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Edited Transcript of NATI earnings conference call or presentation 29-Oct-19 9:00pm GMT

Q3 2019 National Instruments Corp Earnings Call

AUSTIN Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of National Instruments Corp earnings conference call or presentation Tuesday, October 29, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander M. Davern

National Instruments Corporation - CEO & Director

* Eric Howard Starkloff

National Instruments Corporation - President & COO

* Karen M. Rapp

National Instruments Corporation - Executive VP, CFO & Treasurer

* Marissa Vidaurri

National Instruments Corporation - Head of Strategic Communications & IR

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Conference Call Participants

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* John Warren Marchetti

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Nicholas Heisler;Susquehanna International Group, LLP;Equity Research Associate

* Richard Charles Eastman

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the National Instruments Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to speaker today, Ms. Marissa Vidaurri, Head of Investor Relations. Please go ahead, Ma'am.

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Marissa Vidaurri, National Instruments Corporation - Head of Strategic Communications & IR [2]

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Thank you. Good afternoon. Thank you for joining our Q3 2019 earnings call. Speakers today are Alex Davern, Chief Executive Officer; Eric Starkloff, President and Chief Operating Officer; and Karen Rapp, Chief Financial Officer. We'll start with an update on our business and then take your questions. During the course of this conference call, we shall make forward-looking statements, including statements regarding future growth and profitability, our focus, plans, vision and strategic direction, our market position, capital allocation plans, and our guidance for revenue and EPS for Q4. 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, including any weakness in the global economy, fluctuations in revenue from our large customers, foreign exchange fluctuations, expense overruns, manufacturing inefficiencies, adverse effects of price changes and effective tax rate. 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 21, 2019, and quarterly report on Form 10-Q filed on August 2, 2019.

These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements.

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/NATI. With that, I will now turn it over to Chief Executive Officer, Alex Davern.

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Alexander M. Davern, National Instruments Corporation - CEO & Director [3]

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Thank you, Marissa, and good afternoon. Thank you all for joining us today. My key messages today are strong performance by NI in a contracting PMI environment, our highest non-GAAP net margin for the first 3 quarters of the year since the IPO in 1995 and that I believe NI is very well positioned for long-term growth.

Our revenue came in at the midpoint of our guidance and our earnings per share came in a slightly above the midpoint. Our non-GAAP operating margin for Q3 was a record for a third quarter, and we continue to deliver very strong cash flow.

I believe that by maintaining our revenue and delivering on our profitability goals during the current industrial recession, we're building a very strong foundation. This is the best performance by the company during a period of a contracting PMI since the IPO in 1995. And I believe it puts us in a strong starting position when the market recovers.

We made great progress as a company over the last 3 years. We believe our core strategic vision to be the leader in software-defined automated test and automated measurement systems provides us with a clear path to significantly expand our served available market, while continuing to leverage our highly differentiated platform. Over the last 3 years, the NI leadership team has systematically realigned all the functions of the company to pursue our core strategic vision. We've realigned our business to focus on the industries and applications we believe get the greatest benefit from our differentiated platform.

We have realigned our sales channel to be informed of our business units and to focus on the accounts with the greatest potential. We have realigned our marketing operations to focus on enhancing our brand, and we have realigned our service and operations teams to provide greater system-level value.

Together, this has resulted in a fully aligned company committed to the goal of accelerating our future revenue and profit growth. This has allowed us to deliver a 94% increase in our non-GAAP net income for the first 9 months of 2019 compared to the same period in 2016.

I am pleased to see the significant impact that this realignment is having on our profitability now, and I believe that impact will follow through to revenue growth in 2020 and 2021.

After 4 quarters of weakness in the industrial economy, history would show that a market recovery should be in sight. This, coupled with the expected benefit to NI of the transition of 5G to mainstream mass production later in 2020, give us reason to anticipate improved revenue in 2020.

In the meantime, we remain focused on delivering on the differentiation and flexibility of our software-centric platform to help us increase share as customers look for new options to meet market demands.

We're executing on our commitment to deliver structurally higher profitability and believe we are on track to achieve our profitability goals in 2019.

Our ability to deliver on our profit goals in this difficult environment means we will be in a very good starting position when the market recovers.

