Q4 2021 National Instruments Corp Earnings Call
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Thank you for standing by welcome to the National instruments fourth 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 the 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 Marissa Vidaurri head of Investor Relations. Please go ahead.
Good afternoon. Thank you for joining our Q4 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 quarter before opening 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 products supply chain constraint backlog the potential impact of COVID-19 on the company's business.
And results of operation successful integration of the acquisitions and future results of acquired companies 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 23, 2021, and our quarterly report on Form 10-Q filed on November one 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 to conform the statement to actual results or changes in our expectations. A reconciliation of our non-GAAP financial measures disclosed in this call to the most directly comparable.
GAAP financial measures are related disclosures are contained in our press release and I thought Tom question Ivy.
We are excited to announce that <unk> has been appointed senior Vice President and general manager for the transportation business.
Most recently, serving as senior Vice President and Chief customer and strategy officer at Hsni treated joined and I with more than two decades of experience in the automotive industry.
In the coming months and management will be hosting meetings at the conference is for Needham just Wanna in Morgan Stanley . Please visit <unk> Dot Com Slash Natty for presentation times, we look forward to speaking with you. In addition, you can find the press release and quarterly presentation to supplement today's discussion on our website at <unk> Dot Com slash now with that I will now turn the call.
Over to Chief Executive Officer, Eric Stockpile.
Thank you Marisa good afternoon, we appreciate everyone joining us today in.
In Q4, we reported our fifth consecutive quarter of strong performance, we achieved multiple all time performance records in our business, including record quarterly revenue and record quarterly non-GAAP operating income for Q4 year over year orders were up 19% revenue was up 14% non-GAAP EPS.
<unk> was up 18% and non-GAAP operating income was up 22%.
<unk> 2021 represents an inflection point of performance for Ni, we continued to deliver on our commitment to accelerate growth and improve profitability. Our strong financial performance is a direct result of strategic changes we've made over the last several years.
We focused to enhance our software capability to drive new long term opportunities.
In addition to our own organic investments, we acquired optimal plus in 2020 to serve as the core of our data and product analytics capability and open new market opportunities. We also partnered with cadence answers and the math works to connect design and stimulation with test.
And starting in 2022, we have made the decision to shift our single seat software licenses to subscription, which will lead to more recurring revenue and better predictability in our business.
Second we focus to capitalize on secular trends by targeting system level offerings to accelerate our growth. We targeted these offerings at <unk> and wireless electrification and autonomy and new space applications.
We restructured our sales force to increase direct engagement with top accounts in these domains and today. These applications and our focus accounts are growing significantly faster than the company and driving our overall growth.
Third we've streamlined our business to create a more efficient engagement with customers and to drive scale and leverage in our broad based business, we invested for multiple years and ni Dot com and these investments showed strong return with online order growth up 44% in 2021, we shifted our tier three customers to utilize global.
Distribution partners and the results from this shift exceeded our expectations in 2021.
Next we focused on inorganic opportunities to accelerate our growth strategy.
Quarter, we announced two acquisitions in the high growth application of electric vehicles, which we expect will add approximately 4% of revenue in 2022 and.
And H research delivered to plan in Q4, and we are targeting to close on the <unk> business of <unk> or in late Q1, 2020 to have high expectations for our multi year growth in this industry focused on the large EV and Adas investments of our customers. We will continue to prioritize inorganic investments that strategically aligned to our business and order.
To accelerate growth.
And lastly, we delivered on our commitment to drive efficiency across our cost structure, we better aligned our people to the critical needs of our growth strategy with head count down 3% year over year in 2021 and are planned to remain approximately flat in head count in 2022, and a year of expected strong revenue growth and.
And as I've said, we expect earnings to outpaced revenue for the foreseeable future.
The effect of these changes brings increased confidence in our business as we enter 2022.
We're in a position of strength with strong demand record backlog and disciplined expense management. So our expectation is to now meet or exceed our previous 2023 financial model in 2020 to a full year ahead of schedule as I said last quarter, we expect to deliver 16% to 18% revenue growth year over year in 2020.
And to exceed our financial target of 20% non-GAAP operating margin.
Now onto our industry results for the full year 2021 the.
The areas of intentional focus are delivering to our expectations. I believe this is a proof point that we are focused on the right areas to accelerate growth, we expect double digit growth across all of our business units in 2022.
Semiconductor and electronics revenue was $394 million up 21% year over year. We saw continued strength in our focus area of <unk> and wireless communication, which represents more than 50% of revenue for this business and we continue to see success in new offerings for automated labs in this space.
