National Instruments Corp

F:NI1

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to the National Instruments, Fourth Quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Marissa Vidaurri, Head of Investor Relations. Please go ahead.

[Marissa Vidaurri, Head of Investor Relations]

Good afternoon. Thank you for joining our Q4 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 quarter before opening up for your question. Our discussion today will include forward-looking statements, including without limitation, those regarding revenue, earnings, gross margin, operating expenses, capital allocation, targets, and future business outlook and guidance, including expected demand for our products, supply chain constraints, backlog, the potential impact of COVID-19 on the company's business and results of operations, successful integration of the acquisitions and future results of acquired companies, and execution on our strategy.

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 23rd, 2021 and our quarterly report on Form 10-Q filed on November 1st, 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 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 in ni.com/nati. We're excited. to announce that DeRito Rockenbach has been appointed Senior Vice President and General Manager for the transportation business. Most recently, serving as Senior Vice President and Chief Customer and Strategy Officer at HFI. Rita joins NI with more than two decades of experience in the automotive industry. In the coming months NI management will be hosting meetings for the conferences for Needham, this SWANA and Morgan Stanley.

Please visit ni.com slash 90 per presentation times. We look forward to speaking with you. In addition, you can find the press release and quarterly presentation to supplement today's discussion on our website at ni.com/nati. With that, I will now turn the call over to Chief Financial Officer, Eric Starkloff.

[Eric Starkloff ]

Thank you, Marissa. Good afternoon. We appreciate everyone joining us today. In Q4, we reported our fifth consecutive quarter of strong performance. We achieved multiple all-time performance records in our business, including record quarterly revenue and record quarterly non-GAAP operating income. For Q4 year-over-year orders were up 19% revenue was up 14%. non-GAAP EPS was up 18% and non-GAAP operating income was up 22%. 2021 represents an inflection point of performance for NI. We continued to deliver on our commitment to accelerate growth and improve profitability. Our strong financial performance is a direct result of strategic changes we've made over the last several years.

First, we focus to enhance our software capability to drive new long-term opportunities. In addition to our own organic investments, we acquired Optimal Plus in 2020 to serve as the core of our data and product analytics capability and open new market opportunities. We also partnered with, Cadence, Ansys, and the math works to connect design and simulation with test. And starting in 2022, we have made the decision to shift our single seat software licenses to subscription, which will lead to more recurring revenue and better predictability in our business. Second, we focus to capitalize on secular trends by targeting system level offerings to accelerate our growth.

We targeted these offerings at 5G and wireless, electrification and autonomy, and new space application. We restructured our sales force to increase direct engagement with top accounts in these domains. And today, these applications and our focus accounts are growing significantly faster than the company and driving our overall growth. Third, we've streamlined our business to create a more efficient engagement with customers and to drive scale and leverage in our broad-based business. We invested for multiple years in ni.com and these investments showed strong return with online order growth up 44% in 2021. We shifted our tier 3 customers to utilize global distribution partners and the results from this shift exceeded our expectations in 2021.

Next, we focused on inorganic opportunities to accelerate our growth strategy. Last quarter, we announced two acquisitions in the high-growth application of electric vehicles, which we expect will add approximately 4% of revenue in 2022. And NH Research delivered the plan in Q4 and we are targeting to close on the EV business of Heinzinger in late Q1 2022. I've high expectations for our multiyear growth in this industry focused on a large EV and ADAS investments of our customers. We will continue to prioritize inorganic investments that strategically align to our business in order to accelerate growth.

And lastly, we delivered on our commitment to drive efficiency across our cost structure. We better aligned our people to the critical needs of our growth strategy with headcount down 3% year-over-year in 2021 and a plan to remain approximately flat in headcount in 2022 in a year of expected strong revenue growth. And as I've said, we expect earnings to outpace revenue for the foreseeable future. The effect of these changes brings increased confidence in our business as we enter 2022. We are in a position of strength with strong demand, record backlog, and disciplined expense management, so our expectations it's to now meet or exceed our previous 2023 financial model.

