Aug 1, 2021
Operator
Good day and thank you for standing by. Welcome to the Q2 2021 NATI Earnings Conference Call.
At this time all participants are in a listen-only- mode. After the speaker’s presentation, there will be a question-and-answer session.
I would now like to hand the conference to your host, Ms. Marissa Vidaurri.
Please go ahead.
Marissa Vidaurri
Thank you. Good afternoon.
We appreciate you joining our Q2 2021 earnings call. I'm joined today by Eric Starkloff, President and Chief Executive Officer; and Karen Rapp, Chief Financial Officer.
We will start with an update on our performance in the second quarter before opening up for your questions.
Eric Starkloff
Thank you, Marissa. Good afternoon, everyone.
I really appreciate you joining us today. We had a great Q2.
I'll share some color on the quarter and then I'll discuss progress to our growth strategy before I hand it over to Karen, to dive into the financial details. We were very pleased with the strong results in Q2, as momentum continued across the business with very high customer demand and great execution.
Supply chain constraints continue to be a headwind but were in line with our expectations coming into the quarter. Our teams were able to adapt quickly to the situation helping us to exceed our revenue expectations.
We believe our results are proof that our strategy is working and our continued market focus is paying off. This was a quarter of records with results exceeding our expectations.
Most notably, Q2 revenue exceeded the high end of our guidance and was an all-time record for a second quarter. We achieved record orders for Q2 up 33% year-over-year with double-digit order growth across all industries and all regions.
Karen Rapp
Thanks, Eric. And thanks everyone, for joining us today.
The NI team delivered another outstanding quarter. We continue to see strong momentum in the second quarter with GAAP revenue of $347 million, up 15% year-over-year and above the high end of our guidance.
We were pleased to see increased customer demand for our unique software connected solutions across all regions and industries. As expected, our backlog grew to about four weeks.
giving us more visibility into Q3, while still providing very competitive lead times to our customers. For Q2, focused accounts continue to see strength with orders up 28% year-over-year and up 30% over 2019 as we continue to see benefit in aligning resources to high-growth opportunities.
For our broad-based business, orders were up 49% year-over-year and up 5% over 2019, led by success in our digital channel and global distribution initiatives, while also benefiting from the continued macro recovery. We reported strong year-over-year order growth across all regions in the second quarter.
In the Americas, orders were up 22% year-over-year and EMEA, orders were up 51% year-over-year and in Asia-Pacific orders were up 36% year-over-year.
Eric Starkloff
Thank you, Karen. We continue to focus on delivering on our goals in 2023 and beyond.
We remain confident in our ability to accelerate both growth and profitability. The strength we've seen across the business this year and our ability to execute further increases my confidence in these goals.
As we look ahead, I remain inspired by our opportunities and the impact that we've been able to make with our customers globally. I want to recognize all of our employees for their perseverance, execution, and dedication not just in Q2, but in the years of work we've all done to put us in this decision.
With that, we'll now take your questions.
Operator
Your first question comes from the line of Samik Chatterjee. Please go ahead.
Samik Chatterjee
Hey thank you. Hi good afternoon Eric.
So, I guess I wanted to start with asking you about new orders. And just given the situation we had a year ago I guess most of the orders and on a year-over-year basis look like you're getting some very strong increases over the last year.
Can you give us a bit more color on the order trends maybe sequentially what you're seeing related to 1Q does look like they're strong, but particularly, if you can give us more color on a sequential basis around the segments like what are you seeing in semis and where are you seeing the most strength and in that related order? Just give us more sense on a sequential rather than a year-over-year basis because some of the comps might be kind of viewed from a year ago.
Eric Starkloff
Yes, I understand the question. Thank you for it.
I'll give you a couple of perspectives on this. One is we look at it year-over-year.
Of course we also look at it over a two-year time horizon because that tends to normalize out some of the disruptions that we saw the last year of course. And I would just say that I'll start there and then I'll give you some sequential comments.
From a two-year point of view, it's really in line with our long-term expectations. So, from an industry point of view, the strongest performance over two years remains in semi electronics.
And the next areas are in ADG and transportation which are both over 20% on a two-year basis. Two different stories there.
ADG as I mentioned is kind of steady growth over growth. And that's kind of the nature of that business.
It's a very important part of our portfolio because of that. Transportation was down for two years and then has recovered very strongly.
And so I mentioned that the orders in this quarter were an all-time record for any quarter in transportation. So it's very, very encouraging and it's driven by the areas that we're focused on within the space.
And so that also is encouraging that the areas we're focused on receiving the most growth. And then lastly portfolio similarly that was down over the last couple of years and it's recovered very strongly.
It's up 15% approximately over two years. So very, very strong growth in the quarter look more normal to our strategy when you look over two years.
