National Instruments Corp

F:NI1

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Q2 2021 NATI Earnings Conference Call. [Operator Instructions] I would now like to hand the conference to your host, Ms. Marissa Vidaurri. Please go ahead.

[Marissa Vidaurri, executive]

Thank you. Good afternoon. We appreciate you joining our Q2 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 second 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 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 and our quarterly report on Form 10-Q filed on May 3, 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 statements to confirm the statements 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.

Reminder to mark your calendars. We will host our virtual investor conference on August 17 at 10:00 a.m. Eastern Time. At this event, our executive leadership team and I will share a deeper drive into our growth strategy, secular growth drivers we believe will accelerate progress to our 2023 financial model and how we intend to enhance our already differentiated software position. Please visit ni.com/nati for link to Livestream.

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

[Eric Starkloff, executive]

Thank you, Marissa. Good afternoon, everyone. I really appreciate you joining us today. We had a great Q2. I'll share some color on the quarter, and then I'll discuss progress to our growth strategy before I hand it over to Karen to dive into the financial details. We were very pleased with the strong results in Q2 as momentum continued across the business with very high customer demand and great execution. Supply chain constraints continue to be a headwind, but were in line with our expectations coming into the quarter. Our teams were able to adapt quickly to the situation, helping us to exceed our revenue expectations.

We believe our results are proof that our strategy is working and our continued market focus is paying off. This was a quarter of records with results exceeding our expectations. Most notably, Q2 revenue exceeded the high end of our guidance and was an all-time record for a second quarter. We achieved record orders for Q2, up 33% year-over-year with double-digit order growth across all industries and all regions. In Q2, we also achieved record non-GAAP operating income, up 38%. Q2 GAAP operating income was up 50% year-over-year. In addition, we achieved record revenue and non-GAAP operating income for the first half of 2021, and we're entering the second half with a very strong backlog position.

At the investor conference, we will talk in more detail about our software strategy for growth. And in Q2, software growth year-over-year outpaced the company and year-to-date represents 21% of total revenue. We're also pleased with the progress on our channel transition so far this year. We have set clear goals to achieve higher efficiency in our broad-based business of over 30,000 accounts where scale and leverage can be achieved through both e-commerce and global distribution. These customers represented approximately 30% of our Q2 orders and reported record year-over-year order growth. We believe our strategy to serve these customers with e-commerce and distribution will ultimately improve customer experience, lower our cost of sale and improve our reach. The leverage in this portion of our business will also allow us to continue to forward invest in higher growth opportunities and focused accounts. Our focused accounts include approximately 2,500 accounts that we believe have the highest potential to expand our system-level offerings and increase our share of wallet.

These customers represented approximately 70% of total Q2 orders.

Now turning to our results by industry. Our semiconductor and electronics business reported strong results with year-over-year order growth up 35% in Q2. We were quickly able to leverage the OptimalPlus technology for our connected life cycle and analytics solution, which opens up new ways to support the needs of our customers throughout their product development flow, allowing them to use software to drive predictive data insights. Our transportation business continued to benefit from the recovery in vehicle production, with year-over-year order growth of 46% in Q2, representing an all-time record quarter for orders. We are encouraged by these results after 2 years of challenging headwinds.

As discussed previously, we expected an imminent recovery of vehicle production, which would then fuel increased investment in the key areas of electrification and active safety systems. The portion of this business focused on electric vehicles and ADAS continued to significantly outpace the rest of the business and now represents approximately 30% of our transportation orders. Order growth remained steady in aerospace, defense and government for Q2 with year-over-year order growth of 15% over an already strong 2020 Q2, representing record orders for second quarter. This has been a solid growing business over multiple years, a testament to our ability to accelerate system-level value for customers through software and services.

We are confident in our ability to capitalize on the steady defense spending environment. In addition, we continue to win highly innovative opportunities in new space applications, and we've been excited to watch multiple customers reach significant milestones in the past few months. Our portfolio business reported year-over-year order growth of 42% in Q2. This represents the third consecutive quarter of order growth for this business. We believe these results these results are indicative of a stronger macro economy as well as our intentional strategy shift to better serve our broad-based business through e-commerce and global distributors. We will share more at our investor conference about our strategy to grow our portfolio of business and make it more resilient through economic cycles.

