Nov 2, 2014
Executives
David Hugley - General Counsel Dr. James Truchard - President and CEO Alex Davern - EVP, CFO and COO Eric Starkloff - EVP and Director, Sales and Marketing
Analysts
Patrick Newton - Stifel
Operator
Good day, everyone, and welcome to the National Instruments Third Quarter 2014 Earnings Conference Call. Today's call is being recorded.
You may refer to your press packet for a replay dial-in number and pass code. With us today are David Hugley, General Counsel and Secretary; Alex Davern, Chief Operating Officer; Dr.
James Truchard, President, CEO and Co-Founder; and Eric Starkloff, Executive Vice President of Global Sales and Marketing. For opening remarks, I'd like to turn the call over to Mr.
David Hugely, General Counsel and Secretary. Please go ahead, sir.
David Hugley
Good afternoon. During the course of this conference call, we shall make forward-looking statements including our guidance for fourth quarter revenue and earnings per share.
We wish to caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to the documents the Company files regularly with the Securities and Exchange Commission, including the Company's most recent annual report on Form 10-K filed on February 20, 2014 and our Form10-Q filed about August 3, 2014.
These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements. With that, I will now turn it over to the Chief Executive Officer of National Instruments Corporation, Dr.
James Truchard.
Dr. James Truchard
Thank you, David. Good afternoon and thank you for joining us.
Our key points from Q3 are record quarterly revenue -- record Q3 revenue for Compact RIO, PXI, and data acquisition products and non-GAAP operating income up 38% year-over-year. I am pleased to see a new quarterly revenue record in the third quarter.
Our leadership position and our discipline at expense management allow us to guide to continued year-over-year revenue growth and an improvement in our operating performance in Q4. I am optimistic about our long-term position in the industry.
The differentiation we deliver to our customers through graphical system design, help scientists engineer simplified problems and reduce costs while scaling and adapting to rapidly changing demands. In our call today, Alex Davern, our Chief Operating Officer will review our financial results.
Eric Starkloff, our Executive Vice President of Global Sales and Marketing will discuss our business and I will close with a few comments before we open up for your questions. Alex?
Alex Davern
Good afternoon and thank you for joining us today. Today we reported quarterly revenue of $314 million for Q3, an 8% year-over-year increase and a new all-time revenue record.
For Q3, net income was $40 million with fully-diluted earnings per share of $0.31 and non-GAAP net income for Q3 was $47 million, with non-GAAP fully-diluted earnings per share of $0.37. As discussed in our earnings call, in Q3 we recognized a tax benefit of $14 million or $0.11 per share related to a settlement with the Internal Revenue Service of the examination of our U.S.
income tax returns for 2010 and 2011. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.
Non-GAAP gross margin in Q3 was 75.4%, up 40 basis points from Q3 of last year. Total non-GAAP operating expenses were $192 million, up 4% year-over-year.
For Q3, our non-GAAP operating margin was 14.3%, up 300 basis points from Q3 of last year. Non-GAAP operating income of $45 million was up 38% year-over-year.
Year-to-date, we met our goal of driving significant operating leverage, delivering a 270 basis point increase in operating margin over the same period last year. Now taking a look at order trends, for Q3, the value of our total orders was up 6% year-over-year.
We saw 3% year-over-year growth of orders with a value below $20,000, while orders with a value between $20,000 and $100,000 grew 9% year-over-year, and orders with a value over $100,000 were up 10% year-over-year. Included in our total orders is $12 million in orders received from our largest customer in Q3 this year, compared to $4 million in Q3 last year.
We have continued to receive orders from this customer in Q4 and for the full year through today, we have received a total of $56 million in orders from this customer, compared to $35 million at this time last year. Revenue from our largest customer was $17 million in Q3, compared to $4 million in Q3 of last year.
As of September 30, NI had $448 million in cash and short-term investments, up $46 million from Q2. In addition, we paid $19 million in dividends in Q3.
Now I'd like to make some forward-looking statements. While the global PMI remained relatively stable in Q3, the recent strengthening of the U.S.
dollar makes us cautious about business conditions as we look to 2015. However, as we continue to deliver on the leverage plan we outlined at our investor conference, we expect an improved year-over-year operating performance in Q4.
As a result, we are guiding for record revenues in Q4, with revenues expected to be in the range of $312 million to $342 million. At the midpoint, this represents 9% year-over-year growth.
Gross margins are expected to be up sequentially in Q4, and as a result we currently expect GAAP fully diluted earnings per share will be in the range of $0.23 to $0.35 for Q4, with non-GAAP fully diluted earnings per share expected to be in the range of $0.29 to $0.40 per share. And these are forward-looking statements.
