Q3 2019 Earnings Call

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I would now like hand, the conference over to your Speaker today Ms. Maria <unk> head of Investor Relations. Please go ahead, Sir ma'am.

Thank you good afternoon.

Thank you for joining our Q3 2018 earnings call speakers today, our Alec Davern, Chief Executive Officer, Eric Starkloff, President and Chief operating Officer, and hearing route Chief Financial Officer, We will start with an update on her business and then take your question.

During the course of this conference call, we shall make forward looking statements, including statements regarding future growth and profitability, our focus plans vision and strategic direction, our market position capital allocation plans and our guidance for revenue and EPS for Q4, we wish to caution you that such statements are just predictions 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 expense overrun manufacturing inefficiencies adverse effects the price changes and effective tax rate.

We refer you to the documents the company files regularly with the Securities and Exchange Commission, including the company's annual report on Form 10-K filed on February 21st 2018, and quarterly report on Form 10-Q filed on August back in 2019. These documents contain and identify important factors that could cause our actual results to differ.

Were materially from those contained in our forward looking statement a reconciliation of our non-GAAP financial measures disclosed in this call to the most directly comparable GAAP financial measures are related disclosures are contained in our press release and on and I Dotcom wash snotty with that I will now I'll turn it over to Chief Executive Officer, Alex Davern. Thank you.

Good afternoon. Thank you all for joining US today my key messages today, our strong performance by Eni in a contracting PMI environment.

Highest non-GAAP net margin for the first three quarters of a year since the IPO at 1995.

What I believe Eni is very well positioned for long term growth.

Our revenue came in at the midpoint of our guidance on our earnings per share a came in slightly above the midpoint. Our non-GAAP operating margin for Q3 was a record for a third quarter and we continue to deliver very strong cash flow.

I believe that by maintaining maintaining our revenue and delivering on our profitability goals. During the current industrial recession. We're building a very strong foundation. This is the best performance by the company during a period of a contracting PMI since the IPO in 1995, and I believe it puts us in a strong starting position when the market recovers.

We made great progress as a company over the last three years, we believe our core strategic vision to be the leader in software defined automated test an automated measurement systems provides us with a clear path to significantly expand our served available market, while continuing to leverage our highly differentiated platform.

Over the last three years and our leadership team has systematically realigned all functions of the company to pursue our core strategic vision.

We've realigned our business to focus on the industry's an applications, we believe get the greatest benefit from our differentiated platform.

We've realigned our sales channel to be informed of all business units at a focus on the accounts with the greatest potential.

We've realigned our marketing operations to focus on enhancing our brand and we've realigned our service and operations teams to provide greater system level value.

Together. This has resulted in a fully aligned company committed to the goal of accelerating our future revenue and profit growth. This has allowed us to deliver a 94% increase in our non-GAAP net income for the first nine months of 2019 compared to the same period in 2016.

I'm pleased to see the significant impact at this realignment is having on our profitability now and I believe that that impact will follow through to revenue growth in 2020 and 2021.

After four quarters of weakness in the industrial economy history would show that market recovery should be insight. This coupled with the expected benefit too and I have the transition of fiveg to mainstream mass production later in 2020 give us reason to anticipate improved revenue in 2020.

In the meantime, we remain focused on delivering on the differentiation and flexibility of our software centric platform to help us increased share.

As customers look for new options to meet market demands.

We are executing on our commitment to deliver structurally higher profitability and believe we are on track to achieve our profitability goals in 2019.

Our ability to deliver on our profit goals in this difficult environment means we will begin a very good starting position when the market recovers.

Now switching topics, having participated in 100 and earnings calls over my career I'm excited to have the opportunity to discuss my personal transition.

It has always been my intention to lead Eni for as long as was necessary to successfully transition from our founder to significantly strengthened the company's position and to reset for future growth.

Excited to announce that Eric Starkloff will be succeeding me as CEO effective February onest of 2020.

