National Instruments Corporation

Good day and thank you for standing by. Welcome to the NIQ3 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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 TAR11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. To get it started, I'll pass it over to Marissa Bedoury, Head of Investor Relations. Please go ahead.

Good afternoon. Thank you for joining our Q3 2022 earnings call. I'm joined today by Eric Starclough, 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 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 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 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 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 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 natty. You can find the press release and quarterly presentation to supplement today's discussion on our website at ni.com slash natty. As announced last month, Karen Rapp, Chief Financial Officer, plans to retire in May 2023. The company is in the process of an external search. Karen will remain in her current role until a successor is in place, and then will shift to a temporary advisory role to ensure a smooth transition. Management will be hosting meetings at the Bayer Conference in November in Chicago, the NASDAQ Conference in December in London, and the Needham Conference in January in New York. We look forward to seeing you there. With that, I will now turn the call over to Chief Executive Officer Eric Starcloth.

Thank you, Marissa, and we appreciate all of you joining us today. We achieved very strong performance in the third quarter with record Q3 orders, all-time record revenue for a quarter, and record Q3 non-GAAP EPS. This is the fourth consecutive quarter of year-over-year records for all three of these measures. The key takeaways that we'll share with you for Q3 are record revenue of $428 million, up 17% year-over-year, and up 15% year-over-year through Q3. Non-GAAP operating margin up 110 basis points year-over-year through Q3. and commitment to our plans for margin expansion in 2022 and 2023. I want to acknowledge that while Q3 performance was strong, we did start to see a slowdown in demand in certain markets starting at the end of Q3, and which we expect to continue into Q4. We ended the quarter with 12% order growth year-over-year, with a drop in order rate occurring in the last few weeks of September. Orders were approximately flat year over year in that period, with weakness in semiconductor and particularly in China. Weakening in demand is something we've been planning for. The model we shared for 2023 at our investor conference last month, for example, contemplated a recessionary scenario with a 5% decline in bookings in 2023. In that scenario, we laid out the tailwinds in our business, including a reduction of backlog and a healthier supply environment that we believe will contribute to double-digit revenue growth in 2023. In Q4, we expect weakening demand, but likely not fully offset by a substantial improvement in supply environment, which could limit our ability to reduce backlog. Our differentiated modular hardware and industry-standard automation software align well to critical customer needs and subsegments with powerful growth drivers. including electric and autonomous vehicles, wireless communication, and new space technology. To our focus on these secular growth trends, we've increased the mix towards our highest growth industry business units and areas where we can meaningfully grow share. In addition, we expect to expand our share of wallet with increased direct customer engagement at our Tier 1 accounts, which today account for approximately 40% of our total revenue. At these accounts, we are delivering more complete solutions that allow customers to develop higher quality products faster and at a lower cost. In return, we have seen an increase in program wins and standardization on NI technology. Across the industries we serve, our business is well positioned in both R&D validation and in production tests. We estimate that approximately 60% of our total business is in R&D, with 40% in production. And our software and data analytics platform enable us to uniquely deliver value across that entire workflow. Now on to results by industry for the third quarter. Semiconductor and Electronics reported Q3 revenue of $102 million, up 8% year-over-year, with orders down 3% year-over-year. Though we expected a slowdown in the growth of our semiconductor business, orders dropped suddenly in the final few weeks of the quarter, especially in China. While a 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 Semiconnector workflow will soften the impact that a Semiconnector downturn will have on our business. In Q3, we won several large analytic software contracts in Semiconnector, including our largest software contract ever, which had predictable revenue over the three- to five-year period of those contracts. We also expect that the semiconductor devices we test in analog, wireless, and mixed signal will remain more robust than other areas like consumer devices. Transportation reported record Q3 revenue of $84 million, up 58% year-over-year, with orders up 47% year-over-year. Our strategic shift in 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 Q3, EV and ADAS represented approximately 50% of our transportation business, and we expect the revenue from these growth areas will exceed 50% of our transportation business by the end of this year. The recent acquisitions of Kratzer, NH Research, and Heinzinger accounted for approximately 20% of our transportation revenue in the third quarter. Through these acquisitions, we believe we now have the most competitive portfolio of end-to-end battery test capability in the market today. We are seeing the strength of our strategy evidenced by early demand that has exceeded our expectations and expect these investments to drive long-term growth for NI. Recently, we're proud to receive the Charged for Innovation Award from the Battery Innovation Center, a nonprofit research institute. This award recognizes a company with fielded technology that is making a significant impact on the automotive industry. And personally, I was in Europe this quarter with our new Kratzer team and also visiting a large European automotive OEM. The opportunity we have at EV is compelling. Our organic investments combined with the technology and talent we've added to these acquisitions create a highly compelling and competitive offering to our customers. Aerospace defense and government delivered great results with record revenue for Q3 of $105 million, up 13% year-over-year, with orders up 15% year-over-year. ADG continues to outperform our expectations with growth fueled by robust defense spending. We also continue to see strong opportunities in new space technologies, including launch vehicles and satellites, that are well aligned with our platform and channel. In our portfolio business, which serves the majority of our broad-based customers, achieved revenue in Q3 of $138 billion, up 8% year-over-year, with orders up 7% year-over-year, despite the global PMI dropping below 50 in September. This is the area we believe is the 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 also optimizing our digital channel to these broad customers has gained traction, further providing leverage and scale in this portion of our business. We expect revenue from the distribution of digital channels to grow to approximately 20% of our total revenue in 2022, up from 9% of our total revenue in 2020. In the longer term, we expect our transition to software subscription will improve the resiliency and growth opportunity for this business. This transition is on track to our expectations. The initiatives that we've executed since 2017 have transformed NI into a company with higher growth, better profitability, and lower cyclicality. We believe our strong performance over the last several quarters is directly correlated to these strategic shifts, which we believe positions us on a more positive long-term trajectory. In summary, we plan for a weaker macro in 2023, and we remain committed to the targets we set at our investor conference last month for 2023 through 2025. In our business, we've seen signs of a weaker macro starting in September and are taking actions to mitigate its impact in the short term and deliver on our plan for 2023 and beyond. With that, I'll now turn it over to Karen to discuss our Q3 results in more detail.