Jul 30, 2017
Executives
David Hugley - VP, General Counsel & Secretary Alex Davern - President & CEO Karen Rapp - CFO
Analysts
Vijay Bhagavath - Deutsche Bank Patrick Newton - Stifel Richard Eastman - Robert W. Baird
Operator
Good day, everyone, and welcome to the National Instruments Second Quarter 2017 Earnings Conference Call. Today's call is being recorded.
You may refer to your press packet for the replay dial-in number and passcode. With us today are David Hugley, Vice President, General Counsel and Secretary; Alex Davern, President and CEO; and Karen Rapp, CFO.
For opening remarks, I would 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 future growth and profitability, future restructuring charges, and our guidance for revenue and earnings per share for the third quarter 2017.
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 Annual Report on Form 10-K filed on February 16, 2017 and our quarterly report on Form-10Q filed on May 1, 2017.
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, Alex Davern.
Alex Davern
Good afternoon and thank you for joining us today. My key messages today are; revenue of $319 million, a record for second quarter, core revenue growth of 7% year-over-year, and non-GAAP net income of $35 million, up 21% year-over-year and a new record for the second quarter.
I'm pleased with our execution in Q2 as we continue to drive toward our revenue and profitability goals. This quarter we saw our core revenue up 7% year-over-year and record revenue for the second quarter and for the first half.
We believe that alignment of our product and channel investments towards the growth opportunity areas of 5G communications, semiconductor test, the connected vehicle, and the Industrial Internet of Things continues to move our platform closer to our customers' challenges. These investments help to increase our impact within these opportunity areas and will help our customers speed time-to-market, reduce cost of test and limit costly downtime.
I'm pleased with the results that we saw across all three regions during the quarter, as well as the revenue growth within Automotive, Wireless and Semiconductor test. Looking at order size, we saw strength in Q2 and orders over $20,000 driven by system-level products like PXI.
Orders under $20,000 were flat year-over-year and we saw weakness from PC data acquisition products related to the weakness in a broader PC market. Software products saw continued year-over-year revenue growth in Q2 and price agreement continue to be a strong driver of adoption of our software tools and major accounts.
This quarter was particularly exciting as we unveiled significant software launches at NIWeek. LabVIEW, our flagship software and enabler of our platform accelerates our customer's productivity and as a result continues to be a strategic driver of loyalty in our customer base.
The latest release includes new ways to measure and connect the Industrial IOT, including the new LabVIEW Cloud Toolkit which connects LabVIEW applications to Amazon Web Services and additional support for Python. This release also expands the reach of LabVIEW to new users at the engineering design flow including technicians that need measurement and analysis capabilities.
Without programming, many new users can take measurements, visualize data and perform analysis to simplify iterative and common tasks and designer test. In addition to the LabVIEW release, we added a new category of software value add for our customers with the announced of our new system management software.
This product called SystemLink is a new monetization opportunity for NI. It will help production and test facilities optimize asset utilization by centralizing software and data management on distributed test efforts.
These releases and the rapid innovation enabled by our software platform refresh will help us to meet the demands of a growing number of users with diverse needs. The value of our software driven by development efficiency is our hardware integration and enterprise access to data ensures that we continue to deliver a new value to our broad-based to software users.
PXI instrumentation and RF products have continued year-over-year revenue growth in Q2. Over the past 20 years, the NI PXI portfolio has grown to include 100s of profits spending the measurements needs of thousands of automated test customers.
In the past year we have seen the second generation vector signal transceiver continue to drive penetration of PXI and the NI platform into new measurement of test applications at the cutting edge of communication prototyping and semiconductor and production test. At NIWeek this week we heard from Analog Devices, how the PXI platforms helping to meet production timelines and budgets for new semiconductors products.
We also heard from an reliance partner in our ecosystem, NOFFZ, that how PXI has enabled them to meet the production test needs of a wide range of products like wireless modules, gateways and radar systems. In developing these systems, a large part of our partners time can be spent integrating mechanical, electrical and safety infrastructure which tend to be standard across many applications.
To have speed their system development, we announced more compete system configurations and services which will enable partners and customers to purchase complete test system from NI. For our customers, this reduces the number of vendors to streamline purchasing and for NI we can increase sales efficiency by delivering systems faster.
At NIWeek customers at automotive aerospace and semiconductor showed how many new data NI data acquisition products are pushing the limits of measurement technology. It showed how these products can validate performance of battery stacks and electric vehicles, measure power consumption of low power integrated circuits and characterize high speed acoustic signals like shockwaves.