Transportation revenue was $212 million up 27% year over year.
While this business previously correlated primarily to automotive production rates are shifted focus to EV and Adas, where our customers are making significant investments has shifted the trajectory of this business we.
We expect by the end of 2022, these fast growing applications will represent more than 50% of the revenue and transportation.
Aerospace defense and government revenue was $370 million up 8% year over year. This business remains a steady and profitable growth engine delivering year over year growth in both 2020, and 2021 led by strength in defense applications and new space investments.
And our portfolio of business, which represents the majority of our broad based customers achieved revenue of $496 million up 10% and.
In addition to the favorable macro our focus on optimizing the channel and better positioning our offerings to these broad customers has gained traction or shift to subscription software will also provide more resiliency in this area of our business.
In summary, it's clear that our customers are facing major technology inflections, including wireless communication of <unk> economists in electric vehicles, and new technology for space innovation. Each of these is a major technology hurdle that for many customers is a once in a career inflection point.
Our unmatched expertise and modular systems test automation software and product analytics, making are uniquely positioned to help our customers navigate these challenges to improve their development and manufacturing operations.
With that I will turn it over to Karen to discuss our Q4 results and our outlook for Q1, Thanks, Eric Hello, everyone and I delivered another consecutive quarter of strong financial results Q4 revenue was a record at $421 million up.
14% year over year and at the high end of our guidance.
Demand continued to be strong and our supply chain organization went above and beyond to manage through continued component constraints to meet customer needs. We ended the year with over $150 million in backlog, keeping our lead times very competitive at about five weeks.
Total orders in Q4 were an all time record for the company and up 19% year over year in the us.
Americas orders were up 34% year over year and in EMEA orders were up 20% year over year, both representing records for a fourth quarter.
In Asia Pacific orders were down 2% year over year, primarily due to a strong compare in Q4 2020.
In Q4, we generated $50 million of GAAP operating income and $96 million of non-GAAP operating income translating into a non-GAAP operating margin of 23% for the quarter.
Q4, non-GAAP gross margin remained solid at 74%.
non-GAAP operating expenses were up 9% year over year, driven by an increase in variable pay which is aligned to our strong business performance.
We reported Q4, GAAP net income of $40 million and diluted earnings per share of <unk> 30.
Q4, non-GAAP net income was $80 million and diluted non-GAAP earnings per share was <unk> 60.
At the high end of our guidance and an increase of 18% year over year.
Now shifting to full year 2021 performance.
Customer demand was strong with orders up 24% year over year, enabling a <unk> increase in backlog.
We delivered on the targets shared at our Investor Conference in August with record revenue of $1 5 billion up 14% year over year.
Our 2021 non-GAAP gross margin was 75% continuing to demonstrate the value our customers see in our software connected systems.
GAAP operating margin was 8% non-GAAP operating margin was the highest in the last 20 years at 18, 6% and up 290 basis points from 2020, despite an increase of $45 million in variable pay year over year, demonstrating the focus we have had in driving efficiency in our cost structure.
In 2021, GAAP net income was $89 million, we delivered record non-GAAP net income of $224 million.
37% year over year.
Now, let me comment on capital management, our balance sheet remains strong with $211 million of cash at the end of the fourth quarter cash flow from operations was $143 million for fiscal year 2021 and.
In the fourth quarter, we returned $66 million to shareholders through dividends and share repurchases for the full year 2021, we returned $198 million to our shareholders reinforcing our commitment to shareholder value.
Our capital allocation strategy remains balanced we will continue to invest in organic capabilities to ensure we stay ahead of our customers' technology needs. We will also prioritize inorganic investments that strategically aligned to the business in order to accelerate growth.
We believe we have proven success in our growth strategy and enter 2022 and a position of strength, we're confident in our ability to accelerate growth, while returning excess cash to shareholders through dividends and share repurchases.
The board of directors authorized a new stock repurchase program of $250 million the new program.
It is effective immediately and is in addition to the previously authorized program. The Ni Board of Directors also approved a quarterly dividend of <unk> 28 per share an increase of 4% and payable on February 28, 2022 to stockholders of record on February seven 2022.
We expect our dividends represent approximately half of our non-GAAP net income in 2022.
Now shifting to guidance for Q1 'twenty two.
The momentum in customer demand for our software and systems combined with the durability of our backlog gives us confidence for strong revenue growth in 2022, while we expect our software subscription base recurring revenue and cash flow to increase over time as a result of our software licensing model transition, we do expect some headwinds to our net sales and operating profit.