Now switching topics. Having participated in 100 NI earnings calls over my career, I'm excited to have the opportunity to discuss my personal transition. It has always been my intention to lead NI for as long as was necessary to successfully transition from our founder to significantly strengthen the company's position and to reset for future growth. I'm excited to announce that Eric Starkloff will be succeeding me as CEO effective February 1 of 2020. I will then take on the role of strategic adviser to the CEO through May, before taking up a teaching position at University of Texas McCombs School of Business in the fall. I've worked with Eric for over 20 years and I have enjoyed partnering with him on our journey over the past 3 years to realign NI for long-term growth and profitability.

His many years of leadership at NI and his passion for innovation make him the right choice to take NI forward. I will remain on the Board, and Eric will be joining the NI Board as part of his promotion. So with that, let me congratulate Eric, and turn it over to him to talk through our performance for Q3.

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Eric Howard Starkloff, National Instruments Corporation - President & COO [4]

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Thank you. And good afternoon. First, let me take the opportunity to personally thank Alec for his leadership and his tremendous impact on NI.

It has been my honor to work alongside with him for the past 22 years, most importantly in the last 3 as we partnered together, along with our leadership team, to create our core strategic vision and align the entire company for long-term growth.

I remain confident in our strategy, our leadership team and our ability to deliver results for all of our stakeholders.

We will continue to focus on growth and profitability, on creating career paths for our employees and on adding more value to our customers to increase our opportunity in the market.

Now onto our performance in Q3. We aligned the company to our new vision and strategy and we remain pleased with our progress and our performance relative to a challenging macro environment.

This quarter, we met the midpoint of our revenue guidance despite a weaker industrial economy that was adversely impacted by trade tensions, a down cycle in semiconductor and continued decline in the global automotive industry. Our year-over-year bookings were down 5% in Q3 compared to one of the best quarters in recent years, Q3 2018, where we reported year-over-year bookings growth up 13%.

Now I will provide context on our quarterly order growth by industry.

In semiconductor, we saw the impact of the now multi-quarter decline in the overall semiconductor industry with a low double-digit decline in orders year-over-year in the quarter. Despite the overall industry weakness, our bookings in semiconductor are flat year-to-date through Q3, and we believe our strategy remains strong and our share continues to grow.

A significant focus of our semiconductor business is the testing of 5G chips. The success in the market of dedicated instruments for early 5G R&D is a positive indicator for the automated validation and automated production applications that follow in 2020 and beyond. Over the past 12 months, we have already seen a significant uptick in chipmakers building out sub-6 GHz production capacity, especially for 5G infrastructure equipment, and this remains a growth driver for our overall semiconductor business. While the deployment timing for millimeter wave 5G is on a different time line in sub-6 GHz, we are currently shipping millimeter wave test systems for both validation and production tests.

So far, millimeter wave 5G deployments have been limited in scope, and the cycle of automated validation and production test equipment has been somewhat delayed due to Huawei restrictions and Intel's exit from the 5G modem business and subsequent sale to Apple. We believe these market conditions will dictate the pace at which market volume of millimeter wave 5G production test increases.

Lead customers are already using our millimeter wave vector signal transceiver released in May 2019, and the reception of this product has been very strong. In transportation, we saw orders decline in Q3 low double digits year-over-year. We continued to see strong growth in our business in the areas of electrification, active safety and autonomy, while the rest of the transportation business reflects the weakness of the broader market.

Our focus remains on mitigating these market weaknesses and continuing to aggressively invest in the areas of high growth in order to increase the proportion of our business in those applications. Our aerospace, defense and government orders grew low single digits year-over-year in Q3.

Our platform continues to add significant value to this industry, which benefits from our software-connected approach and the ability to help our customers control their proprietary IP and meet their needs for highly customized and long life-cycle systems.

The cycles of this industry tend to run counter to the overall industrial economy as the spending environment this year has remained positive. With respect to our broad portfolio of customers in all other industries, which represents nearly half of our business, orders were down low single digits year-over-year in Q3 compared to a very strong Q3 of 2018.

Historically, this part of our business has been the most correlated to the PMI.

Through the first 3 quarters of 2019, this part of our business has been experiencing the headwind of the weakness in the industrial economy, which we believe has begun to stabilize. Strength in customer adoption of our software across all industries continued in the third quarter, with orders up 6% year-over-year and strong growth in enterprise agreements up 14% year-over-year. We believe these results are positive indicators of future revenue growth potential and opportunities for our software-connected platform. In summary, we remain committed to our R&D investment, confident in our long-term strategy, and believe we are in a strong position to take advantage of future growth opportunities. Now I'd like to turn it over to Karen Rapp, our Chief Financial Officer, for the financial updates.

