National Instruments Corp (NATI) 2002 Q1 法說會逐字稿

Good day everyone and welcome to the National Instruments quarterly earnings release conference call.

Just as a reminder, today's conference is being recorded.

You may refer to your press release packet for the replay dial-in number and pass code. The replay will be available by 6:30 p.m. central time today and will end at midnight central time on Thursday, April 25th.

And at this time for opening remarks and introductions, I would like to turn the conference over to General Counsel Mr. David Hugely

Please go ahead, sir.

Good afternoon.

During the course of this conference call, we shall make projections and forward-looking statements regarding the future financial performance of the Company including projections of future sales growth, expense levels during 2002, and business returning to a normal pattern.

Such statements are based on management's current expectations or beliefs and are subject to uncertainties that could cause actual events or results to differ materially. Some of the risks that could cause our financial results to differ from the forward-looking statement include fluctuations in customers demand for the Company's products, expenses exceeding the Company's budget targets, and delays in the introduction of new products.

We refer you to the documents the Company files with Securities and Exchange Commission including the Company's recent Form 10-K. These documents contain and identify other important risks.

This call is being made at 4 p.m. central time on April 18th, 2002 and we undertake no duty to update any statements made herein.

With that, I will now turn it over to the President and CEO of National Instruments Corporation, Dr. James Truchard.

Thank you David. Good afternoon and thank you for joining us today.

Our key points are continued improvement in our business, strong growth and record sales for PXI and and continued investment in strategic R&D and sales initiatives.

We are pleased that economic for the future have continued to improve. Ion the sequential basis, our revenue now has followed a normal pattern, normal pleasing little pattern for two consecutive quarters.

While we are disappointed that our Q1 revenues was down year-over-year, we are pleased with our results we are pleased with our results both with our competitors demonstrating the quality of our business and the strength of our market position.

Alex Davern, our CFO will review our financials, , our Director of Strategic Marketing will discuss our business, and I will close with a few comments before we open up for your questions.

Alex.

Good afternoon and thank you for joining us today.

During Q1 NI delivered a good performance in what continues to be a tough environment with revenue of $94.7 million and fully diluted earnings per share of 14 cents. We continue to have very good expense control and increased our operating margin modestly from 10.5 percent in Q4 to 10.8 percent in Q1, the highest level since Q2 of last year.

Now, I'll go into some of the details starting with revenue. In our conference call on January 23rd, we stated that our daily order rate for the quarter through January 22nd was down 12 percent. The order rate improved after January 23rd and was down 10 percent for the quarter as a whole.

The U.S. investment in the economy continued to stabilize during Q1 but the purchasing manager's index improving to 55.6 in March, it's highest level in more than two years. Industrial production has also started to recover, increasing in each of the last three months after a dramatic decline in 2001. U.S. industrial production was down 2.9 percent year-over-year in March compared to a year-over-year decline of almost six percent in December.

Sequentially, revenue was up slightly from Q4, which is in line with what has historically been the company's seasonal pattern and is significantly better than the six percent decline we saw in Q1 of last year.

After declining in the first three quarters of last year, the last two quarters with sequential revenues up 11 percent in Q4 and up slightly in Q1, have followed the historical seasonal pattern that we saw prior to 2001. This gives us confidence that our business is returning to a more normal pattern.

As a result of the slightly easier revenue compare, our year-over-year growth trend improved in Q1 going from minus 17 percent in Q4 to minus 12 percent in Q1. On a regional basis, in Q1 our year-over-year in the U.S. improved and Asia also, while in Europe, which slowed down later last year the year-over-year revenue decline was consistent with Q4. As a side note, revenue in Q1 was up one percent compared to Q1 of 2000. This is a performance that is unlikely to be matched by many of our competitors.

Moving on to income statement gross margins in Q1 were 73.2 percent, up slightly from 73.0 percent in Q4. The improvement in gross margins was primarily driven by improved efficiency as we slowly gained operating leverage by increasing the volume through our new Hungarian production facility.

We believe the stability of our gross margins during the economic downturn clearly demonstrates the we offer to our customers and to differentiate our position we have in the market.

