Q4 2019 Earnings Call

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Our one on your telephone please be advised to today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker most of it Ari head of Investor Relations. Please go ahead.

Good afternoon. Thank you for joining our Q4 2019 earnings call Speaker today, our Alec Davern, Chief Executive Officer, Eric Starkloff, President and Chief operating Officer.

<unk> Chief Financial Officer, we will start with an update on our 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 objectives momentum vision is strategic direction, our market position capital allocation plans in our guidance for revenue and you'd be asked for Q1, we wish to caution you that such statements are just predict.

The 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 overrun manufacturing inefficiencies.

Corruption from public health concern adverse effect the price change at an effective tax rate.

For you to the documents that the company files regularly with the Securities Exchange Commission, including the company's Andrew report on Form 10-K filed on February 21st 2019, a quarterly report on Form 10-Q filed on October 31st 2019.

These documents contain and identify important factors that could cause our actual results to differ materially from both contained in our forward looking statement.

A reconciliation of our non-GAAP financial measures this close enough to call to the most directly comparable GAAP financial measures are related disclosures are contained in our press release in and I Dotcom Flash NADDI.

And I will be attending biscuits Guana conference in New York on March 12, and hosting our investor conferences opt in on May 19th we look forward to seeing you there.

With that I will now all over the Chief Executive Officer, Alec Davern like humorous.

Good afternoon, and thank you for joining us our key messages today, our record net income per quarter and a four year.

Record quarterly revenue of $367 million, a 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 they are not projects has been the slowest growth year for the global economy since 2009.

Thank you for the company reported record quarterly revenue and record net income what accelerated order growth showing renewed momentum as we enter 2020.

The diversity of our business has always been the key differentiator and away to balance economic headwinds the power of our software centric platform on our significant investment and innovation helps our customers meet their market demands faster on has created new adjacent cheese for enterprise growth.

As it goes up my 26. Your career then I would my hundred in the 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 evolved 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 my commitment.

To drive the next phase of growth our leadership team set out for key objectives.

Or do some new core strategic vision to significantly expand our market opportunity to realign the entire company behind our 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 an automated measurement systems provides us with the focus necessary to drive the long term growth, but then.

Anyway 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 over the quarters to introduce a new operating model for how we execute as a business for sales marketing and services. This change required us to realign around the customer for R&D required us to realign around disciplines. In addition to products and for manufacturing a DNA that required us to realign around systems in order to.

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 struck structurally realign the company to be able to achieved that goal consistently.

As a result, we have essentially doubled and non-GAAP net income of an eye over the last three years.

A key to analyze culture has always been our employees, bringing the people then I 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 all with the plan globally.

The outcome was a significant increase in our employee engagement over the last three years.

To further position and I for long term growth. We also reset many strategic relationships over the last three years, what companies such as Opel Arty math works and he taught us.

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 the time to market reduced designers and lower costs, while allowing customers to reuse.

Their intellectual property and algorithms to be entire design flow.

As I reflect on the progress we've made over the last three years I'm extremely proud of the company we are today I.

I'm inspired by the global impact of a nice 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 the position of strength would 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 and I now I'd like to turn the call over to our next CEO Eric Starkloff.

Thank you Alex and good afternoon.

Let's give an update on our business before handing the call with my perspective on the future outlook for and I.

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 end up 11% over Q4 2017.

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 Fiveg R&D as a positive indicator for add on as the automated validation and automated production opportunity is expected to follow in 2020 and beyond.

And 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 Q O Q4, and high single digits for the year.

The diversity of applications and strength of our platform continued 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 demand 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.

And 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.

It 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 speeds continue to outpace overall company revenue growth year over year for 29 team continuing a multiyear 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 adjacent seed and expand our reached a 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 and our ability to execute our growth plan in 2020.

I believe we have the right strategy in place to make our customer successful and drive and ice growth.

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

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 are 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 $20000 were up 19% year over year in orders under $20000 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 for a quarter in 20 years at 23%.

Q4, non-GAAP net income of $73 million.56 per share.

The company reported Q4, GAAP net income of $59 million or 45 cents per share.

Our Q4 earnings per share includes three cents. There was not included in our guidance due to the U.S. foreign tax credit regulations issued December 2019.

Also include Q4 GAAP earnings per share is eight cents related to an income tax benefit resulting from recording a deferred tax asset as we divested our ADW our 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, our platform and brought in our customer reach.

