Q3 2022 National Instruments Corp Earnings Call
[music].
Good day, and thank you for standing by and welcome to the N. I Q3, 2022 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 the session you will need to press star one on your telephone.
You will then hear an automated message advising your hand is raised please.
Please be advised that today's conference is being recorded.
I'll get it started I'll pass it over to Marissa Vidaurri head of Investor Relations. Please go ahead.
Good afternoon. Thank you for joining our Q3 2022 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 it up for your questions.
Our discussion today will include forward looking statements, including without limitation those regarding the company's expectations of meeting or exceeding our financial targets.
Capital allocation financing and investment plans the payment of its quarterly dividend and its future business outlook and guidance, including demand for its products ability to realize revenue from backlog and future results of acquired companies and execution of great strategy.
We wish to caution you that such statements are just predictions and 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 22002.
<unk> and subsequent quarterly reports on Form 10-Q.
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 statements 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 or related disclosures are contained in our press release and on Ni Dot.
Dot Com slashdot.
You can find the press release and quarterly presentation to supplement today's discussion on our website at <unk> Dot com rationality.
As announced last month, Karen Rapp, Chief Financial Officer plans to retire in May 2023. The company is in the process of an external search Karen Rohan remain in her current role until a successor is in place and then we'll shift to a temporary advisory role to ensure a smooth transition.
Management will be hosting meetings at the Baird Conference in November in Chicago, The NASDAQ Conference in December in London, and the Needham Conference in January in New York.
Forward to seeing you there.
That I will now turn the call over to Chief Executive Officer, Eric. Thank.
Thank you Bruce and we appreciate all of you joining us today.
We achieved very strong performance in the third quarter with record Q3 orders all time record revenue for a quarter and record Q3 non-GAAP EPS.
This is the fourth consecutive quarter of year over year Records for all three of these measures.
The key takeaways that we'll share with you for Q3, our record revenue of $428 million up 17% year over year and up 15% year over year from Q3.
non-GAAP operating margin up 110 basis points year over year through Q3.
Commitment to our plans for margin expansion in 2022 and 2023.
I want to acknowledge that while Q3 performance was strong we did start to see a slowdown in demand in certain markets starting at the end of Q3, and we expect to continue into Q4.
We ended the quarter with 12% order growth year over year with the drop in order rate occurring in the last few weeks of September orders were approximately flat year over year in that period with weakness in semiconductor and particularly in China.
Weakening of demand, there's something we've been planning for the model we shared our 2023 at our Investor Conference last month for example, contemplated a recessionary scenario with a 5% decline in bookings in 2023.
In that scenario, we laid out the tailwind in our business, including a reduction of backlog and a healthier supply environment that we believe will contribute to double digit revenue growth in 2023.
In Q4, we expect weakening demand, but likely not fully offset by a substantial improvement in supply environment, which could limit our ability to reduce backlog.
Our differentiated modular hardware and industry standard automation software align well to critical customer needs in sub segments with powerful growth drivers, including electric and autonomous vehicles wireless communication and new space technology.
Through our focus on these secular growth trends, we've increased the mix towards our highest growth industry business units and areas, where we can meaningfully grow share.
In addition, we expect to expand our share of wallet with increased direct customer engagement at our tier one accounts, which today account for approximately 40% of our total revenue.
At these accounts, we are delivering more complete solutions that allow customers to develop higher quality products faster and at a lower cost.
In return we have seen an increase in program wins and standardization on AI technology.
Across the industries, we serve our business is well positioned at both R&D validation and production test.
We estimate that approximately 60% of our total business is in R&D with 40% in production.
And our software and data analytics platform enable us to uniquely deliver value across that entire workflow.
Now on to results by industry for the third quarter.
Semiconductor and electronics reported Q3 revenue of $102 million up.
Up 8% year over year with orders down 3% year over year.
So we expect it to slow down the growth of our semiconductor business what has dropped suddenly the final few weeks of the quarter, especially in China.
While the slower semi cycle has been anticipated we believe the combination of our exposure to R&D test and.
Our ongoing progress in delivering software across the semiconductor workflow will soften the impact that a semiconductor downturn will have on our business.
In Q3, we won several large analytics software contracts in semiconductor, including our largest software contract effort.
Predictability predictable revenue over that three to five year period of those contracts.
