Q3 2020 National Instruments Corp Earnings Call
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Good afternoon, and thank you for joining our Q3 2020 earnings call I'm joined today by Eric Starkloff, President and Chief Executive Officer, and Karen Brown, Chief Financial Officer, We will start with an update on our performance in the third quarter and share our outlook for Q4 before opening up for your question I guess.
And today will include forward looking statements, including statements regarding future growth and profitability, our focus plans objectives target goal [laughter].
Michigan capital allocation plan dividend expense management plan charges revenue and earnings guidance and our outlet.
We wish to caution you that such statements are just predictions and the actual events or results may differ materially and could be negatively impacted by numerous factors, including any uncertainties related to the COVID-19 pandemic and further economic and market disruptions, resulting from COVID-19, any further weakness in the global economy and changes.
In the Crane global trade regulatory environment, 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 Twentyth 2020, and the company's quarterly report on form 10-Q filed on August exports 2020 used.
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 statement to can for him to 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 related disclosures are contained in our press release and on and I got complex anatomy.
And I management will be hosting meetings at the Baird Stifel and RBC conferences next month for days. Please visit <unk> dot com nationality with that I will now turn the call over to Chief Executive Officer, Eric Starkloff.
Thank you Melissa good afternoon, I appreciate everyone joining us today and hope you and your families remain safe and well.
Please come in above the midpoint of our guidance for revenue and earnings.
We're also pleased that despite remaining.
Challenges to the global economy, we did see some improvement in key parts of our business during the quarter Karen will discuss more for details on our results later in the call. We also continue to make significant progress on our long term growth strategy and I will discuss details about progress now as well as provide some color on our third quarter industry results before handing it over.
Karen.
At a recent Investor conference I shared our ambition to disrupt our industry once again redefining the way our customers approached test and measurement salt.
Software is absolutely critical to this ambition and test data is also an important ingredient. It is uniquely valuable because nothing else to help our customers how their products will actually perform in the real world. We aim to make test the key enabler of product performance by integrating automated test system and test data analytics degree.
<unk> digital thread of data because across engineering and manufacturing workflows.
We we were in a unique position to accomplish this goal today, we offer the most comprehensive set of driver level software application software test operation software and now data analytics in our industry we.
We already serve applications from validation through production within each industry focus area and we have all the expertise and the automation of testing and these systems.
The complexity of our customers' products continues to grow in scale. Many of the manual steps will need to be automated by intelligence system and I believe we are in the best position to lead that change this.
This vision is the foundation of our growth strategy and we are prioritizing our investments to achieve it.
We are focusing our execution on this vision through four strategic pillars software systems services and a more streamlined buying process for our customers. Our plan includes the following.
Well they are software position through new offerings, particularly at the enterprise level and we aspire to increase our software revenue from 20% of revenue today that 30% over time shifting towards primarily recurring or subscription based software.
We will expand on our system level offerings to provide a higher level starting point for our customers and increase our share of wallet.
We will increase services, where we believe our expertise offers clear differentiation and value.
And we will continue to streamline the process of doing business with an eye.
The focus to streamline especially for our large base of smaller accounts is the next natural evolution in our sales transformation. We are focused on driving more efficiency in the ways, we serve and support our broad based customers, while still helping to ensure their success.
Over the past several years, we have driven scale and leverage in our marketing sales and support model. We are committed to both reducing our costs and improving the experiences of a large number of smaller accounts we serve.
For these customers, we will continue to optimize how they engage with an eye, including further utilizing our E commerce for lower touch and evaluating where distribution can improve efficiency and customer reach we will continue to focus our expert sales force on system level opportunities in our top potential accounts.
We remain focused on driving growth through our strategy, despite economic uncertainty and are aligning expenses with our expectations although.
Although we believe a macro tailwind is in our future. We are taking action now to better serve our customers while aligning the capacity needed to achieve our long term goals.
As part of these efforts, we have made the difficult but necessary decision to reduce our global workforce by approximately 9% with most of that reduction in ESG today.
We believe these efforts will accelerate our growth strategy and enable us to make the necessary investments across the business to hit our long term financial goals.
Being a leader in our space requires bold moves and we are committed to delivering a high level of performance of the company to help exceed the expectations of our stakeholders.
Now turning to our industry results this quarter and semiconductor as we expected orders were down high single digits year over year in Q3. So we remain on pace for a record year. We believe millimeter wave is beginning to show increased adoption with release of Fiveg cell phones, which will drive more millimeter wave enabled.
It works, we also continue to experience some negative impact in the semiconductor space from the heightened us trying to trade tensions.
Serving automated testing from early research the validation and production test opens up a unique opportunity for us to support our customers' needs throughout their design flow, we are making significant progress on our design to test offering through leverage of key relationships with industry leaders like our strategic Alliance Alliance with cadence after.
Through our recently announced strategic agreement with all the time.
As we attempt to solve a long standing problem of allowing customers to linked design and test workflows, we're seeing strong interest from many leading semiconductor companies, who will provide critical product feedback in early stages of solution development.
$308 million down, 9% year over year and above the midpoint of our guidance in.
In Q3 orders were down 7% year over year orders under $20000 were down 11% year over year with sequential improvement from Q2 2020.