By increasing measurement voltage, bandwidth and precision, we are expanding the capability of our platform to search the real worlds measurement needs of new technologies. In Q2, CompactRIO saw significant customer interest in the areas of energy and advanced control and monitoring.
CompactRIO is ideally suited to take advantage of the ubiquitous connectivity and edge analytics needed for the indusial Internet-of -Things. Combining the latest in FPGA and application process of technology within our software enables our customers to integrate more sensing, more analysis and more control into the systems of the industrial Internet-of-Things.
For example, at NIWeek Blue Origin showed that they use CompactRIO to automate dozens of test cells in parallel to meet their aggressive launch schedules. Also the NIWeek this year our customers showed how our platform and ecosystem helps them harness the power of the exponential trends driving our industry and our world.
Moore's Law, the explosion of intelligent devices and the rise of big data can be overwhelming but when harness can bring self driving cars to our roads, make everyday objects smart devices and enable new methods of high speed transformation. With thousands of NI customers in attendance including AT&T, DARPA and Valeo, NIWeek is proof point in the industry for technologies from 5G to driverless vehicles.
That only have becoming a reality but our platform is significantly accelerating the path to market. Wireless communication particularly 5G has been moving rapidly and accelerating toward first deployments.
With strong revenue growth in the first half from our software defined radio products, our customers continue to demonstrate the value of the NI platform and our differentiated position within 5G as they grow the number of deployments used to test and validate these technologies. This year in NIWeek our customers demonstrate major steps toward market viable 5G communication, and each year we see how the NI platform is helping to meet these accelerating timelines.
For example, AT&T is using the NI platform to measure the signal effects of the real-world environment on new wireless transmission frequencies. By better understanding attenuation and restoration in the real-world, the researchers in AT&T labs can create more robust transmission schemes and ensure more reliable connectivity.
These example as well as others from Nokia, Samsung and University of Bristol showcase our product and channel coverage within research and development. Given our long history with automated production test, we believe we are in the unique position to serve the needs of these companies as 5G technology moves out of the lab and into products.
Thank you. And I will now turn it over to our Chief Financial Officer, Karen Rapp for the financial update.
Karen?
Karen Rapp
Thank you, Alex and hello everyone. This is my first earnings release at National Instruments and I’m proud to be part of such a strong and respected company.
Today we reported Q2 revenue of $319 million, a record for the second quarter. Revenue was up 4% year-over-year.
Core revenue which we defined as GAAP revenue excluding the impact of our largest customer and the impact of foreign currency was up 7% year-over-year. Looking at our operational results, non-GAAP gross margin in Q2 was 75%.
Total non-GAAP operating expenses were $194 million relatively flat year-over-year. Our non-GAAP operating margin increased by 140 basis points year-over-year to 14%, demonstrating commitment to our new operating model.
We reported net income of $25 million with fully diluted earnings per share of $0.19. Non-GAAP net income was a second quarter record at $35 million or $0.27 per share, which represented 21% increase in earning versus the second quarter of 2016.
Included in our GAAP net income is $4 million of restructuring charges. A reconciliation of our GAAP and non-GAAP results is included in our earning press release.
Now taking a look at order trends in more detail, for Q2 the value of our total orders was up 5% year-over-year in U.S. dollars.
Included in that total is $12 million in orders received from our largest customer, compared to $18 million in Q2 2016. Revenue from our largest customer was $10 million in Q2, compared to $14 million in Q2 2016.
Now breaking down our Q2 order values. Excluding our largest customer, orders or the value below $20,000 were flat in the second quarter.
As an indicator of the strength of our systems business, we saw all orders over $20,000 up 15% year-over-year. Orders with the value between $20,000 and $100,000 were up 1% year-over-year, adversely impacted by the soft spending by the U.S.
government, due to the late budget approvals. All orders with the value over 100,000 were up 42% year-over-year.
We believe the systems order growth is indicative of the value of our innovative platform and the strength of our direct customer relationships. We continue to be deliberate in our sales channel investments in order to optimize our overall customer coverage and support our growth goals.
Moving to the balance sheet and capital management. During the quarter we paid $27 million in dividends, continuing our history of returning value to our shareholders.
We ended the quarter with cash and short-term investment of $368 million at June 30, 2017. And the NI Board of Directors have approved a quarterly dividend of $0.21 per share.
Now, I’d like to make some forward-looking statement. Included in our guidance for Q3 2017 is approximately $6 million in revenue from our largest customer compared to $8 million recognized in Q3 2016.
