NATI

National Instruments Corporation (NATI)

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National Instruments Corporation (NATI)

Q3 2013 Earnings Call

October 31, 2013 5:00 p.m. ET

Executives

David Hugley - Vice President, General Counsel, and Secretary

James Truchard - President, CEO

Alex Davern – CFO, COO, and Executive Vice President

Pete Zogas - Senior Vice President of Sales and Marketing

Analysts

Patrick Newton - Stifel

Bryan Kipp – Janney Capital Markets

Presentation

Operator

Good day everyone and welcome to the National Instruments' Third Quarter 2013 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 Pete Zogas, Senior Vice President of Sales.

For opening remarks, I would like to turn the call over to Mr. David Hugely, 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 our guidance for our fourth quarter revenue, operating expenses and earnings per share. We wish to caution you that such statements are just prediction 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 quarterly report on Form 10-Q filed August 1, 2013. 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 are: Q3 revenue of $289 million, strong revenue growth in RF and CompactRIO products and continued spending discipline in Q3. Revenue for Q3 came in at $289 million comparable with Q3 a year ago and above the mid-point of our guidance. I am pleased with our continued spending discipline during the quarter with operating expenses down sequentially for the second consecutive quarter.

This is a testament to the keen focus of our employees across the company and our collective efforts on improving our non-GAAP operating margins toward our goal of 18%. In our call today, Alex Davern, our Chief Operating Officer will review our results; Pete Zogas, our Senior Vice President of Sales 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 revenue of $289 million, $9 million above the mid-point of the guidance we gave on July 29. As you can see in the presentation accompanying n this webcast, in Q3 of 2012 we recognized $27 million in revenue from our largest customer, which was our largest sales quarter to this customer.

This compare had a significant impact on our overall revenue growth this quarter as we recognized $4 million in revenue from this customer in Q3 of this year. As a result, our total revenue was relatively flat year-over-year in Q3 while revenue, including our largest customer, grew 8% year-over-year.

For Q3, net income was $16 million with fully diluted earnings per share of $0.13 and non-GAAP net income for Q3 was $24 million, with non-GAAP fully diluted earnings per share of $0.19, $0.03 above the midpoint of our guidance range. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

From a regional point of view, revenue was up 9% year over year in the Americas, up 7% in Europe and up 24% in the emerging markets. However revenue was down 27% year over year in East Asia, as the vast majority of revenue from our largest customer is recognized in this region. Additionally, we saw a significant negative impact from the time and value of the yen, with orders from Japan in Q3 being down 20% year over year in U.S. dollars.

Non-GAAP gross margin in Q3 was 75.1%, up 240 basis points from Q2 due primarily to a change in customer mix. Total non-GAAP operating expenses were $184 million, down approximately $1 million sequentially. The year-over-year growth in our non-GAAP operating expenses was 3% in Q3 and I am pleased with the continued budget discipline throughout the company. For Q3, our non-GAAP operating margin was 11.3%, with non-GAAP operating income of $33 million, up 8% sequentially.

Now taking a look at trends by order size. In Q3, we saw a 2% year-over-year increase in the value of our total orders. Breaking that down, we saw a 2% year-over-year growth of our orders with a value of below $20,000. Orders between $20,000 and $100,000 were approximately flat; while orders over $100,000 were up 8% year-over-year. Excluding our largest customer, our total orders would have been up by 8% year-over-year and orders over $100,000 would have been up by 48% year-over-year.

Now turning to cash management, inventories declined by $6 million as we continued to adjust our production schedules. In addition, we paid $18 million in dividends during the quarter. Cash and short-term investments increased by $21 million in Q3 to $344 million as of September 30.

In summary, Q3 was a difficult quarter for the test and measurement industry. These challenges were exacerbated by the budget process in the United States and a large year-over-year fall in the value of the Yen. But despite these challenges, we believe NI was able to continue to gain market share.

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