I will then take on the role of strategic advisor to the CEO through May before taking up a teaching position at the University of Texas Mccomb School of business in the fall.

I've worked with art for over 20 years, and I have enjoyed partnering with him on our journey over the past three years to realign Eni for long term growth and profitability is many years of leadership at Eni and his passion for innovation, making the right choice to take any forward.

I will remain on the board and Eric will be joining the anti board as part of his promotion.

So with that let me congratulate Eric and turn it over to him to talk through our performance for Q3.

Thank you and good afternoon.

First let me take the opportunity to personally thank Alec for his leadership and his tremendous impact on Eni. It has been my honor to work alongside with him for the past 22 years. Most importantly in the last three as we partnered together along with our leadership team to create our core strategic vision and align the entire company for long term growth.

I remain confident in our strategy, our leadership team and our ability to deliver results for all of our stakeholders. We will continue to focus on growth and profitability.

On creating career paths for our employees and on adding more value to our customers to increase our opportunity in the market.

Now onto our performance in Q3.

We have allowed the company to our new vision and strategy and we remain pleased with our progress and our performance relative to a challenging macro environment.

This quarter, we met the midpoint of our revenue guidance. Despite a weaker industrial economy. There was adversely impacted by trade tensions at down cycle in semiconductor and continued decline in the global automotive industry, our year over year bookings were down 5% in Q3 compared to one of the best quarters in recent years Q3 2000.

18, where we reported year over year bookings growth up 13%.

Now I'll pause I will provide context on our quarterly order growth by industry.

In semiconductor we saw the impact of the now multi quarter declined in the overall semiconductor industry with a low double digit decline in orders year over year in the quarter.

Despite the overall industry weakness our bookings in semiconductor are flat year to date through Q3, and we believe our strategy remains strong and our share continues to grow.

As a significant focus of our semiconductor business is the testing of Fiveg chips. The success in the market of dedicated instruments for early Fiveg R&D is a positive indicator for the automated validation and automated production applications that follow in 2020 and beyond.

Over the past 12 months, we've already seen a significant uptick in chip makers building out sub six gigahertz production capacity, especially for Fiveg infrastructure equipment and this remains a growth driver for our overall semiconductor business.

While the deployment timing for millimeter wave Fiveg is on the different timelines in sub six gigahertz. We are currently shipping millimeter wave test systems for both validation and production test so far millimeter wave fiveg deployments have been limited in scope and the cycle of automated validation and production test equipment has been somewhat delayed due to.

Hallway restrictions and Intel's exit from the Fiveg modem business and subsequent sale to Apple.

We believe these market conditions will dictate the pace at which market volume of millimeter wave Fiveg production test increases.

Lead customers are already using our millimeter wave vector signal transceiver released in May 29 team and the reception of this product has been very strong.

And transportation, we saw orders decline in Q3, low double digits year over year, we continued to see strong growth in our business in the areas of electrification active safety and autonomy, while the rest of the transportation business reflects the weakness of the broader market. Our focus remains on mitigating these market weaknesses and continued.

Me too aggressively invest in the areas of high growth in order to increase the proportion of our business in those applications.

Our aerospace defense and government orders grew low single digits year over year in Q3, our platform continues to add significant value to this industry, which benefits from our software connected approach and the ability to help our customers control their proprietary IP and meet their needs for highly customized and long lifecycle systems.

The cycles of this industry tend to run counter to the overall industrial economy as the spending environment. This year has remained positive.

With respect to our broad portfolio of customers and all other industries, which represents nearly half of our business orders were down low single digits year over year in Q3 compared to a very strong Q3 of 2018.

Historically this part of our business has been the most correlated to the PMI through the first three quarters of 29 team. This part of our business has been experiencing the headwind of the weakness in the industrial economy, which we believe has begun to stabilize.