During the quarter, our employees did an outstanding job in controlling costs. Our total expenses were flat sequentially at $59 million, a full percent decrease over Q1 of last year.

SG&A expenses were down six percent but our R&D investment was up six percent and that represents 17 percent of revenue.

During the quarter we capitalized $400,000 in R&D expenses while we amortized $1 million of previously capitalized expenses. Total expenses were $2 million below the 61 million we forecast in January. We anticipate that we will start to see expenses increase sequentially in Q2.

Operating margins come in at $10.2 million or 11 percent of revenue. While operating results show sequential improvement, we did take a hit below the operating income line. The positive impact of interest and foreign exchange dropped from $840,000 in Q4 to essentially zero in Q1. This decline was as a result lower interest rates and the dramatic decline of the value of the yen against the dollar in January. These declines reduced our diluted earnings per share by a penny.

Net income was $7.4 million or eight percent of revenue.

With that, I would like to make some forward-looking statements.

Since the IPO in 1995, our seasonal pattern has been for revenue in Q2 to increase by an average of three percent from Q1. With the only second quarter sequential decline occurring last year. As I discussed previously, since our revenues have followed our previous seasonal pattern for the past two quarters, we expect our revenue in Q2 will continue this trend and show modest sequential increase over Q1. Looking out further, we expect to return to year-over-year revenue growth in Q3 this year.

Now this is a forward-looking statement and must caution you that actual revenues for Q2 and Q3 could be negatively affected by numerous factors such as the actual performance of the global economy, delays in new product releases and foreign exchange fluctuations.

The improvement in the purchasing manager's index and in industrial production indicate that the manufacturing sector has stabilized and is showing some signs of recovery. We will be closely monitoring these indexes for clear signals that the industrial economy can sustain this recovery.

It should be noted that there was a delay of approximately six months between the decline of the purchasing manager's index below the break-even level of 50 in August of 2000 and a noticeable impact on the economy on our business in Q1 of 2001.

On the expense side, we currently expect our expenses for the second quarter to be approximately $61 million. We're expecting and increase of approximately $1 million in sales and marketing expenses and we're also expecting to see an increase of approximately $1 million in G&A.

As we have discussed in past calls, we have been defending our intellectual property over the last several years and, as a result, we have successfully stopped the infringement of our live view patents in multiple locations. We are currently involved in another defense of the live view patents, which is due to go to trial in September. The increase in G&A expenses reflects the increase we expect to see above our normal run rate for legal expenses. We expect to see a similar expense increase in Q3.

With that, I'd like to take a moment to reflect on how we have managed through the last two years, since January of 2000. During this tough economic period, we maintained our revenues despite a dramatic slowdown in the industry and we believe we have clearly gained market share.

In addition, we have continued our strategic investments in sales and R&D. We increased our head count by 30 percent over the last two years. In addition, our increased leverage of the web has helped us to increase our field sales force by 45 percent since March of 2000 while only increasing our sales and marketing cost by two percent over Q1 2000.

We believe that these investments leave us in a very good position to take advantage of any economic recovery. We'll continue to watch our business for setting future order trends but our bias now is increasing in investment in R&D and sales with a view toward achieving our goal in 2003.

With that I'll turn it over to Ron.

Thank you Alex.

We turned in a solid performance in Q1 in the face of the mixed economic environment. Some of the many industries we serve showed signs of improvement in Q1, while others were still down sharply. Though the climate remains challenging, we were pleased to see our business follow our normal seasonal pattern for the second consecutive quarter.

From a product line standpoint, the star performance in Q1 were our modular PXI hardware platform for complete system solutions and our software for embedded and realtime applications. Both of these product lines, once again, had very strong growth and record sales in Q1 and they're strength helped us continue to penetrate new accounts and win business in strategic new applications.

For example, , one of the world's largest suppliers of automotive systems and components is now use and PXI for rapid prototyping of next generation automobile control systems. Adaptive cruise control, for example, is a sophisticated control system that uses special radar to sense cars on the road ahead and automatically slow down or speed up. Using and PXI, estimates they have accelerated their development schedule and reduce their development costs by over 30 percent.