Our global execution remains strong as we continue the journey to meet or exceed our 2023 financial model. We are committed to these goals with a priority to accelerate growth and a passionate win. With that, I'll turn over the call to our Chief Financial Officer, Karen Rapp, before I close with a few comments.

[Karen Rapp, executive]

Thanks, Eric, and thanks, everyone, for joining us today. The NI team delivered another outstanding quarter. We continue to see strong momentum in the second quarter with GAAP revenue of $347 million, up 15% year-over-year and above the high end of our guidance. We were pleased to see increased customer demand for our unique software connected solutions across all regions and industries. As expected, our backlog grew to about 4 weeks. -- giving us more visibility into Q3, while still providing very competitive lead times to our customers.

For Q2, focused accounts continue to see strength with orders up 28% year-over-year and up 30% over 2019 as we continue to see benefit in aligning resources to high-growth opportunities. For our broad-based business, orders were up 49% year-over-year and up 5% over 2019, led by success in our digital channel and global distribution initiatives, while also benefiting from the continued macro recovery.

We reported strong year-over-year order growth across all regions in the second quarter. In the Americas, orders were up 22% year-over-year, and EMEA orders were up 51% year-over-year. And in Asia Pacific, orders were up 36% year-over-year. Non-GAAP gross margin in Q2 was 74.8%. We continue to see about 50 basis points of impact from additional costs related to COVID-19 that began in Q2 of last year, and we expect these costs to continue throughout 2021.

As I've mentioned previously, we have increased the percentage of variable pay for our employees and tied it to the revenue and profit performance of the business. In line with stronger financial performance in 2021, we expect variable pay to increase this year.

In Q2, our variable pay expense increased $10 million year-over-year. While we continue to invest in areas of critical importance, our focus on driving scale is making our business model more resilient. We remain committed to the execution of our growth strategy while also improving our profitability in order to ensure our priority of maximizing shareholder value. We delivered record non-GAAP operating income up 38% year-over-year for the second quarter.

We reported Q2 GAAP net income of $17 million and diluted earnings per share of $0.13. Q2 non-GAAP net income was $47 million and diluted non-GAAP earnings per share was $0.35 at the high end of our guidance and an increase of 37% year-over-year. Our balance sheet remains strong. We ended the quarter with $265 million in cash and short-term investments. For Q2, our cash flow from operations was $22 million. We expect cash flow from operations as a percent of revenue to increase in the second half of the year. We continue to have a balanced approach to capital allocation and clear priorities. We plan to continue to invest in innovation and technology to disrupt our space through systems and enterprise software to fuel the market opportunities that Eric referenced.

In Q2, we paid $36 million in dividends. The NI Board of Directors approved a dividend of $0.27 per share, payable on August 30, 2021, to stockholders of record on August 9, 2021. We view our strong cash position as not only a way to provide returns for our shareholders through dividends and share repurchase, but also for inorganic investments to accelerate long-term growth. Our M&A funnel was focused on opportunities that are 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. Our intent is to continue to execute across these capital priorities. However, in any given quarter, our growth strategy may cause us to prioritize one over others.

Now shifting to guidance for Q3 2021. We're encouraged by accelerating demand and our ability to deliver to our customers in the second quarter and expect this efficiency to continue into the third quarter. For the third quarter of 2021, we currently expect GAAP revenue to be in the range of $355 million to $385 million. At the midpoint, this represents 20% year-over-year revenue growth versus Q3 2020 and 7% sequential growth. With the strong macro environment and accelerating customer demand, we also expect to grow backlog in the range of $30 million to $40 million in Q3.

In line with our strategic focus on systems and due to the continued supply chain constraints, we expect lead times in the range of 3 to 5 weeks as we exit the year. We expect slightly better than normal seasonality from Q3 to Q4 for revenue. We expect GAAP diluted earnings per share will be in the range of $0.10 to $0.24 for Q3, with non-GAAP diluted earnings per share expected to be in the range of $0.31 to $0.45, which is an increase of 65% year-over-year at the midpoint. 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 and the strength of our operational efficiency.

