National Instruments Corp

F:NI1

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 NATI Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker, Marissa Vidaurri, Head of Investor Relations. Please go ahead.

[Marissa Vidaurri, Head-Investor Relations]

Good afternoon. Thank you for joining our Q1 2020 earnings call.

Speakers today are Eric Starkloff, President and Chief Executive 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, objectives, momentum, vision and strategic direction, our market position, capital allocation plans dividend policy, expense reduction plans and technology accelerators and our outlook. 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, including any uncertainties related to the COVID-19 virus, any further weakness in the global economy, fluctuations in revenue from our large customers, foreign exchange fluctuations, changes in the current global trade regulatory environment, expense overruns, manufacturing inefficiencies, disruption from public health concerns, adverse effect of price changes and effective tax rates.

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 20, 2020. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements.

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.

As a reminder, on January 15, we closed on the sale of our AWR subsidiary to cadence, adding approximately $160 million to our cash balance. In 2019, AWR was approximately 2% of revenue. To enable a more relevant compare, we will use the term organic to refer to refer to certain non-GAAP measures that exclude the impact of acquisitions and divestitures completed within the last 12 months, which currently includes AWR.

In addition, as we continue to prioritize the health and safety of our employees, customers, shareholders and communities, we have made the decision to cancel our in-person events through the rest of 2020. This includes our annual user conference, NIWeek. Each year, our investor conference is held in conjunction with NIWeek, which gives you access to our leadership team and offers the opportunity to hear directly from our customers. We are reimagining how to create these connections in a new format, and I will share more detail soon.

For now, we will be participating in the virtual JPMorgan conference in May and the virtual Baird, Bank of America and Stifel conferences in June. We look forward to speaking with you at these upcoming events.

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

[Eric Starkloff, President and Chief Executive Officer]

Thank you, Marissa. And good afternoon. We hope you and your families are staying safe, and we appreciate you taking time to join us today. Given the circumstances, I will start today with some commentary on how we are approaching this crisis and our commitment to our long-term strategy. Then I will provide commentary on how Q1 unfolded and what we are seeing so far in Q2 before handing it over to Karen for the financial update.

The COVID-19 situation remains very dynamic globally and the health and safety of our employees and our communities continue to be a top priority. Over the past two months, our team has responded swiftly to the evolving crisis and performed at an incredibly high level. We implemented work from home for a majority of our global employees and so far, have exceeded my expectation for the level of productivity that we have achieved. We have also adapted our direct communication and interactions with customers and employees to ensure we remain connected even while we are physically apart.

While the full impact of COVID-19 on 2020 is uncertain, the core strengths of NI remain very clear, our highly differentiated software position, the diversity of our business and the innovation of our people. We have navigated tough times before, and today, we are in a stronger position structurally. I also believe we are in a stronger position strategically with a focus on growth opportunities in areas of tests that remain strategic priorities for our customers.

In this time of crisis, we are grounded in key principles to drive our decision-making. First, we will live our 100-year plan. While we adjust to the short term, we'll do so with a commitment to our long-term objectives. This framework has served us well for decades, and is particularly important in times like this. It facilitates balancing our decisions across time horizons and delivering value to all of our stakeholders, our employees, customers, shareholders and communities.

Second, we will do our part as a global company to help in this crisis. I'm extremely proud of our ability to step up and partner with customers who are utilizing our technology to assist their applications on the front lines of prevention and treatment of COVID-19. This includes numerous applications like production of lifesaving ventilators, new nanofilter technologies for masks and research to fight the virus. The work of our customers is critically important and continues through a crisis like this one.

Third, we will respond to the challenge with innovation. Now more than ever, our customers need us to be creative, especially in the ways we interact. This challenging time presents a myriad of opportunities to adapt how we virtually engage with our customers, while also broadening our reach to new ones and supporting new remote test applications with our software.

And finally, our intent is to maintain critical investments and capacity. Our plan sustains our strategic investments in R&D, sales, marketing and other core capabilities while reducing discretionary expenses elsewhere. We are committed to continue investing in our people. These investments strengthen our position to come out stronger when the crisis ends.

