Q3 2021 National Instruments Corp Earnings and to Acquire NH Research Inc Call

October 28, 2021

[music].

Thank you for standing by and welcome to the National instruments third quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone as a reminder, today's program is being recorded I would now.

Like to introduce your host for today's program risk.

Or is it the Jerry head of Investor Relations. Please go ahead.

Good afternoon. Thank you for joining our Q3 2021 earnings call I'm joined today by Eric <unk>, President and Chief Executive Officer, and hearing Rapp Chief Financial Officer, We will start with an update on our performance in the quarter before opening it up for your questions.

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

Business and results of operations and successful integration of the acquisitions and execution on our strategy.

We wish to caution you that such statements are just predictions and that actual events or results may differ materially and could be negatively impacted by numerous factors.

We refer you to the documents that the company files regularly with the Securities and Exchange Commission, including the company's annual report on Form 10-K filed on February 23rd 2021, and our quarterly report on Form 10-Q filed on August <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 expectations.

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

We recently announced two leadership changes that we believe support our focus in our core business and innovation of new disruptive software technologies to accelerate growth first we appointed atomic Benjamin as Executive Vice President Chief Technology Technology Officer, and head of product analytics.

This role he will utilize external experience to lead and is development of software driven business models are central to driving new and long term disruptive technology innovation for long term growth opportunities.

<unk>, new areas tied to data product hemolytic and enterprise software.

We also promoted Scott rats, and experienced and I leader to the role of executive Vice President platform and products.

In this role he will lead and ice global development teams responsible for building the products required to meet customer needs through our core platform capabilities to create differentiation and leverage across a nice dividend.

Eric will discuss this in more detail.

In the coming months and I management will be hosting meetings at the virtual conferences for Baird Stifel, NASDAQ and Needham Please visit and I thought com slashed Audi per presentation times, we look forward to speaking with you with that I will now turn the call over to Chief Executive Officer, Eric Stark law. Thank.

Thank you Marisa good afternoon, we appreciate everyone joining us today.

We reported outstanding results in Q3, with 30% order growth, 19% revenue growth and 83% non-GAAP EPS growth as momentum continued across our business for the fourth consecutive quarter. The strategic changes we've made over the last several years are clearly paying off we are committed.

Two accelerating growth and our focus on secular growth opportunities such as <unk> autonomous and electric vehicles.

And new technology for space innovation is leading to high customer demand the leverage and scale of our broad based business enables us to continue to invest in these higher growth opportunities while significantly growing our profitability.

Shortly after taking on the role of CEO in 2020, I committed to a three year financial model through 2023.

Today as we are in a position of continued strong demand record backlog and favorable expense expense trends entering 2022.

We expect to meet or exceed our 2023 expectations in 2020 to a full year ahead of schedule.

For 2022, our expectations are to deliver double digit revenue growth, even with flat backlog and to achieve another year of double digit earnings growth.

We also remain committed to increasing our recurring software revenue. We have had success with our subscription based licensing and expect to increase that recurring revenue stream in 2022.

Today, we announced two acquisitions to strengthen our electric vehicle or EV testing capability, which I'll speak to in a moment. We expect these acquisitions to add an additional $50 million to $60 million to our 2020 to revenue and to be immediately accretive to our earnings per share.

Looking ahead multiple years, we expect the investments we've made into the business will enable earnings growth to continue to exceed revenue growth.

Now I want to discuss how we're focused to achieve these results and offer clarity to how the recent leadership announcements that Marissa highlighted will enable us to accelerate growth. We will continue to focus on our core systems capabilities that have driven our growth, while also creating new business opportunities through product analytics and enterprise software.

We believe we are in a unique position with capabilities that link these two growth opportunities together to realize our full potential.

So first we remain focused on strengthening our core systems opportunity. We started this effort more than a year ago with focused through our <unk> framework on software systems services and streamlining our operations as part of this initiative, we changed the way, we serve and support our customers.

We focused on higher level systems and services to our highest potential customers, while streamlining engagement with a broad based customers to drive leverage and scale.

We believe the strong growth and success that we've seen across our business. This year is a direct result of these changes we are delivering on this strategy and it is leading to record revenue and operating income.

We have communicated that strategic acquisitions are aligned to our strategy is a lever we are prepared to use to accelerate growth and this morning, We announced the acquisition of NH research a leader in high power test and measurement applications, such as electric vehicles and batteries.

We also entered into a definitive agreement to purchase the EV systems business of heightened singer a European leader in high current and high voltage power systems.

The focus of these acquisitions is to accelerate growth in fast growing EV applications.

We believe combining the strength of Eni's flexible EV test platform with these companies high power systems expertise will enable us to optimize testing workflows and accelerate the time to market for our customers in this critical technology inflection.

We also plan to drive long term growth through new business opportunities and product analytics and delivering increased enterprise level value through data. This separate as critical as it represents a new level of value, we can deliver to our customers and an opportunity to disrupt our industry for long term growth. This journey began with the combination of.

