National Instruments Corporation

Thank you for standing by, and welcome to the NI Q4 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speakers' presentations, there'll be a question and answer session. To ask a question at that time, please press star 11 on your text phone telephone. As a reminder, today's conference call is being recorded. I will now turn the conference to the host, Ms. Marissa Bedard, Vice President of Investor Relations. Please go ahead.

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 Barenbaum, Chief Financial Officer, and Karen Rapp, Strategic Advisor 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 dividends, and its future business outlook and guidance, including demand for its products, ability to realize revenue from backlogs, 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 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 quarterly presentation deck on ni.com. You can find the press release and quarterly presentation to supplement today's discussion on our website at ni.com. Management will also be hosting meetings at the Susquehanna Conference in New York on March 2nd and the Morgan Stanley Conference in San Francisco on March 7th. We look forward to seeing you there. I will now turn the call over to Chief Executive Officer 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 9th. Dan has extensive experience leading financial operations, 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's 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% for fourth quarter. which is an all-time record for a quarter. 2022 is a strong year as we continue to make strides in transforming 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% of 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 tiered 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 roadmaps to focus on application-specific systems and 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 tests through LabVIEW and adding additional development tools, application software, and also expanding into growing adjacencies in 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 in 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 a slower semicircle 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 a semiconductor downturn will have on our business. Last quarter, we won several large analytic 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 we'll 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. We expect these investments to drive long-term growth for NI. A 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 orders strengthen 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. And 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 have gained 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 planned ahead and took action in anticipation of softening of the semiconductor cycle and a weaker overall macro economy. We are planning toward 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?