We also expect that the semiconductor devices, we test analog wireless and mixed signal will remained more robust than other areas like consumer devices.
Transportation reported record Q3 revenue up $84 million up 58% year over year with orders up 47% year over year.
Our strategic shifted focus to EV, and Adas, where our customers are making significant investments has changed the trajectory of this business and we expect that we will continue to deliver market leading growth rates.
In Q3, <unk> represented approximately 50% of our transportation business and we expect the revenue from these growth areas will exceed 50% of our transportation business by the end of this year.
The recent acquisitions of Crapser NH research and heightened singer accounted for approximately 20% of our transportation revenue in the third quarter.
These acquisitions, we believe we now have the most competitive portfolio and the and battery test capability in the market. Today, we are seeing the strength of our strategy evidenced by early demand that has exceeded our expectations and expect these investments to drive long term growth for ni.
We're proud to receive the charged for innovation award from the Battery Innovation Center, a nonprofit research Institute.
This award recognized the company with fielded technology that is making a significant impact on the automotive industry.
Personally I was in Europe , this quarter with our new Kresser team and also visiting a large European automotive Oems.
The opportunity we have in EV is compelling.
Our organic investments combined with the technology and talent, we've added through these acquisitions create a highly compelling and competitive offering to our customers.
Aerospace defense and government delivered great results with record revenue for Q3 of $105 million up 13% year over year with orders up 15% year over year.
AEG continues to outperform our expectations with growth fueled by robust defense spending.
We also continued to see strong opportunities in new space technologies, including launch vehicles satellites that are well aligned with our platform and channel.
And our portfolio of business, which serves the majority of our broad based customers achieved revenue in Q3 of $138 million up.
Up 8% year over year with orders up 7% year over year, despite the global PMI dropping below 50 in September .
This is the area, we believe the most susceptible to a softening macro environment and we have been taking steps to make this business more resilient.
Our focus on utilizing global distribution to better position our offerings.
Optimizing our digital channels. These broad customers has gained traction further providing leverage and scale in this portion of our business.
<unk> revenue from the distribution of digital channels to grow to approximately 20% of our total revenue in 2022 up from 9% of our total revenue in 2020.
<unk> term, we expect our transition to software subscription will improve the resiliency and growth opportunity for this business. This transition is on track to our expectations.
The initiatives that we've executed since 2017 have transformed ni in a company with higher growth better profitability and lower cyclicality we.
We believe our strong performance over the last several quarters is directly correlated to the strategic shifts, which we believe positions us on a more positive long term trajectory.
In summary, we plan for a weaker macro in 2023, and we remain committed to the targets. We set at our Investor Conference last month for 2023 through 2025.
In our business, we've seen signs of a weaker macro starting in September and are taking actions to mitigate its impact in the short term and deliver on our plans for 2023 and beyond.
With that I'll now turn it over to Karen to discuss our Q3 results in more detail. Thank you Sir.
Everyone in Q3, our GAAP revenue was $428 million up 17% year over year and ahead of the midpoint of our guidance.
The strengthening of U S dollar had a negative impact to revenue of approximately minus 5% year over year in Q3.
The currency headwind was approximately $10 million sequentially, which was worse than we expected we were able to mitigate this through reduction in backlog and we were pleased with our strong core revenue growth and growth from our recent <unk> acquisition.
As Eric mentioned demand grew double digits in Q3 with orders up 12% year over year.
For the third quarter orders were up 16% year over year in the Americas up 23% year over year in EMEA.
One 1% year over year and Asia Pacific.
We ended the quarter with backlog of approximately $240 million down $9 million sequentially.
We continue to have competitive lead times of approximately seven weeks.
And less than 1% and order cancellations due to lead times.
Our confidence in the resiliency of our backlog and our ability to eventually realize this revenue with supply chain disruptions ultimately east remains strong.
Because our solutions are often a capital expense and provides unique capabilities for our customers. We do not typically incur any double ordering risks.
Not seen anything that would indicate a change to that historic pattern.
Q3, non-GAAP gross margin was 70%.
490 basis points year over year, driven primarily by broker fees paid for components that were in short supply.
We expect these temporary headwinds to slow one supply catches up to the softness in demand.
But we will continue to have cost pressure for the Golden screw type components in Q4.
We expect the supply chain constraints to ease in the first half of 2023 and a reduction in broker purchases to positively impact our 2023 non-GAAP operating margin.