Ability during the transition period, and we've built that into our guidance.
With our current visibility and expectations of the macro environment for the first quarter of 2022, we expect revenue to be in the range of $385 million to $415 million at the midpoint. This represents 19% revenue growth.
We expect our 2022 revenue profile to return to our pre COVID-19 seasonality with approximately 23% of our revenue in Q1.
This guidance is based on our current understanding of supply issues and assumes no manufacturing shutdowns due to COVID-19.
We expect GAAP diluted earnings per share will be in the range of 13 to 27 for Q1 with non-GAAP diluted earnings per share expected to be in the range of 35 to 49.
An increase of 31% year over year at the midpoint.
In Q1, we expect the current component pricing environment, and our software transition to cause gross margin to temporarily be below our long term average.
To offset this near term headwind to pricing and robust operating expense management, leading to an improvement in operating margin year over year.
We currently expect to exceed our financial target of 20% non-GAAP operating margin in 2022 and are targeting earnings per share growth above our revenue growth for the year.
In closing, we will continue to strengthen our competitive advantages and make our business scalable 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 you Karen.
As we closed out the year I took some time to reflect on my last two years as CEO I'm really proud of the resiliency of our business and our strong financial performance, which is a direct result of the strategic changes we made over the last several years and the hard work and determination of our people and I continue to be inspired by the work that they do every day.
One initiative that is very important to me personally is the impact we have on society and that's long been a part of our culture at Eni.
One thing I focused on was to make our effort in this area a more transparent and more intentional and so in 2020, we established the first corporate impact strategy that includes 10 year goals to ensure our positive influence on society.
Our focus is rooted in three pillars changing the faces of engineering building, an equitable and driving society and engineering a healthy planet. These are critical pursuits, and I'm honored to share that just this month and I was named to Newsweek's. Most responsible companies. This is great recognition in the big accomplishment in the first year.
Of our corporate impact strategy I want to sincerely. Thank all of our employees for their commitment to our purpose and for their multiple years of hard work and perseverance. Your work enabled us to achieve our fifth consecutive quarter of strong financial performance and has put us in a position to exceed our 2023 financial goals a full year ahead of schedule.
With that we will now take your questions.
Certainly ladies and gentlemen, if you once again if you have a question at this time. Please press Star then one we also ask that you. Please limit yourself to one question and one follow up you may get back in the queue. At this time allows our first question comes from the line of meta Marshall from Morgan Stanley . Your question. Please.
Great. Thanks, and I appreciate the presentation and congrats on the quarter just wanted to dig into the supply chain briefly you've mentioned it clearly is something that you are working to mitigate maybe there's a small gross margin impact for you guys, but just wanted to get a sense of is there any end customer demand that's impacted.
By their ability to kind of get chips that we should be mindful of.
And then maybe just a second question for me.
Obviously, it's a strong 2022 guide just wanted to contextualize.
How you measure the headwind that comes from kind of the transition and the the software license model to subscription.
Sure. This is Karen let me, let me maybe start.
See if Eric wants to add more to this.
The near term headwinds that we're seeing in supply chain are primarily driven by component cost.
We saw that through the end of 2021 and really through the first half of 2022 as a as a short term headwind.
We're hoping that type of inflationary pressure levels off over time, and then becomes more of a tailwind back to historic levels and we also have the temporary software impact built into the guidance that we provided as well. So again that again, we look at as kind of a near term current.
Timing issue that we're working through to drive even more upside as we come out of it on the backend.
From a from a customer perspective, there's not any one.
That were causing headwinds are issues for we tend to have such a large diverse customer base and our <unk>.
Lead times still remain incredibly competitive it about five weeks on average so there may be some that are a little longer than that but others that are shorter and we believe based on the feedback and the interactions we've had with our customers.
That's not creating significant issues for them.
We're being very deliberate about making sure that we're managing across that entire customer base.
And maybe I'll add a little bit of color on the software transition question that you have.
Just kind of calibrate that so the first two.
Today, a majority of our software business is already recurring over the last few years, we have been shifting through our volume license agreements or enterprise agreements, particularly at our larger customers. So that those are time based licenses, what we've decided to do it at the beginning of this year is to shift the remaining part of our software portfolio, which.
As the single seat licenses to be subscription based so that will be primarily recurring it does have a small impact of revenue for 2022, as Karen said that built into guidance.
And then of course, it becomes more and more favorable as time goes on we believe that our software is.
