Q4 2022 National Instruments Corp Earnings Call
Speaker 2: Thank you for standing by and welcome to the NISQ4 2022 earnings conference call. At this time, all participants are in a listen only mode. After the speakers presentations, there will be a question and answer session. To ask a question at that time, please press star 11 on your touchstone telephone. As a reminder, today's conference call is being recorded. Thank you.
Speaker 3: I would now like to turn the comments to the host, Ms. Marissa Bedard, Vice President of Investor Relations. Please go ahead.
Speaker 4: Thank you. Good afternoon. Thank you for joining our Q4 2022 earnings call. I'm joined today by Eric Starclough, President and Chief Executive Officer, Daniel Barron-Bomb, Chief Financial Officer, and Karen Rapp, Strategic Advisors to the CEO . We will start with an update on our performance in the quarter before opening it up for your question.
Speaker 5: Our discussion today will include forward-looking statements, including without limitation, those regarding the company's expectations of meeting or exceeding financial targets, its capital allocation, financing and investment plans, the payment of its quarterly dividends, and its future business outlook and guidance, including demand for its products, and its
Speaker 6: Ability to realize revenue from backlogs. Future results of acquired companies.
Speaker 7: execution of growth strategies, and the outcome of the company's restructuring activities and strategic alternatives process. 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.
Speaker 8: We refer you to the documents that the company files regularly with the Securities and Exchange Commission.
Speaker 9: including the company's annual report on Form 10K, filed on February 22, 2022, and the subsequent quarterly reports on Form 10K.
Speaker 10: These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statement. We assume no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectation.
Speaker 11: 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 quarterly presentation deck on ni.com slash nati.
Speaker 12: You can find the press release and quarterly presentation to supplement today's discussion on our website at ni.com slash Maddie.
Speaker 13: Management will also be hosting meetings with the Sue School on a conference in New York on March 2nd and the Morgan Stanley Conference in San Francisco on March 7th. We look forward to seeing you there. I will now turn the call over to Chief Executive Officer Eric Starklough.
Speaker 14: Thank you, Marissa. Good afternoon, and we appreciate you joining us today. So first, I want to take a moment to introduce Dan Berenbaum, our new CFO , who joined us on January 9.
Speaker 15: and has extensive experience leading financial operations, various technology businesses. He's already had an immediate impact as we execute our growth strategy and focus to achieve our operating margin expansion targets for 2023 and beyond.
Speaker 16: Karen's going to close out 2022 in the call today. And I want to once again take the opportunity to recognize and thank Karen for her significant contributions to our success over the past six years.
Speaker 17: After Karen speaks, Dan will provide outlook for Q1 2023.
Speaker 18: And I'll start by kicking things out for the update on the business in the fourth quarter and for the four year of 2022.
Speaker 19: The key messages you'll hear today are, we closed out a record year in 2022 with a strong 4th quarter.
Speaker 20: We achieved record non-GAAP quarterly revenue of 449M dollars, up 7% year over year and in line with our guidance.
Speaker 21: And we delivered non-gap operating margin of 25% for fourth quarter, which is an all-time record for a quarter.
Speaker 22: 2022 is a strong year as we continue to make strides and tricks forming NI into a higher proof, more profitable, and more resilient company.
Speaker 23: Despite ongoing global macroeconomic uncertainty, we delivered on the 2022 targets that we shared at our September investor conference with record revenue of $1.7 billion of 13% year-to-year and 9-gap operating margin of 20% of 130 basis points compared to 2021.
Speaker 24: As we head into 2023, we are planning towards the recessionary growth scenario in line with what we shared in September .
Speaker 25: And even in a wide range of downturn scenarios, we now expect to exceed our 300 basis point non-GAAP margin expansion target.
Speaker 26: Our results are due to the transformation of our business that started in 2017.
Speaker 27: We have successfully executed on a set of transformational initiatives over the past 5 years, including We transformed our go-to-market into a tier channel strategy based on customer potential and stood up a non-direct channel in 2021.
Speaker 28: These changes have driven growth in our top accounts and significant cost leverage in SGA. See more videos from SGA
Speaker 29: We formed industry specific business units and have hired experts in those industries to lead them.
Speaker 30: We have shifted our roadmaps to focus on application specific systems and software aligned to fast growing sub segments, including electric and autonomous vehicles. Wireless communication and new space technology.