Given our historic seasonality trend, we currently expect total revenue in Q3 to be in the range of $304 million to $334 million. The midpoint of this range represents a new revenue record for the third quarter.
We expect GAAP fully diluted earnings per share will be in the range of $0.16 to $0.30 for Q3 with non-GAAP fully diluted earnings per share expected to be in the range of $0.22 to $0.36. Included in our Q3 2017 GAAP earnings per share guidance is approximately $1 million of restructuring charges.
As of June 30, headcount is down 2% from December 31, 2016. For the full year we estimate the impact of restructuring charges on net income to be approximately $7 million to $8 million.
Another housekeeping item, we estimate that given current exchange rates, the impact of foreign currency will be minimal in Q3. We continue to expect total non-GAAP operating expenses to be up approximately 1% year-over-year in the second half of the year.
In summary, we are encouraged by the strong order growth in Q2 and our focus on disciplined expense management. We believe this focus will keep us on the right path as we move forward toward our growth and profitability goals this year and in 2018.
As these are forward-looking statements, I must caution you that our actual revenue, expenses and earning could be negatively affected by numerous factors such as any weakness in global economy, fluctuations in revenue from our largest customer, foreign exchange fluctuations, expense overruns, manufacturing and efficiencies, adverse effect of price changes and effective tax rates. We will be participating at the Oppenheimer conference and the Jefferies Summit in Chicago in August, the Deutsche Bank conference in Las Vegas in September and Stifel conference also in September.
We look forward to seeing you there. With that, I will turn it back over to Alex for some closing comments.
Alex Davern
Thank you, Karen. I’d like to close the day by thanking our employees for embracing our mindset of growth and profitability.
We made good progress towards our goals in the first half with record revenue and 26% year-over-year growth in our non-GAAP net income. This positions us well to deliver on our leverage goals for 2017 and for 2018.
Thank you. And we will now, open up for your questions.
Operator
[Operator Instructions] And our first question comes from the line of Vijay Bhagavath from Deutsche Bank. Your line is now open.
Vijay Bhagavath
First here would be, helpful to note from you. Any qualitative color, you can give us into the back half and ideally into next year.
In terms of end markets, any specific customer segments, any specific categories of order transactions. And that I'm coming from is it really helps us better model and think at the segment level at the use case level and ideally at the order category level?
Thanks.
Alex Davern
Sure. So, Vijay as we look out into Q3, while we talk about Q2 of course from an industry point of view, second semi in automotive, communications, we saw some definite weakness in U.S.
government spending in Q2. As we look into Q3, we’re really guiding based on our historical trend into the third quarter and at this point, we’re not assuming any bounce back in U.S.
government spending in Q3 at this point. We will see how that plays out as we go through the third quarter.
On a longer term trends, continue to be encouraged by the continued strength in global PMI. We're seeing some evidence from the semiconductor companies more than Analog and recent results from Intel and others that there is some underlying strength building in the industrial economy.
We certainly hope that, that plays through into the second half of next year and that’s quite encouraging. But obviously we’re only giving guidance at this point for the third quarter.
Vijay Bhagavath
Quick follow-up for Karen. You know, Karen, you might have a certain thought process of improving EBITDA margins incrementally or you know the operating performance of the company.
How is it tracking versus your own internal goals and what might be some of the levers we could see for improving EBITDA margin incrementally as we head into the back half and into next year? Thanks.
Karen Rapp
We continue to be very focused on executing to the operating model that we presented at NIWeek and from what we’re looking at right now and our guidance for Q3 reinforces that model is going to play through. We’ve got the guidance for second half operating expenses at a 1% growth year-over-year and we believe that's right in line with where we intent to be from that operating model perspective.
Operator
And our next question comes from the line of Patrick Newton from Stifel. Your line is now open.
Patrick Newton
I guess my typical housekeeping question to start. Could you help us with the employee exiting the third quarter and the average order size?
Karen Rapp
Employees for the headcount Patrick, is right about 7,400 heads, 7398 to be exact and that’s a 2% decline from December year end. And then the average order size that we saw was up 10% year-over-year at $5,900.
Patrick Newton
And then, are we still expecting a 21% tax rate for the full year?
Karen Rapp
We are, that’s our outlook at this point.
Patrick Newton
And then the orders of 100K plus growing 42% year-over-year is incredibly impressive. Can you comment on drivers by maybe geography or end market, where those orders are coming from.
And are we right to think that these orders could take multiple quarters to fulfill meaning on top of your industrial commentary Alex that this bodes well for back half of the year?
