National Instruments Corp

F:NI1

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 National Instruments Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that 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 IR]

Good afternoon. Thank you for joining our Q4 2019 earnings call. Speakers today are Alex Davern, Chief Executive Officer; Eric Starkloff, President and Chief Operating Officer; and Karen Rapp, Chief Financial Officer. We will start with an update on our business, and then take your questions.

During the course of this conference call, we shall make forward-looking statements, including statements regarding future growth and profitability, our focus, plan, objectives, momentum, vision and strategic direction, our market position, capital allocation plans, and our guidance for revenue and EPS for Q1. 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 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 effects 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 21, 2019, and quarterly report on Form 10-Q, filed on October 31, 2019. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements. 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.

And I will be attending the Susquehanna Conference in New York on March 12, and hosting our investor conference in Austin on May 19. We look forward to seeing you there.

With that, I will now turn the call over the chief executive officer, Alex Davern.

[Alex Davern, CEO]

Thank you, Marissa. Good afternoon, and thank you for joining us. Our key messages today are record net income for a quarter and the full year, record quarterly revenue of $367 million, and 9% year-over-year increase in Q4 orders, showing renewed momentum as we enter 2020, and positive order growth across all four of our business units in Q4. I'm pleased with our ability to maintain our revenue and deliver record net income in what the IMF projects has been the slowest growth year for the global economy since 2009.

In Q4, the company reported record quarterly revenue and record net income, but accelerated order growth showing renewed momentum as we enter 2020. The diversity of our business has always been the key differentiator and a way to balance economic headwinds. The power of our software centric platform and our significant investment in innovation helps our customers meet their market demands faster and has created new adjacencies for NI's growth.

As I close out my 26-year career with NI with my one-hundred and first earnings call, I'd like to reflect on the progress that we have made as a company over the last three years. I took on the role of CEO at a time when we needed to significantly evolve in order to drive the next phase of sustainable growth. We committed to a three-year plan to realign the company for a stronger future, and we delivered on that commitment. To drive the next phase of growth, our leadership team set out four key objectives to introduce a new core strategic vision to significantly expand our market opportunity, to realign the entire company behind that vision, to achieve our profitability goal, and to ensure a world-class employee engagement. I believe our core strategic vision to be the leader in software defined automated test and automated measurement systems provides us with the focus necessary to drive the long-term growth of NI in a way that leverages our core strengths, our platform, our brand, our channel, and our operational excellence.

The second objective was to transition to become more customer centric and realign our focus behind industry facing business units. This was a big change and required us to introduce a new operating model for how we execute as a business. For sales, marketing, and services, this change requires us to realign around the customer. For R&D, it required us to realign around disciplines, in addition to products, and for manufacturing and G&A, it required us to realign around systems in order to support the new operating model.

The third objective is to achieve our profit goal by delivering 18% non-GAAP operating margin through the economic cycle. As a team, we committed to achieving this goal in three years. Thanks to a lot of hard work across the company, we were able to deliver on our commitment in two years. We reported 18% non-GAAP operating margin in 2018, and despite the broad industrial recession in 2019, we exceeded our goal, reporting 19% operating margin for the year, and demonstrating that we have structurally realigned the company to be able to achieve that goal consistently. As a result, we have essentially doubled the non-GAAP net income of NI over the last three years.

The key to NI's culture has always been our employees. Bringing the people at NI along with us on this journey was critical to our success in implementing our new business direction. Our leadership team did an amazing job of not only executing the plan, but also of ensuring transparent communication of the plan globally, and the outcome was a significant increase in our employee engagement over the last three years. To further position NI for long-term growth, we also reset many strategic relationships over the last three years with companies such as OPAL-RT, MathWorks, and ETAS. Most recently, we partnered with Cadence Design Systems, a leader in electronic design for analog, mixed signal, RF design tools. We believe this partnership will improve integration between the offerings of both our companies while helping our common customers to shorten their time to market, reduce designers, and lower costs, while allowing customers to reuse their intellectual property and algorithms through the entire design flow.

As I reflect on the progress we have made over the last three years, I am extremely proud of the company we are today. I'm inspired by the global impact of NI's technology. I believe our unique software centric platform provides increased opportunity as customers realize the full business benefits of our platform. I believe the full potential of our business can be realized to the benefit of our shareholders. I'm handing off the company in a position of strength with a recovering macro economy, renewed order growth, and a very strong leadership team. It has been an exciting 26-year journey for me personally, and I look forward to the future success of NI.

Now I'd like to turn the call over to our next CEO, Eric Starkloff.