Speaker 31: We've expanded our software portfolio, building on our leadership position and automated tests through LabVIEW and adding additional development tools.
Speaker 32: applications software, and also expanding into growing adjacency systems management and product analytics.
We've accelerated our strategic transformation with a number of important ballpark acquisitions, including multiple companies, enabling us to deliver complete offerings in electric vehicle testing. Now, the fastest growing part of our business.
And we have been keenly focused on our cost structure to increase our leverage and our flexibility of spending.
As a case in point, in 2022, we saw an unanticipated headwind of 420 basis points largely due to ongoing supply chain constraints.
And yet, managed our operating expense to still hit our commitment of 100 basis point improvement to operating margin.
We continue to focus on the efficiency of our operating expenses and expect a strong uptick and operating margins again this year.
We have made shifts in our organization to consolidate our operational core and enable a leaner SGNA art.
In 2.1, we are also implementing a targeted restructuring of approximately 4 percent of our global headcount.
Our high confidence in 2023 is directly correlated to the strategic shifts we've made, which we believe have created a stronger trajectory for growth.
Now, one to results by industry.
The areas of intentional focus are delivering to our expectations.
I believe this is a proof point that we're focused on the right areas to accelerate our long term growth.
Semiconductor and electronics reported 2022 revenue of $433 million up 10% year over year. With Q4 orders down 10% year over year, in line with our expectations for the quarter.
While a slower semicycle has been anticipated, we believe the combination of our exposure to R&D tests and our ongoing progress in delivering software across the semiconductor workflow will soften the impact that a semiconductor downturn will have on our business.
Last quarter, we won several large analytics software contracts in Semiconductor, including our largest software contract ever. Which will add predictable revenue over the next 3 to 5 year period of those contracts.
Transportation reported 2022 revenue of 302 million dollars, up 40% year over year. With Q4 orders up 35% year over year.
Our strategic shift to focus in EV and ADAS where our customers are making significant investments has changed the trajectory of this business. We expect that will continue to deliver market leading growth rates in 2023.
As we expected, EV and ADAS now represent more than 50% of our transportation business.
The recent acquisitions of Craser, NH research, and Heinsinger accounted for approximately 24% of transportation revenue in the fourth quarter.
Through these acquisitions, we believe we now have the most competitive portfolio of end-to-end battery test capabilities in the market today. We expect these investments to drive long-term growth for NI.
A recent success was winning a large battery lab deployment resulting in $22 million in revenue that will be recognized over the course of 2023.
Aerospace, defense, and government delivered strong results with 2022 revenue of $412 million, up 9% year over year, with Q4 orders down 12% year over year.
As a reminder, and as we noted in our Q3 call, in Q4 2021, we closed a large program win in ADG. So the decline in your orders was expected.
We expect to see order strength in this business in 2023 driven by robust defense spending.
We also continue to see strong opportunities in commercial space technologies like launch vehicle and satellite.
And our portfolio business, which serves the majority of our broad-based customers, achieved revenue to the year of $511 million, up 5% year-rehear, with Q4 orders down 10% year-rehear.
This is the area that has historically been most susceptible to installing macro environment and we have been taking steps to make this business more resilient.
Our focus on utilizing global distribution, the better position our offerings, and optimizing our digital channel to this broad customer base on gain traction.
further providing leverage and scale in this portion of our business.
We expect revenue from distribution and digital channels to grow to approximately 22 percent of our total revenue in 2023, up from 9 percent of our total revenue in 2020.
We also expect our transition to software subscription will improve the resiliency and the growth opportunity for this business.
As we mentioned previously, starting in January of 2022, we transitioned our single-seat licenses to subscription, which resulted in a 2% headwind to revenue for the full year.
We were pleased to exceed our internal targets on this transition in 2022 and going forward the vast majority of our software portfolio is now recurring revenue.
In summary, we believe the company is in a strong position. We planned ahead and took action in anticipation of softening in the semiconductor cycle and a weaker overall macroeconomy.
We're planning toward the recessionary growth scenario and live with what we shared in September .
And even in a wide range of downturn scenarios, we now expect to exceed our 300 VATES point non-GAP margin expansion target.
With that, I'll turn it over to Karen to discuss our Q4 and urine results in more detail. Karen? Thanks, Eric.
Q4 was a record quarter with gap revenue of $448 million of 7% year over year.