NII and optimal plus platforms last year.

Our new CTO Thomas Benjamin has deep expertise in enterprise software businesses and will drive our product analytics growth opportunities across all of our business units.

He's also working with my leadership team on how we can further strengthen our core systems across the business through software and the leverage of modern cloud and mobile technology. This focus will make our business both more differentiated as well as more resilient.

Our focus on our core capabilities and new opportunities enables us to balance our short term and long term growth goals with the right investments needed to ensure their success.

Our industry focus has strengthened our customer relationships and tuned our business to the secular opportunities that are driving our growth.

Our semiconductor and electronics business continues to be a strong growth driver for the company and a proof point of our more focused strategy.

We believe the move to higher frequency bands for wireless applications will play to our strength. In addition, we believe our connected lifecycle analytics solutions open up new ways to support the needs of our customers throughout their product development flow, allowing them to use software to derive predictive data insights.

In transportation revenue for EV in active safety or aid at combined increased nearly 60% year over year in Q3, and we expect these two focused areas to represent more than half of our total transportation revenue by the end of 2022.

We predicted this part of our business would strengthen and drive growth this year and it has delivered.

Our aerospace defense and government business remains a steady and profitable growth engine with growth in both 2020 and 2021. Our success continues with focus on new space innovation and continued strength in defense applications are focused on insights from data presents a clear opportunity in this area as well.

And our portfolio of business continues to deliver strong results with its third consecutive quarter of year over year revenue growth, we continue to exceed expectations across this broad set of customers as we focus on leverage and resiliency in this portion of the business our strategy of providing easy to use solutions through E Commerce and global distribution.

<unk> channels is paying off.

In summary, our customers are pursuing major technology inflections, including wireless communications, <unk> autonomous and electric vehicles, and new technology for space innovation.

Each is a major technology hurdle that for many customers is a once in a career inflection points.

Our unmatched expertise and modular systems and test automation software across the workflow, making are uniquely positioned to help our customers navigate these challenges and to take advantage of the prevailing software trends. So they can get more value out of their test systems and improve their development and manufacturing operations with that ill turn the call.

Over to Karen to discuss further our Q3 results and our outlook for Q4, Karen Thanks, Eric and Hello, everyone.

<unk> delivered another quarter of strong financial results Q3 revenue was $367 million up 19% year over year and a record for third quarter, we continue to navigate through supply chain constraints with results aligned to our expectations.

Unplanned freight issues at the end of the quarter resulted in revenue slightly below the midpoint of our guidance. However, customer demand continues to be strong Q3 ended with backlog of $143 million up $116 million from the start of the year.

Total orders in Q3 were $404 million, an all time record for the company and up 30% year over year in the Americas orders were up 28% year over year, and EMEA orders were up 23% year over year and in Asia Pacific orders were up 39% year over year.

For the third quarter orders from focused accounts were up 27% year over year and orders from broad based accounts were up 37%.

Due to the negative impacts of Covid in 2020, we believe it is also helpful to compare results to pre pandemic performance.

For Q3, 2021 versus Q3 2019 total orders were up 21%.

Orders for focused accounts were up 25% and orders for broad based accounts, which were hit the hardest in 2020 were up 12%.

Pleased to see double digit growth.

Two year compare and believe this is another solid proof point that our customer focused strategy is working.

Our lead times remain competitive in an average of approximately five weeks and we are seeing less than 1% of cancellations due to this extension.

We also converted the vast majority of our Q2 ending backlog into revenue within the third quarter. Despite.

Despite the ongoing supply chain constraints in the short term the momentum in customer demand for our systems combined with the durability of our backlog gives us confidence for continued revenue growth in 2022.

Q3 revenue was strong across all business units semiconductor and electronics revenue was $95 million up 31% year over year with ongoing strength across wireless customers in Asia.

Transportation revenue was $51 million up 41% year over year with continued success in our focus areas of EV and Adas.

Aerospace defense and government revenue was $91 million up 3% year over year in Q3 building on the strong performance delivered by this business unit in 2020.

And we are pleased to see the third consecutive quarter of revenue growth and our portfolio of business unit at $131 million up 16% year over year, a testament to the success of our broad based initiatives.

Year to date software and related services revenue increased 16% year over year compared to our total company revenue growth of 14% year over year and represents 21% of total revenue.

Annual recurring revenue now represents 18% of total revenue.

In Q3, we generated $67 million of non-GAAP operating income translating into a non-GAAP operating margin of 18, 2% for the quarter and 18, 1% on a trailing 12 month basis.

Q3, non-GAAP gross margin remained solid at 75% non.

Non-GAAP operating expenses are up 10% year over year, driven by an increase in variable pay as previously discussed our variable pay is tied to the annual revenue and profit performance of the company.

We reported Q3, GAAP net income of $27 million and diluted earnings per share of <unk> 20.