In 2022, a full year ahead of schedule, as I said last quarter, we expect to deliver 16% to 18% revenue growth year-over-year in 2022 and to exceed our financial target of 20% non-GAAP operating margin. Now, onto our industry results for the full year 2021. The areas of intentional focus are delivering to our expectations. I believe this is a proof point that we are focused on the right areas to accelerate growth. We expect double-digit growth across all of our business units in 2022. Semiconductor and electronics revenue was $394 million up 21% year-over-year. We saw continued strength in our focus area of 5G and wireless communication, which represents more than 50% of revenue for this business and we continue to see success in new offerings for automated labs in this space.

Transportation revenue was $212 million up 27% year-over-year. While this business previously correlated primarily to automotive production rates, a shifting focus to EV and ADAS, where our customers are making significant investments, has shifted the trajectory of this business. We expect by the end of 2022 these fast-growing applications will represent more than 50% of the revenue in transportation. Aerospace, defense, and government revenue was $370 million up 8% year-over-year. This business remained a steady and profitable growth engine delivering year-over-year growth in both 2020 and 2021 led by strength in defense applications and new space investments.

And our portfolio business, which represents the majority of our broad-based customers, achieved revenue of $496 million, up 10%. In addition to the favorable macro, our focus on optimizing the channel and better positioning our offerings to these broad customers has gained traction. Our shift to subscription software will also provide more resiliency in this area of our business. In summary, it's clear that our customers are facing major technology inflections including wireless communication and 5G, autonomous and electric vehicles, and new technology for space innovation.

Each of these is a major technology hurdle that for many customers is a once in a career inflection point. Our unmatched expertise in modular systems, test automation software, and product analytics make NI uniquely positioned to help our customers navigate these challenges to improve their development and manufacturing operations. With that, I will turn it over to Karen to discuss our Q4 results and our outlook for Q1.

[Karen Rapp, Chief Financial Officer]

Thanks, Eric. Hello, everyone. NI delivered another consecutive quarter of strong financial results. Q4 revenue was a record at $421 million, up 14% year-over-year, and at the high end of our guidance. Demand continued to be strong and our supply chain organization went above and beyond to manage through continued component constraints to meet customer needs. We ended the year with over $150 million in backlog, keeping our lead time very competitive at about five weeks. Total orders in Q4 were in all-time record for the company and up 19% year-over-year. In the Americas, orders were up 34% year-over-year, and in EMEA orders were up 20% year-over-year, both representing records for a fourth quarter. In Asia-Pacific, orders were down 2% year-over-year primarily due to a strong compare in Q4 2020.

In Q4, we generated $50 million of GAAP operating income and $96 million of non-GAAP operating income translating into a non-GAAP operating margin of 23% for the quarter. Q4 non-GAAP gross margin remain solid at 74 Non-GAAP operating expenses were up 9% year-over-year, driven by an increase in variable pay, which is aligned to our strong business performance. We reported Q4 GAAP net income of $40 million and diluted earnings per share of $0.30. Q4 non-GAAP net income was $80 million and diluted non-GAAP earnings per share was $0.60 at the high end of our guidance and an increase of 18% year-over-year.

Now shifting to full year 2021 performance, customer demand was strong with orders up 24% year-over-year enabling a 6X increase in backlog. We delivered on the targets shared at our Investor Conference in August with record revenue of $1.5 billion up 14% year-over-year. Our 2021 non-GAAP gross margin was 75%, continuing to demonstrate the value our customers see in our software connected systems. GAAP operating margin was 8%. Non-GAAP operating margin was the highest in the last 20 years at 18.6% and up 290 basis points from 2020, despite an increase of $45 million in variable pay year-over-year, demonstrating the focus we have had on driving efficiency in our cost structure. In 2021, GAAP net income was $89 million. We delivered record non-GAAP net income of $224 million, up 37% year-over-year. Now let me comment on capital management.