Thank you three we generated $80 million of GAAP operating income and $92 million of non-GAAP .
Operating income a non-GAAP record for third quarter translating into a non-GAAP operating margin of 21% for the quarter, an improvement of 110 basis points year to date through Q3.
Q3, GAAP net income of $62 million and diluted earnings per share of <unk> 47.
Thank you three we had a onetime sale of property, which contributed <unk> 19 cents.
Our GAAP earnings per share.
We reported record Q3, non-GAAP net income of $71 million.
And record diluted non-GAAP earnings per share of <unk> 53.
An increase of 26% year over year.
non-GAAP earnings per share was up over 40% sequentially, despite incremental headwinds from interest expense and currency of approximately five penny versus Q2.
Now, let me comment on capital management.
<unk> remained strong with $149 million of cash at the end of the third quarter.
Cash flow from operations was $36 million in the third quarter.
In Q3, we continued to invest in inventory to enable us to ship systems to customers as soon as the final components are available.
We expect our inventory position to turn into a tailwind for future cash once the supply constraints ease and the need to build inventory. This past, we expect to bring inventory down enabling us to cover non-GAAP net income to cash at historic levels or better.
We expect our cash flow from operations to improve in Q4 sequential revenue growth.
<unk> working capital investments.
In the third quarter, we returned $119 million to shareholders through dividends and stock repurchases.
We repurchased approximately 2 million shares at an average price of $40 25.
Approximately $109 million remains on the repurchase authorization approved by our board of directors of January 19, 2022.
Yeah, and our board of directors approved a quarterly dividend <unk> 28 per share payable on November 28, 2022 to stockholders of record on November seven 2022.
Our capital allocation strategy remains balanced we will continue to invest in organic capabilities to ensure we stay ahead of our customers' technology needs and prioritize inorganic investments strategically aligned to the business in order to drive growth at.
At the same time, we will continue to look for opportunities to return cash to shareholders through our dividend and stock repurchase programs.
Now shifting the guidance for Q4.
Being cautious with our short term outlook due to the strong U S dollar and the slowing of orders at the end of Q3.
Pursuing orders in Q4 approximately in line with what we saw in the last few weeks of Q3.
We also benefited from a large AG program wins in Q4 last year that creates a tough compare.
For the fourth quarter of 2022, we expect revenue to be in the range of $435 million to $465 million.
The mid point this represents 7% revenue growth year over year.
Our guidance assumes the U S dollar continues to thanks, Ralph and our.
The impact is similar to Q3.
Minus 5% year over year for the quarter.
Well, a weaker demand environment will ultimately lead to improved supply, we expect supply uncertainty components to continue to be tight through Q4 and to constrain our revenue.
We remain focused on delivering 100 basis points of non-GAAP operating margin improvement for the year.
To take appropriate actions to scale expenses.
We expect GAAP diluted earnings per share in the range of 22 to.
To 30 success for Q4 with non-GAAP diluted earnings per share is expected to be in the range of 54.
Yes.
An increase of 2% year over year at the midpoint.
We've assumed that the headwinds from currency and interest expense remained similar to Q3.
In summary, Q3 results were in line with our guidance despite currency headwinds.
We saw a slowing in customer orders at quarter end.
We anticipate the slowing demand will lead to some easing of supply constraints are being cautious in our Q4 guidance.
We continue to see the benefits of the actions we have taken to increase scale into our business model.
Continue to sharpen our focus on breakeven pension all investments for growth and streamlining processes for greater efficiency.
Even in a potential recessionary environment.
And our ability to deliver on our commitment to increase our non-GAAP operating margin by 100 basis points in 2022, and an additional 300 basis points in 2023.
Perfect.
Thanks, Karen.
Summary, we are confident in the actions we have taken to better position the company to perform despite the short term headwinds that may occur.
Remain committed to our goals for long term growth to profitability and see our recent financial results as proof that we have the right strategy in place.
As I mentioned, we've done a lot of hard work over the past five years to fundamentally transform the company and change the trajectory of our performance. The key elements of the strategy of gains traction and demonstrated success driving a higher level of growth.
Now we are focused on executing the strategy and achieving the return on those investments with a focus on top line growth and strong leverage and earnings growth on the bottom line.
A big Thank you again to all of our employees, who have driven our strategy and committed to significant expense management actions throughout this year.