Q3, non-GAAP net income was $55 million and diluted non-GAAP earnings per share was 42.

Exceeding the midpoint of our guidance and an increase of 83% year over year.

Now, let me comment on our capital management results, starting with our cash generation cash flow from operations was $86 million year to date, we've built inventory of $43 million. During this time period as a result of the continuing supply chain challenges.

We expect inventory growth to continue through early 2022.

We define free cash flow as cash flow from operations less capital expenditures free cash flow on a trailing 12 month basis was $119 million in.

In the quarter, we paid $36 million in dividends and repurchased approximately 600000 shares of our stock at an average price of $41 73.

In total we have returned $176 million to our shareholders in the past 12 months reinforcing our commitment to shareholder returns.

Our balance sheet remains strong with $231 million of cash and short term investments at the end of the third quarter C&I Board of directors approved a quarterly dividend of 27 cents per share payable on November 29, 2021 to stockholders of record on November eight 2021.

The acquisition of NH research was funded primarily through our existing credit facility in October 2021.

Our history of positive cash flow allows us the flexibility to fund future M&A do either of the remaining undrawn balance on our existing credit facility or through access to other capital markets.

We expect to fund that hanger EV systems acquisition through cash on hand.

We view, our strong cash position as a way to provide returns for our shareholders through dividends and share buybacks. We will continue to prioritize inorganic investments to accelerate long term growth when aligned to our growth strategy and industry focus.

Now shifting the guidance for Q4 2021.

So our backlog and customer demand continue to be strong across all industries and regions.

Supply pricing and logistics dynamics remain a challenge.

We believe Q4 revenue will ultimately be a function of supply. So we are widening the range of our guidance.

With our current visibility for the fourth quarter of 2021, we expect GAAP revenue to be in the range of $385 million to $425 million.

At the midpoint this would be 13% revenue growth in fiscal year 2021 at the high end of the expectations, we outlined in our August Investor Conference <unk>.

Manned exceed this guidance and we expect backlog to end the year in the range of $180 million to $190 million, representing over $130 million of future profit and competitive lead times of approximately six weeks.

This guidance is based on our current understanding of impacts of COVID-19 and supply issues.

With this outlook total orders in 2021 would exceed $1 6 billion for the year up over 20% year over year.

We expect GAAP diluted earnings per share will be in the range of 17 to 31 cents for Q4 with non-GAAP diluted earnings per share expected to be in the range of 47 to <unk> 61.

Our GAAP earnings per share includes <unk> related primarily to restructuring and other costs driven by consolidation of one of our R&D sites in Germany impacting less than 1% of our head count.

At the Q4 midpoint non-GAAP earnings per share for the full year 2021 would be up 30% year over year.

Our Q4 guidance includes a partial quarter from our recent acquisition of NH research.

The operating margin of this business is accretive to NII and the flow through to earnings per share is also included in our guidance.

Looking forward to 2022, we're encouraged by the strength of our customer demand durability of our backlog and our current view of the macro environment.

However, we expect to see supply chain constraints continue through at least the first half of 2022.

We expect our pending acquisition of the hangar EV systems business to be complete in Q1 2022.

Combined we expect NH research and hangar to represent 3% to 4% of total <unk> revenue in 2022.

Due to the complementary nature of these companies to Ni's priorities, we expect that there will be minimal cost synergies from these transactions. The focus is to accelerate growth and utilize the expertise of these two leading technology companies to broaden our reach to customers in the fast growing space of electric vehicles.

For 2022, given the investments we've made to scale and grow the business and the current market assumptions in our focus areas. We expect another year of double digit revenue growth in the range of 16% to 18%.

We expect component pricing pressure on gross margin.

Offset by continued robust expense management and minimal impact from variable pay to drive overall improvement in operating margin. We currently expect to exceed our 2023 goal of 20% operating margin in 2022.

For 2022, we are targeting earnings per share growth above our revenue growth.

In closing, we will continue to strengthen our competitive advantages and make our business stronger and more resilient, we remain committed to accelerating growth improving profitability and maximizing shareholder value.

Now I'll turn the call back over to Eric for some closing comments. Thank.

Thank you Karen we demonstrated the strength of our business and our strategic focus in Q3 and believe we have good momentum to close out 2021, and our 2022 and a position of strength, we continue to focus on delivering on our commitments by strengthening our core and investing in new disruptive technologies that help our customers improve.

Their businesses.

We believe our software and systems capability cannot be easily duplicated, creating high barriers to entry and as our customers problems become increasingly more complex and challenging. We believe we are best suited to ensure their success in the market.

I am confident that through this intentional focus we can accelerate growth and maximize shareholder value.

And I want to once again, thank all of our employees for their perseverance and the multiple years of focus and hard work that has put us in this position of strength.

With that we will now take your questions.

Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone if your question has been answered.