Orders over $20000 were down 4% year over year as expected primarily due to the impact of China regulation.
Continued weakness and transportation then overall weakness in Europe.
In the Americas orders were flat year over year, EMEA was down 16% year over year, and Asia Pacific was down 7% year over year.
Entering the fourth quarter, we are pleased to see orders trending up both in the pipeline and our broad based business Q4 quarter to date orders are trending up across all regions as well.
Non-GAAP gross margin in Q3 was 74.1% we continue to see about 70 basis points of impact from additional costs related to COVID-19.
Services has been an accretive growth area for us and we will continue to focus on monetizing the services, we provide and leveraging our services expertise to drive high value system sales. This.
This operational change shifted approximately $3 million from operating expenses to cost of goods sold in Q3, but had no impact on operating margin.
We are on track to the full year gross margin target of 75% that we outlined in our 2020 model at our Investor Conference in August.
Non-GAAP operating margin in Q3 was 13% the company reported a Q3 GAAP net loss of $4.6 million and diluted earnings per share of minus four cents per share included in our GAAP net loss is a onetime charge of $4 million related to the acceleration of certain unvested options that were assume.
And as part of our optimal plus acquisition.
This amount was not included in our GAAP earnings per share guidance reported in July.
Q3, non-GAAP net income was $30 million and non-GAAP earnings per share was 23 cents, which is two cents above the midpoint of our guidance.
We had modeled Q3 2020 is the bottom of the trough for Eni and we believe this assumption is valid and we will begin the root.
Covering moving forward. We believe that we are also on track for the full year operating margin target of 15% that we outlined in our 2020 model at our Investor Conference in August.
Our balance sheet remains strong we ended the quarter with $290 million in cash and investments with the improved credit environment, We anticipate amending our existing credit agreement on October Thirtyth 2020 to increase the revolving line of credit refinance the existing term loan and increase our incremental borrowing capacity.
We anticipate that the amended agreement will include other changes that are beneficial to the company.
In the short term, we do not expect a material change in our level of outstanding debt.
For the first nine months, our cash flow from operations was $109 million, representing 12% of revenue.
I believe this consistent and solid result demonstrates the benefit of the diversity and resiliency of our business model.
Our capital allocation priorities remain clear and unchanged we plan to continue to invest in innovation and technology to stay ahead of the needs of our customers and deliver a world class customer experience.
Dividends remain a priority in Q3, we paid $34 million in dividends. The anti board of directors has approved a dividend of 26 cents per share payable on December 7th 2020 to stockholders of record on November 16th 2020.
We will continue to be opportunistic with share repurchase in the third quarter, we returned $16 million to shareholders through repurchases of 447000 shares of common stock at an average price of $34.86 per share.
We view our strong cash position is not only a way to provide returns for our shareholders through dividends and opportunistic share repurchase but also for strategic investments for long term growth and stability. Our M&A funnel has been focused on identifying technology to leverage across our platform and on strategic accelerators to achieve our growth targets faster.
We're pleased with the progress of the integration of optimal plus the alignment and synergy with our strategy and areas of focus has already been evident becomes.
Because the optimal plus technology is being integrated with the Eni platform and the revised offerings will combine eni and optimal plus technology, we do not intend to break out financial details specific to optimal plus going forward.
We have been encouraged by the improvement in the global PMI during the third quarter, indicating sequential improvement in the macro economy, Although global GDP still remains negative year over year. Despite.
Despite some positive signs in our business, we remain cautious as there is still quite a bit of uncertainty, including a possible contraction due to another wave of the virus.
For the fourth quarter of 2020, we currently expect GAAP revenue to be in the range of $333 million to $363 million we.
We expect total non-GAAP revenue, which adjusts for the impact of purchase price accounting related to optimal plus to be in the range of $335 million to $365 million at the midpoint. This represents 13% sequential growth versus.
As Q3 2020.
We expect GAAP fully diluted earnings per share will be in the range of minus four cents to 10 cents for Q4 with non-GAAP fully diluted earnings per share expected to be in the range of 32 cents to 46 cents.
We remain dedicated to serving our customers in China, a regional focus for Eni, while also complying with relevant export regulations.
We continue to see a negative impact of approximately 3% of revenue per quarter from the expanded trade regulations and geopolitical landscape, which is built into our guidance.
As Eric mentioned, we are committed to executing to our operating model and strategic plans.
Included in our Q4 GAAP earnings per share guidance is approximately 13 cents of restructuring charges.
We expect operating expense savings from this restructuring to begin in Q1 2021, we're.
We're taking these actions to strategically align our resources for growth and cost savings.
We expect minimal restructuring charges in 2021.
In summary, we delivered Q3 revenue above the midpoint of guidance. Despite the current economic uncertainty. This is a testament to the hard work and adaptability of all our employees globally.
I believe this is also indicative of the stability provided by our broad customer base and industry diversity the value customers see in our innovative platform and the strength of our operational efficiency.
We will continue to align resources to higher growth opportunities, while reducing costs in pursuit of our long term financial model. We believe our strong balance sheet puts us in a position of strength and stability through this global pandemic and what lies ahead.