Delphi is another worldwide manufacturer of automotive parts and systems. They're now using our text executive software for production testing of automobile climate controllers. They reduced their test time by 45 percent and with parallel test capability they doubled the number of products they can test at one time.

One of the world's largest aerospace companies has selected PXI with for all of their test systems in a project related to a high profile missile defense program by the bullet hitting bullet concept. They estimate saving over 30 percent in hardware cost and over 40 percent in software development time compared to traditional VME systems using the VX works realtime operating system.

In the physical side, the new PXI system is much smaller. These include multiple PXI chassis with a large number of our PXI measurement modules and SCXI switch modules. They also include several third party, military avionics PXI modules from vendors who worked with us to support their products on the . These are some of the largest, most complex PXI systems developed to date and they clearly demonstrate that our virtual instrumentation approach can now scale to much larger system opportunities for the future.

Another example is a global player in the oil production industry. This customer used embedded on our field point 2000 distributed measurement and control hardware, to implement new control systems that maintain peak operational efficiency of refinery equipment, as well as offshore oil and gas pipeline. Their new systems prevent the build up of oil and gas inside underwater pipelines by monitoring and controlling refinery valves and pumps more reliably. In addition, when they perform scheduled maintenance, their new systems can now return their equipment to peak production within hours instead of days.

and PXI are also playing a key role for the international space station. Where noise from each piece of equipment must be carefully controlled. Nelson Acoustical Engineering working with NASA Glen Research Center used and PXI to implement a new generation of test systems optimized for space flight hardware. They reduced their test times by up to 90 percent and also automates the calibration, test documentation, report generation, and more.

We also had continued success in Q1 with our machine vision product. Milestone Technology recently introduced a new breakthrough security system designed for use at airports, government buildings, and other areas requiring tight security. The system uses our machine vision hardware and our data acquisition hardware to simultaneously acquire both image and electromagnetic information. And because can combine and analyze all of this data in an integrated fashion, it can pinpoint potential dangers much more accurately, while at the same time setting off fewer false alarms.

Our continued aggressive R&D investment over the past year led to a strong start in 2002 with new products. In January, we announced the latest upgrade of our entire product family, including . Among it's many new features, this new upgrade takes full advantage of Windows XP to instantly enable web based control of with just two mouse clicks, adds exciting new capabilities for wireless communication and delivers much faster network performance for embedded and realtime systems.

In February, we announced our new release of our popular measurement studio software. This new release seamlessly integrates into Microsoft Visual Studio Dot Net, which is Microsoft's latest general-purpose programming environment to enhance productivity with our comprehensive suite of measurement tools. For nearly two decades, we have successfully leveraged commercial technologies for Microsoft for measurement and automation. This upgrade, once again, maintains compatibility with our large installed base, yet enables our customers to align with the latest Microsoft tools.

Long-term continuity through many years of changing Microsoft technologies has been a key trademark of our company and a key factor in building and maintaining our strong software leadership and our customer loyalty.

In March, we announced a new software product called NI Switch Executive. It is the industry's first open architecture switch management software for automated test systems. Traditionally, only engineers who purchased expensive proprietary ATE systems have had access to switch configuration tools. Now, with our new Switch Executive, we bring these sophisticated tools to open affordable PC-based test systems. Just as the PC displaced large, proprietary mainframe computers to democratized computing for masses, our new Switch Executive is yet another step in our mission to democratized the test and measurement industry by bringing high end ATE functionality to a much larger base of mainstream engineers and scientists with our virtual instrumentation platform.

In March, we also upgraded our popular Test Stand product to add integrated support for our new Switch Executive. We first introduced Test Stand in 1998 as part of a major strategic initiative to leverage our large installed base of users, increase our penetration on the factory floor and drive sales growth for our new PXI system platform. That strategic initiative has proven to be very successful. Seventeen of the top 20 electronics companies are already using Test Stand to test a variety of products such as handheld wireless devices, automotive multimedia electronics systems and fiber optic components. Just this month, Test and Measurement World Magazine announced that Test Stand 2.0 was selected as the 2002 test product of the year and we are very proud to receive this honor.

