National Instruments Corp

F:NI1

Earnings Call Transcript 2022-Q1

[Operator]

Good day and thank you for standing by. Welcome to the Q1 2022 NATI Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Marissa Vidaurri, Head of Investor Relations, NI. Please go ahead.

[Marissa Vidaurri, Head, Investor Relations]

Good afternoon. Thank you for joining our Q1 2022 earnings call. I am 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 quarter before opening up for your questions.

Our discussion today will include forward-looking statements, including without limitation, those regarding revenue, earnings, gross margins, operating expenses, capital allocation, targets and future business outlook and guidance, including expected demand for our products, supply chain constraints, backlog, impact of the war in Europe, COVID-19 and related shutdowns in our software licensing model transition, successful integration of the acquisitions and future results of acquired companies, execution on our strategy and achievement of our financial targets.

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 22, 2022. 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 statements 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. You can find the press release and quarterly presentation to supplement today’s discussion on our website at ni.com/nati.

On March 31, we announced a definitive agreement to purchase the test systems business of Kratzer Automation AG, a European leader in providing holistic customer solutions for electric vehicles. We believe that this investment, along with others we have made in this space, will help accelerate our ability to serve customers in the high growth area of vehicle electrification. The acquisition is expected to add 2% revenue growth during calendar year 2022.

We purchased the test systems business of Kratzer for approximately $59 million. We view this business as the tuck-in with no immediate cost synergies. However, this acquisition does contribute to our software technology roadmap and we believe puts us in a leadership position for vehicle electrification test systems. The deal is expected to be accretive to our financial results in the calendar year 2023 due to revenue synergies. NI will fund this transaction through cash drawn from its existing revolving credit facility. The deal is subject to statutory approvals and is expected to close in May 2022, with approximately 200 employees joining NI.

In the coming months, NI management will be hosting meetings at the conferences for Cowen and Bank of America. Please visit ni.com/nati for presentation times. We look forward to speaking with you.

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. Good afternoon. I appreciate everyone joining us today. In addition to reviewing our performance in the first quarter, we plan to discuss a few other items on the call today. First, I will take some time to talk about the technology attributes that set NI apart from our competition that have driven our recent growth and that we believe will fuel our growth into the future. Karen will then discuss overall financial performance in the first quarter as well as provide guidance for Q2, and I’ll come back to provide an update to our long-term model that focuses on revenue growth outpacing the test and measurement market and a commitment to a steady and sustained increase in operating margins.

But before we get into those details, I want to share about our performance in Q1. Demand for our products was exceptionally strong. The proof point for this strong demand can be seen in our year-over-year order growth during the quarter, which accelerated to 27% growth year-over-year over a strong Q1 2021 and was well ahead of our expectations.

Our bookings growth was a record for first quarter and is a leading indicator of our business and a result of our strategy. While demand was very strong, we reported revenue at the low end of our guidance. The unplanned suspension of business in Russia as well as the pandemic-related shutdown in Shanghai at the end of the quarter caused our revenue to be below the midpoint. A shortfall in delivery of specific components from one of our key suppliers limited our ability to offset these headwinds, despite the unplanned top line challenges, we delivered record revenue for our first quarter with 15% growth year-over-year and 28% growth in non-GAAP earnings per share. The strong demand, double-digit revenue growth and strong earnings growth in Q1 was a continuation of our strengthening performance over the past 5 quarters, so I’d like to spend a moment to explain why we believe our business is strong and resilient and why we believe the momentum will continue.

What truly differentiates NI and what’s been driving our recent performance is our focus on two key factors. First, we provide flexible and modular test solutions that enable our customers to increase their ability to constantly evolve their testing systems and get to market faster. We believe NI’s extensive modular capability provides the fast performance and lowest cost of tests available today. This is an essential capability, especially for those customers in markets where the technology is quickly changing, such as electric and autonomous vehicles, wireless communications and new space technologies. We believe we have the best product architecture to adapt to these changing customer needs, and it’s our focus on these high-growth areas that we expect will provide resiliency and contribute to our ability to grow faster than the test and measurement market.