Now turning to our results in Q1, I am proud of the resiliency within our business and from our employees in Q1. As you might expect, our team had to adapt to new ways, yet delivered strong execution across our business globally. In Q1, we reported revenue of $309 million, down less than 1% year-over-year and within our guidance range. Organically, revenue was up approximately 2% year-over-year. And organically, our orders were up 1% year-over-year in the first quarter.

As reported in our April 2 news release, regional organic order results for the first quarter are as follows: In the Americas, orders were up 8% year-over-year; EMEA orders were down 3% year-over-year; and orders in APAC were down 5% year-over-year; Greater China reported orders down 12% year-over-year in the quarter.

The impact of the virus progressed at different rates regionally through the quarter. APAC reported a 12% year-over-year order decline in January and February, with a rebound of 3% order growth in March as restrictions started to be lifted and business returned to a more normal level in the last month of the quarter.

EMEA started to show impact of restrictions toward the end of the quarter, with orders down 6% year-over-year in March. The impact was less pronounced in Americas, which stayed relatively strong throughout Q1 with orders up 8% year-over-year in March.

Turning to industry color, on an organic basis, semiconductor orders were very strong, up double digits year-over-year in Q1 and through continued success from the deployment of NI's 5G testing systems, specifically to support infrastructure build-outs around the world. Orders for transportation were up mid-single digits year-over-year in Q1. And we continue to see growth in areas of electrification and active safety outpace the rest of our business. For aerospace, defense and government, orders were up mid-single digits year-over-year in Q1 in what has continued to be a relatively steady spending environment.

We believe these results are indicative of our strategic focus and solid execution of opportunity management by our sales teams. These positive results helped to offset our portfolio business with orders down high single digits year-over-year in Q1 due to macro impact from COVID-19 as reflected in a dramatic drop in the global Purchasing Managers Index.

Given the economic uncertainty as we look forward to Q2 and the rest of 2020, we remain cautious and are planning for a wide range of scenarios. As of today, Q2 organic orders are down 5% year-over-year, with stability in orders over $20,000, which we believe reflects strength in our system-level strategy.

The number of customer meetings has also remained stable despite restrictions. Though we've had a significant decline or even a complete freeze in some countries of in-person visits in the first quarter we adapted quickly to increase our virtual connections with customers and total customer meetings were down less than 5% year-over-year. We executed our sales transition several years ago, investing in our inside sales force with a focus on virtual account management. This organization is more critical now than ever. They are leading the way in expertise in remote connection with our customers while taking the advantage of new technology like remote product demos and gaining insight into transforming buying behaviors. We believe this customer engagement model served as an advantage in the first quarter. And that long term, these engagements will enable us to gain share when the economy recovers.

We are also seeing many in the engineering community taking advantage of their work from home status to improve their system development skills through software certification. Early in the crisis, we began offering free online training courses to the entire engineering community and to-date we've seen a 10 times increase in the use of this training and a 25 fold increase in the number of new users. It's a great example of addressing this challenge and supporting our customers. Our customers have found our software connected approach provides significant benefit over traditional test equipment. Automated NI labs allow for more remote management and we believe our comprehensive software portfolio provides automation and connectivity capability that provide a significant strategic advantage for our customers. For example, many lab and production sites have been able to take advantage of the enterprise capabilities of SystemLink for remote systems management and test monitoring.

In Q1, overall software revenue was up mid-single-digits year-over-year with a double-digit increase in revenue from our enterprise agreements. In addition, growth in active software seats was up low single digits year-over-year in the first quarter continuing our trend in seat growth and customer adoption. Economic uncertainty remains, but I believe we have the right strategy in place. Our proven ability to navigate tough times gives me confidence we can maintain stability in the short-term while staying focused on the critical investments for future growth. We will continue to monitor our business closely as the environment evolves and will adjust as necessary.

With that, I'll turn over the call to our Chief Financial Officer, Karen Rapp.

[Karen Rapp, Chief Financial Officer]

Thanks Eric, and thanks everyone for joining us today.