Remove yourself from the queue. Please press the pound key we also ask that you. Please limit yourself to one question and one follow up you may get back in the queue. As time allows our first question comes from the line of Mark Delaney from Goldman Sachs. Your question. Please.

Yes, congratulations on the good results and outlook and thank you for taking the questions first is on the acquisitions, both tied to electrification and Evs I'm curious.

Is there a reason you're announcing them both at the same time and how important is it that you do both of them in order to have the full set of solutions you'd like to build or to each of them makes sense independently and you spoke to the revenue side pretty specifically from the deals could you elaborate a bit more on the margin and EPS impact of that was true.

Yeah, Mark I'll start thanks.

For your question Hope you're doing well, yes. These are really important deals let me characterize the the opportunity here first of all as I mentioned is a fast growing space the market itself growing 30% to 40% we've already seen this as a major growth driver for our business and the portion that we serve today the thing to understand about these these two businesses.

This one is they are highly complementary to our existing capability and what I mean by that is we have existing capability for measurement and software and analytics and these two companies have high powered electronics, which is.

It really needed to complete the whole system and then they are highly complementary to each other primarily in their geographic footprint and H research, primarily serving the U S market and <unk> is primarily serving the European market. So doing those together, we view as an opportunity to rapidly scale our solution.

<unk> in this space and as I said in an area, that's growing really fast and our customers have a lot of urgency you've heard all the announcements from various EV companies. There is a ton of urgency for them to get this technology into market.

So we see a strong demand.

And it's our goal to be in a position to service that growth and demand with this complete capability Karen you want to comment on the margins, but yeah sure from a profitability standpoint. They are so complementary in the way that they are expanding our revenue and reach with customers that we're actually looking at them combined which is why I commented on.

The fact that we're pleased that they are immediately accretive to our current margin position. So.

If you look at where we are from an ni perspective, they will actually continue to increase that percentage of operating margin combined for ni.

Thanks, a lot helpful.

Okay.

One follow up on that.

The 23 excuse me.

How it twice your outlook and meeting the 23 target model a year ahead of time.

Given the supply constraints that I'm curious what gives you the confidence regarding our revenue and it's a.

A very impressive number so it's good to see that but if you could talk a little bit more on what gives you that confidence that would be helpful. Thanks.

Yes, Mark good good question. So yes, we laid out that model as I mentioned back in 2020, I don't know if everyone believed at the time that we would be able to hit it. So it's pretty exciting that we find ourselves in a position of confidence to hit it a year early let me describe a little bit the confidence and then Karen can chime in as well.

First of all if you look at where we're going to we believe we'll end this year based on the guidance the bookings number at about $1 6 billion. So you can you can see that even with that sort of sort of one book to bill of one that provides double digit growth going into 2022.

So we think that's just a very very favorable position, we expect the demand to.

Stay strong certainly in the first half of the year.

And then while the supply will continue to be a challenge. We we expect that for the first half of the year. We do believe during calendar year 2022 that that will moderate during the year and so that is also built into that expectation that gives us that confidence.

16% to 18% top line growth.

Last one I'll say is just and Karen mentioned it but we think we're also in a favorable expense position as well.

A pretty challenging compare this year when you look at going from a negative year to are really strongly positive year in terms of variable pay.

Absorbed that expense increase this year and as we look into 2022, we would expect that that's flat.

<unk> flat and and that gives us a really good expense position as we go as well and that's that's why we also expect to exceed that operating income target that we set for 2023 a year early.

Thank you.

Our next question comes from the line of Rob Mason from Baird. Your question. Please.

Yes, good afternoon.

This job nice job.

Just to go back to the acquisitions.

We recorded these companies play.

Maybe just in the value chain is it is it more focused on design validation where.

Or is it production floor.

And then I guess when we look at your overall solution.

Where do you expect the majority of the opportunities to reside.

Yes, thanks, Thanks, Rob so they'll do that.

I'll play in both areas, although mostly in validation.

So if you think about both batteries and.

And things like and burgers and electric Motors Theres, a really intense focus on the characterization and testing of those and validation the <unk>.

Battery in particular is the most expensive component of an electric vehicle and being able to understand the characteristics of that the quality of that the lifetime of that becomes an essential element of the performance of the vehicles. So there's a huge focus by Oems as well as suppliers.

Batteries and burgers and other components of the electric vehicles, so mostly mostly validation, but the technology also scales to production as well.

Actually I see.

And then.

The other question is just.

Just around your semiconductor test business.

That's been a source of strength for <unk>.

Bit.

You kind of suggested all your markets are strong all your regions are strong, but you know as.

As you look into that one in particular.

Youre seeing some.

Hence.

Around.

In terms around inventories and whatnot, starting to get up a little bit and I'm just curious.

How do you think that if there is some type of inventory.

<unk> mid cycle pause or whatnot, given where your position how that business is positioned how do you think that plays through to your demand levels if that.

<unk> somewhere in 'twenty two.

