National Instruments Corporation

Good day, ladies and gentlemen. Thank you for standing by. And welcome to the second quarter 2022 NADI Earnings Conference call. At this time, all participants are on a listen-only mode. After this week's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host, Marissa DeVare, Head of Investor Relations. Please go ahead.

Good afternoon. Thank you for joining our Q2 2022 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 quarter before opening it up to 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 dividends, and its future business outlook and guidance, including demand for its products, ability to realize revenue from backlogs, future results of acquired companies, and execution of growth strategies. 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. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statement. 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 NADI. You can find the press release and quarterly presentation to supplement today's discussion on our website at ni.com slash NADI. On May 5th, we announced the closing of our acquisition of the test systems business of Kratzer Automation AG. We believe that this investment, along with others we have made in this space, will help accelerate our ability to serve customers in the high-growth area of vehicle electrification. We view this acquisition as a tech-in that will contribute to our software technology roadmap and put this in a leadership position for vehicle electrification test systems. We purchased this business for approximately $57 million, and we funded the transaction with cash drawn under our existing revolving credit facility. In connection with the acquisition, approximately 200 employees joined NI. As is our annual tradition, we will host an investor conference in September with more details to be shared in the coming weeks. In addition, management will also be hosting meetings at the Goldman Sachs Conference in September and the Bayer Conference in November. We look forward to seeing you there. With that, I will now turn the call over to our Chief Executive Officer, Eric Starcloth.