From a financial perspective, I'm pleased that we closed the first quarter within guidance despite the impact of the COVID-19 virus. I believe in these significant business cycles that we benefit from the diversity of our customer base with over 35,000 customers spread relatively evenly around the globe and across multiple industries.

In Q1, we reported revenue of $309.4 million, down 1% year-over-year. Q1 organic revenue was up approximately 2% year-over-year. Organic order growth in Q1 was up 1% year-over-year with orders over $20,000, up 7% year-over-year and orders under $20,000, down 8% year-over-year. Our non-GAAP gross margin in Q1 was 76%, which was down 2.5% year-over-year. Approximately 50 basis points of this decline was related to the divestiture of our AWR software business. Approximately 100 basis points of the decline is due to temporary fluctuations in the quarter. These include currency impacts, additional inventory reserves, product mix and manufacturing variances which include additional freight costs due to the COVID-19 situation. During this period, our average product discounts have remained stable.

The remaining change of about 1% is due to an operational change that has no impact on operating margin. As one of our growth strategies we have consolidated our service offerings and reorganized with dedicated resources to support this. In Q1 2020, approximately $3.4 million of costs incurred for customer education and hardware services that would have previously been included in sales operating expenses are now reported as cost of goods sold. We expect to see approximately this level of change through the rest of 2020 services has been an accretive growth area for us and we will continue to focus on monetizing the services we provide and leveraging our services expertise to drive high value system sale. Non-GAAP operating margin in Q1 was 13%. The company reported Q1 GAAP net income of $133 million and diluted earnings per share of $1.01 per share, which included $0.94 of divestment gains.

Q1 non-GAAP net income was $34 million and non-GAAP diluted earnings per share was $0.26 cents per share. A balance sheet remains strong. We ended the quarter with $584 million in cash and no debt. In Q1, our cash flow from operations was $44 million representing 14% of revenue. From a long-term sustainability perspective we're exiting Q1 2020 with record cash. We're increasing our liquidity by converting certain fixed income holdings to money market holdings and we have increased our line of credit to $95 million. I believe our clear strategic focus and strong balance sheet puts us in a position of strength, providing flexibility and creating opportunities especially in these times of economic uncertainty. Our capital allocation priorities remain clear and unchanged. We plan to continue to invest in innovation and technology in order to stay ahead of the needs of our customers and deliver a world class customer experience.

In Q1, we paid $34 million in dividends. The NI Board of Directors approved the dividend of $0.26 per share payable on June 8, 2020 to stockholders of record on May 18, 2020. Similar to the 2009 recession, our dividend remains a key part of our capital allocation strategy. Given our strong financial position, we continue to manage our pipeline of inorganic growth opportunities as we look for strategic accelerators to enhance our platform technology and help us achieve our long-term growth targets. We may also choose to take advantage of opportunistic share repurchase in the future. In Q1, we returned $7 million to shareholders through repurchases of 165,000 shares of our common stock at an average price of $39.58 per share. The total impact of COVID-19 on our economy remains uncertain. While I'm proud of our ability to remain resilient this quarter, we have limited visibility into the second quarter, making the impact hard to quantify.

As a result, we will not provide guidance for Q two 2020 at this time. We do plan to release a business update on June 9th, when we expect to have a clear insight into the quarter. For now, there are some details I want to share to help provide additional insight into our business. From a manufacturing perspective, our major production facilities in Hungary and Malaysia are fully operational. Our procurement teams have direct communication with key suppliers and our local teams are actively involved with government officials to stay informed of changes. A robust inventory management and ability to balance output across our facilities helps enable manufacturing continuity. I want to thank our manufacturing teams as they continue to work to minimize disruptions. In the first quarter, our non-GAAP operating expenses were down $6 million as compared to the same quarter last year. The sale of our AWR business reduced expenses by $4.5 million year-over-year and the services operational changes mentioned earlier, reduced expenses $3.44 million.

Excluding these changes, our non-GAAP operating expenses would have been up by 1% year-over-year in line with our organic revenue increased.

