Q1 2021 National Instruments Corp Earnings Call

April 29, 2021

[music].

Okay.

Good afternoon, everyone. This is the operator your conference is about to begin please continue to standby.

Once again this is your operator, you kind of things will begin in two minutes. Please continue to standby.

[music].

Good day and thank you for spending by welcome to the Q1 of 2021 National instruments earnings Conference call at the time, all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session to ask the question during the session you will need to price.

Part of one of your telephone if you require any assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Marissa Vidaurri head of Investor Relations. Thank you. Please go ahead.

Good afternoon. Thank you for joining our Q1 2021 earnings call I'm joined today by Eric <unk>, President and Chief Executive Officer, and pairing rack Chief Financial Officer, We will start with an update on our performance in the first quarter before opening up for your questions.

Section today will include forward looking statements, including without limitation those regarding revenue earnings gross margin operating expenses capital allocation targets and future business outlook, including supply chain constraint backlogs and the potential impact of COVID-19 on the company's business and results of operation.

<unk>.

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. We refer you to the documents that the company files regularly with the Securities and Exchange Commission, including the company's annual report on form 10-K filed on February 20, <unk> 2021.

These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward looking statements. We assume no duty to update any forward looking statement to conform the statement to actual results or changes in our expectation of.

A reconciliation of our non-GAAP financial measures disclosed in this call to the most directly comparable GAAP financial measures of related disclosures are contained in our press release and on Ni Dot Com Slash natty.

Non-GAAP revenue is defined as GAAP revenue adjusted to exclude the impact of purchase price accounting.

And our management will be hosting meetings at the virtual conferences for Needham and J P. Morgan in May in addition to Baird Bank of America and Stifel. In June please visit <unk> Com Slash Natty for presentation times, we look forward to speaking with you and Mark your calendars, our virtual Investor Conference is confirmed for Tuesday August 17.

With that I will now turn the call over to Chief Executive Officer, Eric start clock.

Thanks, Brian really appreciate everyone joining us today, so first I'm going to discuss progress to our multi year goals and strategy and provide some color on Q1 results before I hand, it over to Karen day back into the financials. We saw strong momentum in Q1 with numerous highlights across the business chief among them were very strong order grew.

<unk> at 19% year over year, an all time record orders for first quarter.

Strong momentum in the key applications of focus validating our long term strategy and software is currently up to 22% of our total revenue.

Q1 revenue was a record for a first quarter up 8% year over year due to broad supply chain constraints across our industry not all orders were shipped within the quarter, resulting in an increase in backlog going forward. We expect it to continue to cause the shifted the timing of our revenue recognition. So we remain confident in our ability to.

Ultimately ship that backlog and optimistic in the continued momentum in our business.

Software is in our DNA and it's the driving force behind our growth strategy as.

As the complexity of our customers' products continues to grow and scale. Many of the manual steps need to be automated by intelligent systems and software will be critical to their success.

I believe we are in the best position to lead a disruptive change in our industry around software and data and we are prioritizing our investments to achieve this.

Our intent is to increase our software revenue to 30% or more of our total revenue by 2025 shifting towards primarily recurring or subscription based software.

In Q1 software and related services revenue grew to 22% of our total revenue.

Another critical component of our strategy is achieving efficiency in our broad based business in order to allocate resources to higher growth opportunities at our Investor Conference last August we shared a tiered view of our account structure. The top two tiers combined include approximately 2500 accounts referred to as our focus accounts.

Which include our customers with highest potential where we're looking to most significantly expand our system level offerings and increase our share of wallet. These.

These customers represented approximately 70% of total Q1 orders.

The third tier, which referred to as our broad based business includes over 30000 accounts, where scale and leverage can be achieved through e-commerce and global distribution. These customers represented approximately 30% of our Q1 orders.

Now turning to our results by industry.

Our newly combined semiconductor and electronics business reported mid double digit year over year order growth in Q1 and achieved all time record quarterly orders for semi and electronics combined.

<unk> strength and the China ecosystem continued to fuel growth, particularly through increased adoption of our RF test capability for five G, including production tests and lab wins at key semiconductor accounts and.

In addition, the leverage of optimal plus technology as the underlying platform for our new connected lifecycle and analytic solution allows us to focus on supporting the needs of our customers throughout their product development flow using software to derive predictive data insights. We believe we are highly differentiated in this capability.

With <unk>, introducing significant challenges of multi vendor RF front end and other chipsets interacting with one another there is an increased need for more open and flexible approaches to both design and test.

Last month, and I enjoy and I joined the open RF consortium, an organization dedicated to creating a <unk> ecosystem of functionally interoperable hardware and software.

Furthermore, this month, we joined the Ati's next G Alliance as a founding member of this organization, we will seek to advance North American mobile technology leadership in <unk> over the next decade, we're honored to have our own for two five rate play a leadership role in both of these organizations.

Our transportation business continued to benefit from the recovery in vehicle production with orders up double digits year over year in Q1 and up sequentially again from Q4. This was an all time record quarter for transportation orders showing strong growth. After two years of challenging headwinds. We believe the continued recovery of.

Vehicle production will fuel increased investment in the key trends of electrification active safety systems, where we continue to see particularly strong growth.

In Q1, we released new software capabilities and expanded instrumentation for our electronic control unit test system, which can accelerate both development and test time by up to 40% over traditional end of life testers and we're pleased with early customer response in an environment of rising demand in the space.

Order growth remained steady in aerospace defense and government up mid single digits year over year in Q1. This.

This has continued to be of solid growing business over multiple years. It is a testament to our ability to accelerate system level value for these customers.

And this based software services and support our critical sources of differentiation to the customer once a government contract. For example is one of those long term value in hardware and software lifecycle support debt, we are well suited to provide representing a steady stream of revenue into the future.

And we continued to see momentum and so called new space applications at companies, including Virgin orbit Blue origin, and many others. This.

This new era of exploration of highly innovative and moving very fast and it benefits from our software based approach.

Our portfolio of business grew orders double digits year over year in the first quarter. This represents the second consecutive quarter of order growth for this business aligned with our expectations to see of strengthening and our broad based business along with an improving economic environment.