2022 was a record year for revenue at $1.7 billion and 13% growth year over year.
Our queue for orders were down 3% year-over-year as we expected.
We started to see a decline in the semi-market and the macroeconomy at the end of September , and we plan for that to continue in Q4.
As Eric mentioned, we had a strong Q4 last year with a large ADG order that we knew would not repeat in 2022.
By region, fourth quarter orders were down 7% year over year in the Americas.
up 7% year-over-year in EMEA, and down 9% year-over-year in Asia Pacific.
We ended the quarter with delinquent backlog of approximately $230 million, which is approximately 7 weeks of revenue.
We're confident in the resiliency of our backlog and in our ability to realize this revenue as supply chain constraints continue to ease.
Because our solutions are often a capital expense and provide unique capabilities for our customers.
We don't typically incur any double ordering risk, and we haven't seen anything that would have been indicated change in that historic pattern.
We also continue to see minimal cancellations due to lead times at less than 1%.
Non-Yat Gross Margin for both Q4 and full year 2022 with 70%.
2022 non-yap gross margin was down 420 basis points year over year, driven primarily by broker fees paid for components that were in short supply.
We continue to see supply concerns easing, while there's still some key golden-room components, especially in legacy semi-technology.
We expect the supply chain constraints to ease in the first half of 2023 and the reduction in broker purchases to positively impact our 2023 operating margin.
In Q4 we generated $60 million of GAAP operating income and $112 million of non-GAAP operating income, a non-GAAP record for a fourth quarter.
We delivered non-GAP operating margin of 25 percent in 24.
For the full year, gap operating margin was 12%. 9 gap operating margin was 20%, a record for an eye, at an increase of 130 basis points zero over year. Demonstrating the continued focus we have had on driving variability and efficiency in our cost structure.
We're reported Q4, gas net income of $40 million and diluted our needs for share of $0.30.
We reported record Q4 non-gap net income of $83 million and record diluted non-gap earnings per share of $0.63, an increase of 5% year over year.
For the full year 2022, gap net income was $140 million.
We delivered record non-get net income of $255 million of 14% year-over-year.
In summary, two or four results were in line with our expectations. In 2022 was another strong year of growth on both the top line and bottom line for NI. I'm proud of the results we're delivering.
Finally, as many of you know, this will be my last earnings call, although I'll be here through May to help ensure a smooth transition.
I'm excited to have Dan here. His background and skill set is a great addition to NI and his experience will help us continue to grow in all areas.
I've enjoyed getting no venue view over the past six years and I appreciate your time, interest and commitment to understanding our business. I'm confident in the trajectory of that eye and excited about the company's future prospects.
Now we'll turn it over to Dan to discuss our outlook for Q1. Thank you, Karen, and thank you, Eric, for the warm welcome to NI. I'm very happy to be here and to be participating in this call as we look ahead to 2023.
As you can imagine, I spent my first few weeks at NI immersing myself in the business. It won't surprise those of you who followed NI for a long time that I've been deeply impressed by the high level of talent across the organization, a testament to NI's strong culture of engineering and commitment to customers. It's also very clear that the transformation of NI continues to gain momentum.
confidence in our ability to execute on a quarterly basis as well as over the long term.
As Eric mentioned, we remain committed to our target of delivering at least 300 basis points of non-GAAP operating margin improvement in 2023. We have a number of initiatives in flight, which underpin our confidence, including supply chain planning improvements, tight control of discretionary spending, and the restructuring which Eric mentioned earlier.
Specific to gross margin, as we enter 2023, we expect to tailwind from lower purchase price variants as we see our supply chain constraints ease. We also expect to see the benefit of pricing actions which have been taken over the past several quarters.
For Q1, we expect to deliver a more than 100 basis points sequential improvement in non-Gab gross margin compared to Q4.
With respect to operating expenses, we anticipate that Q1 effects will rise slightly from Q4 levels, as we make targeted investments to ensure our future growth while maintaining discipline around discretionary spending.
The restructuring actions that Eric mentioned previously will result in a reduction of approximately 4% of our headcount, primarily in SG&A. We anticipate that most of the benefits from this reduction will start in Q2.
After declining significantly as a percentage of revenue over the past few years, we expect OPEX to increase gradually in absolute terms as we go through 2023. But to remain flattish or decline as a percent of revenue in relation to Q1.