As we look forward, we remain focused on achieving 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. 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, executive]

Thank you, Karen. We continue to focus on delivering on our goals in 2023 and beyond. We remain confident in our ability to accelerate both growth and profitability. The strength we've seen across the business this year and our ability to execute further increases my confidence in these goals. As we look ahead, I remain inspired by our opportunities and the impact that we've been able to make with our customers globally.

I want to recognize all of our employees for their perseverance, execution and dedication, not just in Q2, but in the years of work we've all done to put us in this decision. With that, we'll now take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Samik Chatterjee.

[Samik Chatterjee, analyst]

So I guess I wanted to start with asking you about new orders. And just given the situation we had a year ago, I guess most of the orders and on a year-over-year basis, look like you're getting some very strong increases over the last year. Can you give us a bit more color on the order trends maybe sequentially, what you're seeing related to 1Q does look like they're strong, but particularly if you can give us more color on a sequential basis around the segments, like what are you seeing in semis and where are you seeing the most strength and -- in that related order? Just give us more sense on a sequential rather than a year-over-year basis because some of the comps might be kind of viewed from a year ago.

[Eric Starkloff, executive]

Yes, I understand the question. Thank you for it. I'll give you a couple of perspectives on this. One is we look at it year-over-year. Of course, we also look at it over a 2-year time horizon because that tends to normalize out some of the disruptions that we saw the last year, of course. And I would just say that I'll start there and then I'll give you some sequential comments.

From a 2-year point of view, it's really in line with our long-term expectations. So from an industry point of view, the strongest performance over 2 years remains in semi electronics. And the next areas are in ADG and transportation, which are both over 20% on a 2-year basis. Two different stories there. ADG, as I mentioned, is kind of steady growth over growth. And that's kind of the nature of that business. It's a very important part of our portfolio because of that. Transportation was down for 2 years and then has recovered very strongly. And so I mentioned that the orders in this quarter were an all-time record for any quarter in transportation. So it's very, very encouraging, and it's driven by the areas that we're focused on within the space. And so that also is encouraging that the areas we're focused on receiving the most growth.

And then lastly, portfolio, similarly, that was down over the last couple of years, and it's recovered very strongly. It's up 15% approximately over 2 years. So very, very strong growth in the quarter, look more normal to our strategy when you look over 2 years. And then finally, from a sequential point of view, the way I would characterize the order growth is that it has continued to accelerate. So Q2 saw an uptick in order growth over Q1. And then based on the guidance that we gave, if you look at the midpoint and some of the expectations we're setting on backlog, we are expecting order growth continue to strengthen. We've got a very strong start to the quarter, and we expect it to continue to strengthen in Q3.

[Samik Chatterjee, analyst]

Okay. Got it. And for my follow-up, Eric, I guess, if I heard you guys correctly, you do expect backlog to increase. And I'm just trying to get a sense, is there a limitation on the supply that you're seeing that may be constraining some of your ability to deliver to the strong demand that you're seeing? What is the latest on the supply side outside of the headwinds on the cost that you called out, how much of a constraint is that in -- on the revenue side?

[Karen Rapp, executive]

Yes. Samik, this is Karen. I'll take that one. It's exciting because we're actually still seeing order growth continue to outpace revenue growth. So the way we're looking at it is seeing some of the supply issues stabilize but not to a point where they're back to where they used to be at this point. So we are planning to build $30 million to $40 million of additional backlog in Q3, which will put us at about a 5-week lead time coming out of Q3, which is still incredibly competitive in the space that we're in. The other thing that, that does for us is it continues to give us visibility into the quarters going forward and in our space. Maybe it's important to note that we tend to see very minimal cancellations. And even when you're looking at a 4- to 5-week lead time, we're still able to shift that product really quickly. So it gets it out the door within -- right after the end of the quarter, basically to start getting it to customers.

[Eric Starkloff, executive]

And I'll just add briefly, Samik, that one thing I was really encouraged by is that the supply chain constraints sort of met our expectations in Q2. If you go back a couple of quarters, it was pretty unknown how this would play out. It's now at a point where at least for Q2, it was relatively predictable or met our expectations. And so that's a -- I'd say, a good sign, but it still remains a headwind in that we're -- as Karen said, we're growing orders faster than revenue.

