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National Instruments Corp (NASDAQ:NATI)
Q2 2019 Earnings Call
Jul 30, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. And welcome to the National Instruments Q2, 2019 Earnings Call. [Operator Instructions]

I would now like to introduce your host for today's call Ms. Marissa Vidaurri, Head of Investor Relations. Ms.Vidaurri, you may begin.

Marissa Vidaurri -- Head of Investor Relations

Good afternoon. Thank you for joining our Q2, 2019 earnings call. Speakers today are Alex Davern, Chief Executive Officer; Eric Starkloff, President and Chief Operating Officer; and Karen Rapp, Chief Financial Officer.

We will start with an update on our business and then take your questions. During the course of this conference call, we shall make forward-looking statements, including statements regarding future growth and profitability, our focus, plans, vision and strategic direction, our customers continuing to innovate, our cash deployment and our guidance for revenue and EPS for Q3. We wish to caution you that such statements are just predictions and that actual events or results may differ materially, and could be negatively affected by numerous factors, including any weakness in global economies, fluctuations in revenue from our large customers, foreign exchange fluctuations, expense overruns, manufacturing inefficiencies, adverse effective price changes and effective tax rates.

We refer you to the documents the Company files regularly with the Security and Exchange Commission, including the Company's Annual Report on Form 10-K filed on February 21, 2019 and quarterly report on Form 10-Q filed on May 1, 2019. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements.

A reconciliation of our non-GAAP financial measure posted [phonetics] in this call to the most directly comparable GAAP financial measures and related disclosures are contained in our press release in on ni.com.

With that, I will now turn it over to Chief Executive Officer of National Instruments, Alex Davern.

Alex Davern -- Chief Executive Officer

Thank you. Marissa. Good afternoon and thank you for joining us today. Our key messages today are excellent execution despite external disruptions in the quarter. Revenue of $334 million, down 2% year-over-year and up 7% sequentially. Record non-GAAP net income for the second quarter and we returned approximately $80 million to shareholders through dividends and share repurchases.

We achieved the midpoint of our non-GAAP earnings per share guidance as a result of strong gross margins and the ability to scale our operating expenses. Revenue came in slightly below the midpoint of our guidance as the global PMI reached its lowest level since October of 2012. Additionally, the Huawei trade restrictions and Intel's decision to exit the 5G smartphone modem business had negative impacts across our global supply chains. And as we discussed at our Investor Conference, we paused all Huawei shipments when Huawei was placed on the entity list in May.

This week we have resumed shipment of the products, which we determined were in compliance with US export regulations. And despite the contracting PMI, we delivered a 11% year-over-year growth in non-GAAP net income for the first half. This reinforces my confidence in our long-term opportunity for growth and our ability to deliver structurally higher profitability.

Three years ago, we began the journey of renewed focus on growth and profitability. We aligned on our new core strategic vision to be the leader in software defined automated test and automated measurement systems. We reoriented our sales force to strengthen relationships within all levels of our key accounts and to broaden the reach of our inside sales force.

We shifted to add more system level value to our customers and we focus within the key industries of semiconductor, transportation and aerospace, defense and government, where we believe our platform is best suited to add value and drive growth for our business. We leveraged our centers of excellence and committed to a goal of delivering 18% non-GAAP operating margin through the economic cycle.

The strength of our operational performance gives me great confidence in the long-term future of NI, as more of the impact of our strategic realignment comes to fruition in the next two years. To talk through the details of our performance for the quarter, I'd like to turn it over to Eric Starkloff, President and Chief Operating Officer.

Eric Starkloff -- Chief Operating Officer

Thank you, Alex. And good afternoon. Our strategy for growth continues to provide alignment in our execution. We remain optimistic in our strategy to drive growth through focus and then how we can create a competitive advantage for our customers. I will now provide some context on our order growth in the quarter by industry and by region.

Despite disruptions in the global supply chain due to Huawei and Intel's 5G decision, our semiconductor business continued to deliver strong year-over-year order growth in Q2, which we believe is indicative of market share gains resulting from our strategy to build system level offerings targeted at this focus growth opportunity. Our customers use our semiconductor test offering across characterization, validation and production test with continued strong traction specifically in the validation and production test of sub-6 gigahertz 5G components.