We believe that in addition to the stronger economy. This improvement is also a result of our strategic investments to enhance our E Commerce channel and ramp our global distribution to increase our reach to broad based customers.

I continue to be optimistic about the long term growth opportunities for our portfolio of business as we hone our focus on the common needs of this customer segment in the short term we're focused on not only taking advantage of the recent macro recovery, but also proactively increasing demand by improving how we position package price of promote our curve.

Offerings, we've made organizational changes to support these efforts and our team continues to refine our medium and long term growth opportunities through increased focus on the value of our software and systems standardization.

Our execution remains strong and growth the priority on our journey towards our 2023 financial model. We are committed to these goals with the strategic focus and a passion for success.

With that I'll turn it over the call to our Chief Financial Officer, Karen Rapp before I close with the few comments.

Thanks, Eric and thanks, everyone for joining us today. It was an exciting quarter. We continued to see strong momentum in the first quarter with GAAP revenue of $335 million up 8% year over year end of record for our first quarter non-GAAP revenue was up 9% year over year the.

The industry wide supply constraints were slightly more of a headwind than we expected, causing us to end the quarter with revenue of just below the midpoint of our guidance.

Eric mentioned this is the timing issue as the demand was even stronger than expected across the business.

In the first quarter customer demand was higher than our typical seasonality with record orders for our first quarter up 19% year over year. Following a strong Q4. We believe this demonstrates the success of our strategy to provide higher level of solutions for our customers through systems and software.

We've historically broken out our order growth above and below $20000 as we transitioned the distribution. The split is no longer meaningful as many distributors consolidate their orders to us.

Going forward, we'll use the customer carrying lines referenced by Eric to share color into our business.

The historic trend of our orders using this lens will be posted the ni dot com slash natty.

For Q1 orders for a broad base of business were up 14% year over year led by success in our digital channel and global distribution initiatives. While also benefiting from the continued macro recovery are for.

The accounts continuing to see strength with orders up 21% year over year as we continue to better align resources to high growth opportunities.

Positive year over year order growth was reported across all regions in the first quarter in the Americas orders were up 8% year over year.

There is in EMEA were up 2% year over year in orders in APAC were up 51% year over year.

Ranked in APAC was evident across the region as our local sales team continues to pivot to new opportunities and create new customer relationships.

Non-GAAP gross margin in Q1 was 75, 3% we continue to see about 70 basis points of impact from additional costs related to COVID-19 that began in Q2 of last year and we expect those costs to continue through 2021.

Services has been an accretive growth area for us and we will continue to focus on monetizing the services and expertise we provide to drive high value system sales.

Our intent is to maintain our gross margins demonstrating the value customers place on the high level of software in our offerings.

We reported Q1, GAAP net income of $4 5 million and diluted earnings per share of <unk>.

Two of our non-GAAP net income was $42 million and diluted non-GAAP earnings per share was <unk> 32.

Just above the midpoint of our guidance and an increase of 23% year over year.

Our balance sheet remains strong we ended the quarter with $299 million in cash and short term investments for Q1 of our cash flow from operations was $30 million, representing 9% of revenue even in a supply constrained environment.

We continue with the balanced approach to capital allocation with priority is clear and unchanged. We plan to continue invest in innovation and technology to disrupt our space through systems and enterprise software.

Dividends remain a priority in Q1, we paid $36 million in dividends. The Ni board of directors approved the dividend of <unk> 27 per share payable on June one 2021 to stockholders of record on May 10 2021.

We view our strong cash position is not only of way to provide returns for our shareholders through dividends and opportunistic share repurchase but also for inorganic investments for long term growth. Our M&A funnel is focused on opportunities aligned to our strategy, where we can leverage additional technology across the business and acquire industry specific technology of expertise.

Both serving the strategic accelerators to help us achieve our 2023 financial model faster.

We're pleased with the efficiency and progress of the optimal plus the integration the acquisition continues to accelerate our opportunity in enterprise level of product analytics and its the foundation to building out the rest of our platform.

Now shifting the guidance for Q2 2021, we're encouraged by the strength in demand as we begin the second quarter and.

For the second quarter of 2021, we currently expect GAAP revenue to be in the range of $304 million to $334 million. We expect total non-GAAP revenue, which adjusts for the impact of purchase price accounting to be in the range of $305 million to $335 million at.

At the midpoint this represents 6% year over year revenue growth versus Q2 2020.

Similar to Q1, we expect our customer demand to exceed our revenue guidance due to supply chain constraints, we expect to grow backlog in the range of $40 million to $50 million in Q2.

We estimate our order growth to be in the range of 20% to 25% year over year in Q2, and continuing the momentum from Q1.

We expect Q2, GAAP and non-GAAP operating expenses to be approximately the same percentage of revenue as Q1.

We expect GAAP diluted earnings per share will be in the range of minus <unk> 12 for Q2 with non-GAAP diluted earnings per share expected to be in the range of 21 to 35.

Our strong results. This quarter are 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 as we look forward, we remain committed to our long term final.

<unk> model of targets and believe our goal of delivering a compound annual growth rate of 9% revenue growth with 20% operating margin by 2023 is achievable we.

We'll continue to align resources to what we believe are higher growth opportunities, while working to reduce costs in pursuit of our long term financial model and we believe our strong balance sheet puts us in a position of strength to capitalize on inorganic investments to help accelerate growth.

Now I'd like to turn the call back over to Eric for some closing comments.

Thanks, Karen we remain confident in our ability to accelerate growth through continued execution of our strategy and meeting or exceeding our long term financial model strength in orders across the business reinforces that our focus is sound and our technology remains critical to customer success. Our focus has been to transform our business for scale and of <unk>.

Each of our full potential in the market. The innovation continues to be a top priority with R&D investments aligned to expanding our systems and enterprise software capabilities.

Last year, the challenging provided us an opportunity to innovate in the ways, we interact with our customers. This year will build upon our digital first strategy with ni connect of virtual event, providing high quality targeted content with the engaging online experience to serve all of our customers and to attract new ones. This event as scheduled.