Second is our open and interoperable software offering, which sits atop both NI’s hardware as well as the instruments from our peers and competitors. This software enables our customers to automate their test processes. Increasingly complex and fast-changing devices require highly automated test systems to ensure their functionality and quality. This comprehensive automation capability is unique to NI and enables our customers to rapidly bring their products to market and evolve them over time. We have the largest footprint of this test automation software in our industry. We plan to build upon this foundation to fuel our growth today and into the future.

Now on to our industry results for the first quarter. Our areas of intentional focus are exceeding our expectations. We believe this is a proof point that we’re focused on the industries with the highest growth potential. In the first quarter, we delivered double-digit order growth across all business units and across all regions. Semiconductor and electronics had record revenue for Q1 at $103 million, up 4% year-over-year, with orders up 38% year-over-year. The focus areas of 5G and wireless communications, drives roughly half of semi electronics business. Transportation had record revenue for Q1, both organically and all in, at $63 million, up 32% year-over-year.

Order growth in transportation was 38% year-over-year. Our shift in focus to electrification and ADAS, where our customers are making significant investments, has changed the trajectory of this business. In Q1, EV and ADAS represented approximately 40% of our transportation business, and we expect to exceed 50% of our transportation business later this year. One example of our recent customer win was at NIO, a Chinese multinational automobile manufacturer, where they’re leveraging NI’s hardware in the loop systems to test the ADAS functionality for an upcoming vehicle with Level 4 autonomy.

Based on these systems, NIO expect to shorten time to market for the mass production of this upcoming vehicle platform. Aerospace defense and government revenue was $93 million, up 22% year-over-year, with orders up 20% year-over-year. This business remains a steady and profitable growth engine and delivered record orders and record revenue for the first quarter. The success is led by strength in defense applications and new space technology investments like launch vehicles and satellites. And our portfolio business, which represents the majority of our broad-based customers, achieved record revenue for a first quarter of $127 million, up 13% year-over-year, with orders up 16% year-over-year.

Our focus on optimizing our digital channel and utilizing global distribution to better position our offerings to these broad customers has gained traction, further providing leverage and scale in this portion of our business. And our transition to software subscription is also improving the resiliency and the long-term growth opportunities in this business. Across the industries we serve, our business is well positioned in both R&D validation and in production test. We estimate that approximately 60% of our business is in R&D, with 40% in production.

Our software and data analytics platform enable us to uniquely drive value across those areas. Now more than ever, our customers are facing fast-paced technology shifts, and our highly flexible and modular test solutions and the increased need for software automation gives us confidence in our ability to continue to outpace the test measurement market.

With that, I will turn it over to Karen to discuss our Q1 results as well as our outlook for Q2. Karen?

[Karen Rapp, Chief Financial Officer]

Thanks, Eric. Hello, everyone. Q1 GAAP revenue was a Q1 record at $385 million, up 15% year-over-year and better than historic seasonality. Approximately 3% of Q1 revenue was from our recent acquisitions. Demand was strong with record orders for Q1 up 27% year-over-year on a strong compare. For the first quarter, orders were up 40% year-over-year in the Americas, up 22% year-over-year in EMEA and up 17% year-over-year in Asia-Pacific.

We ended the quarter with backlog just over $200 million, with competitive lead times of approximately 7 to 8 weeks. We continue to see minimal cancellations in our backlog, which provides confidence that this backlog will ultimately translate into revenue. In Q1, we generated $31 million of GAAP operating income and $66 million of non-GAAP operating income, a record for our first quarter, translating into non-GAAP operating margin of 17% for the quarter, the highest operating margin for our first quarter in more than 10 years.

Q1 non-GAAP gross margin was 71%, down 4% year-over-year, driven primarily by broker pricing for difficult to find components. We expect these temporary headwinds to continue while the supply chain remains constrained. We also continue to incur higher than normal freight costs due to global logistics challenges resulting from the pandemic. We have offset approximately 100 basis points of gross margin headwinds through increases in pricing.