I must caution you that actual revenues, gross margins and earnings could be negatively affected by numerous factors such as any weakness in the global economy, fluctuations in revenue from our largest customer, expense overruns, manufacturing inefficiencies, foreign exchange fluctuations and effective tax rates. In summary, we are pleased with the improved revenue performance of the Company and with the progress we have made on improving our operating margin.
Looking forward, we are working hard to take advantage of the investments we've already made and remain committed to our operating leverage targets. In closing, I'd like to mention that I'll be at the Stifel Midwest Conference in Chicago on November 13 and the NASDAQ Conference in London on December 3.
I look forward to seeing you there. With that, I'll turn it over to Eric Starkloff, Executive Vice President of Global Sales and Marketing.
Eric Starkloff
Thank you, Alex. Good afternoon.
I was pleased with our ability to deliver record revenue while maintaining spending discipline. We continue to maintain a strong opportunity pipeline and strengthen our customer relationships by leveraging the investments we've made over the past few years to grow the depth and reach of our global sales force.
Our growth in orders were seen across many industries. On a regional basis we saw year-over-year revenue up 2% in the Americas, up 8% in Europe and up 34% in East Asia.
Our emerging markets region struggled in Q3 with year-over-year revenue down 14%, affected primarily by the geopolitical disruption to our business in Russia. NIWeek is a unique opportunity for us in August each year that bring together key customers and many of the brightest minds in science and engineering to discuss the industry's trends, share best practices and learn about NI technology.
The inaugural event was held 20 years ago primarily as a user conference, an opportunity for customers to see and train on new products; and it's now grown to be one of the most significant events in our industry. This year we hosted nearly 3,200 attendees in Austin, in addition to over 11,000 attendees who watched the live stream of the keynotes online.
The content and presentations at NIWeek serve as a launching point each year for a series of global events called NIDays. Over the coming months, we will host NIDays events in 42 cities around the world and we expect around 25,000 attendees to join us.
NIWeek also included not only the engineers using our products but also industry thought leaders and executives from many of our key customers. The event has grown into a global forum for leaders in many industries to present their work using NI tools and for industry leaders and executives to discuss their unique challenges and share best practices.
As an example, I had an opportunity to moderate a panel discussion at NIWeek on the Industrial Internet of Things. I was joined by three business and engineering leaders who are right at the center of defining and shaping this trend.
The combination of ubiquitous sensing, smart software based devices, networking and the cloud have led to a great expansion of innovation, not only in the consumer space but in industrial applications as well. Many leading industrial analysts also attended our NIWeek this year.
Les Santiago and Nina Turner, analysts from IDC stated; "We view the coming years to be a transformative time for NI as it diversifies from a test and measurement company to more of an enterprise class systems company driven by opportunities in software design, fiber physical or intelligent and big analog data systems." NIWeek also serves as a launching point for many new products.
As those of you who attended our investor conference saw, we expanded our platform with a number of significant releases, including new high performance RF products, a new enterprise software tool for managing distributed systems and big analog data for condition monitoring, new controllers for our CompactRIO and CompactDAQ product lines and a new systems platform for semiconductor ATE built on PXI and our software. We're excited about the new capability these products bring to our customers and the new opportunities they open up for our business.
The investments we have made over the past few years to build our R&D capability are paying off with revenue from new products released in the past two years at an all-time high. Now turning to our products results.
Our growth in Q3 was driven by strong order growth in CompactRIO, PXI and data acquisition products. In software, growth was bolstered by continued strong sales of new enterprise license agreements.
This has continued to be a strong driver of adoption of our software tools in major accounts and we are seeing the impact as well in further adoption of the rest of our platform in customers that have previously purchased an enterprise agreement. In addition to enterprise level adoption, broad based LabVIEW usage continued to expand with renewal rates near an all-time high and year-to-date new LabVIEW seats up 7% year-over-year.
New LabVIEW seat growth is key to our business, because it provides not only the software license revenue, but also serves as the foundation for long term customer loyalty and as an onramp to sell measurement and control hardware to new customers. Our LabVIEW application software is also a critical element of our modular hardware platforms.
Our data acquisition products saw all time record revenue in Q3, helped by an improvement in the PC industry. Growth in data acquisition was led by our CompactDAQ products across a broad range of application.
For example, CompactDAQ deployments in Q3 included a major automotive OEM, using CompactDAQ systems for brake testing, a research group using CompactDAQ to make geophysical measurements of glaciers and an in-flight monitoring project as part of the development of a new UAV. We continue to build our leadership in PXI with record third quarter revenue for PXI products.
As more engineers transition away from rack-and-stack instruments to a software-defined modular approach using PXI, we believe customers and vendors will continue to recognize the value this platform brings to test applications. We believe the strength of our product portfolio and leadership from 17 years of investment in PXI will continue to enable us to benefit from this shift.