In Q2, our Semiconductor Test System, STS saw record orders, as customers continue to see the value of our offering in semiconductor production test. I would like to take a moment to welcome Ritu Favre as the General Manager of our semiconductor business. Ritu brings with her more than 30 years of experience in the semiconductor industry. Most recently serving as CEO of NEXT Biometrics and previously as the General Manager for the RF business at Freescale.

I look forward to working with Ritu, and leveraging her deep experience to build on our positive momentum in this industry. Our aerospace, defense and government orders grew mid-single digits year-over-year in Q2, in a relatively positive spending environment. Our platform continues to add significant value to this industry, which benefits from our software defined modular approach as it helps these customers meet their needs for highly customized and long lifecycle systems. Our strong software adoption in this industry continues to be a competitive advantage.

In transportation, we saw a double-digit year-over-year order decline in Q2. While the portion of our business is focused on electrification, active safety and autonomy saw strong growth, our transportation business was adversely impacted by the general broad softening of the market from weakness in the overall production rate of automobiles and from a shift in spending from traditional technologies to the new areas I mentioned.

We continue to focus our development on fast growing technologies that most benefit from using our platform. For example, last month we announced the NI battery test system and are seeing a very positive response. This gives us the opportunity to scale to repeatable set of deployments, and increase our rate of success in battery validation opportunities. With respect to our broad portfolio of customers in all other industries, which represents approximately half of our business, orders were down high single-digits year-over-year in Q2.

Historically, this part of our business has been the most correlated to the PMI. Despite the near-term weakness, we still believe this broad-based set of customers provides stability to our business and provides a foundation for future growth. Across industries, we saw a continued growth in the customer adoption of our software platform in the first half. This adoption was driven by the continued new features released in LabVIEW as well as the adoption of the many new software products that we've released over the past two years.

From a regional perspective in Q2 and in US dollars, our EMEA region reported orders down 10% year-over-year. Our Americas region reported orders down 4% year-over-year, and our APAC region reported orders up 3% year-over-year, with continued strong growth in China despite headwinds from the Huawei trade restrictions.

Now I'd like to share some key takeaways from NI Week, the 25th anniversary of our annual user conference that took place in May. At this premier event in our industry, we hosted more than 3,000 engineers and technology leaders in person and nearly 7,000 online. At NI Week, attendees heard directly from industry leaders that spoke about the business benefits of utilizing the NI platform. For example, Valeo reported a 50% reduction in development time and 90% hardware and software reuse. Virgin Orbit shared how they are disrupting the commercial satellite industry, are using the NI platform to support their rapid innovation.

Qorvo shared their use of the NI vector signal transceiver to accelerate their 5G test. And Analog Devices showed improved tested reliability with the NI Semiconductor Test System and how they implemented a common platform from validation to production test. In fact, we were recently recognized by Analog Devices as their supplier of the year for the impact our platform has had on their operational efficiency. We also launched numerous new products in NI Week, including new versions of LabVIEW, LabVIEW NXG and system linked, system data management software and the millimeter wave vector signal transceiver to address the test challenges of 5G.

In summary, we believe innovation from our customers must continue through any economic cycle. And then our platform is a critical component to their success. We remain committed to innovation through our R&D investments, confident in our long-term strategy and focused on internal alignment to our industry growth targets.

Now, I'll turn it over to Karen Rapp, our Chief Financial Officer for the financial update.

Karen Rapp -- Chief Financial Officer & Treasurer

Thank you, Eric. Our revenue in Q2 was 98% of the midpoint of our guidance. Our earnings performance also stayed strong in Q2. With NI's increased scalability and culture of operational efficiency, we delivered $0.35 non-GAAP earnings per share at the midpoint of our guidance, and a record for a second quarter. We are proud of the operational efficiencies and variable pay alignment to performance that we have implemented to help structurally scale our profitability.