Is very valuable to our customers that it is very sticky that renewal rates will remain very high. So it's lucrative from that point of view and it also gives our customers the ability to kind of on ramp onto our software easier with that.
<unk> model. So we think it has benefits for the customer and for us, but just to calibrate its a relatively small revenue impact that's built into guidance.
Got it just circling back on the supply chain question that was less of a question of you.
Whether you were having problems getting equipment to customers or it was more or your customers.
Has their demand of your products that impacted at all by their ability to kind of get chips within their products.
Yes.
I guess that was more of the question was whether it was impacted customer demand.
Dan.
Yes, let me make just one comment on that I mean, as we've said overall the demand environment remains really robust very strong last year. It's because we believe it will continue to be strong in general across our business.
Most of our segments are more correlated to the R&D budgets of our customers of course, we serve both R&D and production, but it's more correlated to R&D.
That case, those don't really have any near term impact and we're not really seeing any substantial impact in terms of customer demand from that.
From the supply issues great.
Great I'll pass it on thanks.
Yep, Thanks, Bob Thank.
Thank you and once again as a reminder, please limit yourself to one question and one follow up you may get back in the queue. As time allows our next question comes from the line of Mark Delaney from Goldman Sachs. Your question. Please.
Yes. Good afternoon, thanks, very much for taking the question.
First on orders I was hoping you could be a little bit more specific I know you mentioned it was a record level.
Broad based end market strength I didn't catch the absolute number I think last quarter was just over $400 million. So perhaps you could clarify where.
<unk> overall came in on an absolute basis and if it could be any more specific around how you're thinking order to trend into <unk> and if you still think book to bill remains above one.
Sure Mark This is Karen Yes. We ended we ended Q4 just over $470 million in orders.
This for the year at something over $60 30, right around that level.
So that was the 14% growth both for.
In revenue that we saw is what sell through as a result of that.
For the forward look we expect book to Bill there is still be higher than one in Q1, especially.
When we started the quarter and where we see so far so that's leading to the confidence that we have to be able to guide the 19% growth in revenue at the midpoint is based on.
Still strong demand plus plus some backlog build potentially in Q1 as a result of the strong demand.
Yeah.
Instrument my follow up on that topic, a little bit more broadly but.
We're in a strong you talked about supply constraints, continuing so maybe you could kind of square that with lead times I think came in a little bit I think it was six weeks five weeks. So maybe just talk through what is the life of the slate shortening of those sometimes thank you.
Sure Yes, we're currently.
At around 555 weeks lead time.
Coming out of Q4, I expect that to actually hold through 2022, it's our intent to.
Can be very strategic about about our lead times going forward and really drive.
Expectations with our customers that they can they can rely on the lead times that we quote to them so driving that consistency with our customers is incredibly important for us and given them credibility and understanding when they'll receive product from us. So the models that we've built out in the guidance we've provided.
<unk> is built on a holding the lead times at about five weeks in 2022.
It will flux that will fluctuate a little bit quarter to quarter right like I said will build a little bit more I think first half, but then that will fluctuate out through the through the year.
Thank you.
Thanks, Mark our next question comes from the line of Husseini.
Husseini from Susquehanna Your question please.
Yes. Thanks for taking my question two for me first one is.
<unk>.
Eric.
Help me understand.
Supply chain disruptions impacting you.
What if you were willing to pay the premium it takes to procure all the components.
What will be the revenue for March UK supply chain destruction wasn't there how much of a revenue.
These impacted because of supply chain disruption or how that part of the work.
Okay.
Sure and I can tag team on this so so yes, I think some of the comments that Karen just made can you give me an idea of it its still there its stabilized quite a bit it's a few key.
Components that are the majority of the.
The challenge that we still have given our expectation that Karen just shared of maybe a book to bill slightly over one but not significantly over it.
It's not a major impact to Q1, and we and as we said all along we think the five weeks approximately five week lead time is highly competitive and so we're comfortable with with where that is the component pricing.
And procuring the right components, especially.
Given our margin everything is it is a priority and that is one of the things that is a short term short term headwind to margin that Karen mentioned, we do mitigate that to an extent with pricing, but there's a time delay right. So we've already announced some price changes to our end customers.
But there is a time delay between the component price increases often in our ability to get that in the market. So that's why that's a margin impact in the short term.
And that's all built in the company of course.
Okay.
You highlighted your leverage to R&D budgets and in that context.
What are the near term opportunities we had the infrastructure build.
Maybe there will be some impact to infrastructure does.