Our balance sheet remains strong with $211 million of cash at the end of the fourth quarter. Cash flow from operations was $143 million for fiscal year 2021. In the fourth quarter, we returned $66 million to shareholders through dividends and share repurchases. For the full year 2021, we returned $198 million to our shareholders, reinforcing our commitment to shareholder value. 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. We believe we have proven success in our growth strategy and enter 2022 in a position of strength. We're confident in our ability to accelerate growth while returning excess cash to shareholders through dividends and share repurchases. The Board of Directors authorized a new stock repurchase program of $250 million. The new program is effective immediately and it's in addition to the previously authorized program.

The NI Board of Directors also approved the quarterly dividend of $0.28 per share, an increase of 4% and payable on February 28, 2022 to stockholders of record on February 7, 2022. We expect our dividend to represent approximately half of our non-GAAP net income in 2022. Now shifting the guidance for Q1 '22. The momentum in customer demand for our software and systems combined with the durability of our backlog gives us confidence for strong revenue growth in 2022. While we expect our software subscription-based, recurring revenue, and cash flow to increase over time as a result of our software licensing model transition, we do expect some headwinds to our net sales and operating profitability during the transition period and we've built that into our guidance.

With our current visibility and expectations of the macro environment for the first quarter of 2022, we expect revenue to be in the range of $385 million to $415 million. At the midpoint, this represents 19% revenue growth. We expect our 2022 revenue profile to return to our pre-Covid seasonality with approximately 23% of our revenue in Q1. This guidance is based on our current understanding of supply issues and assumes no manufacturing shutdowns due to COVID-19. We expect GAAP diluted earnings per share will be in the range of $0.13 to $0.27 for Q1, with non-GAAP diluted earnings per share expected to be in the range of $0.35 to $0.49, an increase of 31% year-over-year at the midpoint.

In Q1, we expect the current component pricing environment and our software transition to cause gross margin to temporarily be below our long-term average. Our plan is to offset this near-term headwind through pricing and robust operating expense management leading to an improvement in operating margin year-over-year. We currently expect to exceed our financial target of 20% non-GAAP operating margin in 2022, and are targeting earnings-per-share growth above our revenue growth for the year. In closing, we will continue to strengthen our competitive advantages and make our business scalable and more resilient. We remain committed to accelerating growth, improving profitability, and maximizing shareholder value. Now I will turn the call back over to Eric for some closing comments.

[Eric Starkloff ]

Thank you, Karen. As we close out the year, I took some time to reflect on my last two years as CEO. I am really proud of the resiliency of our business and our strong financial performance, which is a direct result of the strategic changes we made over the last several years, and the hard work and determination of our people and I continue to be inspired by the work that they do every day. One initiative that is very important to me personally is the impact we have on society and that's long been a part of our culture at NI. Now one thing I focused on was to make our effort in this area more transparent and more intentional.

And so in 2020, we established the first corporate impact strategy that includes 10-year goals to ensure our positive influence on society. Our focus is rooted in three pillars: changing the faces of engineering, building an equitable and thriving society, and engineering a healthy planet. These are critical pursuits. And I'm honored to share that just this month, NI was named the Newsweek 's Most Responsible Companies. This is great recognition and a big accomplishment in first year of our corporate impact strategy. I want to sincerely thank all of our employees for their commitment to our purpose and for their multiple years of hard work and perseverance.

Your work enabled us to achieve our fifth consecutive quarter of strong financial performance and has put us in a position to exceed our 2023 financial goals of full year ahead of schedule. With that, we will now take your questions.

[Operator]

[Operator Instructions] We also ask that you please limit yourself to one question and one follow-up. You may get back in the queue if time allows. Our first question comes from the line of Meta Marshall from Morgan Stanley. Your question, please.