Instead of being simply a module provider, our combination of hardware, application software and our focused sales and support channel provides significant value to our customers, and strong differentiation from our competitors. One area of growth for our PXI business has been in semiconductor test.
At NIWeek we announced our Semiconductor Test System, which is built around standard NIPXI chassis, controllers, modules and our industry leading LabVIEW and Test Stand software to serve high volume production tests of semiconductor chips. An early success of the Semiconductor Test Systems was at Integrated Device Technology or IDT, a developer of low power, high performance mixed signal semiconductors, targeting communications infrastructure.
IDT chose the NI Semiconductor Test System because it provided them with the flexibility of PXI to reconfigure and expand their test platform as performance requirements increased or test needs changed. Our RF business serves a very broad set of applications.
In addition to serving the needs of automated test of wireless devices, our software defined platform is also used to prototype next generation wireless systems. One recent example is at Baruno where they are using LabVIEW and our PXI Flex RIO product to develop cutting edge weather radar systems designed to more accurately predict weather and monitor hurricanes and rain-fronts.
We also continue to be at the forefront of 5G wireless research and prototyping with researchers around the world designing sophisticated test beds for 5G using LabVIEW and PXI. Our CompactRIO product had all time record revenue in Q3.
The success was seen across a range of applications and led by strong adoption of our new CompactRIO 9068 controller we released last year. The combination of a dual core ARM processor, high performance FPGA, Linux RT operating system and rugged mechanical design have made this our fastest ramping and most successful CompactRIO controller ever released.
Duke Energy, the largest provider of power in the United States, has contributed to the initial success of the CompactRIO 9068 for condition monitoring of assets in their power generation plants. In summary, I was very pleased with record revenue in Q3 and our ability to leverage the investments we’ve made over the past several years in both R&D and sales.
I'm excited about the new products released at NIWeek this year and the opportunities they create for our business. The differentiation we offer our customers in power sensors simplify problems and adapt to rapidly changing demands and has driven NI's long term sustainable growth.
With that I will turn it back over to Dr. T for some closing statements.
Dr. James Truchard
Thank you, Eric. I was pleased with the success of NIWeek as it continues to serve as an arm to connect thought leaders from across the industry to engage in high value technology and business discussions.
Each year I enjoy seeing how our tools are driving innovation and discovery by enabling our customers to solve some of the world’s toughest engineering challenges. For many years we’ve been serving applications now considered part of a growing trend of the Industrial Internet of Things.
The elements driving and enabling this trend include sensing, data analysis, data fusion, intelligent control and connecting disparate systems and datasets. These have been areas of core competence for NI for decades and we believe we will continue to be at the forefront of this trend.
As Eric mentioned, we are also at the leading edge of research and prototyping of 5G wireless systems. The unique ability we provide customers to implement their software IT and algorithms on our reconfigurable hardware allows them to develop physical test systems well in advance of commercial availability of standard specific test instruments.
In December, I will be delivering the Keynote address at the IEEE Global Conference in Austin, Texas. Leading wireless researchers will be in attendance including NIWeek Day 3, thought leader Dr.
Gerhard Fettweis from TU Dresden in Germany. As these technologies and standards continue to evolve, we believe those products will be an integral part of the industry's commercialization efforts.
In closing, I want to thank our employees for their concerted efforts to simplify processes, drive productivity, and focus on innovation. We have a maintained our high gross margins as large orders continue to drive year over year growth and our year to date average order size has increased 55% over the last five years.
During this time, we have continued to expand our product portfolio to address more demanding application requirements and have penetrated new application areas for the business. I believe our ability to continue to deliver growth, while preserving our strong gross margin is a testament to the differentiation we provide our customers.
The strong reputation that we built as a broad based test provider has laid the foundation for us to help solve some of the world’s most complex challenges in areas such as energy research, 5G wireless and the Industrial Internet of Things. I am confident the expansion of our platform, new products and operational improvements delivered by our employees will help drive operating leverage while continuing to drive innovation for the long-term growth of the Company.
Thank you. We will now take your questions.
Operator
Certainly. [Operator Instructions].
Our first question comes from the line of Patrick Newton of Stifel. Your line is now open.
Patrick Newton - Stifel
Yes. I guess just my normal housekeeping question, is how many employees exiting the quarter and your average order size?
Eric Starkloff
7,106 employees exiting the quarter, Patrick. And your second question was average order size?
Patrick Newton - Stifel
Yes, sir.
Eric Starkloff
5,180 approximately, up about 5% year-over-year.
Patrick Newton - Stifel
Okay. And then I guess just last year you saw some unexpected pressure in your business in the December quarter given softness in emerging markets.
