Jan 29, 2015
Executives
James Truchard - President, CEO and Co-founder Alex Davern - EVP, CFO and COO Eric Starkloff - EVP of Global Sales and Marketing David Hugley - VP, General Counsel and Secretary
Analysts
Richard Eastman - Robert W. Baird
Operator
Good day, everyone, and welcome to the National Instruments Fourth Quarter 2014 Earnings Conference Call. Today’s call is being recorded.
You may refer to your press packet for the replay dial-in number and pass code. With us today are David Hugley, Vice President, 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 Hugley, Vice President, 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 statements regarding growth in our opportunity pipeline, product success and 5G commercialization and our guidance for first quarter 2015 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 Form 10-Q filed on October 31, 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.
James Truchard
Thank you, David. Good afternoon and thank you for joining us.
Our key points for Q4 are, record revenue and profit, strong revenue growth in LabVIEW, PXI, RF and CompactRIO products and record net cash provided by operating activities. For the full year, we have delivered record revenue and a 57% increase in net income, while our strong growth in PXI expanded our footprint in automated tests.
I am pleased to report record annual revenue in 2014, the 36th year of growth in our 38 year history. As we moved through 2014, we have leveraged improved market conditions and our increased new product revenue to accelerate our revenue growth, ending the year with year over year revenue growth of 11% in Q4.
I am also pleased with the significant operating leverage that we delivered in 2014, which together with our very strong balance sheet, allows us to increase the return of cash to our shareholders. In our call today, Alex Davern, our Chief Operating Officer will review our 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. 2014 was a year of great progress for NI.
Today we reported record quarterly revenue of $333 million, up 11% over Q4 of last year in U.S dollar currency and up 13% year-over-year in constant currency terms. For Q4, net income was $43 million, up 37% year-over-year with fully diluted earnings per share of $0.34.
Non-GAAP net income for Q4 was $51 million, up 33% year-over-year, with non-GAAP fully diluted earnings per share of $0.40 cents. In Q4 we were impacted by two items, which were not included in our guidance.
The first was a tax benefit of $3 million related to the retroactive reinstatement of the R&D tax credit in the United States. The second was a $1 million loss on foreign exchange due to the strengthening of the dollar during Q4.
For the full year, we reported a new annual revenue record of $1.24 billion, up $71 million or 6% year-over-year in U.S dollars and up 7% in year-over-year in constant currency terms. We also reported record annual profits in 2014, with net income of $126 million, up 57% year-over-year and fully diluted earnings per share of $0.99.
Non-GAAP net income for the year was also a new record at $156 million, up 41% year-over-year, with non-GAAP fully diluted earnings per share of $1.22. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.
Non-GAAP gross margin for Q4 was 75.9%, up 10 basis points year-over-year and for the full year was 75.5%, up 50 basis points year-over-year. We executed very successfully on our leverage plan in 2014, with total non-GAAP operating expenses up 5% year-over-year in Q4 and up 2% for the full year.
As a result, we had record non-GAAP operating income for the quarter and the year. Non-GAAP operating income was $66 million for Q4, up 30% year-over-year and was $187 million for the full year, up 31% year-over-year.
Our non-GAAP operating margin was 20% in Q4 and was 15% for the full year, up from 12% in 2013. Now taking a look at orders size.
In Q4 we saw a 13% year-over-year growth of total orders, with 5% year-over-year growth from orders under $20,000, 13% year-over-year growth of orders between $20,000 and $100,000, and 36% year-over-year growth from orders over $100,000. The growth of our systems revenues indicates the success we are having competing directly with our traditional test competitors.
For the full year, total orders were up 8% and deferred revenue increased by $15 million. Revenue from our largest customer was $7 million for Q4, up from $4 million in Q4 last year.
As for the full year, revenue from our largest customer was $52 million, up 47% from 2013. Now turning to capital management.
For the year, the Company had a record $195 million in net cash from operating activities and paid $76 million in dividends. Cash and cash equivalents ended the year at a new record of $471 million.