While we expect our software transition to subscription-based licenses to increase our recurring revenue and cash flow over time, we do expect approximately $30 million of negative impact to our sales and operating profits during 2022, and we’ve built that into our guidance. We are on track with the transition so far as our customers recognize the value of our software. While earnings over these last couple of months have given us confidence in our ability to continue to convert our customers as their licenses renew throughout the year.

Additionally, we believe this transition has the potential to increase software revenue over time. We reported Q1 GAAP net income of $25 million and diluted earnings per share of $0.19. We reported record Q1 non-GAAP net income of $54 million and record diluted non-GAAP earnings per share of $0.41, an increase of 28% year-over-year. The actions we have taken to increase scale into our business model enabled us to deliver earnings growth that exceeded our revenue growth year-over-year in Q1.

Now let me comment on capital management. Our balance sheet remains strong with $143 million of cash at the end of the first quarter. Cash flow from operations was minus $4 million in the first quarter. Our variable compensation plans pay out in Q1, and we continue to build inventory for future revenue. In the first quarter, we returned $68 million to shareholders through dividends and share repurchases. We repurchased approximately 772,000 shares at an average price of $40.74, keeping our share count essentially flat to Q1 2021. The NI Board of Directors approved a quarterly dividend of $0.28 per share payable on May 31, 2022, to stockholders of record on May 9, 2022.

Our capital allocation strategy remains balanced. We will continue to invest in organic capabilities to ensure we stay ahead of our customers’ technology needs. We will also prioritize inorganic investments that strategically align to the business in order to accelerate growth.

Now shifting to guidance for Q2, our demand outlook remains strong for the second quarter, with over 20% order growth to date here in the second quarter, but we expect the Q1 revenue headwind to continue into Q2 as our ability to procure all necessary components remains constrained.

For the second quarter of 2022, we expect revenue to be in the range of $370 million to $410 million. At the midpoint, this represents 12% revenue growth year-over-year and includes approximately $4 million to $6 million for the Kratzer acquisition. While this is a fluid situation, it’s both difficult to predict and quantify with the decision. Our guidance assumes that the short quarter delivery of specific components from one of our key suppliers does not improve for the duration of the quarter.

Our guidance takes into consideration the best information we know today about the deliveries from our suppliers. We firmly see the growth in backlog as a revenue timing issue only. Our confidence in customer demand and our ability to ultimately realize this revenue when the supply chain disruptions ultimately ease remains strong. Because our solutions are capital expense and provide unique capabilities for our customers, we do not typically incur any double ordering risk and have not seen anything that would indicate a change to that historic pattern.

We expect Q2 gross margin to decline 100 to 150 basis points from Q1. Our acquisition mix adds approximately 120 basis points of decline, in addition to the continued headwinds from broker component pricing and increased freight costs. We’re taking numerous actions to mitigate these headwinds, including increasing prices, adding new suppliers, redesigning products to use available components and promoting alternate products with similar capabilities.

We continue to increase the portion of our operating expenses that are variable and are actively managing costs to drive improved efficiency across the business. We expect operating expenses to increase $8 million to $10 million sequentially from Q1 due to a full quarter of salary increases, the return of our in-person customer events and our recent acquisitions. We expect Q2 to be the peak for operating expenses for the year, as we drive additional scale during the year.

We expect GAAP diluted earnings per share in the range of $0.01 to $0.15 for Q2, with non-GAAP diluted earnings per share expected to be in the range of $0.25 to $0.39, a decrease of 9% year-over-year at the midpoint. We expect our tax rate in 2022 to be between 16% to 17%. Given the temporary headwinds we’ve encountered and the resulting impact on our Q1 and Q2 results, I want to comment on our full outlook for the year for 2022. At the midpoint of our guidance for Q2, revenue growth will be 14% year-over-year for the first half.

We expect demand to remain strong but found specific components to be more of a constraint than we originally expected. Given that constraint, we are widening our range for revenue growth for the full year to 12% to 18%. We still believe we have line of sight to the top end of the range. The low end of the range assumes supply constraints and in particular, the highly constrained supply from one of our key suppliers remain as challenging as we experienced in Q1.