For July 2021, and will replace our usual in person user conference in a week this year.

The pandemic also improved our ability to remain highly productive and of remote working environment.

<unk> in our corporate impact strategy is the focus to create a more diverse and inclusive workforce, creating a more flexible working environment will open up new avenues to recruit and retain talent with.

With access to a larger pool of candidates globally I believe we can engage with the more diverse backgrounds of experiences August of reach our highest potential.

As we look ahead I am inspired by our opportunities and believe our strong foundation will help us achieve our long term growth ambitions are strengthening business gives me increased confidence in our ability to deliver on our long term goals with continued focus on sustainable growth and profitability to create value for all of our stakeholders.

Want to recognize all of our global employees for their perseverance execution and dedication not only to support our customers, but to support one another as the <unk> opportunity in our future and I look forward to the opportunity to work alongside all of you to make that happen.

And with that we'll now take your questions.

Okay.

As a reminder to ask the question you will need to press star one of your telephone again.

One of the telephone keypad. However, if your question has been answered and you wish to withdraw from the queue. Please press the pound key. Please note the limit yourself to a question with the follow up but if you have an additional question in the press star one again.

To be back into queue. Please standby, while we compile the Q&A roster.

Our first question is from the line of Cemig Chatterji with JP Morgan Your line is open.

Hi, this is actually get credit for so long.

I guess my first question is relative to the supply constraints that you guys are seeing are there any particular areas in the portfolio weighted.

From the headwinds.

And then on that topic are you seeing any impact from the component environment on the margin.

Sorry can you repeat the second part of that your plan.

Im looking back clear.

Hi is this better.

Yes, yes, yes.

Yes, sorry, my second part of the question was just on whether you're seeing any impact from the component environment on your margins.

Oh on margin.

Sure. The first part I Wonder if you caught eye care of the first part was about if there's particular parts of the supply.

Pretty broad base the.

The component shortages exist across a pretty broad part of our portfolio of how I'd characterize it yes exactly.

But from a margin perspective, some of what we're seeing is besides the lead times pushing out on some of these these components. We are also seeing price increases. However, that's been built into our Q2 guidance and.

Overall, as Eric said, great where may be chasing 10% ish, 10% to 15% of our components. So it's not a significant piece that's going to swing the the gross margin from where we are today significantly.

Got it and then my follow up actually a little bit more general yesterday Qualcomm spoke of.

Opportunity to.

The two millimeter wave of adoption in China, which I.

Okay.

Just curious to hear but also around the topics, maybe what youre hearing.

And with the if you can kind of put in a realistic timeline on the opportunity to materialize.

Yes, I'm going to try to answer you did break up a little bit, but I heard the reference of Qualcomm and really about <unk> of millimeter wave in particular, so let me just comment on that so <unk> as I as I briefly mentioned continues to be of pretty significant growth driver primarily in our semi electronics business. So thats a contributor to the.

The strong double digit.

The mid double digit growth that we saw in Q1, and we anticipate it to continue to be a driver of throughout 2021 now of course as we've said before that is both sub six gigahertz and to your question millimeter wave, we expect sub six gigahertz. The continued to be a growth driver this year.

And thats globally, but that's certainly a big part of the very very strong growth that we saw in APAC, including including China.

And then millimeter wave, we expect that the <unk>.

Back half of this year to become a stronger growth driver as we see more broad millimeter wave of adoption and again that will be.

Global but we are quite pleased with the some of the semiconductor business in general in Asia.

Thank you appreciate the color.

Okay. Thank you.

Our next question is from the line of John Machete with Stifel. Your line is open.

Thanks very much.

Maybe following up a little bit on the supply issues. Just curious if you can give us any color as to whether or not it got worse, a little better as we're going through the quarter, obviously, you're indicating a fairly significant impact here in Q2, just any sense that you can give us in terms of how this likely plays out over the next several quarters and if you think.

This is something that youre going to be dealing with likely throughout the through the full year.

Yes. Thanks, John This is Karen Hi, yes.

Yes, it definitely got worse throughout Q1 versus what we saw coming into the quarter.

With more and more part constraints than what we had expected.

Which is leading to what youre seeing for Q2, what it caused as our lead times as you know has been really short Riley we ship in a few days to maybe a couple of weeks historically on some of our larger systems, but.

We're starting to see our lead times expand we think by the end of Q3, we'll be at kind of four to five week lead times on average because we expect Q2 to continue to be tough and then Q3 to be maybe the peak of this.

Taken us to the support of five week lead times, clearly that's still very competitive in our space when youre looking at lead times around that level, but we do expect based on our current visibility to continue to see that that tightness through Q3.

Hoping starts turning around by then.

We will see it come back to a more favorable position in Q4.

Got it and then maybe as a follow up there.

On the other side of it do you have customers now that are then placing orders earlier I mean again, even with the four to five week lead time.

The stretched out too much for you, but do you have increased visibility as a result of this do you see customers coming in there then.

I mentioned the auto obviously continues to get a little better for you do you worry that the some of these constraints that we've seen across the the auto industry start to weigh on that business as we're getting into the second half.

We are starting to see customers place their orders earlier, our sales team's knocking on doors, saying, hey get it get it in sooner rather than later.

The more of the more visibility we get earlier in the quarter of the more likely it is we can get it out the door in the quarter. So.

Starting to see a little bit more of that one thing maybe the keep in mind, which is maybe a little unique in our business is that our backlog tends to ship right. We don't we don't have the issue where there is a double ordering or.

Lots of cancellations that type of thing, especially when you are talking even when we get to a four week lead time by the time you placed the order.

Getting the Tia pretty quickly there.

The tended to be of capital purchase for our customers that makes it a little stickier to which is nice.

From a transportation perspective, I'm actually excited about the transportation rebound so.

All of what we're seeing in terms of in the market predictions for 14% growth in vehicle production, 21% growth for electronic systems for this year all of that is going to kind of feed through to us and as they get more visibility to timing on when there.

When their factories are running when they need that all of that will feed through for visibility for us as well that's an industry. That's good about getting there the orders in early two so that's helpful.

Yes, just to add a little color John.