Now let me comment on the capital management. Our balance sheet remains strong with $140 million cash at the end of the fourth quarter. Cash flow from operations was $52 million in the fourth quarter. In Q4, we continue to invest in inventory to enable us to meet customer delivery commitments in the face of ongoing supply chain challenges.
As supply constraints ease, we expect inventory to return to more normal levels.
Along with a renewed focus on working capital management, we expect to be able to convert non-gap net income to cash that levels more line or historic performance and a meaningful improvement over 2022.
Our capital allocation strategy remains balanced and disciplined. We will continue to invest in organic capabilities to ensure we stay ahead of the technology needs of our customers and prioritize inorganic investments that strategically align to the business in order to drive profitable growth.
In the fourth quarter, we returned $37 million to shareholders through our dividend. And the N-I Board of Directors has approved a quarterly dividend of $0.28 per share, payable on March 6, 2023 to stockholders of record as of the close of business on February 13, 2023.
We've elected to continue our doodend at current levels given the already very strong return of cash to shareholders.
We did not repurchase shares in Q4. I would note that our Q422 weighted average share count was the lowest since Q420.
With some normal fluctuations, NI's share count has remained roughly flat over the past five years, as we have successfully used our repurchase program to offset dilution.
With that, let's shift to guidance for Q1.
From the first quarter, revenue is expected to be in the range of $415 million to $445 million.
At the midpoint, this represents 12% revenue growth year over year.
Our guidance assumes currency impact similar to Q4.
We expect GAP diluted earnings per share in the range of 14 cents to 28 cents for Q1, with non-GAP diluted earnings per share expected to be in the range of 48 cents to 62 cents, an increase of 35% year over year at the midpoint.
Our Q1 non-GAAP earnings forecast excludes $20 million related to the restructuring we have discussed today, $18.5 million for stock-based compensation, and $15 million for amortization of acquired intangible assets, acquisition-related expenses, and other items.
We anticipate a full year 2023 gap and non-gap tax rate of between 17 to 18 percent, assuming no changes to tax laws.
In Q1, we will also occur an additional approximate $1 million tax expense related to changes in the R&D tax credit.
In summary, we continue to see benefits from analyzed multi-year transformation journey. We are laser focused on making efficient investments in our growth while improving our expense control and working capital management.
As Eric mentioned, we are planning for continued recessionary environment in the 1st, half of 2023. Even against the slower macro backdrop, we are confident in our ability to deliver on our commitment to increase our non gap operating margin by at least 300 basis points in 2023.
I'll merge now turn it back over to Eric for some closing condoms.
and now turn it back over to Eric for some closing comments. Thank you, Dan and Karen.
We are confident in the actions we have taken about a position the company to perform, including in a weaker macro environment. We expect revenue growth even in a headwind environment and remain committed to meeting or exceeding our target of standard-based point margin expansion.
I believe our strong performance in 2022 is proof that we have the right strategy in place.
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. And we're not done yet.
The key elements of the strategy have gained traction and demonstrated that it's a driving a higher level of grace.
Now, we're focused on executing the strategy and achieving the return on this investment with a focus on top-line groom.
and strong leverage and earnings growth on the bottom line.
I want to say a big thank you to all of our employees who have driven our strategy and committed to a significant expense management actions throughout this past year. I know it's not been easy.
Employees in manufacturing and operations in particular have worked incredibly hard to navigate continues and unprecedented challenges in our supply chain. And I sincerely appreciate everyone's hard work at the termination of perseverance.
Before we take your questions, I do want to comment on the strategic review process.
As you all know, NI issued a press release on January 13th announcing that our Board of Directors has initiated a review and evaluation of strategic options for NI.
The comprehensive review will include consideration of a full range of available strategic, business, and financial alternatives.
We know some of you have questions regarding the strategic review, but I'd like to note that we're not planning on answering questions regarding this topic on the call today. We appreciate your cooperation in advance.
And with that, we will now take your questions.
Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 11. We do ask that you please limit yourself to one question and a follow-up, and then feel free to join the queue.
Our first question comes from Simeek Chatterjee of JP Morgan. Your line is open.