And then finally from a sequential point of view, the way I would characterize the order growth is that it has continued to accelerate. So Q2 saw an uptick in order growth over Q1.
And then based on the guidance that we gave if you look at the midpoint and some of the expectations we're setting on backlog we are expecting order growth continue to strengthen. We've got a very strong start to the quarter and we expect it to continue to strengthen in Q3.
Samik Chatterjee
Okay. Got it.
And for my follow-up Eric, I guess, if I heard you guys correctly you do expect backlog to increase. And I'm just trying to get a sense is there a limitation on the supply that you're seeing that may be constraining some of your ability to deliver to the strong demand that you're seeing?
What is the latest on the supply side outside of the headwinds on the cost that you called out how much of a constraint is that in -- on the revenue side?
Karen Rapp
Yes. Samik, this is Karen.
I'll take that one. It's exciting because we're actually still seeing order growth continue to outpace revenue growth.
So the way we're looking at it is seeing some of the supply issues stabilize, but not to a point where they're back to where they used to be at this point. So we are planning to build $30 million to $40 million of additional backlog in Q3 which will put us at about a five week lead time coming out of Q3, which is still incredibly competitive in the space that we're in.
The other thing that that does for us is it continues to give us visibility into the quarters going forward and in our space. Maybe it's important to note that we tend to see very minimal cancellations.
And even when you're looking at a four week to five week lead time we're still able to shift that product really quickly. So it gets it out the door within -- right after the end of the quarter basically to start getting it to customers.
Eric Starkloff
And I'll just add briefly Samik that one thing I was really encouraged by is that the supply chain constraints, sort of, met our expectations in Q2. If you go back a couple of quarters it was pretty unknown how this would play out.
It's now at a point where at least for Q2 it was relatively predictable or met our expectations. And so that's a -- I'd say a good sign but it still remains a headwind in that we're -- as Karen said we're growing orders faster than revenue.
Samik Chatterjee
Thanks, Eric. Thanks, Karen for taking my question.
Eric Starkloff
Thank you. Thanks, Samik.
Operator
Your next question comes from the line of John Marchetti. Your line is open.
Please go ahead.
John Marchetti
Thanks very much. Eric, I'd like to go back to your comments around the two year view.
I mean obviously when comparing some of this against the COVID troubles of last year certainly some of that growth was in place. But over the two year basis it sounds like all of these segments are really starting to come back into more of a growth mode.
Can you talk a little bit about how much of that you think might be share gains, or how much you think is based on what you've done to the portfolio versus how much of it is just more of the cyclical nature of some of these industries coming back more towards a growth trajectory?
Eric Starkloff
Yes. No, John good question.
And so yes, the order growth is up in the low 20s over two years just to put -- I gave the, sort of, industry color when I answered Samik's question. The way I think of it and of course it's hard to tease out exactly that.
Certainly it's a strong macro environment. We see that across the business.
But if I compare things like our portfolio business which has been more tied to economic indices like PMI in the past or if I look at our smaller accounts what we call it broad-based accounts that's a good baseline. Those are up sort of 10% to 15% over that two year period.
And then I look at the areas of focus whether it's through our focused accounts or the areas within the BUs that I described of the focus areas on 5G on electrification and ADAS within transportation et cetera. Those areas are growing much more strongly.
Our focus accounts for up 30% over two years. And those areas of focus are up either strong double-digits or some of them are up sort of triple-digits.
And so that's quite encouraging. So I think that's the part that is based on our strategy and where we're leaning into share gains above the base strong demand that we see across the business.
John Marchetti
Great. Thank you.
And then Karen maybe for you. You mentioned the $10 million incremental expenses associated with the variable pay.
Should we expect -- given the growth that you're talking about here and how should we expect that to continue in the second half? And then how do we think about maybe second half non-GAAP OpEx versus first half?
Karen Rapp
Yes. John that's actually good question.
We're absolutely at this point with what we're looking at from a midpoint of guidance and kind of the way we're looking at Q4 being returning to normal seasonality plus that kind of outlook for the year would imply that you should keep that kind of increase in variable pay built into the second half of the year as well. Beyond that it's going to become normal seasonality at the core of what we're doing from an OpEx standpoint.
John Marchetti
Great. And then maybe if I can just sneak one last one in here.
You talked about expecting to exit 3Q at, sort of, five weeks. If we look out 12 months or 18 months from now you're anticipating getting back to the very low levels that you had from a backlog perspective historically, or do you think maybe just given some of the changes and what's going on globally and in some of these markets that you'll actually be maybe somewhere between the five weeks that you're going to exit and where you had there historically?
Karen Rapp
Yes. I think that -- with the long-term strategy that we have we've talked about this before but as we lean in more on systems those will center around a four-week kind of lead time for systems in general.