During the fourth quarter of 2019, we paid $33 million in dividends and repurchased approximately 800000 shares of our outstanding common stock at an average price of $42 a 98 cents.

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.

In addition, the and I Board of Directors has approved a dividend increase of 4% to 26 cents per share.

On March nine 2020 to stockholders of record on February 18, 2020.

In January we closed the sale of our ADW our 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 ADW our business.

We're closely monitoring the Corona virus and its potential impact on our business. Our first priority is the safety of our employees and we've 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 line with revenue growth.

Our company non-GAAP operating margin target remains 18% through the economic cycle.

We expect gap. So would we expect Q1 GAAP diluted earnings per share will be in the range of 99 cents to $1.13.

This includes 93 cents from the gain on sale of our ADW our business.

This will be excluded from our Q1 non-GAAP diluted earnings per share, which we expect to be in the range of 24 cents to 38 cents.

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.

Well. 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 end 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.

Thank you Karen.

Tomorrow I will have the great honor of taking over the leadership of the company that is highly respected delivers innovative solutions to our customers in 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 to 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.

We increased our focused on long term innovation to help stay ahead of our customers need.

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 Alec for his leadership, which strengthen this company in so many ways.

And I want to thank all of our employees for their commitment to the changes we've made entered the success of our customers.

With that we will now take your questions.

Thank you any interest of time, we ask you limit yourself to one question and one follow up.

If you have additional questions you May press Star then one to rejoin the queue.

And your to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound.

Our first question.

Comes from the line of John .

Your line is open.

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 how they orders up in all four of the segments. I'm wondering if you could just give us some sense of what the different geographies looked like it if you're seeing similar improvements across that spectrum as well.

Yes, Hi, John It's Eric I'll take that are yet to give you the geography view in.

In Q4 orders were up 20% and apacs, there were up 10% in our Americas region, and they were down 2% in EMEA.

And I guess, just as a follow up there as you're looking out into 2020 or how should we think about you know some of these.

Different drivers when you're looking at this being a little bit more of a growth year for you you expect that it's going to be relatively similar across these four sub segments or do you see obviously semiconductor continuing to to lead the way you and maybe you could fold into that some of your expectations for Fiveg.

Yes, so 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 further along in our strategy and semiconductor and Thats been the growth the strongest growth area. We are.

Really excited with strong double digit growth in Q4 and that was over Q4 2018 that also had very good double digit growth. So the momentum there as good as I mentioned in the prepared remarks the.

The fiveg sort of our the fact that the early box instrument sales into R&D has been strong we think there's a good sign for the overall market as we come into.

The 2020 millimeter wave in the second half the year.

And then the second most mature as transportation of course as I mentioned the markets not been very strong overall in automotive, but the areas that we've invested in our growing and overtime that'll that'll get more scale and contribute more to the growth area of that business.

Aero Defense has a pretty positive spending environment in 2019, and we're very pleased with the results of that business.

Our expectation is a positive spending environment and in 2020 as well and then as I mentioned in 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 four quarters in two and industrial recession, we've seen that stabilized from UBS.

My point of view as we mentioned and so naturally that outlook becomes more positive as you compare to that this past quarters.

Thank you.

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

You could just follow up on that is certainly a backlog number Eric that you could share or a book to bill.

For the quarter, yes.

Yes, it's Karen.

We.

Well, let me, let me really transition that off of Q4, starting point we.

We've built backlog at the end of Q4.

And compared to Q4, 18, where we had seen a decrease so.

And then with some strong backlog as you know as we transitioned more to a systems business. We continue to have backlog growth going forward.

So started in the quarter from that viewpoint, okay, and when I when I look at the growth numbers by geography.

Eric.

A little bit surprised how skewed the revenue growth is.

You said is that a function of I guess your orders were up and in all segments, but does that a function of the the semi conductor vertical.

It's a couple of things Rick. It's also looking out over two year basis, I think you'll kind of fee that.

Make a little bit more sense, you know we saw the weakness obviously in Asia. This time last year, I think you'll see it even out more and the other thing I was going to comment on on the Delta between.

The orders that we shared in the revenue is an increase in deferred a deferred revenue we've seen strengthen our softer talked about our enterprise agreements, which are really subscription based software as that continues to grow which is a good thing.

The deferred software revenue is also contributor to that Delta.

I see Okay did Alex Alex did you say 106 earnings calls.

Only a 101, Rick Oh man I did want to cover that kind of that.