Strengthened customer adoption of our software across all industries continued in the third quarter with orders up 6% year over year and strong growth in enterprise agreements up 14% year over year. We believe these results are positive indicators of future revenue growth potential and opportunities for our software connected platform.

In summary, we remain committed to our R&D investment.

Confident in our long term strategy and believe we are in a strong position to take advantage of future growth opportunities.

Now I'd like to turn it over to Karen wrap our Chief financial Officer for the financial update.

Thanks, Eric and congratulations.

Our revenue in Q3 came in at the midpoint of our guidance at $340 million. Our earnings performance stayed strong Q3, and we delivered 44 cents non-GAAP earnings per share slightly ahead of the midpoint of our guidance.

We are proud of our operational efficiencies and variable pay alignment to performance that helps structurally scale our profitability.

Eric mentioned, our year over year bookings were down 5% in Q3 as compared to a strong quarter in Q3, 2018, well, we reported year over year bookings growth up 13%.

Orders over $20000 were down 4% year over year on orders under $20000 were down 6% year over year.

The Q3 2017 orders over 20 today were up 13% and orders under $20000 were down 2%.

In Q3 revenue was down 2% and total year over year.

By region and U.S. dollar terms revenue was flat in the Americas down, 2% in Asia Pacific and down 4% in EMEA.

Excluding the impact of foreign currency exchange revenue was flat in the Americas, flattened asiapac and down 2% in EMEA.

non-GAAP gross margin in Q3 was 77.3% we believe our strong gross margins remain a testament to the value of our brand and the benefits our platform in systems provide to our customers.

non-GAAP operating margin was a record for Q3 at 20.1% up 50 basis points from a year ago.

The company reported Q3, GAAP net income of $52 million were 39 cents per share Q3, non-GAAP net income was $58 million.

Alex talked about the realign we've made over the last three years, we have delivered a 94% increase in our year to date through Q3, non-GAAP net income compared to the first three quarters of 2016, and a very similar PMI environment.

Our non-GAAP net income at that time with 8% of revenue for the first three quarters compared to the 15% we delivered in the first three quarters. This year, which we believe reflects the impact of structural changes we have implemented as a company.

Now an update on our capital allocation strategy, our cash balance remained strong at $432 million at the end of Q3.

Our trailing 12 months cash flow from operations was $237 million, representing 24% of revenue.

I believe our clear industry and application focus together with our strong balance sheet puts the company in a strong position to increase and Ais revenue inorganically through investments that enhance our platform and accelerate the innovation we delivered to customers.

During the third quarter, we paid $33 million in dividends and repurchased approximately 1.1 million shares of our outstanding common stock at an average price of $42.42.

Total cash returned to shareholders from dividends and stock repurchases was approximately $80 million.

Through the first three quarters of 2019, we have returned over $200 million to our shareholders.

The and I Board of Directors has approved the dividend of 25 cents per share for shareholders of record on November 11 2019.

For the trailing 12 months ended Q3 2019, our dividend payout ratio has been approximately 60% of non-GAAP net income.

Also this quarter the board of directors approved an increase to our share repurchase program of an additional 3 million shares putting our total available for purchase at 3.8 million shares.

For the fourth quarter of 2019, we remain cautious due to broad based economic uncertainty and external disruptions mentioned earlier.

We currently expect total revenues to be in the range of $345 million to $375 million.

I expect GAAP fully diluted earnings per share will be in the range of 25 cents to 39 cents for Q4 with non-GAAP fully diluted earnings per share expected to be in the range of 43 cents to 57 cents.

As a reminder, our long term operating model goal continues to be 50% to 60% flow through from revenue to operating income.

At the midpoint of our Q4 guidance. Our 29 out 2019 outlook is to have a cumulative cash flow I'm sorry flow through over the last three years above 80%.

In 2020, we will continue to invest in strategic investments to support our systems business evolution.

We also expect to see variable pay come back in line with revenue growth.