Alex Davern
Certainly, when we look at system-level business in particular, it’s going to move a little bit between the two brackets. But orders over 20K, be now 15% in the aggregate is a very encouraging sign for the - that strength of all the areas of the business that we’re focusing.
As I said earlier on, semi, automotive, communications driving those industries look pretty healthy right now, so that’s encouraging as we look forward. And while we’re being somewhat conservative as we look at guidance here, we’re just going with the historical pattern of being flat from a seasonal point of view.
The majority of the trends we watch are displaying positive signals.
Patrick Newton
And then the answer, I think dovetails nicely into the guidance because I think at the midpoint, you are looking for 4% growth. You said that FX impacts are expected to be minimal and I think given the large customer revenue that you provided us for 3Q, looks like that’s about 50 bps headwind.
So is it conservatism that as you decelerating your core from 7% just reported to what appears to be about 3.5% or is there something else that’s fundamentally decelerating?
Alex Davern
I mean, I think the fundamental indicators that's structural elements that drive our business are healthy as we go into Q4 and into second half, we want to make sure, we’re delivering on the expectations that we set. As we move forward, we had very good profitability growth in the first half of the year, we want to deliver record revenue, record profit for 2017 and we want to be well positioned, had to deliver on our operating leverage goals as we move into 2018.
Karen Rapp
Patrick, let me add to that, I just want to add that, midpoint of your guidance is, puts us at about 5% core revenue growth.
Patrick Newton
And then Karen, your first guide as the CFO of the company. Are there any material shifts and/or how you are setting expectations relative to prior NI practices?
Karen Rapp
I can't speak entirely to the previous NI practices But I am certainly holding people accountable for focusing on our operational target and being very focused in execution and driving what we say we’re going to do.
Operator
[Operator Instructions] And our next question comes from the Richard Eastman from Robert W. Baird.
Your line is now open.
Richard Eastman
Just a quick question perhaps around the large customer dynamic here. What might be the catalyst there to start to see the large customer orders, revenue accelerate?
Is that backend like production test or we somewhat dependent on, the leap to 5G to drive the voice test. What are the prospects there?
Alex Davern
Great, thanks very much. Let me take the test and answer your question.
Last year obviously, we saw quite a bit of growth from our largest customer. This year through the first half we see now revenue will be down.
As we look into Q3 or looking for revenue from that customer be reasonably close to where we were in Q3 last year, a slight decline. And the business with our customer has now become pretty broad based.
So, we're serving a lot of different applications within that customer for a lot of their different products addressing different test needs. The real drivers ultimately there is what new technologies that they bring to their fundamentally up fleet their existing fleet of test equipment and so, that’s really the driver, that will I think dictate the test purchase that they make as we go through the next couple of years.
Richard Eastman
And then just a question around Asia Pac. Maybe some thoughts around the growth there being flat in constant currency.
Is there an industry that’s particularly affected there or why the lack of growth in APAC?
Alex Davern
That’s primarily due to the drop in revenue from our largest customer. Rick, it’s all recognized in APAC because we ship into APAC.
So, when you look at the base business there, we saw both mid-single digit core revenue growth in APAC, pretty similar to the rest of the world in Q3. Excuse me, in Q2, so the base business continue to grow and it’s just the volatility caused by the back of the largest customers is revenues recognized in that region.
Richard Eastman
And then should we - again, just to - could you size out the base of the defense business. And I would think prospects look better there as we look late calendar year and into next year and we start to see some funding flow.
Do you feel the visibility there is better or the prospects are better there on the aerospace, defense side, government side?
Alex Davern
As you know Rick, I think there has obviously been some budget driven delays especially in the U.S. for quite a while.
Those that are pretty much resolved now. And when we’re giving guidance, we are going with the historical pattern.
We’re not assuming a bounce back in government spending. I know the fiscal year ends in September.
So that’s a possibility we may see a better than expected result there but in giving guidance we’ve gone with the seasonal pattern.
Richard Eastman
And then just a last question, we had spoke coming out of the first quarter about a shift of above 3 million of OpEx into the second quarter from the third. Is that dynamic kind of going to be a visible we get in to the third quarter in terms of our operating expense is that - would that show a decline there?
Karen Rapp
Where we are looking at is the second half that's about 1% growth year-over-year from last year.
Operator
Thank you. And I am showing no further questions at this time.
I would like to turn the call back over to Alex Davern for closing remarks.
Alex Davern
Thank you for joining us today. We look forward to seeing you at one of the investor conference will be attending in August and September and we look forward to talking to you again in October.
Bye.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect.
Everyone have a great day.