Thats helpful. Although it did have a couple of mid quarter updates back in the online timeframe. So.

Joining me on counted those.

[laughter] I think I think you've been on most of them right now it's going to say whats your cat Yeah, well you know when I started in this business. They didnt have telephones. So I can you count those books.

The best vessel look like so look forward to run again.

Some event and I, we perhaps.

Thank you Jeff hopefully so thank you Rick.

Thank you and once again, ladies and gentlemen, then a star one to ask a question. Our next question comes from the line of Nick Heisler with SFG. Your line is open.

Hey, guys. It may come here for maybe.

Just a quick question then a follow up.

So first is on the current a virus you said that has already been taken into account for your guidance for 2020 fund to confirm that yes, correct. Yes. This is Karen yes, correct based on what we know now everything we know it's been built into the guidance at this point.

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

I mean, we're going to continue on the path we've been on in terms of our strategy as I mentioned that 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 first question in terms of our outlook in the different verticals.

Okay perfect. Thank you.

Thank you and we have a follow up question from the line of John .

She Eddie with Stifel. Your line is open.

Thanks, very much Karen I, just wanted to ask him 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 expected that EPS grows in line does it grow faster does a gross go 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.

Sure John Yes, thanks for driving a clarification there we've talked about the investments are going to make to drive our capabilities for the systems 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.

Putting services around.

Our systems business to help support that and as you know we also have the variable pay piece coming in and throughout 2001.

Okay. Okay, and then if I can just ask one last clarification as well I know you breakout the EMEA revenue or or excuse me the revenue how much of that is China.

Just trying to get a sense for what the overall percentage of the exposure that China markets.

We've shared before that that approximately half of that business.

Perfect. Thanks, so much.

Well, thank you Jeff.

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

Karen could you just I just wanted to clarify this this opex outlook is again in talking and listening to kind of presentations that you've given then and irrs going and given that theres a lot of discussion around investment.

But also kind of realignment.

Basically.

We're saving in some areas because it looks like you restructuring might might be going up a little bit.

And when we think about redeploying some of that savings.

Good night.

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.

Or maybe 10 points lower than than the model. This year in other words at 5% growth could our incrementals be more like 30 or 35%.

Is that how you're going back to kind of a flow through model. There, yes, just just kind of on the incremental side.

Just trying to figure out because again some investments some cost out I know, you're you're reallocating some of that savings into growth.

But.

Yes, Rick I think maybe some of the waste to think about the.

Cost out is.

Eric talked about earlier, but some of the things we're doing as restructuring for growth. So welders costs coming out from restructuring standpoint, there is also.

Putting on investment into the right places for the future growth as well and and in addition to the systems capability and the services around that but I think maybe.

Maybe a good place to to spend some time and I. We when we do investor day will be will be laying out a longer term model that may help you for now I'd just be centering around 18% operating margin through the cycle and then we can get until little more detail in may.

But.

When you use a phrase again it suggests if you're if and when your growth.

Accelerates in a sustained at a higher level. Obviously, you would suggest your margin will be above the 18%, so I get using that target but.

I think it's more the incrementals that that would be helpful.

Against the against the sales growth number is zero, yes, there right.

Headcount.

Number how do you expect to head count the change in 20 versus.

Year end, if you could give us a number that would be helpful. You're in 19.

Sure. We ended we ended 2019 up about 1% year over year.

So and we're looking to be similar to that coming into 2020 out of 21, okay.

Okay, 70, 320, yes correct.

I think the thing here as you know that the real variable as that variable pay is the biggest element access and obviously given the year. We just finished that was quite quite low and 2019 with the expectation of growth that comes back ends you get a comparison.

Got you Okay excellent alright, thank you.

Thank you Rick.

Thank you and your last question comes from the line of Nick Heisler.

Your line is open.

Hi, guys. Thank you just one more question.

Sure you touched earlier on millimeter wave being a half of the year I just wanted to again, maybe a little bit more information on what you're seeing with millimeter wave right now.

Yes, so broad expectation millimeter wave I think probably similar to others is that demand peg 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 and market in the automated 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.

Okay perfect. Thank you and that's on the infrastructure side or devices or both.

Well like most of these markets typically infrastructure first and then and then devices. Okay perfect. Thank you.

Yes, no problem.

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

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Okay.

Thank you everyone for joining us. Thank you Alex for 101 earnings calls as well as.

Three years of leadership, that's but the company at a very very good position. So thanks, everyone have a good day.

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

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