Now I would like to turn the call back over to Eric for some closing comments. Thank you Karen.
In challenging times, I believe that people leadership and strategy manner. My leadership team is aligned on positioning us to win and taking the right actions to do so.
Building on our unique software position, we believe we have the opportunity to once again modernized and disrupt our industry.
As a business, we have and will continue to take a broad range of actions to ignite growth we must help.
Aligning grow our capabilities to increase our pace of innovation to match the needs of our customers. This includes shifting existing resources and talent to focus on high growth opportunities and adapting the way, we sell to and support our customers, particularly within our smaller accounts there.
Reducing the overall profile of our workforce, we will continue to hire key expertise where needed to execute our strategy and we will continue to view potential inorganic investments as strategic growth accelerators with the opportunity to address a broader range of customer needs.
I want to end by recognizing our employees for their resiliency in a challenging time.
We have taken many of the necessary steps to transform and I, but we must be bolder and move faster, even while simultaneously managing the uncertainty taking place in the world around us part of being a great business is making the tough decisions that put us in the best position to serve our customers and to win.
I remain confident in our opportunity as we continue to invest in the technology and capabilities needed to reach our vision.
And the disrupt our industry.
With that we'll now open it up for your questions.
As a reminder, ladies and gentlemen, if youd like to ask a question at this time. Please press. The Star then the number one key on your touched on telephone.
To withdraw your question press the pound key.
In the interest of time, we ask that you limit yourself to one question and one follow up and rejoin the queue for any additional questions.
Our first question comes from Richard Eastman with Baird. Your line is now open.
Yes, good afternoon.
Eric.
Yes, maybe a little bit more color around the semiconductor down high single digits again I know we.
We expected that but we also have seen maybe a little bit more strength than we thought.
Towards the end of the third quarter than entering the third quarter and I'm curious you know again with all the activity around.
The smart the mobile market the smartphone market.
And the big.
The big introduction cycle that were on here Ron millimeter wave for one of the biggest the us players there.
We are are we involved at all on the test side I mean, we don't see that in the portfolio products business and I think you referenced reference some of the network stuff for on semiconductor. So maybe just some color around the.
The semiconductor piece of the business and then also the mobile handset test business, which I know.
It would normally show up and portfolio products.
Yes, thanks for a great question. So as you look to the look we expected based on sort of timing, we expect to the semiconductor business to be to be negative in in Q3. So it wasnt outside of our expectations and as I mentioned, we're still it's on pace for a record year, we're still quite.
Optimistic about the short and long term prospects for that business. So a couple of things are kind of going on there. So fiveg. Obviously, we've kind of had a lot of success in the sub six gigahertz Fiveg has been a growth growth driver for that business and as you mentioned is now we're.
Turning to see some additional traction in millimeter wave our view on millimeter wave obviously, we've got product in market now, we primarily sell into the infrastructure.
The conductor devices that are used in infrastructure those.
Those we expect that to be ramping primarily in next year, probably peaking the year after that but as I mentioned, we are selling.
Products into that space now certain.
Certainly as you mentioned the fact that there's the most popular cellphone in the world has the millimeter wave and the latest version.
Is a good sign for infrastructure and for the demand for millimeter wave infrastructure. So I think our optimism is priced ticking up a little bit on that side.
Now in semiconductor we also have some of the the things that are more challenging which is that the China regulations. As we mentioned that obviously affects some of our semiconductor business in China and then we also saw a lot into that sort of general industrial mix signal semiconductors, I think that that's what it is.
And maybe as the world, which have been a little bit more moderate in there.
In their business over the last couple of quarters. So Thats. Your last part of your question about portfolio, we have some exposure into the.
Mobile handset tests for a variety of different types of measurements, that's not a primary our focus when we think about fiveg were mostly focus on the semiconductor opportunity.
Okay, and then just as a follow up can I ask.
With the restructuring here in the <unk>.
Realignment the head count reduction the realignment there with some of those assets, but what kind of savings can we anticipate off of that restructuring charges, what kind of a payback do you expect on that in 21.
Yes, Rick highest Karen.
Were they are talked about will be will be redirecting some of that into investments. Some of the key investments that we've been talking about for a while now lists.
Serving our customers more completely with a streamlined buying process. The systems evolution that we've been going through so redirecting those funds into those four assets as Eric laid out so.
So what we'll do is we'll be laying that out.
Each quarter as we understand more closely what revenue is going to look like and how we can align those cost with that revenue growth, but the model I'd refer you back to is the one we use for the long term model back in August when we laid out the the three year plan. The 2023 goal, we talked about SDMA being closer to 30.
He 635% to 36% of our revenue.
And.
We believe that with this this.
Restructuring that were doing will be able to accelerate much closer to that model in 2021 for specifically for that line of SGN, a where we're putting the focus okay. Okay very good. Thank you.
Thanks, Rick.
Our next question comes from Mehdi Hosseini with ESI Gi Your line is now open.
Yes, thanks for taking my question.
Two follow ups.
It does.
Thats correct Thats for Tony Tony Your operating margin is pretty good.
Get back to 15% and if thats the case.
Then you exit the year.
20% operating margins just want to make sure I understood then I have a follow.