Employees in manufacturing and operations in particular have worked incredibly hard to navigate continues an unprecedented challenge in our supply chain.
We really appreciate everyone's hard work determination and perseverance and with that we'll now take your questions.
As a reminder to ask a question you will need to press star one one on your telephone you May ask one question and one follow up question only please standby, while we compile the Q&A roster.
Our first question comes from the line of some mixture Perry Your line is now open.
Hi, Good afternoon. This is Angela Qian Entre pharmacology.
My first question is related to orders. So I just wanted to dig in more into order trends.
Thank.
Your portfolio up 7% this quarter on PMI dropping below 50 in September what are you thinking for the.
The pace of portfolio growth for a moderation of growth going forward and on the flip side seeing a lot of strength in automotive, but what are the risks to auto orders and is there any potential for weakness in autos and then I have a follow up.
Yes, I am.
Sure I'll take that.
So portfolio as you mentioned it was it remained pretty pretty strong actually in the quarter I noted that we saw some.
Flattening of order growth in the last few weeks basically flat order growth. Once you reach that sort of the model that we have going into Q4, our expectation would be that in general our portfolio as I mentioned would be more affected by the macros that tend to be below that.
And as with semi as we go through a semi cycle I will say by the way that we are absolutely still believe in the long term trajectory of semi it's a very good market for us.
In the long term trends regionalization of semi capacity the sectors in semi we're in a really good but we expect it to go through a down cycle in the next few quarters and then and then transportation has been very very strong for us.
Our transportation business, primarily EV and Adas is correlated to essentially new model introductions by the automotive companies in new platforms.
And with active safety systems, those continued to be strong areas of investment.
So our outlook continues to be we believe pretty robust in that area and then I noted that aerospace defense and government, it's very steady for us. It's a good environment I believe it will continue to be a good environment.
Karen did note that we have a compare in Q4 in that specific segment, but our longer term trajectory of order growth.
We expect to continue to be in the similar range that we've had the long term ranges order growth by the way. We've also published from the Investor Conference that we did in September .
And then your follow up.
Alright, yes.
I follow up on more affordable on the Opex side.
Are you implementing any measures to manage cost to avoid.
Earnings declining more than revenues going forward and do you see any risk to your commitment to that 300 basis points of operating margin expansion in 2023.
Haynesville, it's fair enough I'll take that one.
Throughout the year.
Getting ahead of some of the some of the cost pressures, we've done things like slowing our hiring as far back as May earlier. This year, we have done some workforce planning that enables us to feel confident in keeping our head count generally flat in the operating expense bucket for the next few years.
But all of that in addition to doing things like that.
Making sure that we're digitally managing our expenses and making sure that we're getting a return on the dollars that we're investing we also have shifted more of our costs are variable, which enables us to put a little more flexibility in when we see quarters like this.
And moving forward.
But let me talk a little bit more about 2023, because thats a slightly different story, we believe that the work that we've done on operating expenses. This year positions us incredibly well for the continuing to drive scale in the 2023, but theres an additional tailwind that happens in 2023, which is really on the gross margin.
Line, rather than the operating expense line.
We've been we've been paid broker fees this year.
At a level that's about just the 440 basis points of headwind in Q3 for example, we.
We expect that to be over 400 basis points. This year that will that will not stay at that level in 2023, as we see demand softening, we expect supply to ease up and that will give us the opportunity to reduce those broker costs literally that.
Over 400 basis points is truly just purchase price variance for paying more for the same parts than we've paid historically.
Because of the alternative supplier that we're working through there.
So we believe we have opportunity to do that and we remain confident in our.
Our and committed to our numbers for 2023 and delivering on the 300 basis points improvement after delivering 100 basis points improvement this year.
And I'll, just add one thing and recognize our team. So as Karen said this year that broker pricing in that 400 plus basis point headwind to margin was something we didn't anticipate coming into the end of the year and we flex down our spending this year to still meet the bottom line commitments, the 110 basis points of operating margin.
Expansion that we've seen through Q3 and that 100 basis points, we expect for the year and so.
Our confidence also comes from demonstrating our ability to flex.
And C. For example, 15% revenue growth and only only 4% opex growth this year because of that margin pressure that as Karen said it kind of turned around next year and thats what drives that confidence.
Great. Thank you.
Thank you.
Your next question comes from the line of Mehdi Hosseini. Your line is now open.