And so our goal is going to continue to be to have several weeks of backlog. I talked about going out of the year at kind of a three week to five week lead time somewhere in that range.
I think we'll center around that most likely in 2022 is what I'd be expecting.
John Marchetti
Great. Thank you.
Eric Starkloff
Thanks, John.
Operator
Your next question comes from the line of Mehdi Hosseini. Your line is open.
Please go ahead.
Mehdi Hosseini
Yes. Thanks for taking my question.
A couple of follow-ups. This is for the team.
Can you remind me what your backlog was in the up cycle of 2017?
Karen Rapp
Mehdi, I'm sorry, I don't know the numbers back in 2017, but we...
Eric Starkloff
They were typically pretty small comparatively. So we would set around a week or so of backlog most of the time.
But that would give you an approximation.
Mehdi Hosseini
Okay. That's fine.
I was just trying to get a -- gauge the increasing backlog. I see your product portfolio more diverse and your overlay or the supply chain disruption due to COVID.
So your backlogs are certainly longer compared to 2017 the last cycle, right?
Eric Starkloff
Yes. They've gone up quite a bit.
This would be the largest we've had, but to Karen's point, there's these two elements. There's the supply chain, of course, which is causing the increase in backlog.
As she mentioned, they remain quite competitive when you look at typical backlogs in our industry. And then there's also we've said before, strategically as we have more systems business that is going to have the impact of increasing backlog over time, give us more visibility as well into the forward-looking business.
So we view that as a positive thing.
Mehdi Hosseini
Okay. And is there any particular product or end market where the lead times are longer than, let's say, average, or is it…
Karen Rapp
Yes, it was actually -- because of the way we leverage the platform, we're seeing very similar across all industries and all regions.
Mehdi Hosseini
Right. Okay.
And then the last item for me. Is there an update on your efforts to penetrate the 5G?
It's my understanding that that would hinge on millimeter wave, but I'm just wondering if there's an update there.
Eric Starkloff
Yes. So 5G continues to be a growth driver particularly in our semi electronics business.
That's where most of our 5G is. It's not just millimeter wave.
So, most of the business today is in sub-6. We characterized it before it's about half our semiconductor business and that's similar.
So it continues to be a growth driver and is particularly strong, I would say, in APAC probably not surprisingly. And then we do view millimeter wave is still a long-term growth opportunity.
It's an area we serve now as we've said before that the opportunity in terms of the scale of ramp-up of millimeter wave has tended to push out in time into kind of next year for the larger volumes of millimeter wave, but for now we've been seeing steady performance of 5G primarily in sub-6.
Mehdi Hosseini
I think sub-6, mostly this is for high-volume manufacturing, right?
Eric Starkloff
Well, it's about our business including in 5G, it's about 50-50, Mehdi. So it's about half in labs -- in automated labs and about half in high-volume manufacturing.
So we view that as one a nice healthy balance for the resiliency of the business. It's also to our customers we're delivering value because of the commonality of those systems, but it split pretty evenly across those two.
Mehdi Hosseini
Okay. Got it.
Thank you.
Eric Starkloff
Sure. Thank you.
Operator
Your next question comes from the line of Mark Delaney. Please go ahead.
Mark Delaney
Yes. Good afternoon and thanks very much for taking the questions.
First on the operational environment, I realize the company has a facility in Malaysia where unfortunately there's been some increased COVID cases. And as a result of that I think the government has some restrictions on the number of people in some facilities.
Obviously, the company was able to still come in above the high end of its guidance, but I was hoping you could talk a bit more on the operational challenges, the company may be encountering and specific to your Malaysia facility what you've been able to do to overcome those.
Karen Rapp
Yes, Mark, this is Karen. We've not had any operational impact in our manufacturing facilities both in Malaysia and in Hungary.
One of the things that was really neat to see in Malaysia this quarter was a partnership we had with Intel to help our employees get access to vaccinations. We were able to enable our employees to bus them over to the Intel facility.
And we were really pleased with the number of employees that we're able to participate in that as well as their families and the support staff in the factory. But we've been able to keep operations running fully operational and we have not had any impact throughout COVID as a result of any of the limitations so far.
Eric Starkloff
And Mark, if I could just take the opportunity, since you teed up the question. And I'll just say, it's just been remarkable our employees, not just in the factories -- certainly, in the factories and the resiliency they've had to show, but as you highlighted this COVID pandemic has created the need for a lot of adaptability across our business.
And as you noted it's not done yet. We have to show that adaptability.
I've just been really overwhelmed with how well we've been able to run the business and reach very successful financial milestones despite that including being able to operate as Karen said in both of those factories. Something you may have a follow-up to Mark.
Go ahead.
Mark Delaney
I did. Sorry.
