NATI

National Instruments Corporation (NATI)

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National Instruments Corporation (NATI)

Q2 2013 Earnings Conference Call

July 29, 2013 17:00 ET

Executives

David Hugley - Vice President, General Counsel and Secretary

Alex Davern - Chief Operating Officer

Dr. James Truchard - President, Chief Executive Officer, and Co-Founder

Eric Starkloff - Senior Vice President, Marketing

Analysts

Mark Douglass - Longbow Research

Patrick Newton - Stifel

Rob Mason - Robert W. Baird

Presentation

Operator

Good day, everyone, and welcome to the National Instruments’ Second Quarter 2013 Earnings Conference Call. Today’s call is being recorded. You may refer to your press packet for 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, Senior Vice President of Marketing.

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 our guidance for our Q3 revenue, gross margins, operating expenses and earnings per share and statements regarding our expense control plans and future financial performance. 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 quarterly report on Form 10-Q filed May 2, 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.

Dr. James Truchard

Thank you, David. Good afternoon and thank you for joining us. Our key points are second quarter revenue of $296 million, all-time record revenue for RF products, and good spending discipline in Q2. Our revenue in Q2 was weaker than anticipated as we continued to see challenges in our industry. However, I was very pleased with our disciplined cost management during the quarter, and we plan to continue further actions to optimize our spending going forward.

In our call today Alex Davern, our Chief Operating Officer will review our results; Eric Starkloff, our Senior Vice President, 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 second quarter revenue of $296 million, 3% below the midpoint of our guidance range. Although our year-over-year growth in Q2 was weak, we were pleased to see growth given the current weakness in the test and measurement industry and believe that we are continuing to gain market share.

For Q2, net income was $14 million with fully diluted earnings per share of $0.12 and non-GAAP net income was $22 million with non-GAAP fully diluted earnings per share of $0.18, $0.04 below the midpoint of our guidance range. During Q2, we incurred a $0.01 per share loss on foreign exchange, which we had not anticipated when we gave guidance. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

During Q2, we saw a broad weakening of revenue growth across geographic regions. Year-over-year revenue was down 15% in the emerging markets, down 1% in the Americas, up 2% in Europe, and up 10% in East Asia. Growth in East Asia came despite the significant negative impact from the decline in the value of the yen with orders from Japan in Q2 being down 20% year-over-year in U.S. dollars.

Non-GAAP gross margin in Q2 was 73%, down 390 basis points from Q1. As we anticipated in our April’s earnings call, our gross margin was negatively impacted by lower factory utilization and a significantly lower margin on orders for our first RF test application with our largest customer. I will give additional detail on this application in a moment. Total non-GAAP operating expenses were $185 million, down $5 million sequentially. The year-over-year growth in our non-GAAP operating expenses dropped from 12% year-over-year growth in Q1 to 3% year-over-year growth in Q2. And our non-GAAP operating expenses in Q2 were $8 million lower than our guidance. Given the recent broad weakness in the industry, we have identified additional actions, which we are taking to further reduce our spending for the second half of the year. For Q2, our non-GAAP operating margin was 10% with non-GAAP operating income of $30 million. Our operating income was flat sequentially. Our tax rate increased significantly from Q1 mainly due to the impact of the reinstatement of the R&D tax credit in Q1.

Now, taking a look at the trends by order size. We saw 4% year-over-year growth of our orders between $20,000 and $100,000, while orders over $100,000 fell 30% year-over-year. We had a particularly difficult compare in Q2 as the value of orders over $100,000 was up 130% year-over-year in Q2 of last year. So, for perspective, when you compare with Q2 of 2011, our orders over $100,000 were up over 60%. With respect to our largest customer, we are currently serving three different applications for them, each involving the use of LabVIEW and the NI PXI platform to rapidly develop production test solutions, which offer the customer outstanding performance and accuracy at a very low cost of test per unit. Two of the applications we serve for this customer ramped up significantly for initial production in 2012, and as a result, the customers ordering far less units this year. The majority of orders from this customer in 2013 relate to a new PXI application in RF test, which is a highly competitive space in an area which we have not served for this customer before. As a result of the highly competitive nature of this application, the margins were significantly below our corporate average.

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