Yes. Thanks.
For taking my question would it be fair to say that.
Book to Bill for the September quarter came in.
But 95 definitely below one <unk>.
Sorry, Jason.
Yes.
Yes. This is Karen yes, it's fairly close to a one from a book to Bill for Q3, that's correct.
We have slightly over one but.
You are close to you in the ballpark.
Okay.
Yes.
Two things.
Impact.
Booking business.
Business too.
Macro driven weakness, especially in the last two weeks of the quarter.
Also grew.
Continued.
This impact from component availability.
So I'm just trying to reconcile the two and through those two.
Bookings.
The December quarter.
Got it.
Yes, I'll take it it's Eric yes, the bookings side that the impact it's really a.
A weakening of demand at the end of the quarter is still a strong quarter for demand, 12% bookings growth, but as we noted a weakening in Alaska last few weeks primarily semiconductor.
And recently opened in China.
Separate from that from the revenue side of course, there is an FX headwind in Q3 and into Q4, it's about 5%.
Percentage points, so pretty significant.
And then the.
The other element and as you've noted there is supply the point there is that.
Of course in the long run.
Weakening demand environment will ultimately correlate with a much improved supply environment in the short term.
The timing of those we don't think will perfectly line up and so we're being cautious in Q4, that's what we believe will be and we're starting to see the signs up.
A bunch of approved supply environment that we will see a big benefit of that yet in Q4, and it will be pretty constrained on supply.
Especially on some critical components.
That's the actual ability to reduce backlog in Q4 will be constrained based on that supply environment. As we look into 2023, we expect much less of that constraint as we look through the full year.
Okay got it.
Let me ask you one.
Follow up.
Sure.
Okay.
Just look at your commentary on revenue and EPS.
It seems to me that.
Operating margins should be kind of flat to up in December .
December quarter on a Q over Q basis.
You get to the midpoint of the EPS Guide range.
That's the.
Operating margins for Q4 versus Q3 is what you are looking at money.
Yes.
Yes, it'll be similar we had a strong Q3 from an operating margin perspective.
Okay.
Thank you.
Thank you.
Your next question comes from the line of meta Marshall. Your line is now open.
Great. Thanks.
I guess my question for me is just as we look at.
Some of the topline scenarios as we head into the next year.
Your analyst day, you guys had talked about kind of looking at a normal recessionary scenario I guess I'm just wondering.
With the combination of kind of some of the China restrictions that have been put into place and FX like do you consider those additional headwinds to kind of the normal recessionary scenario that you looked at.
Or do you think like the release of more backlog helps offset that I guess I'm just kind of trying to.
Ty kind of more confidence on the topline with what I would consider kind of additional headwinds. Thanks.
Yes sure.
Yes, so when we look at the barbell, we shared which was minus 5% kind of bookings and then we kind of broke down the bridge items from a revenue point of view to get to double digit revenue.
Yeah. The general answer your question is the puts and takes that are still that's still what we what we believe is a realistic scenario that takes into account kind of the information we have right now about about FX.
But if other elements I will comment by the way.
Our point of view at this point from everything we've seen the most recent restrictions with respect to China semiconductor, we don't expect to have a material impact.
Honestly at this time, obviously, we always continue to monitor those kind of restrictions.
Restrictions and export controls have continued to do so but we believe that model is still still holds.
In terms of both the minus five being kind of a bookings number to anchor too as well as the other elements that bridge to revenue.
While we saw a slowdown in orders as I mentioned at some point, we anticipated to that we never know exactly when thats going to when that's going to start we certainly anticipated a lower level of orders for 2023, we started to see some of that behavior of our customers and in.
In this quarter going down to about flat is what we saw at the end of the quarter.
Great and then just maybe a follow up.
Yes.
All lines kind of the headwind from FX, the topline, which was helpful. But is there any kind of corresponding tailwind you guys are getting on.
Opex perspective that we should just be mindful of and that's it for me. Thanks.
Yes. This is Karen.
The price increases that we've been able to pass along to our customers have been.
Continues to be a favorable tailwind we made price increases in 2022 in both February and then again in August .
Double digit price increases in both of those periods and that's that's been flowing through nicely we saw about.
9% tailwind in revenue in Q3 from that specifically the other tailwind is going to continue to be our <unk> acquisitions.
Yes.
But we're really starting in Q3.