With so much uncertainty for 2020, our goal is to focus on our profitability while maintaining our capacity to accelerate our growth in the future. On the expense side, we will continue to be diligent in managing expenses. Some of the actions we are taking includes significantly limiting hiring, cutting discretionary spending, shifting marketing from in person events to a more virtual experience, temporarily reducing executive pay, pushing out our merit cycle to 2021 and prioritizing travel for customer visits. In addition, our variable pay will adjust with our actual business results. We believe these actions will enable us to avoid layoffs and maintain capacity in order to accelerate our growth in the future. And as a result for Q2, we're currently estimating for sequential decrease of approximately 1% to 2% in total non-GAAP operating expenses. At this time we're modeling our 2020 non-GAAP tax rate in the range of 17% to 18% subject to the risk of adjustments.

In a housekeeping item, starting in Q2 2020, our India results will be reported as part of our APAC business. This represents approximately 2% of revenue. We believe India's growth, growth industries and customer profiles better align with our APAC structure and that through this change, we will accelerate growth in the region. AMEA will now represent Europe, the Middle East and Africa. Historical data showing the revenue from these three regions in the new reporting structure will be available at NI's investor website at ni.com/nati next quarter as a reference. As Eric mentioned, we have navigated tough times before and we believe we are in a stronger position today both financially and strategically. In 2009, we maintained our strategic investments while delivering solid profit and cash flow that set us up well for the recovery, allowing us to deliver record revenue and profitability in 2010. This experience to successfully weather difficult times gives me great confidence in our business and our strategy.

In summary, we delivered solid results in Q1. This is a testament to the hard work of all of our employees globally. I believe this is also indicative of the stability provided by our broad customer base and end market diversity. The value customers see in our innovative platform and the strength of our operational efficiency. In 2020 we plan to preserve strategic investments for our long-term growth ambitions, while also executing strong expense management across our business in the short-term. Through our transformation actions over the last few years, I believe we are better scaled for opportunity in this timeframe and that our strong balance sheet puts us in a position of strength to navigate this crisis.

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

[Eric Starkloff, President and Chief Executive Officer]

Thank you, Karen. I want to once again commend our employees for the adaptability and commitment they have shown during this very dynamic environment. To our customers, I want you to know we intend to make the strategic investments and technology to support your innovation and we will strive to lead and how we do business in this new environment. To our shareholders, I want you to know we are committed to making decisions we believe will best balance the short-term reality with our long-term goals and ambitions. Our intent is not just to withstand this environment, but to emerge from it stronger and in a position to gain share. And finally to our communities, I want you to know that we remain committed to supporting you, especially in a time when support is so clearly needed for so many people. Given the significant nature of this crisis, we have committed $2.5 million to COVID-19 relief causes. This is funded through the previously-announced $7 million donor advised fund we created last year. We all look forward to the end of this crisis and to a new normal. But in the meantime, we are focused on adapting, serving our customers, developing and building our product and executing to our long-term strategy. We will get through this together.

With that, we will now take your questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of John Marchetti with Stifel. Your line is open.

[John Marchetti, Stifel]

Thanks very much. Eric, I was just wondering if you could provide a little color, maybe what you've seen in the month of April. You talked a little bit about how March closed out, that overall orders were down 5% here at the start of the quarter. But just curious if you could either give us some additional color, either by geography or maybe even by market segment, just as we're trying to put together a picture for what's going on here in 2Q?

[Eric Starkloff, President and Chief Executive Officer]

Yes. Yes, sure, John. I hope you're doing well. So yes, as I mentioned, through today, we're down 5% in orders for the quarter. I'll give you just a little bit of color. Some things have persisted from Q1. From a regional point of view, it's pretty much in line with what you'd expect in terms of the flow of the way this crisis has played out. So APAC has continued to strengthen, EMEA has continued to stay relatively weak and we have seen the Americas region weakened from what it was in the month of March that I quoted in the prepared remarks.

[John Marchetti, Stifel]

Got it. And then Karen, maybe just as a follow-up to that, how should we think about your typical linearity in a second quarter? You are trying to just sort of benchmark where we are in April against what we might see over the next couple of months as we try to think about the best way to frame looking at 2Q here?