As we go through the year, yes, yes, I understand your question, Rob and Thats sort of built into our expectation of course there is.

At some point.

Semi cycle will moderate, but I want to I want to characterize a couple of things we've shared this before but our semi business and that business unit is.

Semi and electronics by the way. So it includes both the semiconductor portion as well as sort of the downstream electronics that we include and then within semi we said before it's about half production and about half validation. So.

And then now with optimal plus in that technology, we have the data analytics that also scales across validation and production. The point. There is that we are to some extent insulated from the pure production cycle and.

And we see a pretty favorable long term picture and semiconductor when you think of the strong investments that are being made around the world to build additional semiconductor capacity in multiple regions as well as some of the secular drivers on wireless and the new frequency bands that are coming for <unk> and other.

Wireless standards, there is a lot of lab equipment as well as production equipment going into that that we think will will help moderate what will eventually be some sort of bound cycle on the production side of semiconductor and semiconductor production and so that's all built into some of the expectations that we shared for 2022, yes.

Rob This is Karen.

The core of Ni is is to automate processes and so what we're seeing across semi and all of the industries that we serve is.

As things tightened in their space labor shortages, whatever that may be the desire for more automation feeds right into an area, where I can really come in and help and as I had mentioned Thats, where data plays a key role as well coming in and providing that that view to their process that they haven't had in the past. So we feel really good about the opportunities.

Those areas across semi and the other industries.

I see.

Just lastly, one quick question there was a reference earlier in the commentary around backlog being flat.

Next year, but I was not sure if that was the assumption that's built into the.

Kind of 16% to 18%.

Revenue growth.

Yeah, Yeah. So I made that comment it's all just yet Mike.

My point, there was that kind of the point I was also answering and Mark's question is that given the strong bookings of $1 6 billion plus of what we expect to have this year.

We expect to be able to achieve double digit even with flat backlog. We don't know exactly where backlog is going to end. This year, Karen gave a range and so whether it will be.

Flat or not sort of depends on where we end. This year. It is the strength of our strategic interest for us.

To have certainly larger backlog as we have more of our systems business, we expect that to be a larger number.

So exactly where it will be we will see how it plays out but certainly we have the ability to achieve strong double digit growth.

Even if that number is flat in 2022.

Understand understood Okay. Thank you.

Thanks, Rob.

Once again, if you have a question at this time. Please press Star then one.

And it sounds like to hand, the program back to Eric <unk> for any further remarks.

Okay. Thank you all for joining us today have a great day and stay safe.

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

[music].

Yes.

Hum.

[music].

Thank you for standing by and welcome to the National instruments third quarter 2021 earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone as a reminder, today's program is being recorded I would now like to do.

Reduce your host for today's program.

Marissa Vidaurri head of Investor Relations. Please go ahead.

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

Business and results of operations and successful integration of the acquisitions and execution on our strategy.

We wish to caution you that such statements are just predictions and that actual events or results may differ materially and could be negatively impacted by numerous factors.

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

We recently announced two leadership changes that we believe support our focus in our core business and innovation of new disruptive software technologies to accelerate growth first we appointed Thomas Benjamin as Executive Vice President Chief Technology Technology Officer, and head of product analytics.

In this role he will utilize external experience to lead and is development of software driven business models are central to driving new and long term disruptive technology innovation for long term growth opportunities, including new areas tied to data product analytics and enterprise software.

We also promoted Scott rats, and experienced ni leader to the role of executive Vice President platform and products.

Eric will discuss this in more detail.

In the coming months and I management will be hosting meetings at the virtual conferences for Baird Stifel NASDAQ and Needham. Please visit <unk> com Slash Natty per presentation times, we look forward to speaking with you with that I will now turn the call over to Chief Executive Officer, Eric Stark law. Thank.

Thank you Marisa good afternoon, we appreciate everyone joining us today.

To accelerating growth and our focus on secular growth opportunities such as <unk> autonomous and electric vehicles and new technology for space innovation is leading to high customer demand the leverage and scale of our broad based business enables us to continue to invest in these higher growth opportunities while still.

<unk> growing our profitability.

Shortly after taking on the role of CEO in 2020, I committed to a three year financial model through 2023 today.

Today as we are in a position of continued strong demand record backlog and favorable expense expense trend entering 2022, we expect to meet or exceed our 2023 expectations in 2020 to a full year ahead of schedule.

For 2022, our expectations are to deliver double digit revenue growth, even with flat backlog and to achieve another year of double digit earnings growth.

We also remain committed to increasing our recurring software revenue. We have had success with our subscription based licensing and expect to increase that recurring revenue stream in 2022.

Today, we announced two acquisitions to strengthen our electric vehicle or EV testing capability, which I'll speak to in a moment.

We expect these acquisitions to add an additional $50 million to $60 million to our 2020 to revenue and to be immediately accretive to our earnings per share.

Looking ahead multiple years, we expect the investments we've made into the business will enable earnings growth to continue to exceed revenue growth.