Our current outlook for flow through in 2020 will provide a cumulative flow through since 2017 of 50% to 60% within our target range.

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 record operating margin for a third quarter during a tough economic environment, putting us in a position of strength when the economy improves.

And we remain committed to delivering on our goal of 18% non-GAAP operating margin through the economic cycle with that I'll now turn it over to Alex for closing comments. Thank you Karen.

We remain focused on taking share during this industrial recession, we believe our software centric platform provides increased opportunity as customers look for new options to meet their market demands our customers are utilizing the eni platform to provide a competitive advantage to their business, our direct customer relationships sort of key differentiator and our innovate.

One is critical to helping them bring new technologies to market.

Im inspired by the impact of a nice technology within the market today and the exciting opportunities that we have for the future.

Now the last three years has been a very rewarding journey.

We have repositioned eni for long term growth and profitability, we're seeing the impact on our profitability now with a record performance in Q3, and I believe that we will see the impact in our revenue growth in 2020 and 2021.

I want to thank our employees for their commitment to Eni and to our customers and encourage them to continue to strive for operational excellence and with that we will now open up for your questions.

As a reminder to ask a question you need to press star one when your telephone to withdraw your question press the pound.

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Our first question comes from any.

Jamie with Susquehanna. Your line is now open.

Hi, everyone. This is Nick heisler filling in for Mehdi.

Just a few question.

First off with the realignment of the sales in the R&D departments.

See more synergies going forward or on the profitability side or.

You guys just focused on revenue growth moving forward.

Hi, Nick This is Eric I'll take that so I think first of all I think we've already seen quite a bit of synergies Karen referenced the significant increase.

And profitability and some of the records that were set this quarter and the increased flow through that we've had over the past couple of years and Thats. A result of many of the changes that we've made to that alignment as well as the changes and variable pay and other things as you referenced.

So that has been an impact going forward. Our expectation is that we get continued leverage as well as as I mentioned, we have a focus on.

Focusing on areas of the market, where there's more revenue growth opportunity. We knew all along as we've gone through this journey, Alex and I together with the leadership team over three years now we knew all along that those kind of changes to drive the ultimate increase in sustainable revenue growth would take longer but we've been committed to those and committed.

Okay, great. Thank you just another follow up.

So orders booked orders over 20000 has declined for.

Now two consecutive quarters.

That hasn't happened since like 2015 and in 2015 bounced back in the subsequent quarters should we expect.

The same thing here is this other macro environment, what should we look for.

Yes, no it gets Karen orders over $20000, our real focus for us and where we put our pipeline management and so we continue to to work with our customers on the systems opportunities and feed that through so.

If you look back over a two year time period over $20000. Our orders are up 13% going back two years, so nice strong trajectory there.

Okay. Thank you just one more is how should we think about operating expenses in December .

Should we assume the same.

From what we have now and also looking into 2020.

Its carrying again.

Yes, we've built out the guidance assuming.

Suming similar to what you've seen in historic trends for Q4, and so you can continue to build your model that way.

Thank you.

Thanks, Nick.

Our next question comes from John Marchioni with Stifel. Your line is now open.

Hey, John Thanks, very much.

Good afternoon, and Alex generic congratulations to you both.

Just wanted to thank you John real just want to jump in real quick you made a comment obviously you've made it a couple times before where these downturns typically last three to five quarters. We're now it at quarter for here just curious as as you look out if you are seeing sort of tangible signs of things getting better if you're.

You are sort of pulling more from history, a combination of bulk just any color that you indoor air could provide sort of on the the sort of state of the environment that you're operating in right now.

Yes, so maybe I'll offer a couple of thoughts on this we clearly saw a definite impact on our business in Q4 of last year.

And that's when the kind of normal seasonal pattern broke that are seasonal uptick that we would have expected. The scale of that from Q3 Q4 didn't happen that started for US you know we started to see this downturn in Europe and then it came to Asia now over the course is last four quarters, we've seen it impact the Americas as well.