[Karen Rapp, Chief Financial Officer]

Yes. John, good point. We typically run Q1 as our lowest quarter, with the mid quarters relatively flat with each other and then Q4 is our highest quarter. So lots of uncertainty here as we're looking at our business. And as you know, we have pretty low visibility because we do a high-turns business, so we don't enter the quarter with a lot of orders on the book. That's one of the reasons that we're focused on the update on June 9, so that we can share at that point a little bit more about what we're seeing and what we know.

[John Marchetti, Stifel]

Thank you very much. I’ll hop back again.

[Eric Starkloff, President and Chief Executive Officer]

Okay. Thanks John.

[Operator]

Thank you. And our next question comes from the line of Mehdi Hosseini with SIG. your line is open.

[Unidentified Analyst]

Hi guys, its Nick. I'm on for Mehdi. Just wanted to start off just hoping that everyone is doing well and your families are doing well. I wanted to ask a question about the current status of millimeter wave. We're seeing some reports from the news about potential push-outs. We just wanted to get a sense of how that might impact NATI?

[Eric Starkloff, President and Chief Executive Officer]

Yes. And thanks for the sentiment, Nick, and I wish the same for you and your family. Yes, so on millimeter wave 5G, as I've mentioned in – also in the prepared remarks, 5G overall has been a growth driver for us, and it was a growth driver in Q1. As I mentioned, that's primarily related to infrastructure, and it's primarily, as you would expect, sub-6 gigahertz at this point. To your point, some – as I've said before, we were anticipating sort of ramping in the latter part of this year for sort of millimeter wave. It is also our expectation, although the visibility is a little bit less right now, but it's our expectation that, that will likely push to some extent probably into early next year.

[Unidentified Analyst]

Perfect. Thank you. And just a quick follow-up, just like zooming out and looking at semis more broadly, we know the long-term plan here is to share – to gain share. We wanted to know if there are any updates on how the current environment might impact that and how maybe M&A might impact that as well.

[Eric Starkloff, President and Chief Executive Officer]

Yes. Let me give you a little bit of context but also refrain from too much of a crystal ball because crystal ball because crystal ball is not working too well these days but – so semi, as I mentioned, for the quarter, for Q1, was extremely successful, very, very strong growth, and that continues the track record of it being a very strong growth area for us for multiple years now. It's been the fastest-growing part of the business for the last three-plus years. Now just a little bit of context, our business in semiconductor divides relatively evenly across systems that are sold into labs, they're primarily part of R&D investments and R&D budgets; and systems that are sold into production.

If I look back, without trying to predict, but if I look back at other economic kind of crises, what we've seen is that our production business will tend to be a little bit more volatile with respect to the capacity of production and the demand whereas the R&D investments tend to be more consistent. And so the fact that we have a business that's distributed across both of those has generally lent stability to it. Regardless of what the sort of situation is on a macro, it is our expectation, and it is our focus, to continue to gain share in a semi test, and that has been the trajectory we have been on.

[Karen Rapp, Chief Financial Officer]

And maybe I'll add from the – for the M&A part of that, Nick, this is Karen. We continue to look at our M&A funnel, our inorganic funnel, from two lenses: one is opportunities for strategic acceleration in our focus areas, our industries of focus; and then also strategic accelerators for our platform, our software and hardware platform, and what that looks like going forward for growth. With the balance sheet situation that we're in, with the position of strength that we have and the clarity in our strategic focus as well as the intent to stay focused on our long-term growth ambitions, we're continuing to manage that inorganic funnel through this time.

[Unidentified Analyst]

Perfect. Thank you. I’ll get it back in queue.

[Eric Starkloff, President and Chief Executive Officer]

Yes. Thanks for questions, Nick.

[Operator]

Thank you. And our next question comes from Robert Mueller with RBC Capital Markets. Your line is now open.

[Michael Murray, RBC Capital Markets]

Hi, this is Michael Murray on for Rob. Could you give us a sense of what to expect from automotive this year? We're seeing global vehicle production forecast declining up to 20% year-over-year for 2020? How does this correlate with your automotive segment revenues? Thanks.