In January, the USB Implementers Forum adopted Test Stand as their standard for ensuring that computer peripherals comply with new USB 2.0 technology. , USB 2.0 engineering manager at Intel Laboratories stated, "USB peripheral manufacturers needed a high quality software tool to quickly verify device compliance. Test Stand provides an open, flexible environment that delivers significant performance gains for our automated test system." More than 1,000 USB manufacturers will now all have access to standardized Test Stand test suites to validate their products.

In Q1, we announced a new PXI-based system solution for display inspection. This product includes a comprehensive suite of pre-built display test routines such as alignment, pixel defect, color, and contrast that can be used to test cell phones, PDAs, automobile displays, and other mobile terminals. Because the system is based on our open PXI and Test Stand platforms, customers can also easily integrate other technologies such as motion control, audio, electrical, and RF tests.

Flextronics, a leading contract manufacturer, began using our NI display test system for LCD testing in Q1. , test manager of Flextronics India stated, "NI display tests will lower our cost of test while giving us the ability to ship products to customers more quickly. Simply put NI display inspection product makes us more competitive."

In Q1 we also announced a new software development tool called NI Motion Assistant. It simplifies using our motion control products in applications ranging from biotech laboratory research to optical electronics manufacturing.

Now, I would like to talk for a few minutes about the overall tone of business in terms of customer activity levels in Q1. Our business is diversified across many customers in many different industries and money is still very tight at most companies. We believe this works to our long-term advantage because many customers are being forced to find creative new ways to boost productivity while at the same time saving money under restricted budgets.

Our vision for visual instrumentation is focused on saving customers time and money and our message has been especially effective and well received by customers in this current climate.

We were pleased with strong customer interest in our products in Q1. We are working hard to leverage to our growing product portfolio and our expanded field sales force. We are currently executing a very aggressive seminar campaign worldwide including a new seminar focusing on how customers can use our products to benefit from Microsoft's new Dot Net technologies. Overall seminar attendance remained strong in Q1 and was up slightly compared to Q1 last year. But as you might expect, trade show attendance in Q1 was down year-over-year, as many customers still have restricted travel budgets.

While telephone activity in Q1 was essentially flat, the use of NI dot com website continued to show strong growth. We set a new record with over 1.7 million visitors in Q1 up over 20 percent from Q1 last year. As more customers and prospects are choosing NI dot com as their preferred resource for obtaining product information and conducting business directly with NI.

In closing, we are encouraged by the continued strong growth and record sales of our software and our modular PXI hardware platform in Q1. We are also encouraged by our success in winning strategic new business that validates our vision and increases the momentum of virtual instrumentation.

We are off to a strong start with new products in 2002 and we are very excited about the new products we have planned for the rest of the year and beyond. I want to remind you that NI Week 2002 will be held on August 14th through the 16th here in Austin. Our Investor Day is August the 15th. As you know NI Week is a key event for launching new products and meeting with our customers and we believe it will be especially exciting this year.

With that, I'll turn it back over to Dr. Truchard.

Thank you, Ron.

We turned in a solid performance in Q1 in a mixed economic environment. We were pleased to see our business follow our normal seasonal pattern for the second consecutive quarter and our performance relative to our peers and competitors, demonstrates the quality of our business and the strength of our market position.

In the broad range of industries and applications, the success of customers is clearly demonstrating that our vision for virtual instrumentation is sound. The combination of highly productive involving software and modular hardware has struck a chord with our customers.

By leveraging our innovative architectures and highly differentiated platforms, we are bringing to market products that significantly improve the way scientists and engineers approach measurement and automation.

Virtual instrumentation is coming of age. Yet, the virtual instrumentation revolution is only beginning. We have a long-term vision and strategy and our opportunities for the future are expanding every day.

We are intent on further innovation that will make our customers even more productive, more efficient, and more successful. In the past two years we have expanded our R&D head count by 30 percent to accelerate our new product development. Over the same time frame we have increased our field sales force by 45 percent to take further advantage of the many new products and the new opportunities.

These investments have already led to the successful roll-out in some of the most advanced and powerful new products in our history and we have more on the way. I believe some of the platforms, architectures, and products currently in development will be truly revolutionary in nature and I invite you to attend NI Week this year to see some of them first hand.