Hi, this is Angela. On your 2023 guide, I know a few months ago you sort of were guiding towards mid-teens growth in 2023. How does that pass to that level of growth narrow just given for the macro backdrop that we're seeing? How does that pass to that level of growth narrow just given for the macro backdrop that we're seeing?
the semi-down cycle seems more severe than initially expected. And so what are your initial thoughts on 2023 revenue growth?
I'll take that. Yeah, I commented that we were seeing an environment that's consistent with what we anticipated in the September conference and we laid out a set of scenarios and a recessionary scenario particular. That's still our point of view. We didn't guide on revenue for the full year. We obviously guided for Q1 at 12.
commitment to the bottom line performance sort of well within our control and managing that for a wide range of outcomes.
I can add a little bit of color and just say again, we guide 1 quarter at a time. So we're not going to make comments specifically on the full year. As Eric said. Uh, there obviously is that macro headwinds and we are planning for that macro headwind, but, you know, against that backdrop, I think.
was a little bit below what you would consider our normal seasonality. We're guiding Q1 a little bit better than what we would consider our normal seasonality. We have some tailwinds there from training. What we would consider the art of length went backlog, meaning backlog that customers would have liked to see and ship in Q4 that for one reason or another. We weren't able to ship in Q4.
So, we have some of those tailwinds going into Q1. I will also comment that we have historically talked about backlog as a measure of orders that customers wanted in prior quarters, but we haven't really talked about our scheduled backlog.
And our scheduled backlog would add another roughly $220 million to that $230 million worth of delinquent backlog that Karen talked about. Now, part of that is really tied to the transformation of the company. It's tied to the different strategy of the company. NI, if you look back over the years, really used to be much more...
for the full year. We're really only guiding for Q1. We have some of those specific delinquent backlog tailwinds in Q1 that are going to help us, you know, which give us confidence in that better than seasonal guide for Q1. But just to give you a sense of how we think about the puts and takes for the full year if that's helpful.
Yeah, that's really helpful. And then on the operating margin expansion target of 300 points or exceeding that, you know, sort of between your gross margin improvement, you know, your restructuring and other sort of cost controls, you know, where – I'll just gave you a Bach and Jacobs linked program on our website. Yeah, you take that one information and bomb the question of, okay, how do we make aare
What is driving that 300? Like is it mostly the gross margin improvement? Is it mostly the head counterduction? Could you maybe walk through sort of the input into that target?
Yeah, again, we're not really going to talk about a guidance for the full year, you know, sort of pointed you for Q1 that we expect a little bit more than 100 basis points of gross margin improvement. Guy that the office for Q1 given some commentary around that increasing in dollar terms from Q4, but should sort of give you a feel for the.
the profile might shake out for key one. Again, just to give you the thoughts on the full year, and we do have some tailwinds from some of the price increases and some of the purchase price variance is rolling off. So, you know, we definitely have some tailwinds there. Offset by continued headwinds and spots.
over the course of the year, but we're not going to guide specifically beyond Q1. Alright, thank you for taking my questions.
Thank you.
Thank you. Thank you. One moment, please. Thank you.
Our next question comes from the line of Rob Mason of RW Bear. Your line is open. The line is open.
Yes, good afternoon. And hi, Dan.
The price that you're expecting is built into the first quarter guidance and what you were able to capture price realization price increase In the fourth quarter. What was that first quarter and fourth quarter?
Looking for the number. This is this is Aaron. Hey, from pricing in Q4. We saw about it 8% list.
In revenue? And we've built in the Q1 somewhere expectations and line list with what Dan got it. Yes. Here's it, Dan. Come on.
I'm just curious how that. Yeah, no, it's a good question and it's not necessarily that it varies so much by BU, but I will characterize, you know, we are surgical about it. Right? So we're. There's a couple of factors that contribute 1 is as we delivered more and more systems capability.
We're delivering value that's greater than the sum of the parts. And so that's definitely been favorable. The second factor is we've just gotten just more sophisticated ourselves and how we've done this. So our efficacy of targeting price changes and selling the value through our channel, you know, credit to our teams, we've got more and more effective.
At that, and then I'd say, you know, the last element I've been quite pleased with is that we've been able to maintain that also through the channel as we've introduced distribution channel our ability to. To get good pricing to the channel has been strong. And so those factors together.
have led to the results that we saw, which were very, very good in 2022 and an expectation of continued efficacy in that area at 23. I see, it's just as a follow up. Can you walk through the sequential decline in your adjusted operating expenses? I mean, your operating expenses came in.