We believe we are in a unique position with capabilities that link these two growth opportunities together to realize our full potential.

So first we remain focused on strengthening our core systems opportunity. We started this effort more than a year ago with focus through our <unk> framework on software systems services and streamlining our operations as part of this initiative, we changed the way, we serve and support our customers.

We focused on higher level systems and services to our highest potential customers, while streamlining engagement with a broad based customers to drive leverage and scale.

We also entered into a definitive agreement to purchase the E systems business of heightened winger our European leader in high current and high voltage power systems the.

The focus of these acquisitions is to accelerate growth in fast growing EV applications.

We believe combining the strength of ni flexible EV test platform with these companies high power systems expertise will enable us to optimize testing workflows and accelerate the time to market for our customers in this critical technology inflection.

We also plan to drive long term growth through new business opportunities and product analytics and delivering increased enterprise level value through data. This effort is critical as it represents a new level of value, we can deliver to our customers and an opportunity to disrupt our industry for long term growth. This journey began with the combination of <unk>.

NII and optimal plus platforms last year.

Our new CTO Thomas Benjamin has deep expertise in enterprise software businesses and will drive our product analytics growth opportunities across all of our business units.

Also working with my leadership team on how we can further strengthen our core systems across the business through software and the leverage of modern cloud and mobile technology. This focus will make our business both more differentiated as well as more resilient.

Our focus on our core capabilities and new opportunities enables us to balance our short term and long term growth goals with the right investments needed to ensure their success.

Our industry focus has strengthened our customer relationships and tuned our business to the secular opportunities that are driving our growth are.

Our semiconductor and electronics business continues to be a strong growth driver for the company and a proof point of our more focused strategy. We believe the move to higher frequency bands for wireless applications will play to our strength. In addition, we believe our connected lifecycle analytics solutions open up new ways to support the needs of our customers.

Throughout their product development flow, allowing them to use software to derive predictive data insights.

We predicted this part of our business will strengthen and drive growth this year and it has delivered.

Our aerospace defense and government business remains a steady and profitable growth engine with growth in both 2020 and 2021. Our success continues with focus on new space innovation and continued strength in defense applications. Our focus on insights from data presents a clear opportunity in this area as well.

<unk> channels is paying off.

In summary, our customers are pursuing major technology inflections, including wireless communication, <unk> autonomous and electric vehicles, and new technology for space innovation.

Each is a major technology hurdle that for many customers is a once in a career inflection point.

With that I'll turn the call over to Karen to discuss further our Q3 results and our outlook for Q4 Karen.

Hello, everyone and I delivered another quarter of strong financial results Q.

Q3 revenue was $367 million.

Up 19% year over year, and a record for our third quarter, we continue to navigate through supply chain constraints with results aligned to our expectations.

The unplanned freight issues at the end of the quarter resulted in revenue slightly below the midpoint of our guidance. However, customer demand continues to be strong Q3 ended with backlog of $143 million.

Up $116 million from the start of the year.

For the third quarter orders from focused accounts were up 27% year over year and orders from broad based accounts were up 37%.

Due to the negative impacts of Covid in 2020, we believe it is also helpful to compare results to pre pandemic performance for.

For Q3, 2021, <unk> versus Q3, 2019 total orders were up 21%.

Orders for focused accounts were up 25% and orders for broad based accounts, which were hit the hardest in 2020 were up 12%.

We're pleased to see double digit growth.

Two year compare and believe this is another solid proof point that our customer focused strategy is working.

Our lead times remain competitive in an average of approximately five weeks and we are seeing less than 1% of cancellations due to this extension.

We also converted the vast majority of our Q2 ending backlog into revenue within the third quarter.

Spite the ongoing supply chain constraints in the short term the momentum in customer demand for our systems combined with the durability of our backlog gives us confidence for continued revenue growth in 2022.

Q3 revenue was strong across all business units.

Semiconductor and electronics revenue was $95 million up 31% year over year with ongoing strength across wireless customers in Asia.

Transportation revenue was $51 million up 41% year over year with continued success in our focus areas of EV and Adas.

Aerospace defense and government revenue was $91 million.

We are pleased to see the third consecutive quarter of revenue growth and our portfolio of business unit at $131 million up 16% year over year, a testament to the success of our broad based initiatives.

Year to date software and related services revenue increased 16% year over year compared to our total company revenue growth of 14% year over year and represents 21% of total revenue.

Annual recurring revenue now represents 18% of total Eni revenue.

In Q3, we generated $67 million of non-GAAP operating income translating into a non-GAAP operating margin of 18, 2% for the quarter and 18, 1% on a trailing 12 month basis.

Q3, non-GAAP gross margin remained solid at 75% non.

We reported Q3, GAAP net income of $27 million and diluted earnings per share of <unk> 20.

Q3, non-GAAP net income was $55 million and diluted non-GAAP earnings per share was <unk> 42.