Yes, I'll, just add a little bit of color to that because I think.

Yes, Karen said the demand picture has been really good obviously of 19% order growth in Q1, we anticipate something like $20 to 25% year over year order growth in Q2 and.

Even though that increase in lead time has been as of effect on timing. We're confident we will ultimately get the business and as you said, it's still highly competitive compared to expectations of customers and what most of our peers are delivering from a lead time point of view. So that's why we of the confidence that that will be of timing.

The issue that we'll manage through but ultimately.

Ultimately get that business.

Got it okay. Thank you very much thanks.

Thanks, Jeff.

Our next question is from the line of Mark Delaney with Goldman Sachs. Your line is open.

Yes, good afternoon, thanks for taking the questions.

Starting as well on the topic of the supply chain shortages could you quantify how much revenue the company wasn't able to meet in the first quarter that you otherwise would have without the constraints and then if we think about the first half of the year in total.

How much revenue do you think youre unable to fill in.

I'm trying to better understand what sort of additional revenue opportunity there potentially could be in the second half or perhaps even into early next year.

Yes.

We'll be pushing out.

Sure Yeah. This is Karen.

It's where it's a pretty pretty straightforward bridge between bookings and revenue for us of you got the bookings growth at 19% year over year and revenue at 9% year over year for non-GAAP.

Yes. The difference there is the backlog build primarily there's some deferred revenue in there, but we typically have historically shipped almost all of our bookings in the quarter. So you can look at that as the backlog billed for.

For the quarter and.

And longer term.

I do expect that to continue to grow a little bit more through Q2, Q3, I talked about the $40 million to $50 million I think we'll build in Q2 I think Q3 current visibility is the.

That will get us to kind of the four to five week lead times that we're looking at so.

I think it's going to be tough for the next five.

Five months or so and then and then.

I have a clearer picture, even just three months from now.

Okay, Alright, thank you for those additional comments.

On the topic, maybe you could go into more depth on the steps that it is taking them in order to try and alleviate some of the shortages over the next.

The quarter, whereas the peak of this problem, but but also or are you thinking about changing your procurement of inventory strategy longer term based on some of the learnings of COVID-19 and now more recently the chip shortages.

Yes, it's kind of this is there is some fun stuff that we've done despite the that type of situation other than the brute force that are amazing procurement team is doing to tackle in of the component issues as they come up.

R&D team Cross the company got involved to help identify opportunities for where we could.

Redefine products redesign certain components substitute where it makes sense for our customers and working with customers to make that happen. So we've had some real wins in the quarter as a result of that as well.

One of the things we're working toward it is continuing to have more visibility into orders and that will enable us to continue to manage our inventory in a proactive way.

Our always on the journey to simplify our designs for new products and reuse existing components. So that we can leverage inventory from that perspective, as well and certainly leveraging stronger relationships with suppliers going forward, but that's the journey, we've been on and will continue to be an index.

Wanted to Asia.

Our team has done done remarkably well here.

We've had an inventory strategy that would put us in the actually a good position coming into this I think there is a difference that we don't we don't tend to come into a quarter with months and months of of of backlog or really long lead times like some others in the space and so that means that we'll we'll see the suspect maybe more immediately but frankly.

When I look at it from another lens, our inventory strategy of the capabilities of our manufacturing team has kept us at a competitive advantage in terms of what we're actually able to deliver and so even though it's been a big change in lead times for us it's still at a competitive advantage and most of the spaces. We serve so teams.

Done a fantastic job keeping us in that advantageous position.

Thank you.

Thanks Mark.

Once again to all participants if you have an additional question you May press star one now.

Please standby, while we check for additional questions.

Okay.

Is there.

We have an additional question from Mark Delaney with Goldman Sachs. Your line is open.

Thank you for taking the follow up.

Wonder if youre thinking of a little bit more into the transportation segment, if I could and nice to see the good order growth that you reported.

As I recall of the company has some particularly good exposure and some of the autonomous applications and we've seen a lot of momentum there recently just of.

Couple of examples you've had Ford and Toyota.

The new Adas systems.

Continuing to see R&D work in the full autonomy as well. So maybe you can talk about what NII is doing more specifically to help customers prepare for these different levels of autonomy and how do you see the business developing not just in the near term but longer term. Thanks.

Sure absolutely first of all yes, we're as Karen mentioned, we are quite pleased with the result of transportation and excited about the future.

The fact that we had an all time record quarter from an orders point of view.

After a couple of years of some more challenging headwinds in that space I think it was a great indicator and then as I've as I've indicated before.

The Aaas are active safety systems, and <unk> have been growing significantly faster than the rest of the space. So thats. The continued I mean, those have been really high growth rates to your specific question about eight assets were essentially building systems with our customers that help to characterize and ensure the quality of those.

<unk> at various active safety systems in both the labs, primarily in sort of validation labs, and then also in production as well and that scales from <unk>.

Characterizing the sensors themselves to the software that's used in those of autonomy systems through what's called hardware in the loop basically.

<unk> software system that simulates the rest of the vehicle. So that you can ensure that all of the software running that Adas system. For example is working correctly and so to your point. Many companies are investing significantly in this space both the traditional.

Automotive companies as well as many upstart automotive companies that are betting on autonomy and electrification to disrupt the space and we're seeing.

Really good adoption across both the both of those types of companies, yes, let's kind of really.

And that space for autonomous driving so much of it relies on simulation and software debt.

It's right in our sweet spot because we can bring in that that capability to do that automated test for our customers and so it's.

It's an exciting area of growth for us and I'll do one more since the scenario. We're excited about that one of the things we're working on them.

And Youll continue to see US work on this as is <unk>.

Really that line between stimulation in the real world when Youre developing a system like that being able to move seamlessly between completely simulated world and these real world systems. Like I described is very very important to let Karen said that that leads our software based approach is very very well suited for that.

So thats an area that we see as a real growth driver in the years to come.

Understood. Thank you.

Thanks Mark.

And our last question is from the line of Robert Mason with Baird. Your line is open.

Yes, good afternoon.

We've referenced the.

The <unk>.