And I think it was especially in orders over $100,000. When we look at the guidance that you've just provided what expectation have you baked in pertaining to emerging markets for the December quarter?
Eric Starkloff
Sure. When we looked at Q4 of last year, we had a couple of challenges where the emerging markets was obviously one.
And the other challenge was essentially in the Americas around the government shutdown that kicked off in the October timeframe last year and that posed some challenges for us that kind of bled over into Q1. So it created a challenge and I guess in some ways an easy compare for us as we go into the next couple of quarters.
In the emerging markets, absent the geo-political issues around Russia, I would have said we'd be expecting good growth year-over-year in Q4 because it was a challenge last year. We are baking in an assumption for Q4 that Russia and our business in Russia continues to be significantly impacted by the current regime of sanctions, but what we anticipate that what we saw in Q3 we'll continue to see into Q4 in setting guidance.
Patrick Newton - Stifel
Okay. And then I guess in your prepared remarks, Eric, you did talk a little bit about early success with the Semiconductor Test System product lines specifically with IDT.
Can you comment on how the product has been received in the market in general outside of just IDT? And can you help us understand how we should think about revenue growth from this platform making its way into the model over the next 12 to 18 months?
Eric Starkloff
Sure. Sure.
So obviously, it is very early with the Semiconductor Test System. I think broadly we serve the semiconductor market quite a bit more broadly then just that, and we continue to see opportunities across R&D through verification and into production ATE.
With regards to Semiconductor Test System, that's just recently launched. The interest level is quite high.
We see a good opportunity pipeline, but it's certainly early days in terms of impact on revenue.
Alex Davern
In terms of your question on business model, Patrick, when we look to where we stand and certainly the guidance we're giving for Q4 -- it implies record revenue very strong gross margin and implies record operating income. When we look out to the longer term, we don't anticipate any noticeable impact to our gross margin as the anchor of our business model from the Semiconductor Test System, mainly because what will ship around that is going to be a significant amount of high value content that we already have in our portfolio.
Patrick Newton - Stifel
And then just one more if I may, Alex. On the operating leverage scenarios in the past that you've given out to us you said that 10% growth -- you should see OpEx grow about 5% to 6% and the mid-point of your guidance was 9% growth.
So is it fair to say that OpEx should actually be down sequentially on an absolute basis?
Alex Davern
It's a good question Patrick. Our leverage guidance and goals are at the annual level.
So first off, I wouldn't take them completely literally at one quarter versus another quarter. We're right on track for the first nine months and I would anticipate OpEx being relatively flat sequentially.
And I believe we'll hit that leverage target for the year or very, very close to it. As we laid out at the investor conference at NIWeek in August, our very similar plan of action for 2015; and this year we'll successfully, certainly through the first nine months have come close to bridging about half of the delta between where we were last year in operating income and our goal and we'll see how we fare next year, but we intend to stick with the same leverage targets as you know going through 2015.
Operator
Thank you. [Operator Instructions] And I'm showing we have a follow-up question from the line of Patrick Newton of Stifel.
Your line is now open.
Patrick Newton - Stifel
Might as well get them in while I can. I guess, Alex, on the largest customer I wanted to make sure I heard you correctly that the 12 -- that you had $12 million in orders in the current quarter.
And then what -- what level of revenue have you baked into the 4Q guide?
Alex Davern
So relatively, let me just go over the numbers one more time, Patrick. So $12 million of orders in the quarter, we had $17 million of revenue in the quarter.
Obviously we had come in as you know with some backlog for a particular customer as we exited Q2. So looking at Q4, we're probably looking at a revenue number in around the $5 million mark for that customer for Q4.
Patrick Newton - Stifel
Okay. And then also Alex you've commented on a strong dollar negatively impacting your outlook in the quarter.
Is there any way you could at all try to quantify that for us and also quantify any FX impact on the September quarter results?
Alex Davern
Yes. Sure.
The FX impact on September quarter results is relatively modest. A lot of the move that's happened in the dollar, was laid on in the quarter and really here in October.
So as we look forward, we've built-in our assumption in terms of the impact for Q4 into our guidance. As you know, and I think you can see when you look at our gross margin line is we're setting this up as it has gone through many cycles of the dollar.
Our normal strategy in that situation is to view our market for what it is, which is a global market and we'll look at pricing as a vehicle to normalize foreign exchange rate moves as we move into 2015.
Operator
Thank you. And at this time I'm showing there are no further questions in the queue.
I'd like to turn the callback over to management for any closing remarks.
Dr. James Truchard
Thank you for joining us today and we will talk to you next time.
Operator
Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program.
You may now disconnect. Everyone have a great day.