Thank you, Marissa. Good afternoon. We appreciate everyone joining us today. I'm really pleased with our performance this quarter. Our focus on areas where we exhibit competitive strengths is exceeding our expectations and we continue to drive strong momentum in customer demand, delivering record Q2 orders, revenue, and non-gap earnings per share. The key takeaways for Q2 are order growth of 20% year-over-year and revenue up 14% year-over-year. Our focus strategy is leading to ongoing share gains. Earnings growth up 15% year-over-year in the first half. enabled by expense discipline, even as we navigate unprecedented short-term pressure on margins due to supply chain constraints. And we are reiterating our expectations for revenue in 2022, as well as our expectations to meet or exceed our guidance of 100 basis points of non-GAAP operating margin expansion each year from 2022 through 2025. We view this as a floor in expectations and expect to deliver well above this level in 2023. I will comment specifically on our 2023 expectations later in the call. Before Karen discusses the financial results for the second quarter, I want to address a few key topics, including potential future headwinds in our industry, why we believe we are performing well in the current landscape, our industry results in the quarter, and a preview of our expectations for 2023. First, let's discuss potential headwinds in more detail. The outlook on our markets is mixed. On the supply side, the challenges in global supply chains continued in Q2. The shortages of certain components limited our ability to ship product in line with very strong demand. However, these constraints did not get meaningfully worse from last quarter, and we are now in a better position to navigate the short-term headwinds. I'm confident the decisions we've made over the past several months, including increasing prices, adding new suppliers, promoting alternative products, and redesigning products to use available components with similar capability, are positioning us well to succeed in the current environment. In addition, the combination of our purchasing efforts and some loosening in these supply chains has the potential to drive financial tailwinds into 2023. Turning to the macro, While our demand remains robust, we acknowledge the likely softening of the macro environment compared to a very strong environment in 2022 and are anticipating and even planning for this headwind, particularly in elements of our portfolio and semiconductor businesses. Despite these potential macro headwinds, we believe that our intentional focus on higher growth markets, very strong bookings growth over the last six quarters, Record backlog position, growing recurring revenue, and the steps we've taken to manage our expenses give us the ability to achieve significant revenue and earnings growth, even in a potential down cycle. We believe our strong performance over the last several quarters is directly correlated to the strategic shifts we've made in our business to drive growth. Our highly differentiated modular hardware and industry standard automation software align well to the critical customer needs in segments with powerful growth drivers, including electric and autonomous vehicles, wireless communication, and new space technology. Our order growth of 22% year-over-year through the first half and over 50% over the first half of 2020 is both a leading indicator of our business and a proof point to the success of this strategy. Now, on to results by industry for the second quarter. Across the industries we serve, we have honed our strategy to focus on top accounts to increase our share of wallet, ensure operational efficiency, and better target our offerings to key customers. In return, we've seen an increase in program wins and standardization on NI technology, as well as expansion of cross-workflow opportunities from R&D to production tests, further increasing our serves available market. Semiconductor and electronics reported all-time record Q2 revenue of $116 million, up 17% year-over-year, with orders up 10% year-over-year. Though we expect some future slowdown in the growth of our semiconductor business, we believe the areas that we are focused on, wireless, mixed signal, and industrial, will remain much more robust than consumer devices. In particular, the needs of the wireless market will continue to drive demand for test capability for wireless infrastructure, including millimeter waves. As we've noted before, approximately 50% of our semiconductor and electronics business unit revenue comes from production tests, and the other half of this segment is in R&D, which is considerably less exposed to the fluctuations of the semi-cycle. In fact, we have been intentionally forward investing in standardized automated test systems for R&D validation, as well as supporting the semi-industry's large fab investments and expect these areas to be ongoing growth drivers. One of the biggest challenges that wireless device makers face is the sheer complexity of wireless devices, which drives up validation time. Our technology enables customers to get their products to market faster by reducing this time. For example, at Qualcomm, we enabled a reduction in measurement time for validation systems of 40%. This team also uses NI software and data analytics across their workflow and is a lead user on our next generation millimeter wave test technology. 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 a semiconductor downturn will have in our business. Transportation reported record Q2 revenue of $66 million, up 35% year-over-year, with orders up 62% year-over-year. Our strategic shifts and focus to EV and ADAS, where our customers are making significant investments, has changed the trajectory of this business, and we expect that we will continue to deliver market-leading growth rates. In Q2, EV and ADAS represented approximately 40% of our transportation business, and we expect we'll exceed 50% of our transportation business by the end of this year. One recent success is at GM, where they're partnering with NI and our data management and analytics platform to allow them to connect all of their battery test data and quickly develop the insights they need to bring their battery technology to market at scale. Aerospace defense and government delivered outstanding results with record revenue for Q2 of $100 million, up 15% year-over-year. with orders up 25% year-over-year. Our growth year continues to be fueled by defense spending. The current demand backdrop in this area is healthy, and along with our growing relationships and top ADG accounts, gives us confidence in the continued growth of this business. We also continue to see rapidly accelerating opportunities in new space technologies, including launch vehicles and satellites. And our portfolio business, which serves the majority of our broad-based customers, achieved revenue in Q2 of $113 million, up 2% year-over-year, with orders up 6% year-over-year. As I mentioned earlier, this is an area we think is most susceptible to a softening macro environment. Our focus on utilizing global distribution to better position our offerings and optimizing our digital channel to these broad customers has gained traction. further providing leverage and scale in this portion of our business. Today, distribution represents 15% of total orders to the company, up from 10% last year. Longer term, we expect our transition to software subscription will improve the resiliency and growth opportunity for this business. Across the industries we serve, our business is well-positioned to both R&D validation and in-production tests. We estimate across industries that approximately 60% of our business is in R&D and 40% in production. Our software and data analytics platform enable us to uniquely deliver value across these two areas and gain more share of wallet at key accounts. Now, look ahead to 2023. We remain confident in our ability to meaningfully increase our operating margins. It's a top priority for me and my team, and there are many key initiatives underway to ensure we deliver on our commitments to expand margins. This includes channel optimization, increasing share of wallet at top accounts, driving scale and leverage in our broad-based customers, increased R&D efficiency and G&A cost management. We are committed to achieving an increase of our non-GAAP operating margin of 100 basis points each year from 2022 through 2025, with potential for upside should our revenue and share growth continue to exceed our expectations. In fact, even though we are currently planning for a weaker macro entering 2023, we expect to deliver revenue growth on the order of 2022's growth rate. an operating margin well above our previous expectation with approximately a 300 basis point increase over 2022. There are several factors that we believe will drive our performance. Our exposure to key growth opportunities in secular cycles, particularly in transportation and ADG. Our expectation for strong backlog entering 2023. Favorable gross margin impacts as supply chain pressures ease. the growing impact of recurring revenue, and the full-year impact of our expense management focus. We plan to walk through these elements to our model and discuss our three-year strategic plan at the investor conference that Marissa mentioned, and I hope to see you all there. With that, I'll turn it over to Karen to discuss Q2 results in more detail and our outlook for Q3. Karen?