Yes, I think thats the plan that we laid out back in August was the 15% and we still believe we're on track for that for the end of <unk>.
For the full year 2020.
Okay got you and then.
I wanted to circle back on optimal for us.
Hi, how are you thinking of contribution.
In Q4.
I will point in 2021 should we expect some.
Synergy or is that more like two years out any color in terms of how you're integrating and especially on the product sales will be great.
Sure. Yes. This is Ken.
So I had talked last quarter, when we laid out our number or is about about a revenue of in the range of nine to 12 million for optimal plus in Q4, and we're still on track for that.
At this point from a visibility perspective, we had talked about how it wouldn't be accretive until 2021 and thats still the case, especially with.
How fast we're accelerating the integration of optimal for us because of the benefit that we see to your point the synergy really is going to come from consolidating it with our existing Eni business and so were going to quickly lose the visibility in the separation of optimal for US we are not going to run as a separate organization.
It is going to be fully integrated which is.
Something thats gone really well so far in sales.
So we talked about it being accretive in 2021, and Thats still the intent and especially with the opportunities that we're seeing on the topline. There is there is no change to that expectation and I'll just add a little color Manny.
On the revenue synergy side I've been personally spending quite a bit of time with some of the top customers of both optimal plus annise existing platform and I can just say theres qualitatively very very pleased with the digits of value that that capability delivers.
To those customers and the opportunity that we see to to elevate our own relationship and value and needs very very strategic customers for us and then when I talk about as I made some comments in the in the prepared remarks about the vision that we have and the type of software ambitions that we have this is a really import.
And part of it.
And we are going to be building more capability around that to be able to meet that vision.
Thank you.
Thanks, Matt.
As a reminder, ladies and gentlemen, if youd like to ask a question at this time that's star then one.
Our next question comes from the line of John Murphy with Stifel. Your line is now open.
Thanks, very much Eric I was wondering if you talk permitted about the change in the larger order line.
When you mentioned the sequential improvement in orders are below 20, k., but the orders above 20, K. took a pretty steep decline off of what was up last quarter. I'm. Just curious if you could talk a little bit about what you're seeing there. If it's a particular vertical that's really impacting that and how to reconcile that maybe with the more positive order commentary and color.
You know sort of Threeq was a bottom here.
Yes, I'll make some comments.
Qualitative comments on that and then it Karen what's that feathering qualitative comments, you can but I'll tell you. John you know I don't have concerns there that that continues to be the growth driver. There is obviously type.
Timing and the opportunities are are a little bit lumpier. When you think about these larger opportunities. So I think you're just seeing some of that year over year compare.
That continues to be a.
Sort of growth driver for the business overall, and we remain confident that it will continue to be from a vertical I mean, it was part of my commentary of course that the in semiconductor there. Some compares where we expected this to be a quarter that would be year over year down and of course in our semiconductor business. It is primarily in those larger order buckets.
Then the the weakness in.
In transportation has persisted and ABG has stayed relatively strong including in the large the large order bucket. So I really care I'd characterize that is more timing rather than a red bend the trend and Jan.
Hi, I'm really pleased to see the fourth quarter, starting with the trend up across both buckets actually the broad base as well as the large orders. So so good positive start to the to the quarter.
Thank you and then maybe just as a follow up on trying to specifically I know you talked about it being a sort of a 3% headwind as we go through here, but again I'm curious just is you're talking with customers and things of that nature. I mean is the weakness in China solely terrorists related or have you started to see.
A bias or move away attempt to move away from at least.
US based providers as you're looking at that market more broadly.
Yes, I mean, there's been talk about that John we haven't seen that in fact.
I've been really really proud of our results in China, China did outperform.
Outperformed the rest of APAC for this quarter is actually out approximately flat.
And given that headwind that we said was 3% at the company level, obviously, that's a much more significant headway into China. So to to be flat tells us a couple of things. One is I think there is.
Pretty good recovery and just sort of general economic activity. That's good to see and the second is credit to our team the agility of the teams to really pivot where they needed to and go after business that we can go after.
In light of the different trade restrictions.
So credit credit to them and we were pleased that exceeded my expectations for the quarter.
Thank you.
Thanks, Jeff.
Im showing no further questions in queue at this time I would like to turn the call back to Eric Starkloff for closing remarks.
Thanks, everyone for joining us today stay.
Stay safe and we'll talk again soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Mm Hmm.
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Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2020 National instruments earnings Conference call.
At this time all participants are in listen only mode. So if you require operator assistance. Please press Star then zero.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press Star then one.
Please be advised today's conference maybe recorded.
I'd now like to hand, the conference over to your host today versus the diary head of Investor Relations. Please go ahead.
Good afternoon, and thank you for joining our Q3 2020 earnings call I'm joined today by Eric Starkloff, President and Chief Executive Officer, and hearing Brock Chief Financial Officer, We will start with an update on our performance in the third quarter and share our outlook for Q4 for opening up for your question I.
Our discussion today will include forward looking statements, including statements regarding future growth and profitability, our focus plans objectives target goal.
