National Instruments Corporation (NASDAQ:NATI) Q4 2022 Earnings Call Transcript January 31, 2023
Operator: Thank you for standing by, and welcome to the NI Q4 2022 Earnings Conference Call. As a reminder, today’s conference call is being recorded. I would now like to turn the conference to your host, Ms. Marissa Vidaurri, Vice President of Investor Relations. Please go ahead.
Marissa Vidaurri: Thank you. Good afternoon. Thank you for joining our Q4 2022 earnings call. I’m joined today by Eric Starkloff, President and Chief Executive Officer; Daniel Berenbaum, Chief Financial Officer; and Karen Rapp, Strategic Adviser to the CEO. We will start with an update on our performance in the quarter before opening it up for your questions. Our discussion today will include forward-looking statements, including, without limitation, those regarding the company’s expectations of meeting or exceeding financial targets, its capital allocation, financing and investment plans, the payment of its quarterly dividend and its future business outlook and guidance, including demand for its products, ability to realize revenue from backlog, future results of acquired companies, execution of growth strategies and the outcome of the company’s restructuring activities and strategic alternatives process.
We wish to caution you that such statements are just predictions and that actual events or results may differ materially and could be negatively impacted by numerous factors. We refer you to the documents that the company files regularly with the Securities and Exchange Commission including the company’s annual report on Form 10-K filed on February 22, 2022, and the subsequent quarterly reports on Form 10-Q. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements. We assume no duty to update any forward-looking statements to conform the statement to actual results or changes in our expectations. A reconciliation of our non-GAAP financial measures disclosed in this call to the most directly comparable GAAP financial measures or related disclosures are contained in our quarterly presentation deck on ni.com/nati.
You can find the press release and quarterly presentation to supplement today’s discussion on our website at ni.com/nati. Management will also be hosting meetings at the Susquehanna conference in New York on March 2 and the Morgan Stanley Conference in San Francisco on March 7. We look forward to seeing you there. I will now turn the call over to Chief Executive Officer, Eric Starkloff.
Eric Starkloff: Thank you, Marissa. Good afternoon, and we appreciate you joining us today. So first, I want to take a moment to introduce Dan Berenbaum, our new CFO, who joined us on January 9. Dan has extensive experience leading financial operations of various technology businesses, and he’s already had an immediate impact as we execute our growth strategy and focus to achieve our operating margin expansion targets for 2023 and beyond. Karen is going to close out 2022 on the call today. And I want to once again take the opportunity to recognize and thank Karen for her significant contributions to our success over the past six years. After Karen speaks, Dan will provide outlook for Q1 2023. And I’ll start by kicking things off with an update on the business in the fourth quarter and for the full year of 2022.
The key messages you’ll hear today are, we closed out a record year in 2022 with a strong fourth quarter. We achieved record non-GAAP quarterly revenue of $449 million, up 7% year-over-year and in line with our guidance. And we delivered non-GAAP operating margin of 25% in fourth quarter which is an all-time record for a quarter. 2022 is a strong year as we continue to make strides in tricks forming NI into a higher growth, more profitable and more resilient company. Despite ongoing global macroeconomic uncertainty, we delivered on the 2022 targets that we shared at our September investor conference with record revenue of $1.7 billion, up 13% year-over-year and non-GAAP operating margin of 20%, up 130 basis points compared to 2021. As we head into 2023, we are planning towards the recessionary growth scenario in line with what we shared in September.
And even in a wide range of downturn scenarios, we now expect to exceed our 300 basis point non-GAAP margin expansion target. Our results are due to the transformation of our business that started in 2017. We have successfully executed on a set of transformational initiatives over the past five years, including we transformed our go-to-market into a tier channel strategy based on customer potential and stood up a non-direct channel in 2021. These changes have driven growth in our top accounts and significant cost leverage in SG&A. We formed industry specific business units and have hired experts in those industries to lead them. We have shifted our road maps to focus on application-specific systems at software aligned to fast growing subsegments, including electric and autonomous vehicles, wireless communication, and new space technology.