Thanks for the comment there and that's very good news. Just in terms of the orders, I understand there's a component that due to some of these structural opportunities in particularly growing areas, perhaps the company has been picking up some market share.
But given how tight the supply chain has been lead times are short, but are a little bit extended. How do you guys think about the potential risk that there's an element of the order shrink that is perhaps double orders?
And the risk of some cancellations to at least a portion of the orders.
Karen Rapp
Yes. This is Karen again.
We have an interesting business where because the lead times are still only about four weeks coming out of Q2. For the most part, the orders ship right away as soon as the quarter ends.
And so historically we've seen very minimal cancellations. We've been watching that given this current situation.
We haven't seen any increase in the level of cancellations. So we continue to see very minimal -- we ship 90% plus of the backlog that we come into a quarter with right away.
So we're feeling really good about the strength of that backlog and how solid it is to turn into revenue.
Eric Starkloff
And I'll just say that double ordering phenomenon that happens in the semiconductor supply chain generally doesn't -- hasn't historically happened in our market capital equipment. That's generally not been an issue.
Mark Delaney
That's helpful. If I could sneak one last one in.
Just in terms of the comments that you made Karen on fourth quarter revenue, the potential to be slightly better than typical seasonality. It looks like in most years, revenue is up mid- to high single digits sequentially.
So it seems like you're implying a high single-digits or perhaps up low double-digits, but if you could clarify what your interpretation or calculation on normal seasonality is that would be helpful? Thanks.
Karen Rapp
Yeah. Mark, your numbers are the same as mine.
I'm looking at a 7% to 8% kind of percent normal sequential from Q3 to Q4 and I think it will be slightly higher than that the visibility we have right now.
Mark Delaney
Thank you.
Operator
The next question that you have is from Rob Mason. Go ahead.
Your line is open.
Rob Mason
Yes. Good afternoon.
Eric Starkloff
Hi, Rob.
Rob Mason
Hi, Eric. One quick question just on backlog the hot topic.
The -- I think the expectation coming into the quarter Eric was that -- or Karen, you would build about $40 million to $50 million, but just given the way of backlog given the way you outperformed is that -- was that still the case in the quarter the third quarter?
Karen Rapp
That is almost exactly the number Rob. We booked about $50 million of backlog in Q2, just like we expected.
Rob Mason
Okay. Okay.
Eric, you're about to annualize or maybe just have annualized the OptimalPlus acquisition. I was curious if you could just give some thoughts as to, now that you've owned that a year, how that has been integrated into the business?
And also, how did it contribute as you came through this most recent quarter having owned it about a year, just in terms of maybe the revenue contribution, how it's contributing I think primarily to the semi-electronics business and just your take on that overall?
Eric Starkloff
Sure. Rob.
Yes, absolutely. So first the integration has gone very, very well, very smoothly.
We've reached all the integration milestones that we had very pleased. I was actually just over in Israel a few weeks ago where a large number of the employees in the R&D center is for OptimalPlus which was fantastic to be able to be over there in person with those employees for the first time.
And so just a great fit in terms of the people and the technology. The comment I'll make is that one we're very pleased with the pipeline of business and the opportunity expansion that we see in the synergy with the channel.
And then the second is that this is an area and I alluded to it, but it's an area where we're looking to expand our investment over time in this area generally speaking of data analytics and product data analytics both building off of that platform and it's an area for organic inorganic pursuit for us. So that's probably -- the biggest statement is that after a year it's an area that we want to do more in and we see as a potential long-term driver of growth.
Karen Rapp
Maybe I can do a -- real quick for you. We just did our customer conference this week NI Connect.
And there's more there that you can see about customer testimonials and really just understanding what that looks like going forward as we continue to lean in on that space. So a pretty exciting event with great turnout.
Rob Mason
Great. Great.
Last question. Karen, just on the third quarter guidance, should we still be thinking gross margin -- adjusted gross margin in the mid-70 range.
And then around your -- quick back of the envelope math was maybe the midpoint suggests your operating margin is flattish sequentially and operating expenses up kind of 8% or so 7%, 8% sequentially. Is that the case?
Karen Rapp
Gross margin, yeah, will be in line with our long-term trends. It flexes a little bit, as revenue goes up.
So there's some -- a little bit of additional efficiency that we get with higher revenue in gross margin typically. From an OpEx standpoint, continuing to kind of see the normal baseline that you would see from a Q2 to Q3 then plus the variable pay on top but that is the way I look at it Rob.
Rob Mason
Okay. Very good.
Operator
There are no questions at this at this time. I would like to turn the call over back to our speakers.
Eric Starkloff
Thank you all for joining us today. We look forward to seeing you on August 17 at the investor conference.
Have a good day.
Operator
This concludes today's conference call. Thank you all for joining.
You may now disconnect.