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Karen M. Rapp, National Instruments Corporation - Executive VP, CFO & Treasurer [5]

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Thanks, Eric, and congratulations. Our revenue in Q3 came in at the midpoint of our guidance at $340 million. Our earnings performance stayed strong in Q3, and we delivered $0.44 non-GAAP earnings per share, slightly ahead of the midpoint of our guidance.

We are proud of our operational efficiencies and variable pay alignment to performance that helps structurally scale our profitability.

As Eric mentioned, our year-over-year bookings were down 5% in Q3 as compared to a strong quarter in Q3 2018, where we reported year-over-year bookings growth of 13%. Orders over $20,000 were down 4% year-over-year, and orders under $20,000 were down 6% year-over-year.

Compared to Q3 2017, orders over $20,000 were up 13% and orders under $20,000 were down 2%.

In Q3, revenue was down 2% in total year-over-year. By region in U.S. dollar terms revenue was flat in the Americas, down 2% in Asia-Pacific and down 4% in EMEIA.

Excluding the impact of foreign currency exchange, revenue was flat in the Americas, flat in Asia PAC and down 2% in EMEIA.

Non-GAAP gross margin in Q3 was 77.3%. We believe our strong gross margins remain a testament to the value of our brand and the benefits our platform and systems provide to our customers.

Non-GAAP operating margin was a record for Q3 at 20.1%, up 50 basis points from a year ago. The company reported Q3 GAAP net income of $52 million or $0.39 per share.

Q3 non-GAAP net income was $58 million. Alex talked about the realignment we have made over the last 3 years. We have delivered a 94% increase in our year-to-date through Q3 non-GAAP net income compared to the first 3 quarters of 2016 in a very similar PMI environment. Our non-GAAP net income at that time was 8% of revenue for the first 3 quarters compared to the 15% we delivered in the first 3 quarters this year, which we believe reflects the impact of structural changes we've implemented as a company.

Now an update on our capital allocation strategy.

Our cash balance remains strong at $432 million at the end of Q3. Our trailing 12 months cash flow from operations was $237 million, representing 24% of revenue.

I believe our clear industry and application focus, together with our strong balance sheet, puts the company in a strong position to increase NI's revenue inorganically through investments that enhance our platform and accelerate the innovation we deliver to customers.

During the third quarter, we paid $33 million in dividends and repurchased approximately 1.1 million shares of our outstanding common stock at an average price of $42.42.

Total cash returned to shareholders from dividends and stock repurchases was approximately $80 million. Through the first 3 quarters of 2019, we have returned over $200 million to our shareholders. The NI Board of Directors has approved a dividend of $0.25 per share for shareholders of record on November 11, 2019.

For the trailing 12 months ended Q3, 2019 our dividend payout ratio has been approximately 60% of non-GAAP net income.

Also this quarter, the Board of Directors approved an increase to our share repurchase program of an additional 3 million shares, putting our total available for purchase at 3.8 million shares. For the fourth quarter of 2019, we remain cautious due to broad-based economic uncertainty and external disruptions mentioned earlier. We currently expect total revenue to be in the range of $345 million to $375 million. We expect GAAP fully diluted earnings per share will be in the range of $0.25 to $0.39 for Q4, with non-GAAP fully diluted earnings per share expected to be in the range of $0.43 to $0.57.

As a reminder, our long-term operating model goal continues to be 50% to 60% flow-through from revenue to operating income. At the midpoint of our Q4 guidance, our 2019 outlook is to have a cumulative cash flow -- I'm sorry, flow-through over the last 3 years above 80%.

In 2020, we will continue to invest in strategic investments to support our systems business evolution. We also expect to see variable pay come back in line with revenue growth. Our current outlook for flow-through in 2020 will provide a cumulative flow-through since 2017 of 50% to 60% within our target range.

For these forward-looking statements, please remember that our actual revenues and earnings could be negatively affected by numerous factors, highlighted previously by Marissa.

In summary, we delivered record operating margin for our third quarter during a tough economic environment, putting us in a position of strength when the economy improves. And we remain committed to delivering on our goal of 18% non-GAAP operating margin through the economic cycle.

With that, I will now turn it over to Alex for closing comments.

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Alexander M. Davern, National Instruments Corporation - CEO & Director [6]

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Thank you, Karen.