[Operator]

Your next question comes from the line of John Marchetti.

[John Marchetti, analyst]

Eric, I'd like to go back to your comments around the 2-year view. I mean, obviously, when comparing some of this against the COVID troubles of last year, certainly some of that growth was in place. But over the 2-year basis, it sounds like all of these segments are really starting to come back into more of a growth mode. Can you talk a little bit about how much of that you think might be share gains? Or how much you think is based on what you've done to the portfolio versus how much of it is just more of the cyclical nature of some of these industries coming back more towards a growth trajectory?

[Eric Starkloff, executive]

Yes. No, John, good question. And so yes, the order growth is up in the low 20s over 2 years just to put -- I gave the sort of industry color when I answered Samik's question. The way I think of it, and of course, it's hard to tease out exactly that. Certainly, it's a strong macro environment. We see that across the business. But if I compare things like our portfolio business, which has been more tied to economic indices like PMI in the past or if I look at our smaller accounts, what we call it broad-based accounts, that's a good baseline. Those are up sort of 10% to 15% over that 2-year period.

And then I look at the areas of focus, whether it's through our focused accounts or the areas within the BUs that I described of the focus areas on 5G, on electrification and ADAS within transportation, et cetera. Those areas are growing much more strongly. Our focus accounts for up 30% over 2 years. And those areas of focus are up either strong double digits or some of them are up sort of triple digits. And so that's quite encouraging. So I think that's the part that is based on our strategy and where we're leaning into share gains above the base strong demand that we see across the business.

[John Marchetti, analyst]

Great. And then, Karen, maybe for you. You mentioned the $10 million incremental expenses associated with the variable pay. Should we expect -- given the growth that you're talking about here and how should we expect that to continue in the second half? And then how do we think about maybe second half non-GAAP OpEx versus first half?

[Karen Rapp, executive]

Yes. John, that's actually good question. We're absolutely at this point with what we're looking at from a midpoint of guidance and kind of the way we're looking at Q4 being -- returning to normal seasonality plus, that kind of outlook for the year would imply that you should keep that kind of increase in variable pay built into the second half of the year as well. Beyond that, it's going to become normal seasonality at the core of what we're doing from an OpEx standpoint.

[John Marchetti, analyst]

Great. And then maybe if I can just sneak one last one in here. You talked about expecting to exit 3Q at sort of 5 weeks. If we look out 12 or 18 months from now, you're anticipating getting back to the very low levels that you had from a backlog perspective historically? Or do you think maybe just given some of the changes and what's going on globally and in some of these markets, that you'll actually be maybe somewhere between the 5 weeks that you're going to exit and where you had there historically?

[Karen Rapp, executive]

Yes. I think that -- with the long-term strategy that we have, we've talked about this before, but as we lean in more on systems, those will center around a 4-week kind of lead time for systems in general. And so our goal is going to continue to be to have several weeks of backlog. I talked about going out of the year at kind of a 3- to 5-week lead time somewhere in that range. I think we'll center around that most likely in 2022 is what I'd be expecting.

[Operator]

Your next question comes from the line of Mehdi Hosseini.

[Mehdi Hosseini, analyst]

A couple of follow-ups. This is for the team. Can you remind me what your backlog was in the up cycle of 2017?

[Karen Rapp, executive]

I'm sorry, I don't know the numbers back in '17, but we...

[Eric Starkloff, executive]

They were typically pretty small comparatively. So we would see around a week or so of backlog most of the time. But that would give you an approximation.

[Mehdi Hosseini, analyst]

That's fine. I was just trying to get a -- gauge the increasing backlog. I see your product portfolio more diverse, and your overlay or the supply chain disruption due to COVID. So your backlogs are certainly longer compared to 2017, the last cycle, right?

