rapp

Good. We are still on track to be at that target in 2021. So, we feel real good about that and the opportunity to continue to scale that going forward.

Rob Mason

Very good. Okay. Thanks for taking the question.

Eric Starkloff

Yes. Thanks Rob.

Operator

Ladies and gentlemen, that concludes the Q&A session on our conference call for today. You may now disconnect. Thank you for participating. Have a great day, and stay safe.

Karen Rapp

Thanks, everyone.

Eric Starkloff

Thanks.