Given the significant improvement in the company’s operating performance and its financial position during 2014, the Board of Directors has determined that it is appropriate to increase the rate of our return of cash to shareholders, and therefore has increased the company’s quarterly dividend payments from $0.15 cents per share, to $0.19 cents per share. 2015 will mark the 12th consecutive year of dividends for National Instruments.
Now I'd like to make some forward-looking statements. While we were pleased to see the global PMI continue to indicate future growth in the industrial economy, the potential impact on our customers with the recent volatility in the global financial markets, especially the currency markets, makes us cautious in planning for the first half of 2015.
We are focused on execution and we remain committed to the operating leverage targets we set out in our investor conference in August. As we look to Q1, we expect to see a significant headwind to our U.S dollar revenue growth due to the impact of the strengthening of the U.S dollar, especially in Europe and Japan.
Currently we are projecting that the strengthening of the US dollar will reduce our year-over-year U.S dollar revenue growth by approximately 500 basis points in Q1, meaning that we expect to see our constant currency growth be five percentage points higher than our US dollar revenue growth. This estimate is based on current exchange rates and can change as exchange rates fluctuate over the rest of the quarter.
Given the currency volatility, we have been cautious in our outlook for Q1. As a result, we currently expect revenue for Q1 to be in the range of $280 million to $310 million.
At the midpoint, this represents 4% year-over-year revenue growth in U.S dollars and approximately 9% year-over-year growth in constant currency. We currently expect that GAAP fully diluted earnings per share will be in the range of $0.11 cents to $0.23 cents for Q1, with non-GAAP fully diluted earnings per share expected to be in the range of $0.17 cents to $0.29 cents.
Included in our guidance is an expected loss from foreign exchange of $3 million or $0.02 cents per share for Q1 as a result of revaluing our receivables at the new exchange rates. If exchange rates stabilize at the current levels, then we would not expect this impact to repeat in Q2.
As these are forward-looking statements, I must caution you that actual revenues and earnings could be negatively affected by numerous factors such as any further weakness in the global economy, expense overruns, manufacturing inefficiencies, effective tax rates, foreign exchange fluctuations and the effective price increases. In summary, 2014 was a year of great progress for NI.
We were able to deliver record revenue, record profit and record cash flow from operating activities, while we continued to gain market share. Our goals for 2015 are to continue leveraging the investments we have already made to drive sustained revenue growth and to drive towards our long-term, non-GAAP operating margin target of 18%.
With that, I'll turn it over to Eric Starkloff, Executive Vice President of Global Sales and Marketing.
Eric Starkloff
Thank you, Alex and good afternoon. I was very pleased this quarter with our ability to achieve strong bookings growth, leading to record revenue and a strong finish to 2014.
Growth in 2014 was driven by strong new product revenue and we believe we saw the benefits from the investments we made to accelerate R&D over the past several years. We also continued to maintain a strong opportunity pipeline and strengthen our customer relationships, as we leveraged the investments we made in our field sales channel.
We saw broad based growth in Q4 geographically, by industry and across our major product lines. On a regional basis, we saw year-over-year revenue for the quarter up 5% in the Americas, up 8% in Europe and up 24% in East Asia.
Emerging markets returned to growth and was up 11% year-over-year, a very good performance, especially in local currency despite facing challenges in the geopolitical landscape and recent currency fluctuations. We did see some weakness in two industry sectors, aerospace and defense, due to primarily to compare again strong growth in Q4 last year; and energy which has been adversely affected by the recent decline in oil prices.
While lower oil prices create a near term headwind for our customers in oil exploration and production, these applications account for only a few percentage points of our total revenue, while the vast majority our customers will ultimately see benefit from lower energy price. Now turning to our product results.
Our growth in Q4 was driven by record revenue from new products and record quarterly revenue in software, academic products, data acquisition and compact RIO, as well as very strong growth in our PXI and RF products. Record software revenue was bolstered by strong sales of new enterprise license agreements, which continue to be a string rival of adoption of our software tools and major accounts.