In addition capital allocation plan dividend expense management plan charges revenue and earnings guidance and our outlook. We wish to caution you that such statements are just predictions and the actual events or results may differ materially and could be negatively impacted by numerous factors, including uncertainties related to the COVID-19 Pan.
Got it and the further economic and market disruptions, resulting from COVID-19, any further weakness in the global economy and changes in the current global trade regulatory environment. 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 time.
Right 20-F, 2020, and the company's quarterly report on form 10-Q filed on August 4th 2020.
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 statement to conform the statement to actual results or changes in our expectations. A reconciliation of our non-GAAP financial measures disclosed on this call to the most direct.
The comparable GAAP financial measures are related disclosures are contained in our press release and on and I Dot com flush snotty.
And I management will be hosting meetings at the Baird Stifel and RBC conferences next month for days. Please visit <unk> dot com nationality with that I will now turn the call over to Chief Executive Officer, Eric Starkloff.
Thank you Maria good afternoon, I appreciate everyone joining us today and hope you and your families remain safe and well.
We're pleased to come in above the midpoint of our guidance for revenue and earnings were also pleased that despite remaining.
Challenges to the global economy, we did see some improvement in key parts of our business during the quarter Karen will discuss more details on our results later in the call.
We also continued to make significant progress on our long term growth strategy and I will discuss details of that progress now as well as provide some color on our third quarter industry results before handing it over.
Karen.
At a recent Investor conference I shared our ambition to disrupt our industry once again redefining the way our customers approached test and measurement.
Software is absolutely critical to this ambition and test day that is also an important ingredient. It is uniquely valuable because nothing else to help our customers how their products will actually perform in the real world. We aim to make test the key enabler of product performance by integrating automated test systems and data analytics to KRW.
Turning to digital thread of data that goes across engineering and manufacturing workflows.
I believe we are in a unique position to accomplish this call today, we offer the most comprehensive set of driver level software application software test operation software and now data analytics in our industry we.
We already serve applications from validation through production within each industry focus area and we have solid expertise and the automation of testing and the systems.
As the complexity of our customers' products continues to grow and scale. Many of the manual steps will need to be automated by intelligent systems and I believe we are in the best position to lead that change.
This vision is the foundation of our growth strategy and we are prioritizing our investments to achieve it.
We are focusing our execution on this vision through four strategic pillars software systems services and a more streamlined buying process for our customers. Our plan includes the following.
We'll elevate our software position through new offerings, particularly at the enterprise level and.
And we aspire to increase our software revenue from 20% of revenue today that 30% over time shifting towards primarily recurring or subscription based software.
We will expand on our system level offerings to provide a higher level starting point for our customers and increase our share of wallet.
We will increase services, where we believe our expertise offers clear differentiation and value.
And we will continue to streamline the process of doing business with an eye.
The focus to streamline especially for our large base of smaller accounts is the next natural evolution in our sales transformation.
We're focused on driving more efficiency in the ways, we serve and support our broad based customers, while still helping to ensure their success.
Over the past several years, we have driven scale and leverage in our marketing sales and support model. We are committed to both reducing our costs and improving the experiences of a large number of smaller accounts we serve.
For these customers, we will continue to optimize how they engage with an eye, including further utilizing our E commerce for lower touch and evaluating where distribution can improve efficiency and customer reach we will continue to focus our expert sales force on system level opportunities in our top potential accounts.
We remain focused on driving growth through our strategy, despite economic uncertainty and are aligning expenses with our expectations although.
Although we believe a macro tailwind is in our future. We are taking action now to better serve our customers while aligning the capacity needed to achieve our long term goals.
As part of these efforts, we have made the difficult but necessary decision to reduce our global workforce by approximately 9% with most of that reduction in ESG today we.
We believe these efforts will accelerate our growth strategy and enable us to make the necessary investments across the business to hit our long term financial goals.
Being a leader in our space requires bold moves and we are committed to delivering a high level of performance as a company to help exceed the expectations of our stakeholders.
Now turning to our industry results this quarter.
Semiconductor as we expected orders were down high single digits year over year in Q3. So we remain on pace for a record year. We believe millimeter wave is beginning to show increased adoption with release of Fiveg cell phones, which will drive more millimeter wave enabled networks we.
We also continue to experience some negative impact in the semiconductor space from the heightened us trying to trade tensions.
Serving automated testing for early research the validation and production test opens up a unique opportunity for us to support our customers' needs throughout their design flow, we are making significant progress on our design to test offering through leverage of key relationships with industry leaders like our strategic alignments alliance with cadence and through our.
Recently announced strategic agreement with all the time.
As we attempt to solve a long standing problem of allowing customers to linked design and test workflows, we're seeing strong interest from many leading semiconductor company, who will provide critical product feedback in early stages of solution development.
In Q3 orders for transportation continued to be weak down low double digits year over year as the headwind that automobile production continued so we did see year over year growth in the areas of focus around the electrification and active safety systems.
For Aerospace defense and government orders were up low single digits year over year in Q3, and what has continued to be a relatively steady spending environment in particular really in the U.S.
In the third quarter, we saw strong pipeline growth with growth in orders over $20000 year over year, specifically in the us.
Americas in the major accounts, where we're focused.
Orders in our portfolio business were down low double digits year over year in Q3 due to a slow recovery in the broad based business.