We'd been early on in the year in 2022. We took some actions to get ahead of what we saw coming from a back row environment and knowing that the semicircle doesn't all stay up. So we got ahead of that early in 2022. Continue that in all the way through Q4 because as you know at the end of Q3 we started seeing that come on even stronger.
So we stayed incredibly disciplined in Q4. The entire team just stepped up. And as you know, we've also been increasing the percent of our costs that are variable as we go through the year and as we continue to move forward, we continue to drive that flexibility and variability. And we pulled that lever into Q4.
As we saw the macro, the PMI is below 50 now and the semi-cycle really taking a hit in Q4. So, really just be.
The whole point of aligning expenses with revenue has become something that we live on a regular basis and taking that forward. And we demonstrated that I got pretty clearly in Q4.
in the
Yeah, sorry, you bring up a good point that I just wanted to. To point out, build all the things Karen said, you know, that's 1 thing we were really proud of our ability to hit that to 25% operating income and keep for the record as, you know, and then as we come into, you know, you heard the guy from Dan in Q1. Um, you know, that's that's approximately 23%.
Operating income, so that's about 500 basis points above Q1 of 22. So, again, we're really seeing the leverage of the. Of the changes that we've made and the transformation that we've done and the work we've done on cost structure and variability. We're seeing that really starting to come through. You saw it in Q4. We're expecting it in Q1. So we think that sets us up in a real.
We just said that we'll see a positive impact from that starting really in Q2 and a little of that is we're going to be selective about areas for investment as well. So, I wouldn't necessarily. You know, try to draw a straight line from from just the restructure.
I'll hop back in to you. Thank you.
I'll hop back into you. Thank you. Thanks for having me.
Thank you. One moment, please. Our next question comes from the line of Meta Marshall, Morgan Stanley . Your line is open. Great. Thanks. Maybe first question, just on, you know, noting that some of the headcount reduction was due to SG&A, or SG&A was going to be most impacted.
you know, does that change kind of how you think about, you know, more going through the channel, or is it just kind of trimming around the edges, just trying to get a sense of if there's any change to the sales cycle or to the sales structure? And then maybe as a second question, you know, it did look like transportation was obviously very
First of all, just as Dan said, we're super mindful as we went through this process on balancing our ability to achieve efficiency of scale, but also making some of the right investments for growth. I'll just say at the highest level, it's very consistent with
Some of the structural changes that we announced at the end of last year, which were around strengthening to be used, consolidating our core operations and then this sort of leaner sales and marketing team. And as you noted, they are primarily an SG&A. Your specific question. Yeah, it's got multiple factors. I mean, there's just some areas for us to.
to be a bit more efficient. There's areas that are really about the transformation. As I've said before, as we've gone to this tiered model, we achieve efficiency at both ends of the model. So at the top end of our account structure, we're getting really tremendous growth in average order size and account size in those large accounts.
And so we're able to scale that revenue certainly faster than our expenses. So we're realizing efficiency and scale there. At the tier 3 level, you know, the move to distribution to digital has been effective. It's exceeded our expectations as we gone through the year. I gave some quantification.
of how much we go through the, we'll go through the channel. So yes, as back grows, that also gives us an opportunity for some more efficiency there in the way that we're serving our accounts. So, I think when you take those together, along with just some natural, continuous improvement in the way that we sort of run the business.
That's how I characterize those, but highly consistent with the strategy that we have. So your 2nd question about transportation. Yeah. 1st of all, we're really excited about that business. I mean, 40% growth for the year. It's been a, it's really a really, really good performance and it really is good performance across the board. So. You take 1st of all on on electrification, which has been the primary area where we.
electric vehicles that was organic has been pulled up to a very high growth rate as well. And then we're seeing reasonably good growth in the other parts of the business, certainly in active safety, which is a focus area. But we're actually seeing, you know, a tip in the rest of the vehicle as well where we're protecting all of the electronics.
Of a vehicle and part of that is just we've really grown. Our account relationships and the value that we can deliver. To these, these automotive accounts, the shift to easy and autonomy has created a lot more opportunity in the OEMs. In addition to the tier 1, which were our primary customers. Prior to our focus in that area. So.
