National Instruments Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2020 National Instruments Earnings Conference Call. At this time, all participant lines are in listen-only mode, so if you require operator assistance, please press star, then zero. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then one. Please be advised that today's conference may be recorded. I'd now like to hand the conference over to your host today, Marissa Bedari, Head of Investor Relations. Please go ahead.

Good afternoon. Thank you for joining our Q3 2020 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 third quarter and share our outlook for Q4 before opening up for your questions. Our discussion today will include forward-looking statements, including statements regarding future growth and profitability, our focus, plans, objectives, targets, goals, position, capital allocation plans, dividend, expense management plans, charges, revenue and earnings guidance, and our outlook. 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, including any uncertainties related to the COVID-19 pandemic and further economic and market disruptions resulting from COVID-19. any further weakness in the global economy, and changes in the current global trade regulatory environment. 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 20, 2020, and the company's quarterly report on Form 10-Q, filed on August 4, 2020. 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 statement 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 press release and on ni.com slash natty. NI Management will be hosting meetings at the Baird, Stiefel, and RBC conferences next month. For dates, please visit ni.com slash natty. With that, I will now turn the call over to Chief Executive Officer Eric Starcloss.

Thank you, Marissa. Good afternoon. I appreciate everyone joining us today and hope you and your families remain safe and well. We were pleased to come in above the midpoint of our guidance for revenue and earnings. We're also pleased that despite remaining challenges to the global economy, we did see some improvement in key parts of our business during the quarter. Karen will discuss more details on our results later in the call. We also continue to make significant progress on our long-term growth strategy, and I will discuss details of that progress now, as well as provide some color on our third quarter industry results before handing it over to Karen. At a recent investor conference, I shared our ambition to disrupt our industry once again, redefining the way our customers approach test and measurement. Software is absolutely critical to this ambition. And test data is also an important ingredient. It is uniquely valuable because nothing else tells our customers how their products will actually perform in the real world. We aim to make test a key enabler of product performance by integrating automated test systems and test data analytics to create a digital thread of data that goes across engineering and manufacturing workflows. I believe we are in a unique position to accomplish this goal. Today, we offer the most comprehensive set of driver-level software, application software, test operation software, and now data analytics in our industry. We already serve applications from validation through production within each industry focus area, and we have solid expertise in the automation of testing in these systems. As the complexity of our customers' products continues to grow and scale, many of the manual steps will need to be automated by intelligent systems, and I believe we are in the best position to lead that change. This vision is the foundation of our growth strategy, and we are prioritizing our investments to achieve it. We are focusing our execution on this vision through four strategic pillars, software, systems, services, and a more streamlined buying process for our customers. Our plan includes the following. We will elevate our software position through new offerings, particularly at the enterprise level, and we aspire to increase our software revenue from 20% of revenue today to 30% over time, shifting towards primarily recurring or subscription-based software. We will expand on our system-level offerings to provide a higher-level starting point for our customers and increase our share of wallet. We will increase services, where we believe our expertise offers clear differentiation and value. and we will continue to streamline the process of doing business with NI. The focus to streamline, especially for our large base of smaller accounts, is the next natural evolution in our sales transformation. We are focused on driving more efficiency in the ways we serve and support our broad-based customers while still helping to ensure their success. Over the past several years, we have driven scale and leverage in our marketing, sales, and support model. we are committed to both reducing our costs and improving the experiences of the large number of smaller accounts we serve. For these customers, we will continue to optimize how they engage with NI, including further utilizing our e-commerce for lower touch and evaluating where distribution can improve efficiency and customer reach. We will continue to focus our expert sales force on system-level opportunities in our top potential accounts. We remain focused on driving growth through our strategy, despite economic uncertainty, and are aligning expenses with our expectations. Although we believe a macro tailwind is in our future, we are taking action now to better serve our customers while aligning the capacity needed to achieve our long-term goals. As part of these efforts, we have made the difficult but necessary decision to reduce our global workforce by approximately 9%, with most of that reduction in SG&A. We believe these efforts will accelerate our growth strategy and enable us to make the necessary investments across the business to hit our long-term financial goals. Being a leader in our space requires bold moves, and we are committed to delivering a high level of performance as a company to help exceed the expectations of our stakeholders. Now turning to our industry results this quarter. In semiconductor, as we expected, orders were down high single digits year over year in Q3 though we remain on pace for a record year. We believe millimeter wave is beginning to show increased adoption with release of 5G cell phones, which will drive more millimeter wave-enabled networks. We also continue to experience some negative impact in the semiconductor space from the heightened U.S.-China trade tensions. Serving automated testing from early research to validation and production test opens up a unique opportunity for us to support our customers' needs throughout their design flow. We are making significant progress on our design-to-test offering through leverage of key relationships with industry leaders like our strategic alliance with Cadence and through our recently announced strategic agreement with Soliton. As we attempt to solve a long-standing problem of allowing customers to link design and test workflows, we are seeing strong interest from many leading semiconductor companies who will provide critical product feedback in early stages of solution development. In Q3, orders for transportation continued to be weak, down low double digits year over year, as the headwind in automobile production continued, though we did see year over year growth in the areas of focus around electrification and active safety systems. For aerospace defense and government, orders were up low single digits year over year in Q3, and what has continued to be a relatively steady spending environment, particularly in the U.S., In the third quarter, we saw strong pipeline growth with growth in orders over $20,000 year-over-year, specifically in the Americas in the major accounts where we are focused. Orders in our portfolio business were down low double digits year-over-year in Q3 due to a slow recovery in the broad-based business. Orders in this business did improve sequentially in line with recent stability in the global PMI and improvement sequentially in orders under $20,000. We believe the actions we are taking to streamline our business, to focus on top-line opportunities, and to expand our reach to customers will have a positive impact to our portfolio business going forward. We remain focused on execution in the areas of our business that can drive our growth even within the constraints of what has been an overall weaker spending environment. The actions we are taking on both reductions and investments are focused on achieving that growth. we will continue to adapt in the short term while remaining focused on achieving the long-term financial targets that we have set out. With that, I'll turn over the call to our Chief Financial Officer, Karen Rapp, before closing with a few comments.