In addition to enterprise level adoption, broad based LabVIEW usage continued to expand, with very strong growth in LabVIEW adoption and renewal rates near an all-time high. Growth in new LabVIEW seats 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 provides the opportunity to sell measurement and control hardware to new customers.
We continue to expand LabVIEW capability to better serve embedded systems design and rapid prototyping applications. We recently announced the LabVIEW communication systems design suite, which addresses a new group of users, enabling them to rapidly prototype communication systems.
This new LabVIEW tool dramatically simplifies the speed for prototyping process, empowering designers to focus on wireless innovation instead of complex embedded programming. The initial customer response to this new software tool has been very strong.
Our academic products achieved record revenue in the quarter. Over the last decade, we’ve had an intense focus on working with academic institutions to provide students with tools that enable hands-on learning.
Our myRIO product continued to see tremendous growth and adoption in university classrooms and labs. myRIO combines a real time processor in FPGA into a small student friendly package for teaching controls, robotics, mechatronics and embedded concepts with LabVIEW.
In just its first year, myRIO has already been sold to over 1,000 universities and we estimate that over 30,000 students worldwide are using it to build systems at their universities. Our data acquisition product had record quarterly revenue in Q4, helped by improvement in the PC industry.
Growth in data acquisition was led by our CompactDAQ products across a broad range of applications. Our PC based data acquisition devices also achieved all time record quarterly revenue.
We continued to build on our leadership in PXI. 2014 proved to be a particularly strong year for our PXI products, with record annual revenue and unit volume for PXI systems.
Cumulatively, we have now shipped more than 150,000 PXI systems. We believe the strength we are seeing in our PXI side products is driven by having by far the largest PXI portfolio in the industry, a unique and differentiated software position for creating PXI systems, a focused sales and support channels that provide significant value to our customers, and a very strong network of integration partners trained on NI software and hardware.
PXI’s low cost and high performance, lowers the cost of test versus slower and more expensive traditional instruments. One example of this is at Continental, one of the world’s leading automotive suppliers who is using our software and PXI product to accelerate testing a variety of automotive electronic component.
Our tools make it possible for Continental to drive significant improvement and efficiency and decrease the total cost of test to meet intensifying demand in their industry. Our RF products saw more than 50% year-over-year revenue growth in Q4.
While our RF products have been part of our largest application wins, they also serve a very broad set of customers and applications. In addition, the production test of wireless devices, our software defined platform is also used to prototype and validate a very broad set of wireless components and systems.
And this product line’s capabilities have now been enhanced and further differentiated with our new LabVIEW communication system design software. Our CompactRIO product also saw record revenue in Q4.
The success was seen across a range of applications. This portion of our business is seeing lift and significant long term growth potential from the emerging trend of the industrial internet of things, where embedded intelligence, networking and IO are changing the way our customers do their jobs.
One example is at the London underground where they are embedding CompactRIO systems in their subway to predict and prevent failures. This intelligent monitoring system is forecasted to reduce lost customer hours in the London underground by 39,000 hours each year.
We believe that the investments we made over the last several years to accelerate R&D are paying off, with the successful introduction of new products fueling our growth. For example, our new VirtualBench product, combines the functionally of several discrete instruments into a single device that offers integration with both PCs and iPads.
VirtualBench has seen a very strong ramp in units and revenues since its release last year, as well as receiving numerous industry awards. Another new product offering that leverages our platform to reach new customers is our semiconductor test system, which we released in August of 2014.
The semiconductor test system is built around standard NI PXI chassis controllers, modules and our industry leading LabVIEW and testing software to serve high volume production tests in semiconductor chips. It's based on the same standard product that we sell to the broad test and measurement market.
We get significant leverage and cost advantages from those economies of scale that’s not achieved when designing unique applications for specific testers. Initial customer response has been very positive and we are encouraged by the pipeline of opportunities for this new offering.