We remain focused on taking share during this industrial recession. We believe our software-centric platform provides increased opportunity as customers look for new options to meet their market demands.

Our customers are utilizing the NI platform to provide a competitive advantage to their business. Our direct customer relationships are a key differentiator, and our innovation is critical to helping them bring new technologies to market. I'm inspired by the impact of NI's technology within the market today and the exciting opportunities that we have for the future.

Now the last 3 years has been a very rewarding journey. We have repositioned NI for long-term growth and profitability. We are seeing the impact on our profitability now, with a record performance in Q3, and I believe that we will see the impact in our revenue growth in 2020 and 2021. I want to thank our employees for their commitment to NI and to our customers and encourage them to continue to strive for operational excellence. And with that, we will now open up for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mehdi Hosseini with Susquehanna.

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Nicholas Heisler;Susquehanna International Group, LLP;Equity Research Associate, [2]

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This is Nicholas Heisler filling in for Mehdi. Just a few questions. First off with the realignment of the sales in the R&D departments, do you see more synergies going forward or -- on the profitability side? Or are you guys just focused on revenue growth moving forward?

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Eric Howard Starkloff, National Instruments Corporation - President & COO [3]

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Nick, this is Eric. I'll take that. So yes, I think -- first of all, I think, we've already seen a quite a bit of synergies. Karen referenced the significant increase in profitability and some of the records that were set this quarter, and the increase flow-through that we've had over the past couple of years and that is a result of many of the changes that we've made to that alignment as well as the changes in variable pay and other things that you referenced. So that has been an impact. Going forward, our expectation is that we get continued leverage as well as I mentioned, we have a focus on -- focusing on areas of the market where there's more revenue growth opportunity. We knew all along -- as we've gone through this journey, Alec and I together with the leadership team over 3 years now, we knew all along that those kind of changes to drive the ultimate increase in sustainable revenue growth would take longer. But we've been committed to those and committed to achieving both the leverage goals and ultimately the increased revenue growth goals as well.

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Nicholas Heisler;Susquehanna International Group, LLP;Equity Research Associate, [4]

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Okay. Great. Just another follow-up. So orders -- book orders over $20,000 have declined for now 2 consecutive quarters. That hasn't happened since like 2015. And in 2015, you bounced back in the subsequent quarters. Should we expect the same thing here? Or is this about a macro environment, what should we look for?

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Karen M. Rapp, National Instruments Corporation - Executive VP, CFO & Treasurer [5]

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Yes. Nick, it's Karen. Orders over $20,000 are a real focus for us and where we put our pipeline management. And so we continue to work with our customers on the systems opportunities and feed that through. So if you look back over a 2-year time period, over $20,000, our orders are up 13%, going back 2 years, so a nice strong trajectory there.

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Nicholas Heisler;Susquehanna International Group, LLP;Equity Research Associate, [6]

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Okay. Just one more is, how should we think about operating expenses in December? Should we assume the same from what we have now and also looking into 2020?

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Karen M. Rapp, National Instruments Corporation - Executive VP, CFO & Treasurer [7]

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It's Karen, again. Yes. We built out the guidance assuming similar to what you've seen in historical trends for Q4, and so you can continue to build your model that way.

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Operator [8]

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Our next question comes from John Marchetti with Stifel.

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John Warren Marchetti, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [9]

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Alex and Eric, congratulations to you both. Just wanted to jump in real quick. You made a comment obviously, and you've made it a couple of times before, where the downturns typically last 3 to 5 quarters, we're now at quarter 4 here. Just curious as you look out, if -- you're seeing sort of tangible signs of things getting better if you're -- you're sort of pulling more from history, a combination of both. Just any color that you and/or Eric could provide sort of on the -- the sort of state of the environment that you're operating in right now?

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Alexander M. Davern, National Instruments Corporation - CEO & Director [10]

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Yes. So maybe I'll offer a couple of thoughts on this. We clearly saw a definite impact on our business in Q4 of last year, and that's when the kind of normal seasonal pattern broke that our seasonal uptick that we would've expected the scale of that from Q3 to Q4, didn't happen. It started for us -- we started to see this downturn in Europe and then it came to Asia. And now over the course of last quarters last 4 quarters, we've seen it impact the Americas as well.

Now having said that, as we went through from Q1 to Q2 to Q3, we've seen more of that normal seasonal pattern start to reestablish itself. And that is similar to me to what I saw back in '01, '02, in '08, '09. So it's starting to show signs that like -- I said in the call, we should see in the coming quarters a recovery in the market. So that would be very consistent with what we would expect from history.