We’ve expanded our software portfolio, building on our leadership position in automated test through LabVIEW and adding additional development tools, application software and also expanding into growing adjacencies to systems management and product analytics. We’ve accelerated our strategic transformation with a number of important bolt-on acquisitions including multiple companies enabling us to deliver complete offerings in electric vehicle testing, now the fastest-growing part of our business. And we have been keenly focused on our cost structure to increase our leverage and our flexibility of spending. As a case in point, in 2022, we saw an unanticipated headwind to gross margin of 420 basis points, largely due to ongoing supply chain constraints and yet managed our operating expense to still hit our commitment of 100 basis point improvement to operating margin.
We continue to focus on the efficiency of our operating expenses and expect a strong uptick in operating margin again this year. We have made shifts in our organization to consolidate our operational core and enable a leaner SG&A org. In Q1, we are also implementing a targeted restructuring of approximately 4% of our global headcount. Our high confidence in 2023 is directly correlated to the strategic shifts we’ve made, which we believe have created a stronger trajectory for growth. Now on to results by industry. The areas of intentional focus are delivering to our expectations. I believe this is a proof point that we’re focused on the right areas to accelerate our long-term growth. Semiconductor and Electronics reported 2022 revenue of $433 million, up 10% year-over-year, with Q4 orders down 10% year-over-year, in line with our expectations for the quarter.
While slower semi cycle has been anticipated, we believe the combination of our exposure to R&D tests and our ongoing progress in delivering software across the semiconductor workflow will soften the impact that the semiconductor downturn will have on our business. Last quarter, we won several large analytics software contracts in semiconductor, including our largest software contract ever, which will add predictable revenue over the next three to five year period of those contracts. Transportation reported 2022 revenue of $302 million, up 40% year-over-year, with Q4 orders up 35% year-over-year. Our strategic shift to focus in EV and ADAS where our customers are making significant investments has changed the trajectory of this business, and we expect that will continue to deliver market-leading growth rates in 2023.
As we expected, EV and ADAS now represent more than 50% of our transportation business. The recent acquisitions of Kratzer NH Research and Heinzinger, accounted for approximately 24% of transportation revenue in the fourth quarter. Through these acquisitions, we believe we now have the most competitive portfolio of end-to-end battery test capabilities in the market today, and we expect these investments to drive long-term growth for NI. Our recent success was winning a large battery lab deployment, resulting in $22 million in revenue that will be recognized over the course of 2023. Aerospace, defense and government delivered strong results with 2022 revenue of $412 million, up 9% year-over-year, with Q4 orders down 12% year-over-year. As a reminder, and as we noted in our Q3 call, in Q4 2021, we closed a large program win in ADG, so the decline in year-over-year orders was expected.
We expect to see order strength in this business in 2023, driven by robust defense spending. We also continue to see strong opportunities in commercial space technologies like launch vehicles and satellites. In our portfolio business, which serves the majority of our broad-based customers, achieved revenue for the year of $511 million, up 5% year-over-year, with Q4 orders down 10% year-over-year. This is the area that has historically been most susceptible to a softening macro environment, and we have been taking steps to make this business more resilient. Our focus on utilizing global distribution to better position our offerings and optimizing our digital channel to this broad customer base to gain traction, further providing leverage and scale in this portion of our business.
We expect revenue from distribution and digital channels to grow to approximately 22% of our total revenue in 2023, up from 9% of our total revenue in 2020. We also expect our transition to software subscription will improve the resiliency and the growth opportunity for this business. As we mentioned previously, starting in January of 2022, we transitioned our single seat licenses to subscription, which resulted in a 2% headwind to revenue for the full year. We were pleased to exceed our internal targets on this transition in 2022. And going forward, the vast majority of our software portfolio is now recurring revenue. In summary, we believe the company is in a strong position. We plan to head and took action in anticipation of softening in the semiconductor cycle and a weaker overall macro economy.
We are planning towards the recessionary growth scenario in line with what we shared in September. And even in a wide range of downturn scenarios, we now expect to exceed our 300 basis point non-GAAP margin expansion target. With that, I’ll turn it over to Karen to discuss our Q4 and year end results in more detail. Karen?