While we must operate within the bounds of an uncertain economy that remains a major challenge, I can assure you that we are executing on the long-term opportunities before us. While we are encouraged that economic indicators have improved, we look to our own execution as the key factor in our long-term growth as we continue our virtual instrumentation revolution.

We will now take your questions.

Thank you.

The question-and-answer session will be conducted electronically today. If you would like to ask a question, simply press the star key, followed by the digit one on your telephone at this time. We will proceed in the order that you signal us and will take as many questions as time permits. Once again, it is star, one if you do have a question and we'll pause for just a moment.

We'll take our first question from with Thomas Weisel Partners. Mr. Knight, your line is open.

Can you hear me?

Yeah, we can hear you Paul.

OK. Congratulations on the quarter.

Thanks.

Dr. Truchard, in your experience in the test and measurement business, is this industry a lagging indicator? You're kind of saying you follow the downturn, will you follow the upturn in the technology and semi and the general economy this time around?

Lot of different industries over the last several years we've been looking closely at the industrial productions and the other indicator, the purchasing manager's index, and these have helped us understand the broad base of customers we have. And there's sectors like telecom and semiconductors that were hit substantially harder than other sectors and, certainly, these have been key factors for test and measurement as well and I might let Alex comment.

Sure.

I think it's a good point Paul. As I said in the call we followed the downturn in the purch manager's index into negative territory. About six months after that we started to see the real impact on our business especially on the instrument control side. We've seen those indexes now start to improve and we saw our instrument control business actually kind of stabilize here in the first quarter after four or five quarters of sequential decline. So that's certainly a positive sign for the instrument control business.

So I think it's not unreasonable to expect that there will be some lag between the recovery and the industrial economy and it likely to impact our business. It's a little too early to call if and when that's going to happen yet. I think we'll have to wait another quarter or so before we'll be able to see that clearly.

So the tone of business did start to improve as the quarter progressed?

Yeah, we were down -- our daily order ins were down 12 percent when we released in January and then for the quarter, overall, we were down about 10 percent. So we did see some modest improvement the next couple months.

We obviously get significantly easier compares as we get into Q3. So, we'll look for year-over-year growth to start here in the third quarter.

Lastly, what's the best in market for you right now?

Well, I think, there's a couple areas that we're reasonably positive, but I'd say higher education and government aerospace and also automotive are pretty good as well as bio medical.

Thank you.

We'll now move on to with Robert W. Baird.

Yes.

Alex, did you give a break down on the split between traditional instrument control and PC-based instruments?

I didn't actually, but I can fill you in on that.

Our instrument control business relatively flat sequentially and as I said just a second ago, that's a significant improvement after four or five quarters of sequential decline. So we have seen definitely that our instrument control business has stabilized. PC-based measurement business also relatively flat sequentially. But that's what we would expect from Q4 to Q1, that's the typical pattern that we would see.

The real news that we've seen in the last six months, has been after three quarters of, you know, quite dramatic sequential declines. In the last two quarters, we've returned to a more normal seasonal pattern and that's, certainly, building a base and a significant improvement off what we've seen the previous nine months.

So, from the worst of what we'd seen in the downturn last year certainly those areas worst affected have certainly stopped getting worse. We'll now look to see what happens the next couple quarters.

OK and you mentioned that you were starting to see some leverage from your Hungary manufacturing operations. Is that coming in ahead of plan and if so, maybe what could be the contribution as we move in towards the back half of the year and see greater volumes flow through there?

We're very pleased with effectiveness we've achieved in Hungarian facility. The modest increase in gross margin obviously was very modest in the first quarter and I didn't speak too much about it but I wanted to just kind of give an indication as to what we were seeing.

We had anticipated a slight negative impact from the Hungarian operation in the first quarter depending on the volume. We were successful in getting good volumes through there so we saw slight, very slight modest impact.

Looking out the next few quarters, it's really going to depend on top line revenue. If -- obviously last year we saw declining gross margin on the very modest driven by reduction in our leverage or our fixed cost base in manufacturing. We were able to leverage that fixed base off much more volume then that should lead to improve in our gross margins. But it will all depend on how the top line pans out.