For Q2, revenue was $334 million, down 2% year-over-year, flat in constant dollars and up 7% sequentially. In Q2, the value of the Company's total orders were down 4% year-over-year, orders over $20,000 were down 2% year-over-year, and orders under $20,000 were down 6% year-over-year. Our orders were impacted by the broad economic weakness during the quarter as well as the strong dollar.

Non-GAAP gross margin in Q2 was 77.4%. We believe our strong gross margins remain a testament to the value of our brand and the benefits our platform and systems provide to our customers. Our Q2, non-GAAP operating margin was 17%, up 50 basis points from a year ago. The Company reported Q2 GAAP net income of $29 million or $0.22 per share.

Q2, non-GAAP net income was $46 million and an increase of approximately 70% in three years. In Q2, 2016, the PMI was similar to current levels and our non-GAAP net income at that time was 9% of revenue, compared to the 14% we delivered in Q2 this year. The result has been a 92% increase in our non-GAAP net income in the three years between the first half of 2016 and the first half of 2019. And the strongest non-GAAP net margin performance during a period of contracting PMI in the last 20 years.

Now an update on our capital allocation strategy. Our cash balance remained strong at $440 million at the end of Q2. Our trailing 12-months cash flow from operations was $264 million, up 11% year-over-year, and representing approximately 20% of revenue. During the second quarter, we paid $33 million in dividends and repurchased approximately 1.1 million shares of our outstanding common stock at an average price of $41. Total shareholder return was approximately $80 million in Q2.

The NI Board of Directors approved a dividend of $0.25 per share for shareholders of record on August 12, 2019. For the trailing 12-months ended Q2, 2019 our dividend payout ratio has been approximately 60% of non-GAAP net income. For the third quarter 2019, we remain cautious due to economic pressures and external disruptions mentioned earlier. We currently expect total revenue to be in the range of $325 million to $355 million. We expect GAAP fully diluted earnings per share will be in the range of $0.30 to $0.44 for Q3, with non-GAAP fully diluted earnings per share expected to be in the range of $0.36 to $0.50.

Included in GAAP earnings per share guidance is a gain of approximately $0.12 for a pending sale of real estate, net of a donor-advised fund donations that supports our Corporate Social Responsibility initiatives. For these forward-looking statements, please remember that our actual revenues and earnings could be negatively affected by numerous factors highlighted previously by Marissa.

In summary, we delivered record non-GAAP net income due to our increased scalability and strong culture of operational efficiency. We remain committed to delivering long-term shareholder value, and delivering on our goal of 18% non-GAAP operating margin through the cycle.

With that, I will now turn it over to Alex for some closing comments.

Alex Davern -- Chief Executive Officer

Thank you, Karen. The last three years have been a journey to reposition NI for long-term success. Excellent execution, enabled us to deliver strong profitability in the first half of 2019. With non-GAAP net income up 11% over the first half of 2018, and up 93% compared to the same period in 2016. This is the strongest non-GAAP net margin that NI has delivered during a period of contracting PMI in the last 20 years. I believe these are proof points of the structural improvement in our profitability that will deliver lasting benefit.

At NI Week, I spoke with many of our customers and heard first hand that they're utilizing the NI platform to solve their challenges and provide competitive advantage to their business. Our direct customer relationships are a key differentiator, and our innovation is critical to helping them bring new technologies to market. [Indecipherable] event inspired by the impact of NI's technology within the market now and the exciting opportunities we have for the future. At our Investor Conference during NI Week, we shared how our industry focus will drive the next stage of growth for NI. In semiconductor, our growth over the last three years, has exceeded our expectations.

Our historical position in this industry was based on our broad platform approach. And as we transition into more system level offerings we have seen our success to accelerate. The strong results serve as a proof point for our strategy and the model for our other business units. We see the opportunity to continue to gain market share and are looking forward to the impact of our new millimeter wave vector signal transceiver, which allows us to address the production test challenges of 5G.

In transportation, we've had a broad platform-based business for decades. And with the current reduction in investment in traditional automotive technologies and an increase in the trends of electrification, active safety and autonomy we are shifting our focus to deliver more system level value in these key new application areas. With focus on these new areas of investment, we believe we can accelerate growth over the next couple of years, and increase the proportion of our revenue coming from these fast growing applications.