You know, I think things are to use the automotive analogy things are hitting on all cylinders in that area. I guess that's a bad analogy. These vehicles don't have cylinders as much anymore, but you get you get the point. So, you know, all 3 of those factors are contributing to a high degree of growth and then optimism in our outlook and the pipeline that we have.
of G. Goldman Sachs, your line is open.
Yes, thank you very much for taking the question. And Dan, congratulations on the new role. Starting with orders, even though orders were down 3 percent year on year, I think book to bill may have still been near or even a little bit above one based on my math. So could you perhaps level set us on where total orders came in and then.
Sticking with the order topic, could you also comment on the linearity of orders in the 4th quarter? Or perhaps that orders have trended into January . So, we're not talking specifically about our level of orders or level of bookings.
If we can talk about maybe patterns a little bit. Yeah, I can talk about patterns. I mean, I'll just say Mark, the minus 3 was first of all, it's consistent with what we expected. And coming into the quarter, I gave commentary in the different business units, but I would just characterize that as sort of in line with sort of where we expected some headwinds as the things that we talked about in September .
That's what our expectation is built on coming into Q1. And Mark, let me comment a little bit further. I'll go back to the commentary on how to backlog earlier to maybe help you understand how, again, how the business has transformed a little bit and how we're thinking about this moving forward. Obviously, as we go into Q1, we have that tailwind from...
draining a little bit of that delinquent backlog that Karen talked about, the orders that customers would have liked to have shipped previously that we hadn't been able to ship. The business is also very focused as we have transformed as we've gone towards those system solutions, both organically and through the acquisitions in building longer term backlog. So, you know, you're.
We're not going to talk specifically about book to bill and part of that is that I would try to get you focused a little bit more and thinking about our backlog and how that backlog will start to look as we drain the delinquent backlog tailwind for revenue early in the year. And then, as we, as we continue to drain that throughout the year, and then as we build backlog.
expansion opportunity at NI is with some of the other experiences you've encountered in your career. Thank you. Thanks Mark. So listen, I'm obviously extremely excited about NI and the route goes back to when I was an engineer and I was a lab view user. You know, and I is just a foundational technology company.
that is critically important to all parts of the technology industry, of the technology supply chain. That's an incredibly exciting opportunity to be able to join a company like that with a long history of engineering and customer support like that. And of course, I've seen the transition, the transformation that NI has been on over the past five years.
and the opportunity that still exists for that improvement in operating margin, the opportunity to exist for improvement in working capital. These are very exciting opportunities commensurate with that transformation into more of a systems and solutions business. So that's why I'm here.
Thank you. Thank you, Mark. Thank you. One moment, please. All right. Thank you, Mark. Thank you. Thank you, Mark. Thank you.
Our next question comes from the line of David Kelly of Jefferies. Your line is open. The line is open.
Hey, good afternoon. Thanks for taking my questions. Maybe following up on the margin discussion, it sounds like we're seeing some supply chain visibility improvement.
Can you give us some color on the broker pricing impact on Q4 and if that improved into your end? And maybe if you can give us a sense on how you're baking in broker pricing into 1Q guidance, that would be helpful. So I just have a few minute slides for tilting and we have Capital.
Yeah, so again, we're not going to be specific about the numbers in there. We do still have some of that inventory on our balance sheet. Obviously that. We pay it higher prices for, you know, we expect most of that inventory to flush through as we move through 2023 and supply chain conditions. These we expect.
not to be having to pay those broker pricing, but we're not going to be specific about how much we still have and at what point it will flush through again. We said it will be a tailwind in Q1 and as we go through 2023.
I'll add just a qualitative view of that. We definitely have seen, we talked about improving supply chain, and certainly this broker market issue has improved quite a bit. So it really peaked, I think, in Q3. And so we started to see less necessity.
So using those broker markets to procure these very hard to procure components. Again, as Karen said in her remarks, there's still some golden screws and we're still working with that and it's not like it's an unconstrained environment but it's gotten quite a bit better and our the necessity of us doing additional broker purchases is gone down.
quite a bit and that's what's led to the this thing going from a headwind to a tailwind to the expectation we set of a 100-based point improvement in gross margin is based on that improvement that we're seeing and kind of that we've seen over the last quarter.
Got it. That's helpful. And maybe... Go ahead.