[Eric Starkloff, President & COO]

Thank you, Alex, and good afternoon. I'll first give an update on our business before ending the call with my perspective on the future outlook for NI. This quarter, we exceeded the midpoint of our revenue guidance and saw year-over-year order growth across all of our business units with overall company orders up 9% year over year, and up 11% over Q4 2017. In semiconductor, we saw year-over-year orders up double digits in Q4, and up high single digits for the year. We believe our strong results are a testament to our strategy and our ability to continue to take share despite a very difficult year for the overall semiconductor market in 2019. We believe the growth in the market dedicated instruments for early 5-G R&D is a positive indicator for NI, as the automated validation and automated production opportunity is expected to follow in 2020 and beyond.

In transportation, we saw year-over-year orders up low-single digits in Q4, and down mid-single digits for the year. We continue to see strong growth in our business in the areas of electrification, active safety, and autonomy, where we expect to continue to aggressively invest. These high-growth areas and several significant wins that are top automotive accounts helped to offset the weakness in the overall automotive market.

Our aerospace defense and government orders grew double digits year over year in Q4, and high-single digits for the year. The diversity of applications and strength of our platform continue to add significant value in this industry, which benefits from our software centric approach and the ability to help our customers control their proprietary intellectual property, while meeting their demands for highly customized and long lifecycle systems. This differentiation allowed us to maximize our performance with the uptick in defense spending that occurred in 2019. In our portfolio business, we saw orders up low-single digits year over year in Q4, and down mid-single digits for the year. This portion of our business is inclusive of customers in all other industries, and it represents nearly half of our business. This is also the portion of our business that most closely correlates to the global PMI, which was a headwind for most of the year. However, we believe we are beginning to see stabilization in our market, as orders were up in Q4 for this business unit.

Growth in software seats continued to outpace overall company revenue growth year over year for 2019, continuing a multi-year trend in seat growth and customer adoption. Since 2017, software seats are up double digits. We believe this is a positive indicator of future growth potential as we enter new adjacencies and expand our reach to new customers. In summary, we have successfully executed significant changes in the last three years, as we realigned our company around our core strategic vision to expand our served available market. Despite some remaining uncertainty, the current market stabilization, along with another year of maturity of our strategy, gives me confidence in our ability to execute our birth plan in 2020. I believe we have the right strategy in place to make our customers successful and drive NI's growth.

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

[Karen Rapp, CFO]

Thanks, Eric. I'm proud of our performance in Q4. We closed the year strong, with all-time record quarterly revenue of $367 million, up 8% sequentially, which is in line with our long-term average. We had record net income in both a quarter and for a full year, and reported 19% non-GAAP operating margin in 2019. For 2019, revenue was $1.35 billion. Our 2019 non-GAAP gross margin was 78%. Non-GAAP net income was $217 million, up 4% year over year, with non-GAAP operating expenses down over 200 basis points year over year. A reconciliation of our GAAP and non-GAAP results is included in our earnings news release.

Our year-over-year bookings were up 9% in Q4, showing significant growth and providing momentum into 2020. Orders over $20,000 were up 19% year over year, and orders under $20,000 were down 5% year over year. Non-GAAP gross margin in Q4 was 78%. We believe our strong gross margins remain a testament to the value of our brand and the benefits our platform and systems provide to our customers. Non-GAAP operating margin was the highest per quarter in 20 years at 23%. Q4 non-GAAP net income was $73 million and $0.56 per share. The company reported Q4 GAAP net income of $59 million or $0.45 cents per share. Our Q4 earnings per share includes $0.03 that was not included in our guidance, due to the U.S. Foreign Tax Credit Regulations, issued December 2019. Also included in Q4 GAAP earnings per share is $0.08 related to an income tax benefit resulting from recording the deferred tax asset as we divested our AWR business in January 2020. In 2019, we delivered a 95% increase in our annual non-GAAP net income compared to 2016. We believe this improvement reflects the impact of the structural changes we have implemented as a company over the last three years.

Now an update on our capital allocation strategy. Our cash balance at year-end remains strong at $433 million. Our 2019 cash flow from operations was $224 million, representing 17% of revenue. I believe our clear industry focus, together with our solid balance sheet, puts the company in a strong position to increase revenue inorganically, to expand the technology capabilities of our platform, and broaden our customer reach. During the fourth quarter of 2019, we paid $33 million in dividends and repurchased approximately 800,000 shares of our outstanding common stock at an average price of $42.98. For the year, we returned over $300 million to our shareholders through dividends and stock repurchases, including the repurchase of 4 million shares at an average price of $42.83 cents. In addition, the NI Board of Directors has approved a dividend increase of 4% to $0.26 per share, available on March 9, 2020, to stockholders of record on February 18, 2020.