Having said that as we went through from Q1 Q2 to Q3, we've seen more about normal seasonal patterns start to reestablish itself and that is similar to me to what I saw back in one or two and zero eight or nine.

So it's starting to show signs.

That said in the call we should see in the coming quarters.

Our recovery in the market and so that would be very consistent with what we would expect from history. As we look into Q4 as Karen said earlier on our guidance for Q4 sequential growth is a little below the long term average so we're continuing to be a little bit cautious.

But we definitely see the reemergence of our seasonal patterns, our sequential patterns and thats definitely a positive.

And then maybe if I could just follow up there how much of what's going on at least in the short term do you think still is is a direct impact from sort of the the walk away in Intel.

No disruptions that you highlighted last quarter.

Yes, John I'll take that that is certainly part of it I think there's a number of factors here, we talked about it overall for a broad.

Economic weakness our dollar characterize the industrial recessionary environment that we see pretty broadly and then this in addition to that this trade tension is a piece the way we think about as we've said before with while way, it's really a disruption of a big supply chain.

So it's not so much about just the business directly to walk away. It's about a lot of moving pieces and I think thats one of the thing that's things that's contributing to overall weakness in the semiconductor industry, which.

You see is down double digits, not just our business. The industry overall is down double digits and I think that is a contributing factor.

And maybe just as a follow up there Eric.

Can you just remind me how much maybe total China business you guys do and are you seeing signs or are you picking up signs of a sort of anti us bias as as customers are are making purchase decisions that might impact the company's business in that region on a longer term.

Basis.

Yeah, I'll take a John so, yes, I mean about half of our Asia Pacific businesses and as in China, It's actually held up pretty well.

Our China business was positive actually approximately double digit positive in the quarter.

And and so we're cognizant of the point you made in terms of that sentiment. It's not something were directly seeing what we are seeing as a lot of this movement of supply chain, which is a disruption moving across borders so yes, just but.

Alphacare just to echo that we are a service provider in the tool and systems provider to the wall way supply chain hour to its future China based supply chain.

So you know as and when some of that supply chain moves out of the US for example, and is targeted and supported let's say to China, or Taiwan, or Japanese or Korean base suppliers were in position to continue to support that.

I think that helped our business in China over the last couple of quarters actually exactly.

And then maybe if I could just shifting gears a little bit to Fiveg. You can you help us size sort of where that your opportunity set is for you either today or as we look forward I mean, obviously the bulk of it at least today is in the sub six spectrum area. You mentioned some of the early signs of try.

Action with some of the millimeter wave stuff, but just trying to get a sense maybe of what the opportunity set is today and where you think it can get to over a number of years.

Yes, Thats I'll take that John So I'll try to characterize that for you. So first of all as I mentioned in the prepared remarks, it's an encouraging sign that the company that sells at an early R&D boxes into this space have seen successful deployments as so far this year thats not a market that we participate in very much.

And and so thats, an encouraging sign our opportunity comes in the automated validation systems in an automated production. We are seeing success in sub six gigahertz now and as I mentioned millimeter wave is pretty pretty small at this point, but but a lot of lead lead customer adoption from a timing and kind of characterize the.

Five point of view.

For millimeter wave were there will be a larger sort of set of capital purchases because of the repurchase that is required we view that as an opportunity where production will start ramping in the second half of next year they'll be validation systems between now and then but that's the sort of timing of production with peak kind of a couple of years after that and Thats a set.

100 million dollar market opportunity in terms of served available market to us.

Great. Thank you very much.

Sure. Thank you John .

And our next question comes from Richard Eastman with Baird. Your line is now open.

Yes, good afternoon, while well congrats congrats Alex.

I don't know what I'm going to do with myself when you're not any other under the is earnings calls Yeah. I think I think you and I have shared the vast majority of these earning calls actually and recall that have you on the phone and I really appreciate your many years of objective coverage and good support for the company. So I think this must be year like number 80 or so.