We have high expectations for our plans for continued growth.
Four and into 2023.
Yes, I guess I was about right yes.
Thank you.
You were also asking if we'd been real deliberate about.
About spreading our expenses geographically, obviously, our factories are global so that we do get some benefit of the <unk>.
The strong dollar from a cost point of view it doesn't fully offset.
The headwind to revenue, but if thats, what youre asking yes.
But we do get a benefit on the on the expense line.
The strong strong dollar yes.
Great. Thanks.
Okay.
Your next question comes from the line of.
Mark Delaney your line is now open.
Thank you very much for taking the question and good afternoon. My first question was on pricing and following up Karen on the point you were just making about some of the benefits. The company has seen in terms of revenue and.
Flow through of price increases.
As you head into 2023, my understanding was that continued.
<unk> tailwind was part of the 2023 plan and do you think youre still going to be able to achieve the pricing you anticipated.
Based on some of the conversations youre, having with customers in light of the more difficult global demand backdrop.
Yes, absolutely.
Absolutely.
As we have shifted more and more of a system sale and selling solutions to our customers the value proposition that we bring is highly recognized.
Been able to be very successful with the flow through on those price increases this year and we've already got some plans in place for next year that we outlined in September we are absolutely on track to those if not even stronger at this point.
Okay. That's helpful. And then my final question is on supply chain.
Understanding your expectation is that the supply situation should improve in 2023, especially if there is a weaker macroeconomic backdrop.
It certainly makes sense conceptually I'm wondering if you could share any more insights, though on what youre hearing from suppliers in terms of their ability to ship to your expectation and are you seeing improvement.
And what they expect they can deliver to us.
<unk> got into that 'twenty, three time frame or is it more your best view.
Oregon is it.
Matching up with what the yes, if I understand thanks.
Yes, Mark we are in those conversations we are starting to see.
Improved expectations from our suppliers, we are hearing the right things about their expectations improving the challenge is just the timing one so even in the cases, where we have a line of sight.
Getting more supply.
That that delivery might be real late this quarter or even push at the next quarter. So we think it's going to be really tight from that point of view, but we are starting to see.
Actually a demonstrable science.
Some improvement.
Is it happening as fast as we'd like it for this quarter and of course, as we said before it so component dependent.
There is still some of these goldman Goldman screws, but the indicators of improvement across the supply chain are definitely starting to happen, yes, we see that on a day to day basis with what we receive as well, we're getting a higher percentage of our orders delivered more consistently and on time or better so that the actual on the ground.
Improving as well.
Thank you.
Your next question comes from the line of Damian Karas. Your line is now open.
Hi, good evening everyone.
Hi, I had a follow up question hi.
I had a follow up question for you on supply chain and some of those comments on.
Getting the order deliveries out could you, maybe just give us a little bit of a better sense.
On how much of a constraint.
The supply issues have been on sales and.
And maybe if you could.
Tell us how lead times are looking at this stage are they still around eight weeks.
Yes so.
Great question, we've actually this was the first quarter in Q3, where we were actually able to see some reduction in backlog, we've been growing significantly throughout the year actually higher than we expected.
Just the size at our backlog growth this year, we anticipate being somewhere around about 5% year over year.
Above and beyond what we had expected because of the supply constraints.
Nice in Q3, we started to see the ability to bring that back down we ended the quarter right around seven weeks of lead time seven weeks of backlog.
And like I said.
The components are starting to become a little bit more predictable, we track that closely to see.
If our suppliers are meeting their commitments and we continue to see improvements on that which is in a really nice side.
We're still being cautious going into Q4, but we still have a nice solid backlog position. So puts us in a good place to take advantage of that if the supply just rates really do ease up as we expect.
Okay. That's helpful.
And then.
You've spoken about.
Sort of planning preparing and taking actions for in anticipation of the semiconductor downturn.
Could you just maybe elaborate on that a little bit.
If I'm interpreting correctly thinking about the 2023 targets that you put out there in those scenarios. It. It sounds like you are now kind of aligning more towards the lower end of that if you are already taking these actions or could you just.
Give us a better sense for what what you're actually doing.
I can take.
Daniel So there's there's planning and reacting to planning side, we just mean that sort of a lower semiconductor growth rate.
The order rate was built into our expectations as we look into 2023 and beyond we were expecting.
Cycles that usually happen in that market, we're expecting a down cycle.