As we look into Q4, as Karen said earlier on, our guidance for Q4 sequential growth is a little below the long-term average. So we're continuing to be a little bit cautious, but we definitely see the reemergence of our seasonal patterns or sequential partners, and that's definitely a positive.

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John Warren Marchetti, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [11]

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And then maybe if I can just follow up there. How much of what's going on at least in the short-term? Do you think still is a direct impact from sort of the Huawei and Intel disruptions that you highlighted last quarter?

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Eric Howard Starkloff, National Instruments Corporation - President & COO [12]

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Yes. John, I'll take that. That is certainly part of it. I think there's a number of factors here. We talked about it overall for broad economic weakness or as Alec characterized industrial recessionary environment that we see pretty broadly. And then this -- in addition to that this trade tension is a piece. The way we think about as we've said before with Huawei, it's really a disruption of a big supply chain. So it's not so much about just the business directly to Huawei, it's about a lot of moving pieces. And I think that's one of the things that is contributing to overall weakness in the semiconductor industry, which you see as down double digits. It's not just our business, the industry overall is down double digits and I think that is a contributing factor.

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John Warren Marchetti, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [13]

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And may be just as a follow up there, Eric, can you just remind me how much maybe total China business you guys do? And are you seeing signs or are you picking up signs of a sort of anti-U. S. bias as customers are making purchase decisions that might impact the company's business in that region on a longer-term basis?

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Eric Howard Starkloff, National Instruments Corporation - President & COO [14]

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Yes. I'll take it, John. So yes, I mean about half of our Asia Pacific business is in China. It's actually held up pretty well. Our China business was positive, actually approximately double-digit positive in the quarter.

And so we're cognizant of the point you made in terms of the sentiment. It's not something we're directly seeing. What we are seeing is a lot of this movement of supply chain, which is a disruption moving across borders. So...

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Alexander M. Davern, National Instruments Corporation - CEO & Director [15]

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Yes. I'd just like to add -- it's Alec here. Just to echo that. We are a service provider and the tool and systems provider to the Huawei supply chain or to its future China based supply chain. So as and when some of that supply chain moves out of the U.S., for example, and is targeted and ported, let's say, to China or Taiwan or Japanese or Korean-based suppliers, we're in position to continue to support that. And I think that helped our business in China over the last couple of quarters, actually.

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Eric Howard Starkloff, National Instruments Corporation - President & COO [16]

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Exactly.

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John Warren Marchetti, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [17]

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And then maybe I could, just shifting gears a little bit to 5G. Can you help us size sort of where that opportunity set is for you either today or as we look forward? I mean obviously, the bulk of it, at least, today is in the sub-6 spectrum area. You mentioned some of the early signs of traction with some of the millimeter wave stuff. But just trying to get a sense may be of what the opportunity set is today? And where you think it can get to over a number of years?

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Alexander M. Davern, National Instruments Corporation - CEO & Director [18]

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Yes. I'll take that, John. So I'll try to characterize that for you. So first of all, as I mentioned in the prepared remarks, it's an encouraging sign that the company that sells to the early R&D boxes into this space have seen successful deployments as so far this year. That's not a market that we participate in very much, and so that's an encouraging sign. Our opportunity comes in the automated validation systems and in automated production. We are seeing success in sub-6 GHz now. And as I mentioned, millimeter wave is pretty small at this point, but a lot of lead customer adoption.

From a timing, and kind of characterize the size point-of-view, for millimeter wave where they'll be a larger sort of set of capital purchases because of the repurchase that's required, we view that as an opportunity where production will start ramping in the second half of next year. The revalidation systems between now and then, but that's the sort of timing of production with peak kind of a couple of years after that, and that's a several hundred million dollar market opportunity in terms of served -- available market to us.

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Operator [19]

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And our next question comes from Richard Eastman with Baird.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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Well, congrats, Alex. I don't know what I'm going to do with myself when you're not on the other end of these earnings calls.

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Alexander M. Davern, National Instruments Corporation - CEO & Director [21]

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Yes. I think you and I have shared the vast majority of these earnings calls actually and Rick, while I have you on the phone, and I really appreciate your many years of objective coverage and good support for the company. So I think this must be your like number 80 or something like that.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [22]

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Is that an insult or? No, I mean...