Karen Rapp: Thanks, Eric. Q4 was a record quarter with GAAP revenue of $448 million, up 7% year-over-year. 2022 was a record year for revenue at $1.7 billion and 13% growth year-over-year. Our Q4 orders were down 3% year-over-year as we expected. We started to see a decline in the semi market and the macro economy at the end of September, and we plan for that to continue in Q4. As Eric mentioned, we had a strong Q4 last year with a large ADG order that we knew would not repeat in 2022. By region, fourth quarter orders were down 7% year-over-year in the Americas, up 7% year-over-year in EMEA and down 9% year-over-year in Asia Pacific. We ended the quarter with delinquent backlog of approximately $230 million, which is approximately 7 weeks of revenue.
We’re confident in the resiliency of our backlog and in our ability to realize this revenue as supply chain constraints continue to ease because our solutions are off in a capital expense and provide unique capabilities for our customers, we don’t typically incur any double ordering risk, and we haven’t seen anything that would indicate a change in that historic pattern. We also continue to see minimal cancellations due to lead times at less than 1%. Non-GAAP gross margin for both Q4 and full year 2022 was 70%. 2022 non-GAAP gross margin was down 420 basis points year-over-year, driven primarily by broker fees, paid for components that were in short supply. We continue to see supply constraints easing, while there are still some key golden components, especially in legacy semi technology, we expect the supply chain constraints to ease in the first half of 2023 and the reduction in broker purchases to positively impact our 2023 operating margin.
In Q4, we generated $60 million of GAAP operating income and $112 million of non-GAAP operating income, a non-GAAP record for a fourth quarter. We delivered non-GAAP operating margin of 25% in Q4. For the full year, GAAP operating margin was 12%. Non-GAAP operating margin was 20%, a record for NI had an increase of 130 basis points year-over-year, demonstrating the continued focus we have had on driving variability and efficiency in our cost structure. We reported Q4 GAAP net income of $40 million and diluted earnings per share of $0.30. We reported record Q4 non-GAAP net income of $83 million and record diluted non-GAAP earnings per share of $0.63, an increase of 5% year-over-year. For the full year 2022, GAAP net income was $140 million. We delivered record non-GAAP net income of $255 million, up 14% year-over-year.
In summary, Q4 results were in line with our expectations, and 2022 was another strong year of growth on both the top line and bottom line for NI. I’m proud of the results we’re delivering. Finally, as many of you know, this will be my last earnings call, although I’ll be here through May to help ensure a smooth transition. I’m excited to have Dan here. His background and skill set is a great addition to NI, and his experience will help us continue to grow in all areas. I’ve enjoyed getting many of you over the past six years, and I appreciate your time, interest and commitment to understanding our business. I’m confident in the trajectory of NI and excited about the company’s future prospects. Now I’ll turn it over to Dan to discuss our outlook for Q1.
Daniel Berenbaum: Thank you, Karen, and thank you, Eric, for the warm welcome to NI. I’m very happy to be here and to be participating in this call as we look ahead to 2023. As you can imagine, I spent my first few weeks in NI immersing myself in the business. It won’t surprise those of you who have followed NI for a long time that I’ve been deeply impressed with the high level of talent across the organization, a testament to NI’s strong culture of engineering and commitment to customers. It’s also very clear that the transformation of NI continues to gain momentum. As I continue to learn more about our customers, products and operations I’ll focus on continuing those operational efficiency improvements to achieve our short- and long-term margin expansion targets as well as on improving our working capital management and cash flow generation, and building investor confidence in our ability to execute on a quarterly basis as well as over the long term.
As Eric mentioned, we remain committed to our target of delivering at least 300 basis points of non-GAAP operating margin improvement in 2023. We have a number of initiatives in flight, which underpin our confidence including supply chain planning improvements, tight control of discretionary spending and the restructuring, which Eric mentioned earlier. Specific to gross margin, as we enter 2023, we expect a tailwind from lower purchase price variance as we see our supply chain constraints ease. We also expect to see the benefit of pricing actions, which have been taken over the past several quarters. For Q1, we expect to deliver a more than 100 basis point sequential improvement in non-GAAP gross margin compared to Q4. With respect to operating expenses, we anticipate that Q1 OpEx will rise slightly from Q4 levels as we made targeted investments to ensure our future growth, while maintaining discipline around discretionary spending.