[Meta Marshall, Morgan Stanley]

Great. Thanks. And appreciate the presentation and congrats on the quarter. Just wanted to dig into supply chain briefly. You've mentioned that clearly as something that you are working to mitigate and maybe there's the small gross margin impact for you guys. But just wanted to get a sense of is there any end customer demand that's impacted by their ability to get tips that we should be mindful of? And then maybe just second question for me, obviously, it's a strong 2022 guide. Just wanted to contextualize how you measure the headwind that comes from the transition in the software license model to subscription. Thank you.

[Karen Rapp, Chief Financial Officer]

Sure. This is Karen. Let me maybe start and see if Eric wants to add more to this. The near-term headwinds that we're seeing in supply chain are primarily driven by component costs. We saw that through the end of 2021, and really through the first half of 2022 as a short-term headwind. We're hoping that type of inflationary pressure levels off over time and then becomes more of a tailwind back to historic levels. And we also have the temporary software impact built into the guidance that we provided as well. So again, that again, we look at as a near-term current timing issue that we're working through to drive even more upside as we come out a bit on the back-end.

From a customer perspective, there's not any one that's causing headwinds or issues for. We tend to have such a large, diverse customer base and our lead times still remain incredibly competitive at about five weeks on average. So there may be some that are a little longer than that, but others that are shorter and we believe based on the feedback and the interactions we've had with our customers that that's not creating significant issues for them. We're being very deliberate about making sure that we're managing across that entire customer base.

[Eric Starkloff ]

And maybe I'll add a little bit of color on the software transition question that you had. I want to just calibrate that. So at first -- today, a majority of our software business is already recurring. Over the last few years, we have been shifting through our volume license agreements or enterprise agreements particularly at our larger customers, so that those are time-based licenses. What we've decided to do at the beginning of this year is to shift the remaining part of our software portfolio, which is the single fee licenses to be subscription-based so that will be primarily recurring. It does have a small impact of revenue for 2022, as Karen said, that's built into guidance.

And then, of course, it becomes more and more favorable as time goes on. We believe that our software is very valuable to our customers, that it's very sticky, that renewal rates will remain very high. So it's lucrative from that point of view, and it also gives our customers the ability to on-ramp onto our software easier with that subscription model. So I think it has benefits for the customer and for us. But just to calibrate it, it's a relatively small revenue impact that's built into guidance.

[Meta Marshall, Morgan Stanley]

Got it. Just circling back on the supply chain question. It was less of a question of whether you were having problems getting equipment to customers or it was more are your customers -- has their demand of your products been impacted at all by their ability to get chips within their products?

[Eric Starkloff ]

Yeah.

[Meta Marshall, Morgan Stanley]

I guess that was more of the question was whether it was impacting customer demand.

[Eric Starkloff ]

Yeah. Let me make just one comment on that. As we've said, overall the demand environment remains really robust, very strong last year, it's -- we believe it will continue to be strong. In general, across our business most of our segments are more correlated to the R&D budgets of our customers. Of course, we serve both R&D and production but it's more correlated to R&D. So in that case, those don't really have any near-term impact and we're not really seeing any substantial impact in terms of customer demand from that -- from those supply issues.

[Meta Marshall, Morgan Stanley]

Great. I'll pass it on. Thank you.

[Eric Starkloff ]

Thanks, Meta.

[Operator]

Thank you. And once again, as a reminder, please limit yourself to one question and one follow-up. You may get back in the queue as time allows. Our next question comes in the line of Mark Delaney from Goldman Sachs. Your question, please.

[Mark Delaney ]

Yes, and good afternoon. Thanks very much for taking the question. First on orders, I was hoping you could be a little bit more specific. I know you mentioned it was a record level and it was broad-based and market strength. I didn't catch the absolute number. I think the last quarter was just over $400 million. So perhaps you could clarify where order and overall came in on absolute basis and if you could be any more specific around how you're expecting order to trend into 1Q and if you still think book-to-bill remains above 1?