Creation of.

Some new strategies around the broader base business.

More reliant on indirect distribution.

Where are you right now of where do you think you are right now just in terms of assembling that don't work.

And putting the network together.

Oh, you mean of distribution Rob in particular, yes, yes, yes, yes, I can take it yeah. So yeah. So it really started accelerating that strategy significantly in the quarter in Q1, and I'll just say.

Our strategy is really on that.

That tier three of that broad based business I would describe it as both E Commerce and distribution. We saw really good growth ahead of the company growth in ecommerce in Q1. So the investments we've made over the past couple of years are paying dividends in that side of it and then we've started the sign you saw announcements around global distribution and started.

The shift some of that business are actual revenue through that distribution channel went from 3% of year ago to about 5% of revenue in the quarter itself and then the way we're evaluating that is to really on a couple of different dimensions. One is ultimately we think the combination of those strategies makes that.

Highly profitable part of the business and we have goals to increase the profitability of that part of the business and.

And specifically to make sure we're getting the price and value capture through the channel. So we track that quite closely and then that we're expanding the number of customers that we can serve because it's all about scale.

Side of the business so.

From those metrics point of view, let's say, it's a little bit early days, but the early indicators of positive.

So we're encouraged on the.

And of the transition and I'll just give another kudos to our team. That's a it's the big pretty complex transition to do in a pretty short amount of time and so there are a lot of a lot of hard work by our teams to do that and keep customers.

The.

Support of our customers do that process.

So we expect that to continue to ramp through this year.

How do you.

How do you assess your kind of sell out the visibility within the channel has just come together.

Sell through.

Yes currently correct.

There is no inventory being held at our just in our distribution channel. So.

When we do the itself to it.

It's clear where the end customers and who it is at this point.

Okay.

One last question.

As we went through last year and we just we spoke to the 2023 target operating model.

You would you would express some.

I guess optimism around the ability to move towards the SG&A targets for.

Perhaps at a more accelerated pace, how do you feel about those.

The pace right now.

No we're still on track to be at that target in 2021. So.

The real good about that and the opportunity to continue to scale that going forward.

Very good okay. Thanks for taking the question.

Yes, thanks, Rob for a great day.

Ladies and gentlemen that concludes the Q&A session on the conference call for today you may now disconnect. Thank you for participating housekeeping Stacey.

Thanks, everyone.

[music].

Yes.

[music].

Good day and thank you for standing by welcome for the Q1 of 2021, the National instruments earnings Conference call at the time, all participants are listen only mode. After the speaker's presentation. There will be of question answer session to ask the question. During the session you will need to price part of one of your tongue.

I'm sorry.

The required any assistance please press star zero.

I'd now like to hand, the conference over to your speaker of today.

He says the dairy side of it.

Investor Relations. Thank you. Please go ahead.

Good afternoon. Thank you for joining our Q1 2021 earnings call I'm joined today by Eric <unk>, President and Chief Executive Officer, and Karen Rapp, Chief Financial Officer, We will start with an update on our performance in the first quarter before opening up for your questions.

Our discussion today will include forward looking statements, including without limitation those regarding revenue and earnings gross margin operating expenses capital allocation targets and future business outlook, including supply chain constraints backlogs and the potential impact of COVID-19 on the company's business and results of opera.

<unk>.

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. We refer you to the documents that the company files regularly with the Securities and Exchange Commission, including of the company's annual report on form 10-K filed on February 23 2021.

These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward looking statements. We assume no duty to update any forward looking statements chicken for them the statement to actual results or changes in our expectations.

Non-GAAP revenue is defined as GAAP revenue adjusted to exclude the impact of purchase price accounting.

And our management will be hosting meetings at the virtual conferences for Needham and J P. Morgan in May in addition to Baird Bank of America and Stifel. In June please visit and I Dot Com Slash Natty for presentation times, we look forward to speaking with you and Mark your calendars, our virtual Investor Conference is confirmed for Tuesday August seven.

With that I will now turn the call over to Chief Executive Officer, Eric start clock.

Thanks for MRSA I really.

Right, everyone joining us today, so first I'm going to discuss progress to our multiyear goals and strategy and provide some color on Q1 results before I hand, it over to Karen to dive into the financials. We saw strong momentum in Q1 with numerous highlights across the business chief among them were very strong order growth at 19% year over year.

And all time record orders for first quarter strong momentum in the key applications of focus validating our long term strategy.

And software is currently up to 22% of our total revenue.

Q1 revenue was a record for a first quarter up 8% year over year due to broad supply chain constraints across our industry not all orders were shipped within the quarter, resulting in an increase in backlog going forward. We expect it to continue to cause the shift in the timing of our revenue recognition, but we remain confident in our ability.

The ultimately ship that backlog and optimistic and the continued momentum in our business.

Software is in our DNA and it's the driving force behind our growth strategy.

As the complexity of our customers' products continues to grow and scale. Many of the manual steps need to be automated by intelligent systems and software will be critical to their success. I believe we are in the best position to lead a disruptive change in our industry around software and data and we are prioritizing our investments to achieve.

Yes.

Our intent is to increase our software revenue to 30% or more of our total revenue by 2025 shifting towards primarily recurring or subscription based software in.

In Q1 software and related services revenue grew to 22% of our total revenue.

Which include our customers with highest potential where we're looking to most significantly expand our system level offerings and increase our share of wallet. These.

These customers represented approximately 70% of total Q1 orders.

The third tier, which we referred to as our broad based business includes over 30000 accounts, where scale and leverage can be achieved through e-commerce and global distribution of these customers represented approximately 30% of our Q1 orders.

Now turning to our results by industry.

Our newly combined semiconductor and electronics business reported mid double digit year over year order growth in Q1 and achieved all time record quarterly orders for semi and electronics combined <unk>.

With the <unk>, introducing significant challenges of multi vendor RF front end and other chipsets interacting with one another there is an increased need for more open and flexible approaches to both design and test.

Last month, and I enjoy and I joined the open RF consortium and organization dedicated to creating a five day ecosystem of functionally interoperable hardware and software.