Exceeding the midpoint of our guidance and an increase of 83% year over year.

We expect inventory growth to continue through early 2022.

We define free cash flow as cash flow from operations less capital expenditures free cash flow on a trailing 12 month basis was $119 million in.

In the quarter, we paid $36 million in dividends and repurchased approximately 600000 shares of our stock at an average price of $41 73.

In total we have returned $176 million to our shareholders in the past 12 months reinforcing our commitment to shareholder returns.

Our balance sheet remains strong with $231 million of cash and short term investments at the end of the third quarter. The Ni Board of directors approved a quarterly dividend of <unk> 27 per share payable on November 29, 2021 to stockholders of record on November eight 2021.

The acquisition of NH research was funded primarily through our existing credit facility in October 2021.

Our history of positive cash flow allows us the flexibility to fund future M&A through either the remaining undrawn balance on our existing credit facility or through access to other capital markets.

We expect to fund the hanging our EV systems acquisition through cash on hand.

Now shifting the guidance for Q4 2021.

So our backlog and customer demand continue to be strong across all industries and regions.

Supply pricing and logistics dynamics remain a challenge.

We believe Q4 revenue will ultimately be a function of supply. So we are widening the range of our guidance.

With our current visibility for the fourth quarter of 2021, we expect GAAP revenue to be in the range of $385 million to $425 million.

At the midpoint this would be 13% revenue growth in fiscal year 2021 at the high end of the expectations, we outlined in our August Investor Conference <unk>.

<unk> exceeded this guidance and we expect backlog to end the year in the range of $180 million to a $190 million representing over $130 million of future profit and competitive lead times of approximately six weeks.

This guidance is based on our current understanding of impacts of COVID-19 and supply issues.

With this outlook total orders in 2021 would exceed $1 6 billion for the year up over 20% year over year.

We expect GAAP diluted earnings per share will be in the range of 17 to 31 for Q4 with non-GAAP diluted earnings per share expected to be in the range of 47 to <unk> 61.

Our GAAP earnings per share includes <unk> related primarily to restructuring and other costs driven by consolidation of one of our R&D sites in Germany impacting less than 1% of our head count.

At the Q4 midpoint non-GAAP earnings per share for the full year 2021 would be up 30% year over year.

Our Q4 guidance includes a partial quarter from our recent acquisition of <unk> research. The operating margin of this business is accretive to NII and the flow through to earnings per share is also included in our guidance.

Looking forward to 2022, we're encouraged by the strength of our customer demand and durability of our backlog and our current view of the macro environment. However, we expect to see supply chain constraints continue through at least the first half of 2022.

We expect our pending acquisition of the hangar EV systems business to be complete in Q1 2022.

Combined we expect NH research and Hanes inger to represent 3% to 4% of total <unk> revenue in 2022.

We expect component pricing pressure on gross margin.

Set by continued robust expense management and minimal impact from variable pay to drive overall improvement in operating margin. We currently expect to exceed our 2023 goal of 20% operating margin in 2022.

For 2022, we are targeting earnings per share growth above our revenue growth.

Now I'll turn the call back over to Eric for some closing comments. Thank.

Thank you Karen we demonstrated the strength of our business and our strategic focus in Q3 and believe we have good momentum to close out 2021, and enter 2022 and a position of strength, we continue to focus on delivering on our commitments by strengthening our core and investing in new disruptive technologies that help our customers improve.

Their businesses.

I am confident that through this intentional focus we can accelerate growth and maximize shareholder value.

And I want to once again, thank all of our employees for their perseverance and the multiple years of focus and hard work that has put us in this position of strength.

With that we will now take your questions.

Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered I would like to remove yourself from the queue. Please press the pound key we also ask that you. Please limit yourself to one question and one follow up you may get back in the queue. As time allows our first question comes from the line of Mark Delaney from Goldman Sachs. Your question. Please.

Yes, congratulations on the good results and outlook and thank you for taking the questions.

On the acquisitions, both tied to electrification and Evs I'm curious.

Is there a reason you're announcing them both at the same time and how important is it that you do both of them in order to have the full set of solutions you'd like to builder each of them makes sense independently and you spoke to the revenue side pretty specifically from the deals can you elaborate a bit more on the margin and EPS impact in the atmosphere.

Yes, Mark I'll start thanks.

Thanks for your question Hope you're doing well, yes. These are really important deals let me characterize.

The opportunity here first of all as I mentioned is a fast growing space the market itself growing 30% to 40% we've already seen this as a major growth driver for our business and the portion that we serve today the thing to understand about these these two businesses as one as they are highly complementary to our existing capability and what I mean by that is we.

We have existing capability for measurement and software and analytics and these two companies have high powered electronics, which is.

It really needed to complete the whole system and then they are highly complementary to each other primarily in their geographic footprint NH research, primarily serving the U S market and <unk> is primarily serving the European market. So doing those together, we view as an opportunity to rapidly scale our solution capability.