[laughter].

And so no I mean, no not at all not was.

Okay, Alright, well hey, congrats.

I guess going to be quite a my guess is quite an adjustment to the come down off the and I and I train so.

Hi, Graham if I'm looking forward to continuing support the company on the board and.

To share and some of my experiences with a broader audience.

We're excited actually.

Okay Fantastic and congrats to you is we'll Erika that's awesome.

Just.

A couple of things.

When you talk about them, Eric when you mentioned the millimeter wave opportunity.

As a couple of a couple of hundred million dollars is that secondly, you were thought around the market opportunity or is that kind of Emma and I, just maybe share of this production market when it does ramp on the millimeter wave.

Yes, it kind of year for share there.

No that's what I'm, what I'm characterizing and I said several hundred several hundred million dollars.

That is what we call third rail market. So it's the automated validation and production that our capability will be able to address there are of course other parts of the market that are less in focus for us like the early R&D. That's currently for the in focus in this timeframe, where a lot of businesses today, Okay, and we're not when I look at the soft spots in the semi.

Good as you kind of flagged orders were down a little double digits.

Is that real weakness is it in isn't on the smartphone test you know the production side, a smartphone to us kind of trailing fourg royalty or analog chip or where.

Where's the Where's the big Falloff there.

Yes, let me put a couple of points of that Rick first of all you know I also look at the thing integrated over a longer period of time, so yes semiconductor our semiconductor business was down in the quarter. It's.

Up if I look year to date over a couple of years, it's still the fastest growing part of our business up double digits.

So there's you know that part of we have larger deployments and it was a very strong growth component at this time last year. So that's one element of it. The other element is there is sort of abroad.

Sort of a broad based weakness in terms of capital spending in the semiconductor market. I mean, you look at the results from T I and others and you see sort abroad.

Industrial weakness and analog and mixed signal semiconductor we serve a lot of that space. So there is less sort of friendly capital spending environment in general.

Compared to a year ago, okay. Okay.

Okay very good and then just a quick question around the.

The deferred revenue as it as it shows up the software maintenance revenue I should say as it shows up in the quarter was kind of down 2% year over year.

Why is that down should not be up.

Yes, it's Karen Hi, how are you.

Good good okay. Good.

Thanks, Thanks for highlighting that for us as Eric talked about with our EA growth.

We're seeing more and more east come in and the benefit of that to US is that we're able to recognize more of that revenue from a license perspective into the product line on that so you'll see some of that transition overtime.

And you'll see that both in the maintenance piece that we call out for net sales as well as Anand deferred revenue. So just kind of yesterday ferric then those as Karen said, our software revenue shows up in both those lines.

Okay.

Okay.

Okay and then just just maybe one last question Karen just wanted to circle back to something you said earlier Im not sure.

So cumulative flow through.

We will be 50% to 60% from 2017.

220, 20, so what does that mean does that mean that the average.

Incremental adjusted EBIT will be 50%.

If I if I take.

I think a way to think about this Rick is that the very very high flow throughs. We've seen in 2018 and 29 team obviously as we are hitting our profit targets those off and start to moderate yeah. We own we're on track to hit the long term target that we originally set out we have front loaded on kind of delivered an event.

It's a little bit.

So we want to make sure that we are continuing to seed.

The investments needed to drive organic growth.

Okay. So okay. So so our incrementals will moderate.

For 20 into that 50% rate is kind of another way to say.

Yeah, you'll need to do that cumulative on it yet okay. Okay fair enough so that piece and we can.

Okay very good alright, thanks, again, and congrats to both like scenario.

Okay, Okay. Thanks, a million electric generation.

And Im showing no further questions at this time.

So let me us on off by thanking all again for joining us today and really appreciate the time and support that.

Those are you listening have offered to and I and myself personally over the last 25 years. Thank you.

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

Okay.