The restructuring actions that Eric mentioned previously will result in a reduction of approximately 4% of our headcount, primarily in SG&A. We anticipate that most of the benefits from this reduction will start in Q2. After declining significantly as a percentage of revenue over the past few years, we expect OpEx to increase gradually in absolute terms as we go through 2023. But to remain flattish or decline as a percent of revenue in relation to Q1. Now let me comment on capital management. Our balance sheet remains strong with $140 million of cash at the end of the fourth quarter. Cash flow from operations was $52 million in the fourth quarter. In Q4, we continued to invest in inventory to enable us to meet customer delivery commitments in the face of ongoing supply chain challenges.
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As supply constraints ease, we expect inventory to return to more normal levels, along with a renewed focus on working capital management, we expect to be able to convert non-GAAP net income to cash at levels more aligned with our historic performance and at a meaningful improvement over 2022. Our capital allocation strategy remains balanced and disciplined. We will continue to invest in organic capabilities to ensure we stay ahead of the technology needs of our customers and prioritize inorganic investments that strategically align to the business in order to drive profitable growth. In the fourth quarter, we returned $37 million to shareholders through our dividend. And the NI Board of Directors has approved a quarterly dividend of $0.28 per share, payable on March 6, 2023, to stockholders of record as of the close of business on February 13, 2023.
We’ve elected to continue our dividend at current levels, given the already very strong return of cash to shareholders. We did not repurchase shares in Q4. I would note that our Q4 22 weighted average share count was the lowest since Q4 ’20. With some normal fluctuations, NI share count has remained roughly flat over the past five years as we have successfully used our repurchase program to offset dilution. With that, let’s shift to guidance for Q1. For the first quarter, revenue is expected to be in the range of $415 million to $445 million. At the midpoint, this represents 12% revenue growth year-over-year. Our guidance assumes currency impact similar to Q4. We expect GAAP diluted earnings per share in the range of $0.14 to $0.28 for Q1 with non-GAAP diluted earnings per share expected to be in the range of $0.48 to $0.62, an increase of 35% year-over-year at the midpoint.
Our Q1 non-GAAP earnings forecast excludes $20 million related to the restructuring we have discussed today, $18.5 million for stock-based compensation and $15 million for amortization of acquired intangible assets, acquisition-related expenses and other items. We anticipate a full year 2023 GAAP and non-GAAP tax rate of between 17% and 18%, assuming no changes to tax laws. In Q1, we will also incur an additional approximate $1 million tax expense related to changes in the R&D tax credit. In summary, we continue to see benefits from NI’s multiyear transformation journey. We are laser-focused on making efficient investments in our growth while improving our expense control and working capital management. As Eric mentioned, we are planning for continued recessionary environment in the first half of 2023.
Even against the slower macro backdrop, we are confident in our ability to deliver on our commitment to increase our non-GAAP operating margin by at least 300 basis points in 2023. I’ll now turn it back over to Eric for some closing comments.
Eric Starkloff: Thank you, Dan, and Karen. We are confident in the actions we have taken to better position the company to perform, including in a weaker macro environment. We expect revenue growth even in a headwind environment and remain committed to meeting or exceeding our target of 300 basis point margin expansion. I believe our strong performance in 2022 is proof that we have the right strategy in place. We’ve done a lot of hard work over the past five years to fundamentally transform the company and change the trajectory of our performance, and we’re not done yet. The key elements of the strategy have gained traction and demonstrate the success in driving a higher level of growth. Now we’re focused on executing the strategy and achieving the return on these investments with a focus on top line growth, and strong leverage and earnings growth on the bottom line.
I want to set a big thank you to all of our employees who have driven our strategy and committed to a significant expense management actions throughout this past year. I know it’s not been easy. Employees in manufacturing and operations in particular have worked incredibly hard to navigate continued and unprecedented challenges in our supply chain. And I sincerely appreciate everyone’s hard work and determination of perseverance. Before we take your questions, I do want to comment on the strategic review process. As you all know, NI issued a press release on January 13 announcing that our Board of Directors has initiated a review and evaluation of strategic options for NI. A comprehensive review will include consideration of a full range of available strategic business and financial alternatives.
We know some of you have questions regarding the strategic review, but I’d like to note that we are not planning on answering questions regarding this topic on the call today. We appreciate your cooperation in advance. And with that, we will now take your questions.
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