Furthermore, this month, we joined the ACI, Yes next G Alliance as a founding member of this organization, we will seek to advanced North American mobile technology leadership and <unk> over the next decade, we're honored to have our own for two five rate play a leadership role in both of these organizations.

Vehicle production will fuel increased investment in the key trends of electrification active safety systems, where we continue to see particularly strong growth.

Order growth remained steady in aerospace defense and government up mid single digits year over year in Q1. This.

This has continued to be of solid growing business over multiple years. It is a testament to our ability to accelerate system level of value for these customers.

And this based software services and support our critical sources of differentiation to the customer once a government contract. For example of one there is long term value in hardware and software lifecycle support debt, we are well suited to provide representing a steady stream of revenue into the future.

We continued to see momentum and so called new space applications at companies, including Virgin orbit Blue origin, and many others. This.

This new era of exploration of highly innovative and moving very fast and the benefits from our software based approach.

I continue to be optimistic about the long term growth opportunities for our portfolio of business as we hone our focus on the common needs of this customer segment and.

In the short term, we're focused on not only taking advantage of the recent macro recovery, but also proactively increasing demand by improving how we position package price and promote our current offerings. We've made organizational changes to support these efforts and our team continues to refine our medium and long term growth opportunities to increase.

<unk> focus on the value of our software and systems standardization.

Our execution remains strong and growth of priority on our journey towards our 2023 financial model. We are committed to these goals with the strategic focus and a passion for success.

With that I'll turn it over the call to our Chief Financial Officer, Karen Rapp before I close with the few comments.

The industry wide supply constraints were slightly more of a headwind than we expected, causing us to end the quarter with revenue of just below the midpoint of our guidance.

Eric mentioned this is the timing issue as the demand was even stronger than expected across the business.

We've historically broken out our order growth above and below $20000 as we transitioned the distribution. The split is no longer meaningful as many distributors consolidate their orders to us going forward, we'll use the customer carrying lens referenced by Eric to share color into our business.

The historic trend of our orders using this lines will be posted for ni dot com slash natty.

For Q1 orders for our broad based business were up 14% year over year led by success in our digital channel and global distribution initiatives. While also benefiting from the continued macro recovery.

Our focus the accounts continuing to see strength with orders up 21% year over year as we continue to better align resources to high growth opportunities.

Positive year over year order growth was reported across all regions in the first quarter in the Americas orders were up 8% year over year orders in EMEA were up 2% year over year in orders in APAC were up 51% year over year. The strength in APAC was evident across the region as our local sales team continues to pivot.

The new opportunities and create new customer relationships.

Services has been an accretive growth area for us and we will continue to focus on monetizing the services and expertise we provide to drive high value system sales.

Our intent is to maintain our gross margin demonstrating the value customers place on the high level of software in our offerings.

We reported Q1, GAAP net income of $4 5 million and diluted earnings per share of <unk>.

Two of our non-GAAP net income was $42 million and diluted non-GAAP earnings per share was 32.

Just above the midpoint of our guidance and an increase of 23% year over year.

We view, our strong cash position of not only of way to provide returns for our shareholders through dividends and opportunistic share repurchase but also for inorganic investments for long term growth. Our M&A funnel is focused on opportunities aligned to our strategy, where we can leverage additional technology across the business and acquire industry specific technology of expertise.

Serving the strategic accelerators to help us achieve our 2023 financial model faster.

Now shifting the guidance for Q2 2021.

<unk> by the strength in demand as we begin the second quarter for.

For the second quarter of 2021, we currently expect GAAP revenue to be in the range of $304 million for $334 million.

We expect total non-GAAP revenue, which adjusts for the impact of purchase price accounting to be in the range of $305 million to $335 million at.

At the midpoint this represents 6% year over year revenue growth versus Q2 2020.

Similar to Q1, we expect our customer demand to exceed our revenue guidance due to supply chain constraints, we expect to grow backlog in the range of $40 million to $50 million in Q2.

We estimate our order growth to be in the range of 20% to 25% year over year in Q2, and continuing the momentum from Q1.

We expect Q2, GAAP and non-GAAP operating expenses to be approximately the same percentage of revenue as Q1.

We expect GAAP diluted earnings per share will be in the range of minus <unk> 12 for Q2 with non-GAAP diluted earnings per share expected to be in the range of 21 to 35.

Our strong results. This quarter are testaments of 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 as.

As we look forward, we remain committed to our long term financial model targets and believe our goal of delivering a compound annual growth rate of 9% revenue growth with 20% operating margin by 2023 of the achievable. We will continue to align resources to what we believe are higher growth opportunities, while working to reduce costs in pursuit of our long term financial model.

And we believe our strong balance sheet puts us in a position of strength to capitalize on inorganic investments to help accelerate growth.

Now I'd like to turn the call back over to Eric for some closing comments.

Our full potential in the market. The innovation continues to be a top priority with R&D investments aligned to expanding our systems and enterprise software capabilities.

Last year, the challenging provided us an opportunity to innovate in the ways, we interact with our customers and this year will build upon our digital first strategy with ni connect of virtual event, providing high quality targeted content with the engaging online experience to serve all of our customers and to attract new ones. This event as scheduled.

For July 2021, and will replace our usual in person user conference in a week this year.

The pandemic also improved our ability to remain highly productive and of remote working environment.

Included in our corporate impact strategy is the focus to create a more diverse and inclusive workforce, creating a more flexible working environment will open up new avenues to recruit and retain talent with access to a larger pool of candidates globally. I believe we can engage with the more diverse backgrounds of experiences, allowing us to reach our highest potential.

All of our global employees for their perseverance execution and dedication not only to support our customers, but the support one another at <unk>.

<unk> opportunity in our future and I look forward to the opportunity to work alongside all of you to make that happen.

With that we'll now take your questions.

Okay.

As a reminder to ask the question you will need to press star one of your telephone again, such as power one of your telephone keypad. However, if your question has been answered and you wish to withdraw from the queue. Please press. The <unk>. Please note the limit yourself to a question with the follow up but if you have an addition.

No question in the press Star one again.

To be back into queue. Please standby, while we compile the Q&A roster.