[Eric Starkloff, executive]

Yes. They've gone up quite a bit. This would be the largest we've had. But to Karen's point, there's these 2 elements. There's the supply chain, of course, which is causing the increase in backlog. As she mentioned, they remain quite competitive when you look at typical backlogs in our industry. And then there's also we've said before, strategically as we have more systems business, that is going to have the impact of increasing backlog over time, give us more visibility as well into the forward-looking business. So we view that as a positive thing.

[Mehdi Hosseini, analyst]

Okay. And is there any particular product or end market where the lead times are longer than, let's say, average? Or is it...

[Karen Rapp, executive]

Yes, it was actually -- because of the way we leverage -- because of the way we leverage the platform, we're seeing very similar across all industries and all regions.

[Mehdi Hosseini, analyst]

Right. Okay. And then the last item for me. Is there an update on your efforts to penetrate the 5G. It's my understanding that, that would hinge on millimeter wave, but I'm just wondering if there's an update there.

[Eric Starkloff, executive]

Yes. So 5G continues to be a growth driver, particularly in our semi electronics business. That's where most of our 5G is. It's not just millimeter wave. So most of the business today is in sub-6. We characterized it before, it's about half our semiconductor business, and that's similar. So it continues to be a growth driver and is particularly strong, I would say, in APAC, probably not surprisingly. And then we do view millimeter wave is still a long-term growth opportunity. It's an area we serve now as we've said before, that the opportunity in terms of the scale of ramp-up of millimeter wave has tended to push out in time into kind of next year for the larger volumes of millimeter wave. But for now, we've been seeing steady performance of 5G primarily in sub-6.

[Mehdi Hosseini, analyst]

I think sub-6 mostly, this is for high-volume manufacturing, right?

[Eric Starkloff, executive]

Well, it's about our business, including in 5G, it's about 50-50, Mehdi. So it's about half in labs -- in automated labs and about half in high-volume manufacturing. So we view that as, one, a nice healthy balance for the resiliency of the business. It's also to our customers, we're delivering value because of the commonality of those systems, but it split pretty evenly across those 2.

[Operator]

Your next question comes from the line of Mark Delaney.

[Mark Delaney, analyst]

First, on the operational environment, I realize the company has a facility in Malaysia where unfortunately, there's been some increased COVID cases. And as a result of that, I think the government has some restrictions on the number of people in some facilities. Obviously, the company was able to still come in above the high end of its guidance. But I was hoping you could talk a bit more on the operational challenges the company may be encountering and specific to your Malaysia facility, what you've been able to do to overcome those.

[Karen Rapp, executive]

Yes, Mark, this is Karen. We've not had any operational impact in our manufacturing facilities, both in Malaysia and in Hungary. One of the things that was really neat to see in Malaysia this quarter was a partnership we had with Intel to help our employees get access to vaccinations. We were able to enable our employees to bus them over to the Intel facility. And we were really pleased with the number of employees that we're able to participate in that as well as their families and the support staff in the factory. But we've been able to keep operations running fully operational, and we have not had any impact throughout COVID as a result of any of the limitations so far.

[Eric Starkloff, executive]

And Mark, if I could just take the opportunity since you teed up the question. And I'll just say, it's just been remarkable, our employees. Not just in the factories -- certainly in the factories and the resiliency they've had to show, but as you highlighted, this COVID pandemic has created the need for a lot of adaptability across our business. And as you noted, it's not done yet. We have to show that adaptability. I've just been really overwhelmed with how well we've been able to run the business and reach very successful financial milestones despite that, including being able to operate, as Karen said, in both of those factories. Something you may have a follow-up to, Mark. Go ahead.

[Mark Delaney, analyst]

I did. Sorry, for the comment there, and that's very good news. In terms of the orders, I understand there's a component that due to some of these structural opportunities in particularly growing areas, perhaps the company has been picking up some market share. But given how tight the supply chain has been, lead times are short, but are a little bit extended. How do you guys think about the potential risk that there's an element of the order shrink that is perhaps double orders? And the risk of some cancellations to at least a portion of the orders.

[Karen Rapp, executive]

Yes. This is Karen again. We have an interesting business where because the lead times are still only about 4 weeks coming out of Q2. For the most part, the orders ship right away as soon as the quarter ends. And so historically, we've seen very minimal cancellations. We've been watching that given this current situation. We haven't seen any increase in the level of cancellations. So we continue to see very minimal -- we ship 90% plus of the backlog that we come into a quarter with right away. So we're feeling really good about the strength of that backlog and how solid it is to turn into revenue.

