National Instruments Earnings Call Insights: Spending Reduction and Gross Margin Details

National Instruments Corporation (NASDAQ:NATI) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Spending Reduction

Mark Douglass – Longbow Research: Alex you talked about the reduction in spending, so we have already seen it in 2Q and then it’s going to continue in 3Q and 4Q. Can you talk about how you’re reducing the spending, where it’s coming from?

Alex Davern – CFO, COO, and EVP: As you would in a situation like this where you see weakness across the industry, we are moving to align our investments with the opportunity. So, we are looking at areas that would normally be affected in this timeframe, areas like variable pay, some discretionary spending, et cetera. But the primary vehicle will be to use attrition that we would normally see as we go through the year to balance our headcount with our revenue growth as we move towards the end of the year. So, as you – we can talk here we had – our headcount was actually flat from March to June, a time period when it would normally go up. We will see a modest increase in Q3 as our new hires come onboard from college recruiting and then we expect to see our headcount fall sequentially in Q4. We are planning currently to end the year with several hundred less people than we had originally planned.

Mark Douglass – Longbow Research: Then that’s all just from attrition?

Alex Davern – CFO, COO, and EVP: Correct. It is a bit more patient process, but one, we believe helps preserve the culture and drive the value that we believe we can get through productivity…

Mark Douglass – Longbow Research: Then looking, you mentioned 4Q and OpEx down sequentially from 3Q, is that assuming you get a normal seasonal uptick in 4Q, are you implying a sequential downtick from 3Q to 4Q?

Alex Davern – CFO, COO, and EVP: So, on the spending side, we are definitely implying a sequential downtick from Q3 to Q4, but that’s only on spending. On the expense side at this point, obviously, we can’t give guidance on Q4, but I don’t see any reason to believe that we won’t see our normal historical pattern in the fourth quarter – on revenue from a sequential point of view.

 

Gross Margin Details

Patrick Newton – Stifel Nicolaus: Alex, first question I want to dig a little bit in the gross margin side with the 400 basis point roughly sequential decline, I think the original guidance was for 200 basis points, so I assume that lower than expected revenue and utilization was the key driver or results relative to guidance, but I am hoping you can help us bucket the relative impact between the inventory overhand you had heading into the June quarter under the utilization and then also the impact from the RF test application?

Alex Davern – CFO, COO, and EVP: Sure Patrick. So, when we talked last time, I was estimating, I think I answered somewhere between 200 and 250 basis points. We came in about 390 basis points, so it was lower than we had anticipated. Really three or four factors there, one being as we discussed the large order which had significant lower than our normal margins, as we’re ramping that product up into production, our cost for servicing that application now obviously it’s in volume production go forward. Factory utilization appeared to be an issue. We did reduce our contractor employment by about 140 people over the course of the quarter. That perhaps took a little bit longer than we originally anticipated. The weakness of yen as you know also had an impact. And then from a revenue point of view coming in below revenue, the other element that contributed gross margin has been a little bit lower than we anticipated. As we give guidance, we expect to substantially recover that in Q3. We expect to be back on model in Q4.

Patrick Newton – Stifel Nicolaus: Back on model meaning, back into a normalized range of 77% plus on a pro forma basis.

Alex Davern – CFO, COO, and EVP: I don’t want to get that specific at this timeframe, but certainly we would expect if we see our normal sequentially revenue growth in Q4 that we should be able to leverage that into improved margins in Q4…

Patrick Newton – Stifel Nicolaus: Then I guess on the inventory side of things, you previous talked about out of the 200 to 250 basis points, you talked about that being a decent chunk of that impact. Did the inventory burn through aid results at all in the quarter or is it – as it’s going to – I guess originally you talked about it perhaps being cleaned up by the September timeframe, is that likely to push into December now?

Alex Davern – CFO, COO, and EVP: Yes. I think we will largely be complete with that by the end of Q3. The biggest factor that caused margins to fall sequentially and will cause it to grow sequentially into Q3 is going to be that one large application for that one particular customer.

Patrick Newton – Stifel Nicolaus: With that large customer and large application with the expectation of less than $5 million of revenue in 3Q, can you discuss visibility or opportunities with this customer beyond 3Q?

Alex Davern – CFO, COO, and EVP: Well inherently large orders like that are difficult to predict. Certainly we are continuing to engage with this customer looking at mutually beneficial opportunities as we move forward. I think if you look at the slides on the webcast you will see the correlation that we put out there of large orders over 100K, obviously we had a very, very difficult compare in the second quarter comparing against the 130% year-over-year growth rate in Q2 of last year. So, that, certainly posed the challenge of returning to revenue in Q2 and also, then into Q3 of 2013 – 2012. So it is difficult to predict. At this point the only visibility I’d be willing to share would be the guidance to less than $5 million in Q3.

Patrick Newton – Stifel Nicolaus: Just one last one for you Alex. I think your software maintenance revenue dropped below 7% of total sales and this is the first time that’s occurred in my modeling horizon. So I was wondering, if there is anything specifically that impacted this, was it this large application sale? Then are we likely to see a snapback as a percentage of revenue and then a resulting gross margin tailwind in the coming quarters?

Alex Davern – CFO, COO, and EVP: Yes. We would expect certainly this large order of $23 million in revenue in Q2 affected the percentages for all the (indiscernible) and we expect that to revert in Q3.