[Karen Rapp, Chief Financial Officer]

Sure, Mark. This is Karen. Yeah, we ended Q4 just over $470 million in orders, which puts us for the year at something over 1630, right around that level. That was the 14% growth both for -- in revenue that we saw is what sell-through as a result of that. For the forward look, we expect book-to-bill to still be higher than one in Q1 especially where we've started the quarter and where we see so far. So that's leading to the confidence that we have to be able to guide the 19% growth in revenue at the midpoint is based on still strong demand plus some backlog build potentially in Q1 as a result of the strong demand.

[Mark Delaney ]

My follow-up on that topic, a little bit more broadly, but orders are strong. You talked about supply constraints continuing. Maybe you could square that with the times, I think came in a little bit, I think was six weeks and now five weeks so maybe just talk through what is in line the slight shortening of those two times. Thank you.

[Karen Rapp, Chief Financial Officer]

Yeah. We're currently, it's around, but 5, 5.50 weeks lead time. Coming out of Q4, I expect that to actually hold through 2022. It's our intent to be very strategic about our lead times going forward and really drive expectations with our customers that they can rely on the lead times that we quote to them. So driving that consistency with our customers is incredibly important for us, and giving them credibility and understanding when they'll receive product from us. So the models we've built out and the guidance we've provided is built on upholding the lead times at about 5 weeks in 2022. It will flux. That will fluctuate a little bit quarter-to-quarter. Like I said, we'll build a little bit more, I think first half, but then that will fluctuate out through the year.

[Mark Delaney ]

Thank you.

[Eric Starkloff ]

Thanks, Mark.

[Operator]

Our next question comes from the line of Mehdi Hosseini from Susquehanna. Your question, please.

[Mehdi Hosseini, Susquehanna]

Thanks for taking my question and two for me. First one is for Eric and help me understand how supply chain disruption is impacting you. What if you are willing to pay the premium it takes to procure all the components or what will be the revenue for March if supply chain disruption wasn't there? How much of a revenue will be impacted because of supply chain disruption? And I have a follow-up.

[Eric Starkloff ]

Okay. Karen, I can tag team on this. So yeah, I think some of the comments that Karen just made kind of give you an idea of it. It's still there, it's stabilized quite a bit. It's a few key components that are the majority of the challenge that we still have. Given our expectation that Karen just shared of a maybe a book-to-bill of slightly over 1, but not significantly over. It's not a major impact to Q1. And as we've said all along, we think the five-weeks -- approximately five-week lead time is highly competitive. And so we're comfortable with where that is.

The component pricing and procuring the right components, especially given our margin, everything is a priority and that is one of the things that is a short-term headwind to margin that Karen mentioned. We do mitigate that to an extent with pricing, but there's a time delay. We've already announced some price changes to our end customers, but there is a time delay between the component price increases often and our ability to get that in the market. So that's why that's a margin impact in the short term. That's all built in the [Indiscernible], of course.

[Mehdi Hosseini, Susquehanna]

Sure. Thank you. You highlighted your leverage to R&D budgets. And in that context, what are the near-term opportunities? We had the infrastructure bill, maybe there will be some impact to infrastructure for ADAS. You're well leverage there. There's also [Indiscernible] that is going to be finalized soon on the 5G and wireless communication. Are these two catalysts, infrastructure bill and [Indiscernible], are the two factors that are positively or materially impacting your near-term business as it relates to R&Ds.

[Eric Starkloff ]

Yes, both of those. Yes. So certainly 5G, we still can get 5G and wireless overall continues to be a growth driver primarily in our semi - electronics business that has been for a couple of years. I mentioned that's about 50% of the business and it's fairly evenly split between labs and production. We view that as continuing to be a growth driver. We do expect to have consistent with the market that the rate of growth may moderate some in 2022. It's been a very strong growth performer, but we still expect it to be double-digit growth and be in that 10% to 15% range that we said, it's a long-term expectation for that BU. In transportation, those EV and ADAS investments are very substantial.