OK. Very good. Thanks.

We'll now move on to with Thomas Weisel Partners.

Alex, just a quick follow up since Paul's already asked.

Could you comment on the second quarter where you are on your daily order rates?

Dave, it's a good question.

We looked at that and really it's kind of hard to draw any conclusions from where we are in the first couple weeks of April. When we look at April last year, it was really a time of turmoil. We were actually up when we announced earnings on the 12th of April. We were actually up about 11 percent in the daily order rate at that point of time. When we ended up the quarter, our revenue was down two percent. So we saw a dramatic fall off. We think it's more appropriate in the circumstance to look to the sequential change between Q1 and Q2.

The last couple weeks it's very, very early days yet but based on that and then what we saw in our last two quarters of our business behaving more normally, at this point we expect to see that the pattern of the normal sequential pattern recur here in the second quarter.

Hopefully that answers your question.

OK. Thank you.

Once again, I would like to remind everyone it is star, one on your telephone if you do have a question.

And we'll now move on to with Sanders Morris Harris.

Hey congratulations on the quarter.

Couple questions. Relative to the outlook and as we've seen in the past couple years some factors are becoming overspent like telecom and semis and other areas probably under spend and you had indicated that auto and aerospace were looking better.

As you look at the recovery and I think everybody has this same kind of question on their mind about how this recovery's going to take shape. In the industries that you serve, at this point in time, does there look like there could be promise, not to say that we can get the kind of growth in telecom and semiconductor, is there any kind of opportunities in the various industries you serve where under spending has gone on where it could be a pleasant surprise for you? Where your applications may fit some particular needs?

Well Dave, this is Ron and maybe I can give a little more insight and little more color on a kind of an industry breakdown. Obviously as you know, we've got a very diverse business with lots of industries that we serve. Alex mentioned some of the key areas of strength, automotive, biomedical also had a good quarter, consumer electronics in Q1 were up modestly as well and higher education.

Military aerospace is one area where in this last quarter and we tried to highlight some of the applications in the call today. It's an area where our and our PXI platform have really -- we've really got some good design wins that we're very excited about and systems that really go far beyond and the complexity of what many would have thought possible with virtual instrumentation even a year ago. So, we're very pleased to be getting those designs wins in this timeframe.

You know the industries, the usual suspects that we talked about for the last nine months, still had a bad quarter in Q1. ATE and instrumentation, telecom and semiconductor were all down in the 30 to 40 percent year-over-year. The good news is that they did all show some modest sequential improvement from Q4 albeit off a significantly lower base. But we view that as a positive sign as well.

So the really things we're very excited about are the penetration we're getting with and PXI into new applications. And the nice thing about it is that many of these applications pull a lot of hardware behind it and so we're real encouraged by that and by the success we've had there.

And geographically, Europe had been a pretty strong sector for you for a while, now it's turned softer. As you look globally, could you argue that Asia could eventually in this next up a cycle a star performer like Europe was in this last cycle?

Certainly we've seen, Dave, we've seen Asia as a percentage of our increase kind of steadily over the last number of years. We're now looking somewhere around the 15 percent range for revenue.

If you go back six, seven, eight, nine years ago it was 10 or below. So we have successfully expanded our operations in Asia beyond just solely Japan where we were for a long time into the rest of the Asian Tiger countries, which you did in the mid-90's. We certainly saw them as we see here in the first quarter, come very closely back to their level of last year and they were the best performer in the first quarter. We would expect to see them as a percentage of revenue to continue to expand over time and when we look at our opportunity in Asia relative to the rest of the world and for many of the other large traditional test and measurement companies, the percentage of revenue which we get from Asia-Pacific is significantly less than several of our larger peers.

So we see that we're on our probably market potential in Asia and we are continuing to increase our sales head count in these countries to make sure that we can improve our penetration and get the position we believe we should have.

So I think the long and short the answer to your question is yes.

And one other question. On your additions to people count, what did it look like in this quarter?

In Q1 we added very modestly, about one percent to our head count. We're now a little over 2900 people. We will be looking at our head count additions the rest of the year. We are and have been recruiting for engineers for R&D and for application engineers and we'll have a number of engineering candidates start in, I guess, May, June, July time frame.