Yeah, just because they just scan there's some spikes that we posted on the Nanny on our website that you can look at to get some color on some of that bridge for you over here as well. Yeah, pretty spigorous March you want a boys
Got it. Thank you. Really appreciate it. Maybe one quick follow-up on the automotive traction you referenced. Your EV acquisition's clearly been a meaningful contributor to that. Can you talk about the margin trajectory of those acquisitions and maybe how those are trending?
versus your core transport business? Yeah, I can take that. So we actually also have actually on the same slide that Karen pointed you to that's in the investor deck, you can see that the coming in the VB acquisitions have a headwind on gross margin. So some of those system components come in at a lower gross margin.
Trend up and then and that's also built into our expectations of course. And then ultimately, you know, the strategy here is, as I mentioned in 1 of the previous answers to previous question is pulling the rest of our platform. And that's a big part of the strategy is. Is this is selling these complete solutions that include. You know, these battery cyclers and things that we got through these acquisitions, but also include.
Our next question comes from the line of Damian Carr of UBS.
Good evening, everyone. And Karen, thanks for all your help. Best of luck in life with Natty.
Thanks, David. So, I just wanted to kind of follow up on some of the comments regarding order trends. You spoke a little bit on semiconductors slowing and then talked about your longer term view on transportation, but maybe you could just provide a little bit more detailed.
kind of outlook for your order trajectory over the coming quarters, across all your verticals, just kind of based on what you're hearing from your customers and distribution partners.
Yeah, I'll just give overall kind of color on that, Damian. And a lot of it is, you know, we shared the specific order numbers in Q4, and I think that's a pretty good guide, other than the, I mentioned the ADG one was a little bit of an outlier because we had this big compare with a big order in the previous year over year quarter, Q1 2021.
So, in general, it's similar to what we expected. So, semiconductor, it is our expectation that we'll see a near-term headwind in order, so we're seeing that. It's off in Q4 for sure. And that that will persist for some time. We're still, by the way, very bullish in the long term.
opportunity within semiconductor and the opportunities for pursuing and the parts of the market that we're pursuing. We think are all very favorable, but we fully expect some near-term pressure on those orders. That kind of consistent with what we've seen. Also in that kind of category, we send portfolio of business units historically, correlated more to the macro.
Orders were down about 10% in Q4. And so again, that's an area where we're expecting to look at indexes like PMI. We would expect some kind of correlation to the next PMI with our portfolio business unit. And, and, of course, as I mentioned in the script, we're talking about things.
and we're certainly actionic things that will help that be more resilient over time. And then on the other side, transportation, we expect continued strong growth.
And that's on a steep growth trajectory continues to be on a steep growth trajectory that is correlated. Much more with the new model entrance and electric vehicles, the investment that OEMs and others in their supply chain are making and electrification and autonomy. We think. You know, those investments continue to be robust. Thank you.
seen GM's print and they're still bullish on the market and their electric vehicle programs and so forth. And so I expect that to continue to be a high growth, our expectations are high. And then ADG is continued to be a robust business for us. It's performed well and pretty steadily in different macro environment scenarios.
In 2020, it was sort of high single digits, even in a pretty tough macro in 2020. And so we think it's a fairly favorable environment and we expect that to continue to have a similar growth trajectory as it's had. So that's our perspective on the overall color bias by business sharing.
I appreciate all that color, Eric.
Regarding distribution, you had spoken previously about your new partner's building out. And I inventory as a tail in this year. Just curious that that's more or less playing out as you are had expected. Or perhaps given some of the broader.
stopping trends across markets are maybe any of these partners, you know, airing back or deferring their inventory build-up of N.I. products. I guess any number you could share around that, someone would be helpful. Thanks.
Yeah, yeah, so it's, they've built a small amount of stock in 2022, about 20 million, I believe. And then there is still their desire to build additional stock. That is still absolutely the desire of those partners. The reason we haven't is because of supply. We've been constrained in our ability to do so.
So there's still our expectation that we go through this year that supply will ease up as we go through the year and we will be able to provide additional stock into those partners and that stuff. That's another one of the tailwinds when we take up the year overall that Dan referred
Thank you. And did I mention it? Thank you. I'm showing no further questions at this time. I would turn the call back over to Eric Starklaw for any closing remarks.
Okay, really appreciate everyone's interest and your questions today. Thank you all and have a great afternoon.
Thank you. Ladies and gentlemen, this does include today's conference. Thank you all for participating. You may now disconnect. Have a great day. President Clinton address so you can follow more many progress.