Given the strong demand at the low end of the range, we would expect significant additional backlog that carryover to 2023 revenue. We remain confident in our strategy, the resiliency we are creating in our business and the stability of our backlog. We also remain focused on delivering leverage in the business, and we are committed to 100 basis points improvement in non-GAAP operating margin in 2022. This would achieve approximately 20% operating margin at the low end of our revenue outlook. Eric, back to you.

[Eric Starkloff, President and Chief Executive Officer]

Thank you, Karen. I’d like to turn now to our longer-term business model. As we discussed on several prior calls, we expect that the strength in our markets and our operational focus is allowing us to reach our 2023 financial goals a year ahead of the originally communicated schedule. Given the strength we’ve seen and the structural changes we’ve made in our business to enable better scale and leverage, we have set our sights on our next set of long-term business objectives as outlined on Slide 8 in our investor presentation.

We remain focused on margin expansion and see an opportunity to meaningfully increase our operating margins over time based on the changes we’ve made. In our model, we are committing to an increase of our non-GAAP operating margin of 100 basis points each year from 2022 to 2025. Our focus on high-growth areas such as electric and autonomous vehicles, wireless communication and new space technology brings us confidence in our ability to grow faster than the overall test and measurement market. The flexible modular test solutions we provide built on our leading interoperable software that enables customers to automate their test processes and bring their products to market faster and with higher quality.

We take our commitments to shareholders seriously and consider a wide range of market scenarios when drafting these targets. Despite the short-term headwinds to reported revenue from the supply chain issues, we remain confident in our forward long-term growth trajectory and our ability to deliver sustainable share gains. I’m confident we can achieve the operating leverage goal, for example, even in a scenario that contains a meaningful downturn.

I’ll end by thanking our employees for their hard work and perseverance. They are working tirelessly to make our customers successful and are driving incredible demand on our products and systems. And our employees in manufacturing and operations, in particular, are dealing with unprecedented challenges to manage a difficult supply chain situation, while continuing to deliver for our customers. Thank you, all.

With that, we will now take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Meta Marshall from Morgan Stanley. Your line is now open.

[Meta Marshall, Morgan Stanley]

Great, thanks. Appreciate that. Maybe as a first question for me, just maybe isolating the Russia and Shanghai headwinds and maybe separating that from the supply chain. If we could just kind of isolate what you would identify as kind of both of those buckets throughout the quarter. And then just kind of what the accompanying gross margin headwind would be from maybe those two different buckets? That’s the first question.

[Karen Rapp, Chief Financial Officer]

Yes. Sure. This is Karen. Hi, so we had guided a midpoint of about $400 million revenue for Q1 and came in about $15 million short to that. The impact of not being able to ship into Russia and shutting down that business as well as the COVID shutdowns that happened in Shanghai at the very end of the quarter contributed to the majority of that miss. So that did represent that. In normal quarters when supply is not constrained, we’d have had ways to use other levers to offset that. And unfortunately, we ran into a situation where we had a supplier who under-delivered on what we were expecting this quarter, and that shortfall caused us to not be able to offset those misses from those two factors. From a gross margin perspective, our products generally have a pretty consistent gross margin across so there is not a significant gross margin impact for those specifically. The gross margin impact this quarter was almost entirely due to broker pricing being much higher than what we would see for average prices on our parts, and that flowed through at about, that was the 4% of the decline we saw in gross margin in Q1. And we do expect that to continue into Q2 and beyond.

[Meta Marshall, Morgan Stanley]

Got it. And so then when we think about just kind of the reduction in the range going – or the widening of the range going forward, would you attribute most of that to supply chain or should we say 100 basis points of that is also Russia? I just want to make sure that we’re kind of attributing things correctly throughout the year, just as we think about the remainder of the year in your guidance.