The numbers for the rest of the year are really going to depend on the tone of business. So, we'll be guiding as last year and other years, we'll be guiding our plan on head count additions based on what we see in the business.

OK. That was the second part of the question. So it's basically on how the recovery shapes up.

Yeah, we are committed to a certain level of engineering hiring and we're going to take advantage of the opportunity, right now. There's a lot of smart, very bright engineers that are not being recruited heavily so we've got a good opportunity to bring them on board and we're pursuing that. Outside of that realm, any other additions are really going to depend on what we see economically.

OK. Thanks.

Thanks very much Dave.

We'll now move on to from Franklin Advisors.

Yeah, hi guys.

Hi.

Just a couple quick follow-ups.

What's the cap ex spread for the rest of the year?

Sorry, , you broke up on the phone. Can you say that again?

Yeah, what's the cap ex guidance for the rest of the year?

We're looking to budget somewhere in the region of the high 20's for cap ex for the remainder of the year. A substantial portion of that will be to complete our R&D facility here in Austin. We anticipate spending about another $14 million in the next two quarters to finish that building. And once we get past that level, you'll see our capital expenditures drop off dramatically starting in the fourth quarter and into next year.

OK and in terms of expanding Asia. Are you having to build out more of sales team out there, or is that going to be some expenses there as well?

We're continuing incremental expansion of our sales operation. We do have a direct sales force now in about seven or eight different Asian countries. We started in Japan back in, I guess, 1986, '87 timeframe and we went to directly to most of the Asian countries in the mid-90's so we have a strong infrastructure there. Rather than any, you know, staff functions and expense, it's really continuing expansion from the base we've already built.

OK. Great. Thanks.

Thank you very much.

And as a final reminder, it is star, one on your telephone if you do have a question.

And from Roberts and Stevens .

Yes, Alex, wondered if as we look at the third quarter, your guidance was that the up year-over-year. Considering how far down the third quarter was last year, would look for maybe a little more than that? Should expect a normal seasonal up tick?

That's a good question, John and this is one is a little difficult to call right now. Obviously, we're certainly more, you know, have a bit more confidence in being able to call our business now than we did six months ago but still we're in some tough economic times and I really would be more comfortable waiting a couple more months before making a call in the third quarter.

As you said, we were down so much last year, it keeps real, although we continue to be profitable and we were down in double digits relative to some of our competitors who were down, you know, 50 to 60 percent or so. But I am pretty confident at this point that we will have a year-over-year growth in the third quarter. More about it in July.

OK. All right, if you won't answer that one.

How about the summer hiring? Are you going to have a summer class of interns this year and, if so?

Absolutely. We will be bringing interns in this year and they'll be somewhat similar to the level last year, maybe a little bit below. Our full-time head count starting this year and we're also going to be bringing quite a lot of engineers on in the summer.

So we're gaining. One of the things that I think is very impressive about our business model when you look at what we've done in the last two years, you know, we believe we have superior technology, which gives us a strong differentiation in the marketplace. But also in the business model because of our direct sales force and we're a software oriented company that's, you know enabling people to build things themselves, we've really begun to leverage the web as a competitive weapon in our business model and been able to add 45 percent more salespeople in the field in the last two years while only increasing sales and marketing costs two percent. Shows that we can be cost-effective while still building the resources we need to take advantage of an economic recovery should it come.

Alex, do you have a number for us, of a percentage of business that came in through and eye dot com?

It's right around 11 percent or so in the first quarter. Been steady for the last few quarters.

OK. Great. Thank you.

Thanks very much John.

That does conclude our question-and-answer session.

I would now like to turn the call over to Mr. James Truchard, President and Chief Executive Officer.

Please go ahead, sir.

Thank you again for taking the time to join us today. We will be presenting at the Robert W. Baird Growth Stock Conference in Chicago on May 8th, at the CIBC World Market Annual Electronics Conference on May 15th, and the Fox Security Annual Telecom Infrastructure Conference in Dallas on May 29th.

Thank you.

That does conclude our conference everyone. Thank you for joining us today.

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