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Alexander M. Davern, National Instruments Corporation - CEO & Director [23]

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Oh no, not at all. Not at all.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [24]

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Age-wise, no? Okay. All right. Congrats. I think it's going to be quite a -- my guess is quite an adjustment to come down off the NI train, so...

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Alexander M. Davern, National Instruments Corporation - CEO & Director [25]

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Well, I'm looking forward to continuing to support the company on the Board and to share in some of my experiences with a broader audience. So I'm quite excited actually.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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Yes. Okay. Fantastic, and congrats to you as well, Eric. That's awesome. Just a couple of things. When you talk about the -- Eric when you mentioned the millimeter wave opportunity, as a couple of hundred million dollars, is that kind of your thought around the market opportunity? Or is that kind of NI's maybe share of this production market when it does ramp on the millimeter wave? Is it kind of your hope for share there?

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Eric Howard Starkloff, National Instruments Corporation - President & COO [27]

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No, that's -- what I'm characterizing -- and I said several hundred million dollars. That is what we call the served available market. So it's the automated validation in production that our capability will be able to address. There are of course other parts of the market that are less in focus for us. Like the early R&D that's currently sort of in focus in this time frame where a lot of business is today.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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Okay. And when I look at the soft spots in the semi market as you kind of flagged, orders were down low double digits, is that real weakness? Is it in the smartphone test, the production side of smartphone test, kind of trailing 4G or LTE or analog chip? Where is the big fall off there?

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Eric Howard Starkloff, National Instruments Corporation - President & COO [29]

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Yes. Let me put a couple of points on that, Rick. First of all, I also look at this thing integrated over a little bit longer period of time. So yes, semiconductor, our semiconductor business was down in the quarter. It's up -- if I look year-to-date over a couple of years, it's still the fastest-growing part of our business, up double digits. So there's -- that part of -- we have larger deployments, and it was a very strong growth component at this time last year. So that's one element of it. The other element is there is a sort of a broad-based weakness in terms of capital spending in the semiconductor market. I mean you look at the results from TI and others and you see sort of broad industrial weakness in analog and mixed signal semiconductor, we serve a lot of that space. So there is less sort of friendly capital spending environment in general compared to a year ago.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [30]

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Okay. Okay. Okay. Very good. And then just a quick question around the deferred revenue.

As it shows up -- the software maintenance revenue, I should say, as it shows up in the quarter, it was kind of down 2% year-over-year, why is that down? Should that not be up?

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Karen M. Rapp, National Instruments Corporation - Executive VP, CFO & Treasurer [31]

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Yes. It's Karen. Thanks for highlighting that for us. As Eric talked about with our EA growth, we're seeing more and more EAs come in. And the benefit of that to us is that we're able to recognize more of that revenue from a license perspective into the product line on that. So you'll see some of that transition over time. And you'll see that both in the maintenance piece that we call out for net sales as well as in deferred revenue.

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Alexander M. Davern, National Instruments Corporation - CEO & Director [32]

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So to be absolutely fair, Rick, so as Karen said, our software revenue shows up in both those lines.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33]

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Okay. Okay. Okay. And then just maybe one last question, Karen, I just want to circle back to something you said earlier. I'm not sure -- so cumulative flow-through will be 50% to 60% from 2017 to 2020. So what does that mean? Does that mean that the average incremental adjusted EBIT will be 50%, if I take those 4 years?

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Alexander M. Davern, National Instruments Corporation - CEO & Director [34]

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I think a way to think about this, Rick, is that the very, very high flow-throughs we've seen in 2018 and 2019 obviously as we're hitting our profit targets those have to start to moderate and we're on the track to hit the long-term target that we originally set out. We have frontloaded and kind of delivered in advance a little bit. So we want to make sure that we are continuing to seed the investments needed to drive organic growth.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [35]

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Okay. So our incrementals will moderate for '20 into that 50% rate is kind of another way to say it?

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Karen M. Rapp, National Instruments Corporation - Executive VP, CFO & Treasurer [36]

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Yes. You'll need to do the cumulative on it. Yes. Fill out the whole piece and we can...

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Operator [37]

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And I'm showing no further questions at this time.

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Alexander M. Davern, National Instruments Corporation - CEO & Director [38]

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So let me sign off by thanking you all again for joining us today and really appreciate the time and support that those of you listening have offered 2 NI and to myself personally over the last 25 years. Thank you.

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Operator [39]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.