[Karen Rapp, Chief Financial Officer]

Yes. We sized Russia – so last year, the revenue we shipped into Russia was about 1% of our revenue. In the scheme of things, the supply chain impact outweighs that. So whether – I wouldn’t ascribe too much to the Russia situation. It was more of a short-term surprise that happened in Q1. We had built guidance without knowing that, that was going to change. And I think that was what we were trying to get to there is that there was some unexpected things that happened in Q1. Now that we’re aware of those situations, we’ve built that into the future.

[Eric Starkloff, President and Chief Executive Officer]

And similar – just to comment on that, Meta. It’s similar to your question on the quarter, the 1% impact from Russia, the sort of $15 million from Russia and China, our demand was higher than expected and has remained higher than expected. And so all things being equal, we would be more optimistic about the revenue for the year. So it really does, in the end, come down to the supply constraint is the thing that’s primarily constraining. And then we wanted to be kind of particularly transparent in this environment, and that’s why we put a lower end on the range that, as we said in the prepared remarks, assumes that this situation that got to worse and concentrated around a particular supplier in Q1 that it remains that bad for the rest of the year, and that’s what would result in the low end of that range.

[Meta Marshall, Morgan Stanley]

Okay, perfect. I will hand it off. Thanks.

[Eric Starkloff, President and Chief Executive Officer]

Thank you.

[Karen Rapp, Chief Financial Officer]

Thanks.

[Operator]

Thank you. Our next question comes from the line of Mark Delaney from Goldman Sachs. Your line is now open.

[Mark Delaney, Goldman Sachs]

Yes. Good afternoon. Thank you very much for taking the questions. I was hoping to better understand the underlying cause of the supplier – the key supplier that was unable to ship to you. Is this a situation where they are located in Shanghai and they couldn’t get their employees in to make whatever product they were supposed to supply? Or is there some other underlying cause that was causing them to under deliver?

[Karen Rapp, Chief Financial Officer]

Yes, Mark, it’s Karen. As far as we know, it’s not attributable to Shanghai or that situation. It’s a handful of parts, things like FPGAs and programmable logic devices, things that you see others also having trouble meeting that level of demand right now. So I don’t think we’re alone in not getting that supply. It was just – the impact of it was a fraction of what we had expected to get. It was a significant miss to what we were expecting to get is the issue.

[Mark Delaney, Goldman Sachs]

Okay. And then I guess, in terms of the elevated broker purchases that we saw in the quarter, was that broad-based across a number of components? Or is that also kind of associated with these handful of parts that you thought you were going to get and you didn’t get them as you had to go try and offset it with some broker buys? I’m trying to figure out how linked those are or kind of is the broker buy more of a broad-based a phenomenon?

[Karen Rapp, Chief Financial Officer]

Yes. Certainly, it was certainly related to the ones that we were not able to receive, but it is a little broader, right? There still continues to be shortfalls across the supply chain, and we felt like we were in a good position for the rest of those parts to meet our guidance for Q1. It was really not being able to fill that full gap on the ones that we couldn’t get.

[Eric Starkloff, President and Chief Executive Officer]

And Mark, if we – just to comment. If we zoom out kind of consistent with commentary we’ve given before, if you recall that we started off this thing five, six quarters ago. It was a really broad-based set of shortages that we had, 1,000-plus shortages. Our team’s done a really good job kind of managing that situation, getting ahead of that situation, building inventory to address that situation. Over the past couple of quarters, we’ve characterized it as a smaller and smaller number of components. I think I said a couple of handfuls maybe on the last call. So that’s continued to be the environment, as Karen said, these broker buys tend to be on those couple of handfuls. And then we have this sort of particular situation with a set of parts from a supplier that was fairly acute in this quarter. But I think that’s consistent with the way – the trajectory of the way this has evolved over time. It just did affect us more in Q1 than our expectation coming into the quarter.

[Mark Delaney, Goldman Sachs]

That’s helpful. If I could just sneak one last question in. The acquisition, the 2% of revenue, I assume that’s just the part of the year as part of NI. So could you just size what that is for the full year on a revenue basis? And then what are the growth in EBIT margins of the acquisition, so we can think through the modeling of that? Thank you.