Orders in this business did improve sequentially in line with recent stability in the global PMI and improvement sequentially in orders under $20000. We believe the actions, we're taking to streamline our business to focus on topline opportunities and to expand our reach to customers will have a positive impact to our portfolio business.
This going forward.
We remain focused on execution in the areas of our business that can drive our growth even within the constraints of what has been an overall weaker spending environment. The actions. We are taking on both reductions and investments are focused on achieving that growth. We will continue to adapt in the short term while remaining focused on.
Achieving the long term financial targets that we have set out.
With that I'll turn over the call to our Chief Financial Officer, Karen wrap before closing with few comments. Thanks.
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We closed the third quarter with GAAP revenue of $308 million down 9% year over year and above the midpoint of our guidance.
In Q3 orders were down 7% year over year.
Orders under $20000 were down 11% year over year with sequential improvement from Q2 2020.
Orders over $20000 were down 4% year over year.
As expected primarily due to the impact of China regulation.
Continued weakness in transportation and overall weakness in Europe.
The Americas orders were flat year over year, EMEA was down 16% year over year and Asia Pacific.
Down 7% year over year.
During the fourth quarter, we are pleased to see orders trending up both in the pipeline and our broad based business Q4 quarter to date orders are trending up across all regions as well.
Okay.
Non-GAAP gross margin in Q3 was 74.1% we continue to see about 70 basis points of impact from additional costs related to COVID-19.
Services has been an accretive growth area for us and we will continue to focus on monetizing the services, we provide and leveraging our services expertise to drive high value system sales.
This operational change shifted approximately $3 million from operating expenses to cost of goods sold in Q3, but had no impact on operating margin.
We are on track to the full year gross margin target of 75% that we outlined in our 2020 model at our Investor Conference in August.
Non-GAAP operating margin in Q3 with 13% the company reported a Q3 GAAP net loss of $4.6 million and diluted earnings per share of minus four cents per share.
Included in our GAAP net loss is a one time charge of $4 million related to the acceleration of certain unvested options that were assumed as part of our optimal plus acquisition.
This amount was not included in our GAAP earnings per share guidance reported in July.
Q3, non-GAAP net income was $30 million and non-GAAP earnings per share was 23 cents, which is two cents above the midpoint of our guidance.
We had modeled Q3 2020 as the bottom of the trough for Eni and we believe this assumption is valid and we will begin the series.
Moving forward, we believe that we are also on track to the full year operating margin target of 15% that we outlined in our 2020 model at our Investor Conference in August.
Our balance sheet remains strong we ended the quarter with $290 million in cash and investments with.
With the improved credit environment, we anticipate amending our existing credit agreement on October Thirtyth 2020 to increase the revolving line of credit refinance the existing term loan and increase our incremental borrowing capacity. We anticipate that the amended agreement will include other changes that are beneficial to the company and.
In the short term, we do not expect a material change in our level of outstanding debt.
For the first nine months, our cash flow from operations was $109 million, representing 12% of revenue.
I believe this consistent and solid result demonstrates the benefit of the diversity and resiliency of our business model.
Our capital allocation priorities remain clear and unchanged we plan to continue to invest in innovation and technology to stay ahead of the needs of our customers and deliver a world class customer experience.
Dividends remain a priority in Q3, we paid $34 million in dividends. The board of directors has approved a dividend of 26 cents per share payable on December 720, 20 to stockholders of record on November 16th 2020.
We will continue to be opportunistic with share repurchase in the third quarter, we returned $16 million to shareholders through repurchases of 447000 shares of common stock at an average price of $34.86 per share.
We view our strong cash position is not only a way to provide returns for our shareholders through dividends and opportunistic share repurchase but also for strategic investments for long term growth and stability. Our M&A funnel has been focused on identifying technology to leverage across our platform and on strategic accelerators to achieve our growth targets faster.
We're pleased with the progress of the integration of optimal fluff, the alignment and synergy with our strategy and areas of focus has already been evident.
Because the optimal plus technology is being integrated with the Eni platform and the revised offerings will combine eni and optimal plus technology, we do not intend to break out financial details specific to optimal plus going forward.
We have been encouraged by the improvement in the global PMI during the third quarter, indicating sequential improvement in the macro economy, Although global GDP is still remains negative year over year.
Despite some positive signs in our business, we remain cautious as there is still quite a bit of uncertainty, including a possible contraction due to another wave of the virus.
For the fourth quarter of 2020, we currently expect GAAP revenue to be in the range of $333 million to $363 million.
Total non-GAAP revenue, which adjusts for the impact of purchase price accounting related to optimal for us to be in the range of $335 million to $365 million at the midpoint. This represents 13% sequential growth versus.
Q3 2020.
We expect GAAP fully diluted earnings per share will be in the range of minus four cents to 10 cents for Q4.
With non-GAAP fully diluted earnings per share expected to be in the range of 32 cents to 46 cents.
We remain dedicated to serving our customers in China, a regional focus for Eni, while also complying with relevant export regulations.
We continue to see a negative impact of approximately 3% of revenue per quarter from the expanded trade regulations and geopolitical landscape, which is built into our guidance.