In this space.

And as I've said in an area, that's growing really fast and our customers have a lot of urgency you've heard all the announcements from various EV companies. There is a ton of urgency for them to get this technology into market.

So we see a strong demand and it's our goal to be in a position to service that growth and demand with this complete capability Karen you want to comment on the margin, but yes sure.

<unk> ability standpoint, they are so complementary in the way that they are expanding our revenue and reach with customers that we're actually looking at them combined which is why I commented on.

The fact that we're pleased that they are immediately accretive to our current margin position. So.

If you look at where we are from an ni perspective, they will actually continue to increase that percentage of operating margin combined for ni.

Thanks, a lot helpful.

Okay.

One follow up on the 20th III excuse me that.

Turning to outlook and meeting the 23 target model a year ahead of time.

Just given the supply constraints that I'm curious what gives you the confidence regarding our revenue.

A very impressive number so good to see that but if you could talk a little bit more on what's giving you that confidence that would be helpful. Thanks.

First of all if you look at where we're going to we believe we'll end this year based on the guidance for bookings number at about $1 6 billion. So you can you can see that even with that sort of sort of one book to bill of one that provides double digit growth going into 2022.

So we think Thats just a very very favorable position, we expect the demand to.

To stay strong certainly in the first half of the year.

Last one I'll say is just and Karen mentioned it but we think we're also in a favorable expense position as well.

A pretty challenging compare this year when you look at going from a negative year to are really strongly positive year in terms of variable pay.

Absorbed that expense increase this year and as we look into 2022, we would expect that thats.

Flat.

And that gives us a really good expense position as we go as well and that's that's why we also expect to exceed that operating income target that we set for 2023 a year early.

Thank you.

Thank you thank.

Thank you. Our next question comes from the line of Rob Mason from Baird. Your question. Please.

Yes, good afternoon.

Nice job nice job just to go back to the acquisitions.

Recorded these companies play.

Maybe just in the value chain is it more focused on design validation or is it production floor.

And then I guess when we look at your overall solution.

Where do you expect the majority of the opportunity to reside.

Yes, thanks, Thanks, Rob so they'll do Dell.

Play in both areas, although mostly in validation.

If you think about both batteries and things like and burgers and electric Motors Theres, a really intense focus on the characterization and testing of those and validation.

The battery in particular is the most expensive component in electric vehicle and being able to understand the characteristics of that the quality of that the lifetime of that becomes an essential element of the performance of the vehicle. So there is a huge focus by Oems as well as suppliers.

Batteries Inverters and other components of the electric vehicles, so mostly mostly validation, but the technology also scales to production as well.

I see.

And then.

The other question is.

Just around your semiconductor test business that's.

That's been a source of strength for a bit you kind of suggested all your markets are strong all your regions are strong but.

As you look into that one in particular.

Youre seeing some.

Hence.

Sure.

Ron.

Concerns around inventories and whatnot is starting to get up a little bit.

Just curious how do you think that if there is some type of inventory.

Pause mid cycle pause or whatnot, given where your position how that business is positioned how do you think that plays through to your demand levels if that.

Reside somewhere in 'twenty two.

As we go through the year, yes, yes, I understand your question, Rob and Thats sort of built into our expectation of course there is.

At some point.

The semi cycle will moderate, but I want to I want to characterize a couple of things. We've shared this before but our semi business and that business unit is is semi and electronics by the way. So it includes both the semiconductor portion as well as sort of the downstream electronics that we include and then within semi we said before it's.

About half production and about half validation so.

Rob This is Karen.

The core of Ni is to automate processes and so what we're seeing across semi and all of the industries that we serve is.

Those areas across semi and the other industries.

I see.

Just lastly, one quick question there was a reference earlier in the commentary around backlog being flat.

Next year, but I was not sure if that was the assumption that's built into the.

Kind of 16% to 18%.

Revenue growth.

Yes, yes, so I made that comment it's all just yet.

My point, there was that kind of the point I was also answering and Mark's question.

Given the strong bookings of $1 6 billion plus of what we expect to have this year.

We expect to be able to achieve double digit even with flat backlog, we don't know exactly where our backlog is going to end. This year, Karen gave a range and so whether it will be.

<unk> flat or not sort of depends on where we end. This year. It is a steward of our strategic interest for us.

To have certainly larger backlog as we have more of our systems business, we expect that to be a larger number.

So exactly where it will be we will see how it plays out but certainly we have the ability to achieve strong double digit growth.

Even if that number is flat in 2022.

Understood understood. Okay. Thank you.

Right. Thanks, Rob.

Thank you once again for your question at this time. Please press Star then one.

And it sounds like to hand, the program back to Eric <unk> for any further remarks.

Okay. Thank you all for joining us today have a great day and stay safe.

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

Q3 2021 National Instruments Corp Earnings and to Acquire NH Research Inc Call

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