Both VirtualBench and the semiconductor test system were just recognized with best in design and test awards at DesignCon 2015. Finally, the CompactRIO controller released in August of 2013 based on the Xilinx Zynq All Programmable SoC, has continued to see very strong adoption and has been the fastest growing CompactRIO controller we’ve ever introduced.
In summary, I was very pleased with record revenue for the year and in Q4 and with the accelerating growth through the year as we’ve realized the payback from investments we made in R&D, marketing and sales over the past several years. While the recent strengthening of the dollar will have an impact on our revenue growth in US dollar terms as Alex noted, I am pleased to see continued growth in our opportunity pipeline around the world, which reflect the differentiation we offer to our customers.
With that I will turn it back over to Dr. T for some closing statements.
James Truchard
Thanks Eric. I’m pleased with that performance in 2014, with record revenue, significant improvement in our profitability and strong growth for our PXI footprint and automated tests.
Our employees continue to drive innovation through new products that enable our customers to solve some of the world’s toughest engineering challenges. I take great pride in seeing how our customers are using our software and hardware to improve everyday life.
For many years, we have been serving applications now considered part of the 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 data sets.
These have been areas of core compass moves for NI for decades and we believe we will continue to be at the forefront of this trend. Our CompactRIO product for example represents an ideal platform for adding intelligence and connectivity to industrial devices to realize the promise of the industrial internet of things.
We are also at the leading edge of research and prototyping of 5G wireless systems. Just last month, I delivered a keynote at the IEEE GLOBECOM Conference, where leading researchers and scientists from around the world were in attendance to discuss 5G research and ideas to address the capacity crunch we’re facing with commination networks.
As 5G technologies and standards continue to evolve; we believe our products will be an integral part of the industries’ commercialization efforts. During my keynote, I launched our new LabVIEW Communication System Design Suite, which helps engineers develop new communication systems, including areas such as 5G wireless.
This is a version of LabVIEW targeted specifically at communications, design process, and two to meet the needs of those developing novel solutions for new communication systems. The reception among our lead users has been strong and I'm excited to see the impact it provides our customers.
We have built and continue to run our company for long term, sustainable growth. Over the course of several decades, we have successfully managed the business through various economic and currency cycles and are prepared to navigate the recent currency fluctuations.
Our strategy has been to build platforms that leverage commercial technology to increase performance and lower costs. This effectively constraints the markets we target, while also providing an opportunity to grow our business through differentiated products with high gross margins.
The record performance of our PXI products in 2014 is an example of this strategy. In closing, I want to thank our employees for their concerted efforts to deliver innovative new products, value and improved productivity to our customers.
I'm pleased to be able to deliver on our operating leverage goal and deliver record annual revenue. As we continue to expand our product portfolio to address more demanding application requirements, I am confident that we have built the foundation to drive long term growth and profitability of the company.
Also, I will be presenting at the Stifel conference in San Francisco on February 9. I look forward to seeing you there.
Thank you. We will now take your questions.
Operator
[Operator Instructions]. Our first question comes from the line of Patrick Newton of Stifel.
Your line is now open.
Unidentified Analyst
Thank you for taking my call. This is Robert sitting on for Patrick today.
I have a couple of questions on the guidance, kind of specifically relating to the ethics headwinds. So we understand you had a 500 basis point impact to revenue.
Just kind of thoughts on how that impacts expenses. Is there any kind of offset or a natural hedging that you see in your cost structure that you can make some of that impact up?
So I guess my question is, what should we expect the impact to our operating expenses and cost of goods to be due to the strong dollar?
Eric Starkloff
Sure Robert. A very good question.
Over the last number of years, we’ve built a pretty diverse global footprint for National Instruments. Our current estimate is we have a roughly 50% natural hedge at the expense and gross margin our cost of goods sold line against the shift in the dollar.
Now obviously there’s two impacts from the dollar here in Q1, not only the year-over-year impact on revenue and expenses, but we do expect similar, a little bit to what we saw in Q4 that on a reevaluation of receivables that we’ll see a couple of penny hit below the operating income line in Q1. That should, depending on how exchange rates work out, if exchange rates stabilize, we would not expect that to repeat in Q2.