In aerospace, defense and government, we have a broad footprint that we observed with our platform-based approach for many years. This is a large market with a lot of opportunity and it is one where I believe we are under penetrated. In the future, we will be working to deliver more system level value in key application areas to capture a larger portion of this market. Customers in this market value the ability to control their proprietary IP, which is a key advantage that our platform delivers. I believe we have a differentiated opportunity to deliver greater systems level value to the customers in this space.

Our portfolio business is key to the stability and the broad reach of NI, with tens of thousands of our customers leveraging our core platform. Our goal for this business is to continue servicing this broad base of customers with the best platform for software-defined automated test and automated measurement systems, while also delivering more system level value in key growth applications.

We've made significant progress over the last three years to reposition NI for long-term growth and profitability. I want to thank our employees for their hard work and operational excellence. I believe our progress positions NI to take advantage of our transition and deliver significant operating leverage when the market dynamics recover.

We will now open up for your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Richard Eastman with Baird.

Richard Eastman -- Baird. -- Analyst

Good afternoon.

Alex Davern -- Chief Executive Officer

Hey Rick.

Richard Eastman -- Baird. -- Analyst

Quick question. Eric, could you just repeat the order numbers by geographies that you referenced that those were nominal dollars, US dollars? But could you just repeat those, I couldn't [indecipherable]

Eric Starkloff -- Chief Operating Officer

Sure, sure. They were, they were Q2 in US dollars, and the original numbers were, our EMEIA region was down 10% year-over-year. Americas was down 4% year-over-year and APAC was up 3% and then I commented that China was particularly strong within APAC.

Richard Eastman -- Baird. -- Analyst

I see, OK. And that's orders versus the dollar reference that you gave. Okay. And then...

Eric Starkloff -- Chief Operating Officer

Yeah that's orders in USD.

Richard Eastman -- Baird. -- Analyst

Yes. And then, Alex, could you, maybe just speak for a minute or two. You referenced Huawei kind of stopped shipping in May and now have resumed shipping here in the third quarter. Can you give any sense of kind of order of magnitude that I would consider that backlog that's now shipping that slipped from second to third. And maybe the same general question around Intel exiting the modem business. Is there -- I guess you're acknowledging that that was a big enough customer, if not a -- obviously a 10% customer, but it was a big enough customer to move the needle?

Alex Davern -- Chief Executive Officer

Yeah, maybe refresh Rick, what we said publicly. We stated at the Investor Conference that Huawei in FY '18 had been about 1% of our revenue directly and obviously their supply chain would also be a customer of ours as well when you look at the OSATs and the rest of their overall supply chain. So when I look at these two major global technology powerhouses, the uncertainty around their business certainly had an impact on us in Q2, that was a headwind. Certainly, when it comes to shipping, we have been through a deep amount of due diligence, and we will continue to comply with all export regulations but believe that the products we're now shipping are completely in compliance with the US export regulations. It's quite difficult to be honest with you to quantify the extended impact beyond the direct revenue and look at the supply chain of both companies but that uncertainty in Q2 was certainly not helpful around the whole supply chain.

Richard Eastman -- Baird. -- Analyst

And then with Intel selling the modem business, presumably to Apple, obviously Intel, I think it was kind of losing money in that business because of their aggressive spend on development, and that's your reference. I mean Intel was a sizable netty customer on the scale up and development on the modem side?

Alex Davern -- Chief Executive Officer

Yes, certainly. I don't want to talk too much about specific set of customers but Intel is a major global powerhouse in technology as I said and Intel has been a good customer of NI for many years. I think in general the resolution of the uncertainty about the future of that unit is good for the supply chain. And I think that's good for NI and to kind of share my sentiments on the quarter and on the half, these are certainly headwinds along as you, you're very well aware of the declining global PMI we saw in Q2. So when I look at what we faced after we gave guidance to deliver record non-GAAP net income in the second quarter, 11% non-GAAP profit growth for the first half, I think it's an exceptionally good performance, we are really proud of the team.