[Karen Rapp, Chief Financial Officer]

Yes. Mark, it is actually on the full year. The 2% NI size is 2% of the total year revenue, just to put in context, even though it’s not intended to close until Q2. So we also did say that it won’t be accretive in Q1. It’s not terribly negative, but it won’t benefit on the bottom line. In 2022, it’s actually when we start seeing the benefit of the synergies on the revenue side. We believe – we talked about how this is a software solution in electric vehicles. They bring a services capability that takes us to the next level and really puts us at the – in a leading position across the entire EV platform. The revenue synergies that we’re expecting from this are going to show primarily in 2023. And at that point, it becomes accretive to the bottom line and more in line with what we expect across NI overall.

[Mark Delaney, Goldman Sachs]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Rob Mason from Baird. Your line is now open.

[Rob Mason, Baird]

Yes. Good evening. Thanks for taking the question. I just wanted to be clear, we talked about Russia, China in group order. And are you actually – in China happened – the shutdowns happened late in the quarter. Are you actually dialing in any kind of headwind from China? Are you having difficulty having revenue recognized or shipping into that region?

[Karen Rapp, Chief Financial Officer]

Yes. Rob, this is Karen. There is some of that built into the guide. We do anticipate Shanghai opening up within the quarter. What’s hard to predict is what happens after that in China. But what’s helpful is that it’s region by region and not broad-based overall China. The situation we had at the end of the quarter is Shanghai is our main hub for customs. The in and out that goes through there was a significant impact at the end of the quarter. What we aren’t able to size is what might happen in Q2, if anything, extends there or has an impact in a different way.

[Rob Mason, Baird]

I guess, the question is have you – how did you account for that in the guidance?

[Karen Rapp, Chief Financial Officer]

It’s one of the reasons we widen the range because of the uncertainty that we see there.

[Rob Mason, Baird]

Okay.

[Eric Starkloff, President and Chief Executive Officer]

The thing in fact is so much in Q1, Rob, was that it hit right at the end of the quarter. And so if it had happened mid-quarter, we feel like that sort of would have been a disruption we could have overcome. But it was obviously the last six weeks or four weeks of the quarter, so that was pretty challenging.

[Rob Mason, Baird]

Okay. So – but you are assuming it kind of reopens mid-quarter as well, right. The second quarter…

[Eric Starkloff, President and Chief Executive Officer]

For Shanghai, yes.

[Rob Mason, Baird]

Okay. Eric, could you color in some of – the semi-test orders look quite strong, 38%. Just provide some added color there that – what parts of semi test are you seeing to strengthen?

[Eric Starkloff, President and Chief Executive Officer]

Yes, sure, Rob. And I think just – I will just comment more broadly and then going to semi, I mean really pleased, as we said in the remarks, about the order growth and the strength of the strategy and really the places where we are focused are exceeding our expectations. The 27% order growth in Q1 compares to a 19% order growth in the previous year. So, really a growth on strong growth. And like I said it’s in the areas we are focused. So, in semi – by the way, I wouldn’t read a ton into the delta between orders and revenue. I know it was biggest in semi, but that’s kind of a mix of product issue and something that will even out over time, in our opinion. But the strength in semi was in the areas of focus around wireless, 5G and wireless. So, it’s 5G, but also some of the new wireless standards as well. And we have seen good, good wins in both additional production deployments has been very successful and continues to be robust. And then increasingly, we have more and more focus on expanding our lab presence. And we have got some new offerings that we are bringing to market in the lab space to sort of standardize the equipment in the labs, again, for a lot of wireless and mixed signal parts, and pleased with the performance on that side of the business as well. And in semi, that’s a continuation of a pretty long string of successes. That’s been a real growth area for us for a number of years now. And so that momentum has just continued. The last comment I will make on that is sort of the regionalization, if you will of the semi markets is a tailwind for us. In other words, the investments that are going in, in different countries to build semiconductor capability, to build design capability, to build new labs and so forth, we see that as a tailwind and something that’s been – we have been able to capitalize on.

[Rob Mason, Baird]

Was the 5G-related wins that you spoke to, was that mid-band or millimeter wave, or how would you characterize that?