Unidentified Analyst
Got you. Great.
I appreciate that. And then I guess Dr.
T, talking about some general wireless test trends. So one of your wireless test competitors reported earnings this morning.
It mentioned that they had seen the wireless test market contract about 50% during the year. I just want to get your thoughts on that assessment of what’s going on in the market and thoughts on how you see 2015 shaping up from a growth and competitive perspective in wireless tests.
Alex Davern
We see a great opportunity in wireless overall all and Dr. T may want to pitch in here as well.
We look at this as a broad $6 billion market. We are very happy with our results in our RF and wireless business in 2014.
As Eric mentioned in his comments, we saw very strong growth in RF and wireless in the fourth quarter. Obviously we had very good success with our largest customer in 2014.
We feel really well positioned and our strategy in these marketplaces is to leverage broad technology and apply it to a multitude of different market and Dr. T can elucidate a little bit on the broader strategic side of construction..
James Truchard
Sure. If you look at the big picture, basically we work from a platform point of view where we integrate both what we’re trying to do in design and prototyping as we’re doing in 5G, and then test.
This means that our products serve a much broader base than just test. And this means we get economies of scale with a platform based approach that’s to keep up with the latest technology and we won’t be surprised as we see downward trend, further downward trend in the cost of tests for our customers.
Unidentified Analyst
Great. I appreciate the color.
Alex Davern
In short term, I mean part of our strategy is if we’re successful the market will strengthen.
Unidentified Analyst
Got you.
Operator
[Operator instruction.] Our next question comes from the Richard Eastman of Robert W.
Baird. Your line is now opened.
Richard Eastman
Good afternoon. Excellent.
Alex, could you just maybe comments about the orders from the large customer in the fourth quarter, what those look like. And then also I know you are not going to get me real close here, but what would -- how would yon model the outlook from this large customer in 2015 relative to the $52 million of business that you booked with them and shipped in 2014?
Alex Davern
I'll give the specific number first. We had the revenue I believe in the call, in the script that’s out, but the order number was $8 million in Q4 compared to $3 million dollars in Q4 the prior year.
Do you need the full number as well or you probably already have that? Do you?
Richard Eastman
I think I have the order number. Yes, I have the order number for, I can just add this in.
Alex Davern
Okay, no problem.
Richard Eastman
But then how does the outlook look? Obviously you have a great deal in backlog here with that customer.
You didn’t at this time last year either. But is there a reason to assume that that business can be stable?
This is more about test utilization I suppose, but how would you model this large customer or think about them for ’15?
Alex Davern
This is our fourth year where this has been a more than $10 million customer for NI. Very good growth for us in 2014.
We really value this customer. We have a tremendously good relationship with them.
We are servicing a broad range of applications and we continue to put the effort out to ensure that we are delivering value to this customer at every opportunity. I think we are pretty well positioned.
Having said that, I'll give you the answer that my sales team would give me to that question, which is I'll know more in a few months’ time. As we said this time last year, this is a competitive environment of that business of that customer and we’ll know a lot more about our ultimate likely revenue when we are reporting results three months from now.
Richard Eastman
And you have here -- just as a reminder, you have your big comps there from a revenue standpoint in the second and third quarter?
Alex Davern
That is correct.
Richard Eastman
Okay. And then just, Alex or maybe Dr.
T, could you just give me a perspective. When I look at the orders under 20,000, that’s been -- I guess 5% growth is as good as it’s been for four straight quarters or more, but how mature is the market for this more of the transactional business in your mind/ And also, does that less than 20,000 orders, does that skew towards the U.S where I would expect with industrial production having been where it’s at, that that number would be a bit stronger.
James Truchard
For those, our orders they’re -- the business we have with customers, we try to move it upscale to higher volume systems. We may start with a GPIB interface and with time we move them to a PXI system where the average order size goes up substantially.
So that’s one of our goals. So there’ll be a general trend as we go forward.