Those are very high-growth areas, those two. EV approximately doubled for us last year and business. ADAS was close behind in growth rates. And we think those are multi-year investments that were still early innings. The customers type of infrastructure that they ultimately need to build for, say, battery labs, for example, in easy, given the ambitions that those customers have, they have a long way to go. And so it's our opinion that that's a multiyear growth opportunity, where there will be a fairly significant investment over the next few years.

And we're positioning ourselves to capitalize and as I've said, really improve the mix of that business where more than half of it by the end of this year is in those areas where we see large investments continuing for multiple years. So those are the primary growth drivers, Mehdi, you got it right.

[Mehdi Hosseini, Susquehanna]

Thank you.

[Eric Starkloff ]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Rob Mason from Baird. Your question, please?

[Rob Mason, Baird]

Yes. Good evening. Thanks for taking the question. Nice hearing this quarter.

[Eric Starkloff ]

Hey Rob.

[Rob Mason, Baird]

Hey, Eric. Eric, you had mentioned earlier that you expected all of these -- your four main end markets to grow double-digits and you touched on this briefly, I guess, around semiconductor, but how are you thinking about how the growth would be distributed across these end markets? In the context of say, 12% to 14% organic growth level. How those might look, I guess in the other three end markets [Indiscernible]?

[Eric Starkloff ]

Yeah. I'll give some color -- yeah. Is that it, Rob?

[Rob Mason, Baird]

Yes.

[Eric Starkloff ]

I'll give some color on that. I sort of mentioned semi already, maybe moderating the growth a bit, but it's been a very strong multi-year growth trajectory and we still see good growth drivers in that area and expect a double-digit. Then you have ADG, which as I mentioned, that's been a steady growth area for us. We think it'll be double-digit this year and it's coming off to strong high-single-digit growth, years. The defense budgets are a big driver of that. Those are still strong and steady and then new spaces a little bit more of a growth driver within that we see some increasing investments happening. So we think that's a favorable trend.

Our portfolio business which really recovered significantly last year, and I mentioned that in my prepared remarks, getting the double-digit growth after a few years of a declining trajectory. We do expect another year of growth as that flows through. Now, longer-term as we've said before, that's a mid-single-digit growth. Trajectory is what we think long-term, we're doing some things to make that growth more predictable and resilient from the software licensing model that I mentioned and the way we are positioning the products. And then the area where we're seeing the biggest change in growth is in transportation.

So that really started to inflect about this time last year. As we came into Q4, we saw a big sequential jump that was really as we started to put a lot of our focus on electrification [Indiscernible] brought product to market in that space around that time. We started to see traction. That's all fantastic growth, I just quoted some of those growth numbers. We're expecting that to be at higher growth in the other areas for 2022. Our current perspective is that that's a multiyear high-growth opportunity ahead of us. That's how we see it playing out at this point, which is really consistent with what we've invested in.

That matches the long-term expectations and expectations we've set over the last few years, so it is. When I talk about the strategy playing out are coming to fruition and the areas we've invested in were achieving the growth expectations that we had when we made those investments.

[Rob Mason, Baird]

Excellent. Just as a follow-up, Karen, you had mentioned the variable pay component for 2021 in that impact. How does that affect 2022 as a swing factor?

[Karen Rapp, Chief Financial Officer]

Yeah, we've absorbed most of that in 2021, Rob. So when I go into 2022, the increases or the various -- the things that flex there are going to be more about wage inflation types of issues. As you're seeing the attrition that's happening globally and trying to stay ahead of that, make sure we retain our top performing employees. And also, we'll be bringing in more travel in 2022 than we've seen in the last couple of years. So those will be the increases in 2022 that I'm expecting. We've climbed the hill already on the variable pay. So with the results we're looking at in '22, I expect that's to stay relatively consistent to '21.

[Rob Mason, Baird]

Okay. Very good. Thank you.

[Eric Starkloff ]

Thanks, Rob.

[Operator]

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Eric Starkloff for any further remarks.

[Eric Starkloff ]

Thank you all for joining us today. We look forward to seeing you at our future conference or at the next earnings call in April. Have a great day.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.