In January, we close the sale of our AWR business to Cadence Design Systems. This business represented approximately 2.5% of our annual revenue. Our guidance reflects the removal of this business from our financial results. We currently expect Q1 total revenue to be in the range of $308 million to $338 million. At the midpoint, this represents an increase of 6%, excluding our recently divested AWR business.

We are closely monitoring the coronavirus and its potential impact on our business. Our first priority is the safety of our employees, and we have already taken steps to address this. Our guidance includes the impact of the one-week extension of the Chinese New Year holiday. In 2020, to further support our strategy, we plan to invest to support our systems business evolution. We also expect to see variable pay come back in mind with revenue growth. Our company non-GAAP operating margin target remains 18% through the economic cycle. We expect Q1 GAAP diluted earnings per share will be in the range of $0.99 to $1.13. This includes $0.93 from the gain on sale of our AWR business. This will be excluded from our Q1 non-GAAP diluted earnings per share, which we expect to be in the range of $0.24 to $0.38.

Our effective non-GAAP corporate tax rate for 2019 was 16%, and looking forward, based on our understanding of the new tax laws, we estimate a 2020 tax rate in the range of 17% to 18%, subject to the risk of adjustments. This has been built into our guidance. For these forward-looking statements, please remember that our actual revenues and earnings could be negatively affected by numerous factors highlighted previously by Marissa.

In summary, we delivered strong results in a broad industrial recession. I believe this shows the stability provided by our broad customer base and then market diversity, the value customers see in our innovative platform, and the strength of our ability to scale our operations.

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

[Eric Starkloff, President & COO]

Thank you, Karen. Tomorrow, I will have the great honor of taking over the leadership of a company that is highly respected, delivers innovative solutions to our customers and the world at large, and has a 100-year plan that anchors us in a model for long-term success and value.

As we head into 2020 and begin a new decade of business, I believe we are in a stronger position than ever. We have created a more dynamic and responsive company aligned to our customers. We are better distributing decision-making throughout the company to improve our agility and customer responsiveness. We increased our focus on long-term innovation to help stay ahead of our customers' needs, and we've improved profitability and cash flow so that we can use our balance sheet to accelerate our strategy. We have created a strong foundation, which we believe will help accelerate our growth and achieve our long-term aspirations for all of our stakeholders. I want to thank Alex for his leadership, which strengthened this company in so many ways. And I want to thank all of our employees for their commitment to the changes we've made, and to the success of our customers.

With that, we will now take your questions.

[Operator]

Thank you. In the interest of time, we ask you limit yourself to one question and one follow up. [Operator Instructions] Our first question comes from the line of John Marchetti with Stifel. Your line is open.

[John Marchetti, Stifel]

Thanks very much. I was wondering if you could spend a little moment talking about some of the orders that you saw maybe by geography. I mean, you gave us a rundown and talked about adding orders up in all four of the segments. I'm wondering if you could just give us some sense of what the different geographies look like, and if you're seeing similar improvements across that spectrum as well.

[Eric Starkloff, President & COO]

Yes, hi, John. It's Eric. I'll take that. To give you the geography view in in Q4, orders were up 20% and APAC are up 10% in our Americas region, and they were down 2% in math.

[John Marchetti, Stifel]

And I guess just as a follow up there, as you're looking out into 2020, how should we think about some of these different drivers when you're looking at this being a little bit more of a growth year for you? Did you expect that it's going to be relatively similar across these four sub-segments or do you see obviously semiconductor continuing to lead the way in? Maybe you can fold into that some of your expectations for 5-G.

[Eric Starkloff, President & COO]

I'll give some commentary on that. So, let me talk first about - so, what we've seen over the last few years, as we shared before, and it's a combination of what's happening in those spaces as well as the maturity of our strategy. We're furthest along in our strategy in semiconductor and that's been the growth -- the strongest growth area. We were really excited with a strong double-digit growth in Q4, and that was over Q4 2018 that also had very good double-digit growth. So, the momentum there is good. As I mentioned in the prepared remarks, the 5-G sort of are -- the fact that the early box instruments sales and R&D has been strong we think is a good sign for the overall market as we come into 2020 and millimeter wave in the second half of the year. And then the second most mature is transportation. Of course, as I mentioned, the market's not been very strong overall in automotive, but the areas that we've invested in are growing. And overtime, that'll get more scale and contribute more to the growth area of that business. Arrow Defense has a pretty positive spending environment in 2019, and we're very pleased with the results of that business, and our expectation is a positive spending environment in 2020, as well.