[Eric Starkloff, President and Chief Executive Officer]

It’s mostly still in the sort of sub-6 range. As we have said before, we have capability in millimeter wave. We are starting to see some pickup of that. We have new capability coming. We will actually be demonstrating some new capability with a leading customer at NI Connect coming up next month in that space. But most of the current success is still in the sub-6 frequency bands.

[Rob Mason, Baird]

Okay. Very good. Thank you.

[Eric Starkloff, President and Chief Executive Officer]

Thanks Rob.

[Operator]

Thank you. Our next question comes from the line of William Kerwin from Morningstar. Your line is now open.

[William Kerwin, Morningstar]

Hi all and thanks for taking the question. I just wanted to bring it back to the Kratzer acquisition and kind of in a broader sense, I know you have talked about the revenue synergies expected. But I am curious how you see the actual software and product aligning between that and the existing NI portfolio? And if any, what applications you might now be able to target that you couldn’t have previously? And then I have a quick follow-up.

[Eric Starkloff, President and Chief Executive Officer]

Okay. Thanks William. Yes, we are really excited about this deal. We think it’s a great fit. You have seen that our strategy to focus on electrification, electric vehicles has been something we have been investing in quite a bit organically and inorganically. What Kratzer brings is two major things. So, one is a software portfolio that’s fairly application-specific around battery and other EV components. And we think that that is a very good match and helps to accelerate capabilities that we were building, frankly, in that same space. And then the other capability that Kratzer has is really deep application expertise and services expertise with a very intimate relationship with top OEMs in Europe. And so they are really shoulder-to-shoulder with those OEMs and building these kind of systems. And so that fits very, very well with our portfolio, which now includes a whole set of software capability and analytics capability the core test systems and measurement systems. And with the two deals that we did previously, the high-powered electronics that are used for primarily battery and inverter testing. So, that’s the focus. It’s a high-growth market, and it’s an area that we are growing significantly faster. So, it’s an area that’s growing kind of low-triple digits for us.

[William Kerwin, Morningstar]

Excellent. And then I assume that the new guidance range is inclusive of that 2% contribution. And then also curious if there is any change to kind of the long-term thinking of the growth in the transportation business unit with that? Thank you.

[Eric Starkloff, President and Chief Executive Officer]

Yes, I will take that. So yes, the guidance does include that, and that range includes it. And then certainly, our expectations of growth, our edging up in transportation, we are seeing that certainly in the performance from this quarter and the investments we are making in EV. So, that is an expectation of forward performance that, that’s going to be a high-growth segment for us for the next few years. I will also just comment on the overall outlook, we said it briefly. But we talked a bit about the range and extending the range on the revenue for the year. As Karen said, this is really a timing issue. It’s supply constraint. It’s timing issue. It’s our position that at the low end of that range. If we were to be at the low end due to supply constraints that, that revenue would effectively shift into 2023, be recognized in 2023, so drive a higher growth rate in the out year, if you will. So, that’s our expectation.

[William Kerwin, Morningstar]

Great color.

[Eric Starkloff, President and Chief Executive Officer]

And you had a follow-up, William.

[William Kerwin, Morningstar]

No, that’s it. Thanks. Bye-bye.

[Eric Starkloff, President and Chief Executive Officer]

Okay.

[Operator]

[Operator Instructions] Our next question comes from the line of Mark Delaney from Goldman Sachs. Your line is now open.

[Mark Delaney, Goldman Sachs]

Thanks for the follow-up opportunity. The EBIT margin guidance out through 2025, you spoke about doing 100 bps per year. I was hoping you could help us understand how variable that may be in – relative to different revenue growth assumptions. Is the idea that for revenues faster, maybe you are going to invest a bit more, or you kind of talked about the variable nature of some OpEx, so just trying to better sensitize, that even margin progression with revenue growth.