Alex Davern
Really it’s been a trend for the last 10 years or so that the proportion of our revenue coming from larger systems sales has been steadily growing over the course of that last decade as we’ve been disrupting these higher end markets, shrinking those markets and turning them into a high gross margin business for NI. One comment I’ll make Rick is that when I look at our revenue growth just in the most recent quarter with the companies in GNM that have either published or given guidance, our revenue growth is five or 6x the average.
But unfortunately, the average is pretty low. So there has not been a lot of growth in the overall volume in the test business across the globe.
I think that’s partially reflected in the fact -- and caused by the fact that, although industrial production has improved in recent times, we are only now getting back to new aggregate total increase in output, in industrial output in the global economy. I’d like to see global industrial production see some sustained rise over the peaks that we had in 2007.
And I think that would be good for the whole industry. Until we see that, I think volumes in the total industry are going to be somewhat constrained.
Eric Starkloff
Just to add, as Alex mentioned is his prepared remarks that that real strong growth in the system business is indicative particularly of the share that we are gaining ion the traditional markets we believe.
Richard Eastman
Can I, instead of punching back in in two minutes, can I just ask a third question? Alex, do you expect that the business model, the leverage model that you’ve published, does that hold with currency this -- will that hold with currency?
Alex Davern
At this point in time, based on rates where they are today, our expectation to that question and the answer is yes. Now, I wouldn’t want to tell you that that’s infinitely flexible.
So if we see incremental significant, very significant moves in foreign exchange, that may not be the case. So there is a limit to that, but based on where we stand right now our attention is to execute as I said in the prepared remarks, against the leverage plan that we laid out in August.
Richard Eastman
Because you had some natural hedge as you pointed out earlier on 50% of your costs.
Alex Davern
The way to look at it, Rick and you’ve follow the stock at NI probably longer than anybody, but if you look at our gross margin chart over time, we’ve proven that we have the ability to get highly differentiated products, especially on the software domain. We have some flexibility on pricing in international markets that we’ve used as an offset to the unhedged portion of our business risk.
It’s not perfect. That is a strategy that we’ve been able to largely successfully deploy in prior cycles.
Richard Eastman
Got you. Okay, excellent.
Thank you.
Operator
Our next question comes from Patrick Newton of Stifel. Your line is now open.
Unidentified Analyst
Great. This is Rob again.
Thanks for the follow up. A couple of just housekeeping as I look at my notes here.
What was the employee count for the quarter?
Alex Davern
We were right about 7100, essentially flat with last year.
Unidentified Analyst
Okay. And average order size in the quarter?
Alex Davern
Good question. Just give me a second here.
If you’ve got another question you can throw it at me when I'm looking.
Unidentified Analyst
Sure. I guess when we think about industry growth projections maybe in general for 2015 what the rates we are seeing, low single, low to mid-single digits.
PXIs can traditionally outpace the broader market. Just wanted to gauge your thoughts on full year growth.
I know this may be a little early, but is a low double digit something that’s reasonable, or I guess what your thoughts are at this point in time?
Alex Davern
It will obviously be somewhat impacted by the macro, Robert. So wouldn’t want to try to guide in this timeframe for a full 2015.
We’ll see how one plays out and then go from there. We do however fundamentally and have seen fundamentally for well over a decade now the ability of the PXI division that we brought to market to be highly disruptive.
We are very focused on continuing to drive significant incremental value to our customers in that platform. And we hope certainly that customers will continue to value that and allow us to gain market share.
Unidentified Analyst
Great, appreciate that.
Alex Davern
Can I go back and answer your question? About $5,430 which I believe is a new all-time high.
Unidentified Analyst
Okay, great. I appreciate you taking my questions and goodbye.
Operator
Thank you and at this time I'm not showing any further question. I’d like to turn the call back to management for any closing comments.
Alex Davern
Thank you very much for your time today. We will talk to you in April.
Operator
Thank you sir. Ladies and gentlemen, thank you for participating in today’s conference.
This does conclude today’s program. You may all disconnect.
Everyone, have a wonderful day.