[Eric Starkloff, executive]

And I'll just say that double ordering phenomenon that happens in the semiconductor supply chain generally doesn't -- hasn't historically happened in our market capital equipment. That's generally not been an issue.

[Mark Delaney, analyst]

That's helpful. If I could sneak one last one in. Just in terms of the comments that you made, Karen, on fourth quarter revenue, the potential to be slightly better than typical seasonality. It looks like in most years, revenue is up mid- to high single digits sequentially. So it seems like you're implying a high single digits or perhaps up low double digits, but if you could clarify what your interpretation or calculation on normal seasonality is, that would be helpful.

[Karen Rapp, executive]

Yes. Mark, your numbers are the same as mine. I'm looking at a 7% to 8% kind of percent normal sequential from Q3 to Q4, and I think it will be slightly higher than that the visibility we have right now.

[Operator]

The next question that you have is from Rob Mason. Go ahead.

[Robert Mason, analyst]

One quick question just on backlog, the hot topic. The -- I think the expectation coming into the quarter, Eric, was that -- or Karen, you would build about $40 million to $50 million, but just given the way of backlog, given the way you outperformed, is that -- was that still the case in the quarter, the third quarter?

[Karen Rapp, executive]

That is almost exactly the number, Rob. We booked about $5 million of backlog in Q2, just like we expected.

[Robert Mason, analyst]

Okay. Okay. Eric, you're about to annualize or maybe just have annualized the OptimalPlus acquisition. I was curious if you could just give some thoughts as to now that you've owned that a year, how that has been integrated into the business? And also, how did it contribute as you came through this most recent quarter, having owned it about a year just in terms of maybe the revenue contribution, how it's contributing, I think, primarily to the semi-electronics business and just your take on that overall.

[Eric Starkloff, executive]

Sure. Rob. Yes, absolutely. So first, the integration has gone very, very well, very smoothly. We've reached all the integration milestones that we had, very pleased. I was actually just over in Israel a few weeks ago where a large number of the employees in the R&D center is for OptimalPlus, which was fantastic to be able to be over there in person with those employees for the first time. And so just a great fit in terms of the people and the technology.

The comment I'll make is that, one, we're very pleased with the pipeline of business and the opportunity expansion that we see in the synergy with the channel. And then the second is that this is an area, and I alluded to it, but it's an area where we're looking to expand our investment over time in this area, generally speaking, of data analytics and product data analytics, both building off of that platform and it's an area for organic inorganic pursuit for us. So that's probably -- the biggest statement is that after a year, it's an area that we want to do more in, and we see as a potential long-term driver of growth.

[Karen Rapp, executive]

Maybe I can do a -- real quick for you. We just did our customer conference this week, NI Connect -- And there's more there that you can see about customer testimonials and really just understanding what that looks like going forward as we continue to lean in on that space. So a pretty exciting event with great turnout.

[Robert Mason, analyst]

Great. Great. Last question. Karen, just on the third quarter guidance, should we still be thinking gross margin -- adjusted gross margin in the mid-70 range. And then around your -- quick back of the envelope math was maybe the midpoint suggests your operating margin is flattish sequentially and operating expenses up kind of 8% or so, 7%, 8% sequentially. Is that the case?

[Karen Rapp, executive]

Gross margin, yes, will be in line with our long-term trends. It flexes a little bit as revenue goes up. So there's some -- a little bit of additional efficiency that we get with higher revenue in gross margin typically. From an OpEx standpoint, continuing to kind of see the normal baseline that you would see from a Q2 to Q3 then plus the variable pay on top, but that is the way I look at it, Rob.

[Operator]

There are no questions at this at this time. I would like to turn the call over back to our speakers.

[Eric Starkloff, executive]

Thank you all for joining us today. We look forward to seeing you on August 17 at the investor conference. Have a good day.

[Operator]

This concludes today's conference call. Thank you all for joining. You may now disconnect.