You will leverage there is also there.
17 that is going to be finalized soon on the slide <unk> wireless.
Patients.
Are these two catalysts.
Yes.
Infrastructure build and Lisa.
Two factors are there.
Positively or materially impacting your near to business as it relates to R&D.
Yes, both of those yeah, so certainly <unk> still <unk> in wireless overall continues to be a growth driver primarily in our semi electronics.
Business that has been for a couple of years I mentioned thats about 50% of the business and its fairly evenly split between labs and production. So we view that as continuing to be a growth driver. We do expect to have consistent with the market that the rate of growth may moderate some in 2022, it's been a very strong growth performer, but we still expect it to.
Double digit growth and be in that 10% to 15% range that we said is the long term expectation for that Bu and transportation those EV and Adas investments are pretty substantial those are very high growth areas. Those two EV approximately doubled for us last year in business, eight asquith close behind and growth rates and <unk>.
We think those are multiyear investments that that.
We're still early innings, the customers type of infrastructure that they ultimately need to build for say battery labs for example in EV.
Given the ambitions that those customers have they have a long way to go and so it's our opinion that thats, a multi year growth opportunity, where there will be a fairly significant investment over the next few years and we're positioning ourselves to capitalize on that as I've said really improve the mix of that business, where more than half of it by the end of.
This year is in those areas, where we see large investments continuing for multiple years. So those are those are the primary growth drivers you got it right.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Rob makes it from Baird. Your question. Please.
Yes, good evening and thanks for taking the question.
And then just around the quarter.
Eric.
Eric You would you had mentioned earlier that you.
Specced at all of these four main.
In markets to grow double digits and you touched on this briefly I guess around semiconductor, but how are you thinking.
How the growth would be distributed across these end markets.
In the context of.
At 12% to 14% organic growth level.
How those might look.
I guess in the other three end markets.
So Jamie I'll give some color, yes, Rob so yes, I'll give some color on that so I sort of mentioned semi already maybe moderating the growth a bit but it's been a very strong multiyear growth trajectory and we still we still see good growth drivers in that area and expect the double digit.
<unk>.
Then you have up atg, which as I mentioned thats been sort of a steady growth area for us.
We think it'll be double double digit this year and it's coming off of two strong single digit kind of high single digit growth years that defense budgets are a big driver of that those are still strong and steady and then new spaces, a little bit more of a growth driver within that we see some increasing investments happening. So we think thats, a favorable trend portfolio business, which really.
Covered significantly last year, and I mentioned that in my prepared remarks, getting the double digit growth. After a few years of a declining trajectory. We do expect another year of growth as that kind of flow through now longer term as we've said before that's kind of a mid single digit growth trajectory is what we think long term, we're doing some things to make that growth more predictable.
Paul.
And resilient from the software licensing model that I that I mentioned and the way we are positioning the products and then the area, where we're seeing the biggest change in growth is in transportation. So that really started to inflect about this time last year right. So as we came into Q4, we saw a big sequential jump that was really as we started to put.
A lot of our focus on electrification at Ada fishy brought product to market in that space around that time, we started to see traction. That's all fantastic growth I just quoted some of those growth numbers, we're expecting that to be.
At a higher growth in the other areas for 2022.
And our current perspective is that that's a multi year kind of high growth opportunity ahead of us and so that's how we see it playing out at this point, which is really consistent with what we've invested in right. So that matches, the long term expectations and kind of.
Expectations, we've said over the last few years. So it is when I talk about the sort of strategy playing out are coming to fruition at sort of the areas. We've invested in we're achieving the growth expectations that we had when we made those investments.
Excellent excellent.
Just as a follow up Karen you had mentioned the variable pay component for 2021, and Thats impact that impact how does that.
2022.
Swing swing factor for them, yes.
We've absorbed most of that in 2021 lab. So when I go into 2022. The increases are the very things that that flex theyre going to be more about wage inflation types of issues.
Youre seeing.
The attrition that's happening globally and trying to stay ahead of that and make sure. We retain our top performing employees and also we will be bringing in more travel in 2022 than we've seen in the last couple of years. So those will be those will be the increases in 2022 that I am expecting.
We've climbed the hill already on the variable pay so with the results. We're looking at in 'twenty, two I expect that to stay relatively consistent.
<unk> 'twenty one.
Okay very good thank you.
Thanks, Rob.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Eric <unk> for any further remarks.
Thank you all for joining US today, we look forward to seeing you at a future conference or at the next earnings call in April have a great day.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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