As Eric mentioned, we are committed to executing to our operating model and strategic plans.
Included in our Q4 GAAP earnings per share guidance is approximately 13 cents of restructuring charges.
We expect operating expense savings from this restructuring to begin in Q1 2021, we're.
We're taking these actions to strategically align our resources for growth and cost savings we.
We expect minimal restructuring charges in 2021.
In summary, we delivered Q3 revenue above the midpoint of guidance. Despite the current economic uncertainty. This is a testament to the hard work and adaptability of all our employees globally.
I believe this is also indicative of the stability provided by our broad customer base and industry diversity the value customers see in our.
Innovative platform and the strength of our operational efficiency.
We will continue to align resources to higher growth opportunities, while reducing costs in pursuit of our long term financial model. We believe our strong balance sheet puts us in a position of strength and stability through this global pandemic and what lies ahead.
Now I would like to turn the call back over to Eric for some closing comments. Thank you Karen.
In challenging times I believe that people leadership and strategy matter. My leadership team is aligned on positioning us to win and taking the right actions to do so.
Building on our unique software position, we believe we have the opportunity to once again modernized and disrupt our industry.
As a business, we have and will continue to take a broad range of actions to ignite growth, we must have a line and grow our capabilities to increase our pace of innovation to match the needs of our customers. This includes shifting existing resources and talent to focus on high growth opportunities and adapting the way, we sell to and support our customers, particularly with.
In our smaller accounts.
Reducing the overall size of our workforce, we will continue to hire key expertise where needed to execute our strategy and we will continue to view potential inorganic investments as strategic growth accelerators with the opportunity to address a broader range of customer needs.
I want to end by recognizing our employees for their resiliency in a challenging time.
We have taken many of the necessary steps to transform and I, but we must be bolder and move faster, even while simultaneously managing the uncertainty taking place in the world around us part of being a great business is making the tough decisions that put us in the best position to serve our customers and to win.
I remain confident in our opportunity as we continue to invest in the technology and capabilities needed to reach our vision.
And the disrupt our industry.
With that we'll now open it up for your questions.
As a reminder, ladies and gentlemen, if youd like to ask a question at this time. Please press. The Star then the number one key on your touched on telephone.
To withdraw your question press the pound key.
In the interest of time, we ask that you limit yourself to one question and one follow up and rejoin the queue for any additional questions.
Our first question comes from Richard Eastman with Baird. Your line is now open.
Yes, good afternoon.
Eric maybe.
Yes, maybe a little bit more color around the semiconductor down high single digits again I know we.
We expected that but we also have seen maybe a little bit more strength than we thought.
Towards the end of the third quarter than entering the third quarter and Im curious again with all the activity around.
The smart the mobile market, the smartphone market and the big.
The big introduction cycle that were on here around millimeter wave for one of the biggest to us players there.
We're.
Are we involved at all on the test side I mean, we don't see that in the portfolio products business and I think you referenced reference some of the network stuff for on semiconductor. So maybe just some color around.
The semiconductor piece of the business and then also the mobile handset test business, which I know would normally show up and portfolio products.
Yes, Thats correct great question. So as you look to the look we expected based on sort of timing, we expect to the semiconductor business to be to be negative and in Q3, so it wasnt outside of our.
Expectations and as I mentioned, we're still it's on pace for a record year, we're still quite optimistic about the short and long term prospects for that business. So a couple of things are kind of going on there so far.
Fiveg, obviously, we've kind of had a lot of success in the sub six gigahertz Fiveg has been a growth growth driver for that business and as you mentioned now were.
Going to see some additional traction in millimeter wave our view on millimeter wave obviously, we've got product in market now, we primarily sell into the infrastructure.
Conductor devices that are used in infrastructure.
Those.
We expect that to be ramping primarily in next year, probably peaking the year after that but as I mentioned, we are selling.
Products into that space now sort.
Certainly as you mentioned the fact that there's the most popular cellphone and the world has the millimeter wave in the latest version.
Is a good sign for infrastructure and for the demand for millimeter wave infrastructure. So I think our optimism is probably picking up a little bit on that side.
Now in semiconductor we also have some of the.
The things that are more challenging which is the the China regulations as we mentioned that obviously affects some of our semiconductor business in China and then we also sell a lot into that sort of general industrial mix signal semiconductor. So I think that the sort of maybe out of the world, which have been a little bit more moderate in there.
In their business over the last couple of quarters. So on the last part of your question about portfolio, we have some exposure into the.
Mobile handset tests for a variety of different types of measurements, that's not a primary our focus when we think about fiveg, we're mostly focused on the semiconductor opportunity.
Okay, and then just as a follow up can I ask.
With the restructuring here in the <unk>.
Realignment the head count reduction the realignment there with some of those assets, but what kind of savings can we anticipate off of that restructuring charges, what kind of a payback do you expect on that in 21.
Yes, Rick highest Karen.
Were there talked about will be will be.
Redirecting some of that into investments some of the key investments that we've been talking about for a while now with.
Serving our customers more completely with a streamlined buying process. The systems evolution that we've been going through so redirecting those funds into those for US. This is Eric laid out.
So what we'll do is we'll be laying that out.