You can see from the leverage we've created that we're very committed to our profitability goal and as you heard from Karen, the guidance we've given for Q3 is pretty steady with our normal seasonal pattern. So that's a good sign that we're seeing or have an expectation that matches kind of our longer-term seasonal pattern. And after three quarters of kind of slowdown and difficulty in the market, we're looking forward to the easier comparison as they will start in Q4.

Richard Eastman -- Baird. -- Analyst

Okay. Okay, thank you.

Alex Davern -- Chief Executive Officer

Thanks very much, Rick.

Eric Starkloff -- Chief Operating Officer

Thanks, Rick.

Operator

Thank you. Our next question comes from John Marchetti with Stifel.

John Marchetti -- Stifel -- Analyst

Thanks very much. I wanted to just spend a moment if I could on the auto business for a second. I'm curious, obviously you're talking about the shift to some of these new growth technologies and where you are seeing some growth but obviously having some lags. What were some of the more traditional yield exposure there? Is there a timeframe here that we can look at maybe over the next several quarters where maybe we start to see that flatten out? Or you cross over that sort of point where that that auto business can come back to just sort of a growth rate business for you?

Eric Starkloff -- Chief Operating Officer

Yeah, I'll comment on that. John, this is Eric. So look first of all, the fundamentals of our strategy and why we think this is an attractive space in the long-term remain the fact that there is a lot of frankly technology disruption and change is an opportunity for NI in the long term. Specifically, in your question, I mentioned that the areas that we're focused on that represent these new disruptive areas of autonomy and active safety systems and electrification, those are growing strongly. That is on the order of a quarter of our business and it's seeing very strong growth. The rest of the business, we've been a supplier to that industry since the beginning of the company. So we have a long and broad set of business -- long term and broad set of business and that has been affected significantly from the weakness that's happening both cyclically in that market as well as some of the disruption.

Our goal of course is to continue to focus on the area that's growing as that grows over time, it will become a higher percentage and that will be more favorable to our overall growth rate over time. We also would expect that over time, some of the cyclicality of the industry will also turnaround. I think both factors are having an impact in this timeframe.

John Marchetti -- Stifel -- Analyst

Got it. And then maybe just a quick question on the orders as well. We saw the large orders, the orders over 20k kind of turned negative here in this most recent quarter. When we think about that going forward, is that indicative of this overall macro uncertainty as well? Should we think about that is more leverage to some of the specifics that you called out around Huawei or Intel? Quite frankly with that change in orders I was a little bit surprised that the guidance is it strong as it is. So clearly, some things are obviously improving here as we look at the second half of the year just trying to get some color around how to think about some of the shift in the large orders and how that impacts the second half of the calendar year?

Karen Rapp -- Chief Financial Officer & Treasurer

Yeah, John, this is Karen. Thanks for clarifying on that. We believe the orders over $20,000 are still a growth engine for us moving forward and in the long term. If you go back and look at where we were in Q2 last year, had a pretty tough compare year-over-year. We saw order growth but at the same time period last year, 16% for those orders over $20,000. So looking at that from a year-on-year perspective, it makes a little tough in Q2 of '19 but continuing to look for that in the future.

Alex Davern -- Chief Executive Officer

Yeah, John, it's Alex. [Speech Overlap] just want to certainly echo Karen's comment that we over the last decade larger orders has been the growth engine of the company. We absolutely expect that to continue as we go forward and then in my 22 years of doing conference calls, typically we've seen these slowdowns last anywhere from three to five quarters. And so we're three quarters into, into the slowdown, and we'll look forward to a recovery down the road, where I think we will be tremendously well positioned to deliver leverage in the future.

John Marchetti -- Stifel -- Analyst

Thank you.

Operator

Thank you. Speakers, I am showing no further questions in the queue at this time. I would like to turn the call back over to Mr. Alex Davern for any closing remarks.

Alex Davern -- Chief Executive Officer

Thank you very much for joining us today. We look forward to seeing you at our next conference call.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Marissa Vidaurri -- Head of Investor Relations

Alex Davern -- Chief Executive Officer

Eric Starkloff -- Chief Operating Officer

Karen Rapp -- Chief Financial Officer & Treasurer

Richard Eastman -- Baird. -- Analyst

John Marchetti -- Stifel -- Analyst

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