And then, as I mentioned, the portfolio and the rest of our business tends to follow the economic indicators the most closely, and our view on that is obviously we're four quarters in to an industrial recession. We've seen that stabilized from a PMI point of view, as we mentioned, and so naturally, that outlook becomes more positive as you compare to those past quarters.

[John Marchetti, Stifel]

Thank you.

[Operator]

Thank you. And our next question comes from the line of Richard Eastman with Baird. Your line is open.

[Richard Eastman, Baird]

Could I just follow up on that? Is there a backlog number, Eric, that you could share or a book to bill for the quarter?

[Eric Starkloff, President & COO]

Yes.

[Karen Rapp, CFO]

Yes. Hey Eric, it's Karen. Let me maybe transition that off of a Q4 starting point. We built backlog at the end of Q4, and compared to Q4 '18, where we had seen a decrease. So, coming in with some strong backlogs. As you know, as we transition more to a systems business, we continue to have backlog growth going forward, and so starting the quarter from that viewpoint.

[Richard Eastman, Baird]

Okay. And when I look at the growth numbers by geography, Eric, I'm a little bit surprised how skewed the revenue growth is. Is that a function of -- I guess your orders were up in in all segments, but is that a function of the semiconductor vertical?

[Eric Starkloff, President & COO]

It's a couple of things, Rick. It's also looking out over a two-year basis, I think you'll kind of see that make a little bit more sense. We saw the weakness, obviously in Asia this time last year. I think you'll see it even out more. The other thing I was going to comment on, on the delta between the orders that we shared and the revenue is an increase in deferred revenue to strengthen our software. We talked about our enterprise agreements, which are really subscription-based software as that continues to grow, which is a good thing. The first software revenue is also a contributor to that delta.

[Richard Eastman, Baird]

I see, okay. Did Alex -- Alex, did you say 106 earnings calls?

[Alex Davern, CEO]

Only 101, Rick.

[Richard Eastman, Baird]

I didn't think you were that old.

[Alex Davern, CEO]

Well, we did have a couple of mid-quarter updates back in the '09 timeframe.

[Richard Eastman, Baird]

You counted those.

[Alex Davern, CEO]

I think you've been on most of them, Rick.

[Eric Starkloff, President & COO]

Yes, I was going to say. What's your count, Rick?

[Richard Eastman, Baird]

Yes, well, you know what? When I started in this business, they didn't have telephones, so I keep -- count those. Best of luck, Alex. I look forward to running into you at some events and NI Week perhaps.

[Alex Davern, CEO]

Thank you. Hopefully so. Thank you, Rick.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Nick Heisler with SFG. Your line is open.

[Nick Heisler, SFG]

It's Nick, I'm here for Maddie. Just a quick question and a follow up. So first is on the coronavirus. You said that is already being taken into account for your guidance for 2020. Just wanted to confirm that.

[Karen Rapp, CFO]

Yes, correct. Yes, this is Karen. Yes, correct. Based on what we know now, everything we know has been built into the guidance at this point.

[Nick Heisler, SFG]

Okay, perfect. And then on market share across all verticals, do you see any change for 2020, specifically in semi, but also in the others?

[Eric Starkloff, President & COO]

We're going to continue on the path we've been on in terms of our strategy. As I mentioned, it's another year mature in terms of where we can differentiate, and I'll just refer back to the commentary that I made on the last -- one of the - the first question in terms of our outlook in the different verticals.

[Nick Heisler, SFG]

Okay, perfect. Thank you.

[Operator]

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

[John Marchetti, Stifel]

Thanks very much. Karen, I just wanted to ask -- on the last call, we talked a little bit about having to spend a little bit more as we went into '20 to support some of the new growth initiatives and things along those lines. I'm just curious as we're looking out over the whole year -- when I think about EPS growth relative to revenue growth, should I expect that EPS grows in line? Does it grow faster? Does it grow slower because of some of those investments? I'm just trying to get a sense of how you're looking at the year from an OpEx perspective.

[Karen Rapp, CFO]

Sure, John. Yes, thanks for driving the clarification there. We've talked about the investments we're going to make to drive our capabilities for the system's business. And in line with that, our goal is to continue to focus on the 18% operating margin through the cycle. So, we're balancing that with the revenue growth is the way to maybe think about it. But we're going to continue to invest to make our channel more efficient, we're putting services around our systems business to help support that, and as you know, we also have the variable pay piece coming in throughout 2020.