Our first question is from the line of Cemig Chatterji with Jpmorgan. Your line is open.

Hi, this is actually to get credit for the long tunnel.

Yes. My first question is relative to the ICU.

Range that you guys are seeing are there any particular areas in the portfolio range.

Impacts from the headwind and then on that topic are you seeing any impact from the component environment on the margin.

Sure.

Sorry can you repeat the second part of that your.

Climate looking back clear.

Hi is this better.

Yes, yes, yes.

Yes, sorry, my second part of the question was just on whether you're seeing any impact from the component environment on your margins.

Oh on margin.

Sure. The first part I know if you caught eye care of the first part was about if there's particular parts of the supply of it.

Pretty broad base the.

The component shortages exist across a pretty broad part of our portfolio of how I would characterize it yes exactly.

Overall, as Eric said, great where may be chasing 10 percentage, 10% to 15% of our components. So it's not a significant piece that's going to swing the gross margin from where we are today significantly.

Got it and then my follow up actually a little bit more general yesterday Qualcomm spoke.

The opportunity to millimeter wave of adoption in China.

Okay.

Just curious to hear what I'll say around the topics, maybe what youre hearing.

For the year, if you can kind of put in a realistic timeline on the opportunity to materialize.

Yes, I'm going to try to answer you did break up a little bit, but I heard the reference of Qualcomm and really about <unk> of millimeter wave in particular, so let me just comment on that so <unk> as I as I briefly mentioned continues to be of pretty significant growth driver primarily in our semi and electronics business. So thats a contributor to the the.

The strong double digit.

Mid double digit growth that we saw in Q1, and we anticipate it to continue to be a driver of throughout 2021 of them now of course as we've said before that is both sub six gigahertz and to your question millimeter wave, we expect sub six gigahertz. The continues to be of growth driver. This year.

And thats globally, but that's certainly a big part of the very very strong growth that we saw in APAC, including including China.

And then millimeter wave, we expect that the.

Back half of this year to become a stronger growth driver as we see more broad millimeter wave of adoption and again that will be.

Global but we are quite pleased with the some of the semiconductor business in general in Asia.

Thank you appreciate the color.

Okay. Thank you.

Our next question is from the line of John the Machete with Stifel. Your line is open.

Thanks, very much just maybe following up a little bit on the supply issues. Just curious if you can give us any color as to whether or not it got worse, a little better as we're going through the quarter, obviously, you're indicating a fairly significant impact here in Q2, just any sense that you can give us in terms of how this likely plays out over the.

The next several quarters and if you think this is something that youre going to be dealing with likely throughout the does the full year.

Yes. Thanks, John This is Karen Hi, yes.

Yes, it definitely got worse throughout Q1 versus what we saw coming into the quarter.

With more and more part constraints than what we had expected.

Which is leading to what youre seeing for Q2, what it causes our lead times as you know has been really short Riley we ship in a few days to maybe a couple of weeks historically on some of our larger systems, but.

Taken us to the sport of five week lead times, clearly that's still very competitive in our space when youre looking at lead times around that level, but we do expect based on our current visibility to continue to see that that tightness through Q3.

Hoping starts turning around by then.

We will see it come back to a more favorable position in Q4.

Got it and then maybe as a follow up there.

On the other side of it do you have customers now that are then placing orders earlier I mean again, even with the four to five week lead time.

The stretched out too much for you, but you have increased visibility as a result of this do you see customers coming in there.

We are starting to see customers place their orders earlier, our sales team's knocking on doors, saying, hey get it get it in sooner rather than later.

The more of the more visibility we get earlier in the quarter of the more likely it is we can get it out the door in the quarter. So.

Lots of cancellations that type of thing, especially when you're talking even when we get to a four week lead time by the time you placed the order.

Getting the T of pretty quickly there.

For the tended to be of capital purchase for our customers that makes it a little stickier to which is nice.

From a transportation perspective, I'm actually excited about the transportation rebound so.

What were the.

And in terms of in the market predictions for 14% growth in vehicle production, 21% growth for electronic systems for this year all of that is going to kind of feed through to us and as they get more visibility to timing on when they're.

When the factories are running when they need that all of that will feed through for visibility for us as well that's an industry. That's good about getting there the orders in early two so that's helpful. Yes.

Yes, just to add a little color John.

Yes, I'll, just add a little bit of color to that because I think.

Yes, Karen said the demand picture has been really good obviously of 19% order growth in Q1, we anticipate something like $20 to 25% year over year order growth in Q2 and.

Even though that increase in lead time has an effect on timing. We're confident we will ultimately get the business and as you said, it's still highly competitive compared to expectations of customers and what.

Most of our peers are delivering from a lead time point of view. So that's why we of the confidence that that will be a timing issue that we'll manage through but ultimately.

Ultimately get that business.

Got it okay. Thank you very much.

Thanks, Jeff.

Our next question is from the line of Mark Delaney with Goldman Sachs. Your line is open.

Yes, good afternoon, thanks for taking the questions.

Starting as well on the topic of the supply chain shortages could you quantify how much revenue the company wasn't able to me in the first quarter that you otherwise would have without the constraints and then if we think about the first half of the year in total.

The revenue do you think youre unable to fill in the.

I'm trying to better understand what sort of additional revenue opportunity there potentially it could be in the second half or perhaps even into early next year.

Yes.

We'll be pushing out.

Sure Yeah. This is Karen.

It's where it's a pretty pretty straightforward bridge between bookings and revenue for us of you got the <unk>.

Bookings growth at 19% year over year and revenue at 9% year over year for non-GAAP.

And longer term I do expect that to continue to grow a little bit more through Q2, Q3, and I talked about the $40 million to $50 million I think we will build in Q2.

I think Q3 current visibility is the.

That will get us to kind of the four to five week lead times that we're looking at so.

I think it is going to be tough for the next five months or so and then and then.

I have a clearer picture, even just three months from now.

Okay, Alright, thank you for those additional comments.

On the topic, maybe you could go into more depth on the steps that it is taking them in order to try and alleviate some of the shortages over the next.