[Eric Starkloff, President and Chief Executive Officer]

Yes, I will comment on that. And Karen, you can certainly chime in. Mark, yes, it’s – so first of all, we wanted to be clear that we intend to meet that expectation in a range of revenue scenarios, and as I have said, including a meaningful downturn. So, that would include something like industrial downturn or a turn in the cycle of the semi industry. Those are things that are contemplated in the range of revenue scenarios that we believe we can achieve that margin growth. To your point about at the higher end, certainly, we are going to strive for growth above the market, and we will see what the market conditions are over the next few years. But in higher growth scenarios, we will do exactly what you described. We will evaluate the sort of investment opportunities for growth and the opportunity for flow-through to be above that target in a higher growth scenario. But we wanted to commit to something that we could achieve in that full range.

[Mark Delaney, Goldman Sachs]

That’s helpful. And then one last one for me if I could and circling back on the supply constraints. You talked about FPGAs as an example. But I am just trying to understand, is there a linkage we should be thinking of with some of the shutdowns like in Shanghai with the FPGA issue, or are those really distinct events?

[Eric Starkloff, President and Chief Executive Officer]

Yes. You mentioned in the – go ahead, Karen.

[Karen Rapp, Chief Financial Officer]

Yes. I guess, Mark, I am not seeing that be the cause at this point. I guess that could change depending on what part of China gets shutdown in the future potentially. But at this point, that’s not been the reason for the shortfall. I think it’s literally just capacity shortfalls and possibly some of the older technologies that these are built on causing limitations for getting supply out.

[Mark Delaney, Goldman Sachs]

Okay. Thank you for clarifying, I appreciate it.

[Eric Starkloff, President and Chief Executive Officer]

Sure. Thank you.

[Operator]

Thank you. Our next question comes from the line of Samik Chatterjee from JPMorgan. Your line is now open.

[Angela Jin, JPMorgan]

Hi. This is Angela Jin on for Samik Chatterjee. I had a question sort of concerning the price increases. I saw in the presentation that you posted that there was about a 4% revenue contribution to the price increases. And so just thinking through that, are all the price increases you have implemented recently now flowing through, or are you still sort of working through that backlog and it’s partly flowing through? And then plus, you mentioned that you will be implementing more price increases. But just trying to think about the cadence of that and thinking about how that might contribute to your full year revenue outlook going forward?

[Karen Rapp, Chief Financial Officer]

Yes. Angela thanks. This is Karen. It was about – yes, you are right. It was about 4% increase to revenue from the increases that we have already put in place. Those – we did price increases in 2021 and we did another one in February of 2022. The one in February of 2022 will take some time to realize the full impact of that. So, we will see that tailwind going through the rest of this year as a result of those increases as well.

[Angela Jin, JPMorgan]

Got it. And then just thinking about the full range of the revenue outlook, that 12% to 18%, we kind of just – if we strip out the acquisitions from your growth, looking at organic growth, are you expecting more of that growth to be driven by your pricing or maybe your unit volume, or any color there would be appreciated. Thanks.

[Karen Rapp, Chief Financial Officer]

Sure. Yes. So, we saw about 3% in Q1 from acquisitions. When I bring in the full year, the rest of Kratzer coming in, plus having a full year of NH Research and Heinzinger, the rest of the year, I am estimating about a 6% inorganic growth in revenue from the acquisitions that we have done. So, depending on where we end in the range about 6% from acquisitions, I think the price increase 4% in the first quarter will continue to expand a little bit. And then the rest of the growth will be completely dependent on supply and where that comes in with our ability to ship. I do think demand is going to continue to be strong. And as Eric mentioned, if we go out of the year at the low end of the revenue, lower at the 12% or so, we would be potentially looking at about $100 million to $150 million more sitting in backlog that move into 2023 as revenue for that year. It really does just become a timing issue.

[Angela Jin, JPMorgan]

Got it. Yes. That’s all for me. Thank you.

[Eric Starkloff, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Eric Starkloff, NI CEO and President, for closing remarks.

[Eric Starkloff, President and Chief Executive Officer]

Thank you all for joining us today. Thanks for your questions, and have a great afternoon.

[Operator]

This concludes today’s conference call. Thank you for participating. You may now disconnect.