[John Marchetti, Stifel]

Okay. And then, if I can just ask one last clarification as well. I know you break out the APAC revenue. How much of that is China? I'm just trying to get a sense for what the overall percentage of the exposure to that China market is.

[Eric Starkloff, President & COO]

We've shared before that that's approximately half of our APAC business.

[John Marchetti, Stifel]

Perfect. Thanks so much.

[Eric Starkloff, President & COO]

Thank you, John.

[Operator]

Thank you, and we have another follow-up question from Richard Eastman with Baird. Your line is open.

[Richard Eastman, Baird]

Thank you again. Karen, could you just -- I just want to clarify this, OpEx outlook. It's again, in talking and listening to kind of presentations that you've given, and Eric's kind of given, there's a lot of discussion around investment, but also kind of realignment. Basically, we're saving in some areas because it looks like your restructuring might be going up a little bit, and when we think about redeploying some of that savings, should I -- should we be thinking about the model that exists, and maybe the incrementals -- if we were to grow mid-single digits that maybe the incrementals are maybe 10 points lower than the model this year? In other words, at 5% growth, could our incrementals be more like 30% or 35%? Is that how --

[Karen Rapp, CFO]

You're going back to kind of a flow-through model there, Rick? Is that what you're trying to do?

[Richard Eastman, Baird]

Yes, just kind of on the incremental side. Just trying to figure out -- because again, some investments, some cost out. I know you're reallocating some of that savings into growth.

[Karen Rapp, CFO]

Rick, I think maybe some of the ways to think about the cost out is -- Eric talked about it earlier, but some of the things we're doing is restructuring for growth. So, while there's costs coming out from a restructuring standpoint, there's also putting that investment into the right places for the future growth as well, and in addition to the systems capability and the services around that. But I think maybe a good place to, to spend some time and is at NI week. When we do investor day, will be laying out a longer-term model that may help you. For now, I'd just do centering around the 18% operating margin through the cycle, and then we can get into a little more detail in May.

[Richard Eastman, Baird]

But, when you use that phrase, again, it suggests if you're -- if and when your growth accelerates and is sustained at a higher level, obviously would suggest your margin would be above the 18%. So, I get using that target, but I think it's more of the incrementals that would be helpful against the sales growth number. Is there a headcount number? How do you expect the headcount to change in '20 versus year-end, if you could give us that number? That would be helpful, year-end '19.

[Karen Rapp, CFO]

Sure. We ended 2019 up about 1% year over year, and we're looking to be similar to that coming into 2020 or out of 2020.

[Richard Eastman, Baird]

Okay. Headcount growth of 1%?

[Eric Starkloff, President & COO]

7320. Yes, Rick. I think the thing here, as you know, that the real variable is - variable pay is the biggest element of this, and obviously, given the year we just finished, given the year we just finished, that was quite low in 2019 with the expectation of growth that comes back in, so you get a compare issue.

[Richard Eastman, Baird]

I got you. Okay, excellent. All right, thank you.

[Eric Starkloff, President & COO]

Thank you, Rick.

[Karen Rapp, CFO]

Thanks.

[Operator]

Thank you. And our last question comes from the line of Nick Heisler with SFG. Your line is open.

[Nick Heisler, SFG]

Thank you. Just one more question. You touched earlier on millimeter wave being a second half of the year. I just want to get maybe a little bit more information on what you're seeing with millimeter wave right now.

[Eric Starkloff, President & COO]

Yes, so broad expectation of millimeter wave, I think probably similar to others, is that that demand cycle will be spread out more than certainly than sub-six gig. We released the product for millimeter wave May of last year, so we already have a product in market in the automated validation labs. We continue to serve the automated validation space. And then it's the early production opportunities that we expect later in this year.

[Nick Heisler, SFG]

Okay, perfect. Thank you. And that's on the infrastructure side, or devices, or both?

[Eric Starkloff, President & COO]

Well, like most of these markets, typically infrastructure first and then devices.

[Nick Heisler, SFG]

Okay, perfect. Thank you.

[Eric Starkloff, President & COO]

Yes, no problem.

[Operator]

Thank you. And I'm not showing any further questions at this time.

[Eric Starkloff, President & COO]

Okay. Thank you, everyone, for joining us. Thank you, Alex for 101 earnings calls, as well as three years of leadership that's put the company in a very, very good position. So thanks, everyone. Have a good day.

[Operator]

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