[Eric Starkloff, President and Chief Executive Officer]

Yes. Michael, I’ll take that. Again I’ll refrain from too much of a crystal ball. Yes, automotive is an area where, I think, it's natural to expect that there'll be headwinds for the year in that segment. But I want to, again, similar to what I did in semi, put a little bit of kind of characterization on the business there. In our transportation or automotive segment or area of the business, it's actually more slanted towards R&D. That's the predominant part of our business. And as I mentioned before, the areas that we're focused on remain – those are continuing to outgrow the rest of the business, and those are in ADAS and electrification. So while there will be likely some headwinds in that space, what we're seeing among those customers is that they're doing what they can to preserve the investments that they have in the key technologies that are going to ultimately differentiate them going forward. I mean those are the investments that they are trying to hold on to more than anything, and that's what we're kind of aligning our strategy to.

[Michael Murray, RBC Capital Markets]

Okay. Thank you.

[Eric Starkloff, President and Chief Executive Officer]

Welcome.

[Operator]

Thank you. And we have a follow-up question from the line of Mehdi. Your line is open.

[Unidentified Analyst]

Hi, guys, sorry just one more for Karen. Back in May, you kind of laid out a scenario of what expense growth would look like as it relates to revenue growth. And you kind of gave the upside situation. And so given the current environment, I was wondering if you could provide more color on how expenses might shift if revenues stagnate or, theoretically, even goes down?

[Karen Rapp, Chief Financial Officer]

Yes, Nick, thanks for bringing that up. We took the opportunity over the last few years to continue to increase the variable portion of our employees pay as part of our structural realignment. And so as you can imagine, our variable pay will continue to scale with the results of the business overall. We focus on growing on the top line but also the profitability targets that we've set out historically, and that factors into what that variable pay might look like.

[Unidentified Analyst]

And so just to clarify, that rate of growth is the same way in the other direction, specifically the 2% to 3%.

[Karen Rapp, Chief Financial Officer]

There'll be other factors that influence that, depending on strategic investments and what we may be doing across the business. The best way to think about that is maybe modeling out the expenses that I talked through today and what the actions we're taking and what that may look like over the next quarter and kind of build it out from that level, is the way I think about it.

[Eric Starkloff, President and Chief Executive Officer]

Yes, I also want to share, Nick, that we think about these leverage models as a multiyear thing as well, just as we did in the leverage models that you referenced from last May. And so one of the ways we're looking at this, and I use – I'll just use history as a guide. When we look back at the way we the way we performed in 2009, the last big kind of financial crisis and recession, it's a challenging year for us and the rest of the industry in 2009. We took sort of a similar trajectory that we're taking now on preserving the core investments of the company. We were profitable in 2009. And then we came out of it and in 2010, grew 29% and had double-digit growth for the next two years as well of 19% and 10%, respectively.

And so this idea of looking over a multiyear time frame to make sure that we're getting the best return and making the right investments, we're taking the same approach this year as well.

[Unidentified Analyst]

Okay, well said. Thank you.

[Eric Starkloff, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. And we have another follow-up question from the line of John Marchetti with Stifel. Your line is open.

[John Marchetti, Stifel]

Thank you very much. Eric, I'm just curious, you mentioned that you still have fairly high customer engagements going on. And when I think about the challenges from your perspective of figuring out where your business is headed here over the short term, is it a situation where because customers are travel restricted or they're working from home that they're unable to sort of continue to do the things that would drive your business? Or is it more that with those customers really being unsure about their revenue demand or their outlook for growth that they sort of put a lot of purchases on hold?

I'm just curious sort of from your perspective, as you're looking at that customer engagement, where the bottlenecks are, if you will, in terms of them putting in more orders.

[Eric Starkloff, President and Chief Executive Officer]

Yes, John that's a great question. So our ability to engage with customers, well, it's had some effect, and I quoted some numbers there in the prepared remarks. I mean we have generally been pleased with our ability to continue to do that. Our ability to – I mentioned the visits, but we also measure call volume and website traffic and things like that. And so the engagement levels are actually holding up quite well. So I don't think that's the limiting factor. I think the uncertainty comes really in what has the disruption caused from their own work-from-home situation, what has the disruption caused economically from a demand point of view, that's where the uncertainty comes from.