Each quarter as we understand more closely what revenue is going to look like and how we can align those costs with that revenue growth, but the model I'd refer you back to is the one we use for the long term model back in August when we laid out the the three year plan. The 2023 goal, we talked about and DNA being closer to 30.
The 635% to 36% of our revenue.
We believe that with this this.
Restructuring that were doing well be able to accelerate much closer to that model in 2021, Chris specifically for that line of SGN, a where we're putting the focus okay. Okay very good. Thank you.
Thanks, Rick.
Our next question comes from Mehdi Hosseini with energy. Your line is now open.
Yes, thanks for taking my question.
Two follow ups.
Did I hear you correct for Tony Tony Your operating margin.
Thank you.
Get back to 15% if that's the case then you exit the year almost 20% operating margins just want to make sure I understood how the funnel.
Yes, maybe that's the plan that we laid out back in August was the 15% and we still believe we're on track for that for the end of <unk>.
For the full year 2020.
Gotcha and then.
I wanted to circle back on optimal.
Hi, how are you thinking of contribution.
In Q4.
I will point in 2021 should we expect some.
GE or is that more like.
Two years out any color in terms of how you're integrating and especially on the product side would be great.
Sure. Yes. This is Ken.
So I had talked last quarter, when we laid out our number or is about about a revenue of in the range of nine to 12 million for optimal plus in Q4, and we're still on track for that.
At this point from a visibility perspective.
We had talked about how it wouldn't be accretive until 2021, and thats still the case, especially with.
How fast we're accelerating the integration of optimal first because of the benefit that we see to your point the synergy really is going to come from consolidating it with our existing Eni business and so were going to quickly lose the visibility in the separation of optimal plus we are not going to run it as a separate organization.
It is going to be fully integrated which is.
Something that's gone really well so far and so.
But we've talked about it being accretive in 2021, and Thats still the intent and especially with the opportunities that we're seeing on the topline Theres theres no change to that expectation and I'll just add a little color Manny.
Based on this revenue synergy side I've been personally spending quite a bit of time with some of the top customers of both optimal plus and an existing platform and I can just say for those qualitatively very very pleased with the just the value that that capability delivers.
To those customers and the opportunity that we see.
Elevate our own relationship and value and these very very strategic customers for us and then when I talk about as I made some comments in the in the prepared remarks about the vision that we have and the type of software ambitions that we have this is a really important part of it.
And we are going to be building more capability around that to be able to meet that vision.
Thank you.
Thanks, Matt.
As a reminder, ladies and gentlemen, if youd like to ask a question at this time that's star then one.
Our next question comes from the line of John Mcgeady with Stifel. Your line is now open.
Thanks, very much Eric I was wondering if you talk permitted about the change in the larger order line.
Well you mentioned the sequential improvement in orders below 20, k., but the orders above 20, K. took a pretty steep decline off of what was up last quarter. I'm. Just curious if you could talk a little bit about what you're seeing there. If it's a particular vertical that's really impacting that and how to reconcile that maybe with the more positive order commentary.
You know sort of Threeq has bottomed here.
Yes, I'll make some comments qual.
Qualitative comments on that and then if terawatts the tethering qualitative comments, you can but I'll tell you John.
I'll have concerns there that continues to be the growth driver there is obviously timing.
Timing and the opportunities are are a little bit lumpier. When you think about these larger opportunities. So I think you're just seeing some of that year over year compare.
That continues to be a.
Sort of growth driver for the business overall, and we remain confident that it will continue to be from a vertical I mean, it was part of my commentary of course that the and semiconductor there. Some compares where we expected this to be a quarter that would be year over year down and of course in our semiconductor business. It is primarily in those larger order buckets.
And then the the weakness in entry.
In transportation has persisted and ABG has stayed relatively strong including in the large the large order bucket. So I really care I'd characterize that is more timing rather than a red bend the trend and Jan.
We.
Been really pleased to see the fourth quarter, starting with the trend up across both buckets actually the broad base as well as.
The large orders so so good positive start to the to the quarter.
Thank you and then maybe just as a follow up on and trying to specifically I know you talked about it being a sort of a 3% headwind as we go through here, but again I'm curious just as you're talking with customers and things of that nature. I mean is the weakness in China solely terrorists related or have you started to see.
A bias or move away attempt to move away from at least.
US based providers as you're looking at that market more broadly.
Yes, I mean, certainly been talk about that John we haven't seen that in fact, I've been really really proud of our results in China, China did outperform.
Outperformed the rest of APAC for this quarter is actually out approximately flat.
And given that headwind that we said was 3% at the company level, obviously, that's a much more significant headway into China. So to actually be flat tells us a couple of things. One is I think there is.
Pretty good recovery and just sort of general economic activity. That's good to see and the second is credit to our team the agility of the teams to really pivot where they needed to and go after business.
We can go after.
You know in light of the different trade restrictions.
So credit credit to them and we were pleased that exceeded my expectations for the quarter.
Thank you.
Thanks, Jeff.
Im showing no further questions in queue at this time I would like to turn the call back to Eric Starkloff for closing remarks.
Thanks to everyone for joining us today stay.
Stay safe and we'll talk again soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.