And then what can we actually do about it I mentioned there are across the business. We serve in semi specifically there are areas, where spending will create more robust and so leaning into.
Our lab offerings. For example, we have some really compelling products and capabilities for validation test, which will tend to be an area that spending stays at a similar level as it was it's not as impacted as production tested as well as the software capabilities that.
That we are able to deliver into that market those are areas, where our customers. We think we will continue to invest so so that's what we can actually do proactively and then that's as I mentioned thats, what a down cycle is built into our outlook.
Okay, great. Thanks, a lot.
Thank you David.
Your next question comes from the line of Rob Mason. Your line is now open.
Yes, good evening, Hi, everyone Hi, Rob.
Hi, I wanted to stick.
Just on the order theme if we could.
Eric to the extent that you have seen orders slow.
I mean can you make any distinction between.
The orders have trended in the R&D lab space versus those that would be.
Destined for production test.
Yes, I think it might be a little early for us to call that one rob that level of detail because certainly we have seen.
A lot of a lot of business across both of those our anticipation is that.
<unk> will be weaker as we go forward <unk> sorry, the production test part of it I think you can see a little bit of that indication when I when I said that sort of.
Sandy in China and to some extent in some other parts of Asia, where a lot of production has done was a little bit weaker but.
But most of that is just sort of our anticipation of how it is going to happen in the future more than what we've observed so far.
Yes, yes.
Just.
Within your semiconductor business.
And certainly appreciate the added visibility Youre your four segments provide us, which we did not always have in the past and so as I look back towards past cycles.
I'm not as clear as to how you.
Youre seeing me conductor business would have responded can you just help frame what the orders of magnitude standard deviation I guess, maybe around the growth rate has been historically through cycles.
Within the semiconductor growth.
Yes.
Yeah, maybe maybe one way to look at it Rob This is Karen.
What color is up and semiconductor in 2020, most recent cycle that we saw there.
We were about flat year over year. It was up it was up 1% at a time when the business was down minus 5%. So that wasn't necessarily a semi cycle that was COVID-19 related and pandemic.
Debbie was actually.
Pretty robustly over the last few years, but the best.
Retail data point, yet another way you might think of it.
This isn't about our historical data, but if you think about the peers that we have that are production test focused and the cyclicality that they have.
Half of our semiconductor business is exposed to similar level of cyclicality.
And even within that it tends to be a little lower.
Kind of cyclicality range, if you would because of the markets. We're focused on we're on that I mentioned in the analog and mixed signal the automotive components, and everything which which just don't have the peaks or valleys as much as consumer and leading edge semi but that would be a way to think of it.
A little less than what the <unk> focused vendors applied about half the business and the other half of the business has cyclicality like more like the rest of our business not not the high peaks and valleys of production semi so hopefully that helps umbrella.
Yes.
If I could ask Eric just two.
Okay.
Yes, you could.
Isolate where the.
Softness is within the customer base.
What segments, I guess, whether it would be automotive or industrial or some.
<unk> oriented I'm, just curious where you're seeing the softness first.
Sure.
Yes, I think I mean, our expectation of semi when you just look at across it with inventory levels and everything else, but we'll just see some level of broad base weakness suggest.
From the cyclicality of oversupply going it you know what I mean.
But what's happened in the supply chain does that kind of ripple through.
Again, I guess that inventories and everything else I think there'll be a little bit of that across the board.
Areas that we're focused on that I mentioned wireless in analog and mixed signal those applications.
We don't have as much volatility as consumer which as <unk> seen a lot of right now it's down quite a bit in the semiconductor companies focused on that are feeling a lot more than what we would tend to see and in our business and then and then I will also just comment that in that sort of EBIT short to medium term, there's a lot of nice.
Opportunities that we're pursuing and semiconductor devices for automotive.
For new technologies, and automotive Thats still a good a good market.
Some of the fab build outs that are happening globally, and the regionalization of semiconductor.
We do service some part of that market and we expect that to be a continued investment area. So there's certainly a few bright spots in there even EBIT through a down cycle.
Sure sure. Thanks, Eric I appreciate it.
Thanks, Rob.
And we have no further questions have a queue I would now like to turn the conference back to Eric <unk> for closing remarks.
Okay. Thank you all for your time here today and have a good rest of the afternoon.
This concludes today's conference call. Thank you for participating you may now disconnect.
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