Now I will say the diversity of our business helps a lot here. Many of the things we do sell into are essential businesses. When you think about the portion of our business going into aero, defense, government kind of applications, for example, in the U.S., those factories are still running. Those are essential businesses, and they're still generally up and running. And so that does vary quite a bit by industry. But to your question, it's more the uncertainty related to the latter.

[Karen Rapp, Chief Financial Officer]

It's been interesting to me – John, this is Karen. It's been interesting to me to see the ways we're helping our customers be more creative so that they continue to be productive as well. Eric talked about the SystemLink connection and being able to work remotely is a real benefit to our customers right now as well.

[Eric Starkloff, President and Chief Executive Officer]

And we think – yes, we think software is important in this time frame. Our ability to demonstrate and sell software online has been demonstrated to be pretty good. And so we think that's an advantage. And I think like everything we're all experiencing in our daily lives right now, despite some of these challenges, you also find some silver linings. And so we're finding ways to engage with customers in ways that might have been more difficult in the past, and they're more accessible sometimes than they were in the past. And so those are also emerging in this time frame as well.

[John Marchetti, Stifel]

Great. Thank you for the color.

[Eric Starkloff, President and Chief Executive Officer]

Okay, thank you John.

[Operator]

Thank you. [Operator Instructions] Our next question comes from Rob Mason with Baird. Your line is open.

[Rob Mason, Baird]

Yes, good afternoon. Thanks for fitting me in. I wanted to – Eric, you reflected back on 2009 – or Karen. And I wanted to see if you could just juxtapose your portfolio business today versus that period of time as well. I know, obviously, you've made some – the strategic investments in the semiconductor, transportation, aerospace and defense. But how does the mix of the portfolio business compare today versus 2008, 2009?

And maybe also just reflect on the makeup of your software businesses today versus that period of time, and remind us how they performed in 2009 as well.

[Eric Starkloff, President and Chief Executive Officer]

Okay. Let me – I'll take a shot at this, Rob. And some of those numbers, I won't have off the top of my head, but I'll give you context. So yes, certainly, the proportion of our business that's in semi, transportation and ADG has increased since 2009. The other way to look at it it's not the same cut, but I think it's worthwhile to look at it this way, is the over 20,000 and under 20,000 which we do publish back through that time frame, so you can go back and look at the exact number. But what we're experiencing in this time frame, and what we experience is, of course, the mix has become dramatically higher towards the over 20,000 business. That's held up. That held up in Q1. That is what we're sort of actively engaged with our customers much more. That's where the strength of the business lies, and that's quite a different percentage of the business as it was back in 2009.

So that's one way that I would certainly look at it. And then what was the other part of your question?

[Karen Rapp, Chief Financial Officer]

Software.

[Eric Starkloff, President and Chief Executive Officer]

Software, yes.

[Eric Starkloff, President and Chief Executive Officer]

Software, in round numbers, software is a similar percentage of the business as it was back then, but probably the biggest difference, and I quoted some good results from enterprise agreements, but what we've seen is a shift of our software business to more and more of these enterprise level agreements, which are really subscription-based software packages. Typically, that's a three-year term. The renewal rate on those is very high. And so from that point of view, I believe that there's more stability in that software business because it's such a high percentage of subscription base compared to what it was in that time frame.

[Rob Mason, Baird]

And the order mix in portfolio, the portfolio segment that just – that also has a higher bias to orders over 20,000 today.

[Eric Starkloff, President and Chief Executive Officer]

It does. We actually shared the specific numbers on that back in the investor conference in May, so you can check that. But it is a much higher percentage of under 20,000 orders in the portfolio business. That is correct.

[Rob Mason, Baird]

Very good. Okay, thank you.

[Eric Starkloff, President and Chief Executive Officer]

Thanks Rob.

[Operator]

Thank you. And at this time, I'm not showing any further questions. I would like to turn the call back to your speakers.

[Eric Starkloff, President and Chief Executive Officer]

Okay, thanks, everyone. Everyone, I hope you stay safe. Thanks for joining us today.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, you may now disconnect.