The few quarter, whereas the peak of this problem, but but also or are you thinking about changing your procurement of inventory strategy longer term based on.

Some of the learnings of COVID-19 and now more recently the chip shortages.

Yes, it's kind of this is there is some fun stuff that we've done despite the tough situation other than the brute force that are amazing procurement team is doing to tackle the component issues as they come up.

Our R&D team Cross the company got involved to help identify opportunities for where we could.

The redefine product redesign certain components substitute where it makes sense for our customers.

And the customers to make that happen. So we've had some real wins in the quarter as a result of that as well.

One of the things we're working toward it is continuing to have more visibility into orders and that will enable us to continue to manage our inventory in a proactive way.

We are always on a journey to simplify our designs for new products and reuse existing components. So that we can leverage inventory from that perspective, as well and certainly leveraging stronger relationships with suppliers going forward, but that's the journey, we've been on and will continue to be on.

I just wanted to Asia.

I think our team's done done remarkably well here.

We've had an inventory strategy that put us into actually a good position coming into this I think there's a difference that we don't we don't tend to come into a quarter with months and months of of backlog or really long lead time like some others in the space and so that means that we'll we'll see the suspect maybe more immediately but frankly when I.

Look at it from another lens, our inventory strategy of the capabilities of our manufacturing team has kept us at a competitive advantage in terms of what we're actually able to deliver and so even though it's been a big change in lead times for us it's still at a competitive advantage and most of the spaces we serve so.

Team has done a fantastic job keeping us in that advantageous position.

Thank you.

Thanks Mark.

Once again to all participants if you have an additional question you May press star one now.

Please standby, while we check for additional questions.

Okay.

Is there.

We have an additional question from Mark Delaney with Goldman Sachs. Your line is open.

Thank you for taking the follow up I wanted to dig in a little bit more into the transportation segment, if I could end the nicely.

To see the good order growth that you reported there and if I recall of the company has some particularly good exposure and some of the autonomous applications and we've seen a lot of momentum there recently.

Just a couple of examples you've had Ford and Toyota announced new Adas systems.

Continuing to see R&D work in the full autonomy as well. So maybe you can talk about what NII is doing more specifically to help customers prepare for the different levels of autonomy and how do you see that the business developing not just in the near term but longer term. Thanks.

Sure absolutely first of all.

Karen mentioned, we're quite pleased with the result of transportation and excited about the future.

The fact that we had an all time record quarter from an orders point of view. After a couple of years of some more challenging headwinds in that space I think it was a great indicator and then as I've as I've indicated before.

For the Aaas are active safety systems, and <unk> have been growing significantly faster than the rest of the space. So that's continued I mean, those have been really high growth rates to your specific question about eight assets were essentially building systems with our customers that help to characterize and ensure the quality of those.

At various active safety systems in both the labs, primarily in sort of validation labs, and then also in production as well and that scales from.

Characterizing the sensors themselves to the software that's used in those of autonomy systems through what's called hardware in the loop basically.

Hardware and software system that simulates the rest of the vehicle. So that you can ensure that all of the software running that Adas system. For example is working correctly and so to your point. Many companies are investing significantly in this space both the traditional automotive.

Companies as well as many upstart automotive companies that are betting on autonomy and electrification to disrupt the space and we're seeing.

Really good adoption across both of both of those types of companies, yes, let's kind of really.

In that space for autonomous driving so much of it relies on simulation and software debt.

It's right in our sweet spot because we can bring in that that capability to do that automated test for our customers and so it's.

It's an exciting area of growth for us and I'll do one more since the scenario. We're excited about that one of the things we're working on in <unk> and <unk>.

We'll continue to see US work on this as is <unk>.

Really that line between stimulation in the real world when you're developing a system like that being able to move seamlessly between completely simulated world and these real world systems. Like I described is very very important to let Karen said that that leads our software based approach is very very well suited for that.

So thats an area that we see as a real growth driver in the years to come.

Understood. Thank you.

Thanks Mark.

And our last question is from the line of Rob Mason with Baird. Your line is open.

Yes, good afternoon.

We've referenced the.

The <unk>.

<unk> of.

Some new strategies around the broader based business.

More reliant on indirect distribution.

Where are you right now of where do you think you are right now just in terms of assembling that the work.

And putting the network together.

Oh, you mean of distribution Rob in particular, yes, yes, yes, yes, I can take it yeah. So yeah. So it really started accelerating that strategy significantly in the quarter in Q1, and I'll just say.

Our strategy is really on that.

The shift some of that business are actual revenue through that distribution channel went from 3% of year ago to about 5% of revenue in the quarter itself and then the way. We are evaluating that is the really on a couple of different dimensions. One is ultimately we think the combination of those strategies makes that.

Highly profitable part of the business and we have goals to increase the profitability of that part of the business and.

Side of the business so.

From those metrics point of view, let's say, it's a little bit early days, but the early indicators of positive.

So we're encouraged on the.

The transition and I'll just give another kudos to our team it's a big pretty complex transition to do in a pretty short amount of time and so there are a lot of a lot of hard work by our teams to do that and keep customers.

Keep the.

Support of our customers through that process.

So we expect that to continue to ramp through this year.

How do you.

How do you assess your kind of does sell out visibility within the channel has just come together.

Sell through.

Yes, certainly.

There is no inventory being held at our just in our distribution channel. So.

When we do the cells to it.

It's clear where the end customers and who it is at this point.

Okay.

One last question.

As we went through last year and we just we spoke to the 2023 target operating model.

You would you would express some.

I guess optimism around the ability to move towards the SG&A targets.

Perhaps at a more accelerated pace, how do you feel about those.

The pace right now.

No. Good we're still on track to be at that target in 2021, so feel real good about that and the opportunity to continue to scale of that going forward.

Very good okay. Thanks for taking the question.

Yes, Thanks, Rob have a great day.

Ladies and gentlemen that concludes the Q&A session on the conference call for today you may now disconnect. Thank you for participating housekeeping Stacey.

Thanks, everyone. Thanks.

Q1 2021 National Instruments Corp Earnings Call

Request a DemoDemo

NATI

National Instruments

Earnings