National Instruments Corp (NATI) 2002 Q2 法說會逐字稿

Good day everyone and welcome to this National Instruments quarterly earnings release conference call. Today's call is being recorded. You may refer to your press release for the replay dial-in number and pass code. The replay will be available by 06:30 p.m. Central Time today and end at Mid-night Central time on Wednesday July, 24th. For opening remarks I would like to turn the conference over to the General Council Mr. David Hugley. 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 manufacturing efficiencies. Such statements are based on management's current expectations or beliefs and are subject to uncertainties that can cause actual events or results to differ materially. Some of the risks that could cause our financial results to differ from the forward-looking statements include fluctuations in customer demand for the company's products, expenses exceeding the company's budget targets, and delays in the introduction of new products. We refer you the documents the company files with the Securities and Exchange Commission including the company's recent Form 10-K and 10-Q. These documents contain and identify other important risks. This call is being made at 4:00 p.m. Central Time on July 17th, 2002, and we undertake no duty to update any statements made herein. With that I will 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 today are a solid performance in the continued tough environment, strong growth, and record orders for PXI and LabVIEW Real-Time platform and building excitement for new products announcements that NI makes next month. While we are disappointed that our Q2 revenue was down year-over-year, we are pleased with our results relative to our peers demonstrating the quality of our business and the strength of our market position. We believe we continue to gain market share relative to traditional test and measurement vendors in Q2. We are pleased that many economic indicators for the future continue to improve and feel well positioned for a recovery in the industrial economy. Alex Davern our CFO will review our financials. Ray Almgren our Director of Strategic Marketing will discuss that 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 Q2, NI delivered a good performance in what continues to be a tough environment. With revenue of 94 million dollars and fully diluted earnings per share of 14 cents. We continue to have very good expense control and strong cash flow, increasing our net cash and short-term investments by an 11 million dollars during the quarter to 160 million dollars. Sequentially revenue was essentially flat with Q1, which is significantly better than the 10 percent sequential decline we saw in Q2 last year. Because of an easier revenue compare, our year-over-year growth trend improved from minus 12 percent in Q1 to minus 4 percent in Q2. This compares with the revenue declines of 30 to 50 percent seen by other seen by other large customers and companies in Q2. At 94 million dollars in revenue, Q2 results are well positioned to return to year-over-year revenue growth this quarter.

Coming into Q2 we had expected improvement in our year-over-year growth rates in all regions. We were pleased with the improvements realized in the U.S. which went from a 15 percent year-over-year decline in Q1 to a 2 percent decline in Q2 and also in Asia which went from a 1 percent year-over-year decline in Q1to 8 percent year-over-year growth in Q2. However, we were disappointed with the results of our European operations, which were below our plan. The industrial economy in Europe continues to lag the U.S. recovery and we saw a 12 percent year-over-year decline in our European revenues consistent with a 13 percent decline in Q1. On a positive note our European business, we saw the effects of the economic slowdown in Q3 last year, 6 months after the U.S.. We'll have significantly easier compares this quarter and we'll also receive the benefits should the Euro maintain or increase its current value against the U.S. dollar. Moving on to the income statement, gross margins in Q2 are 72 percent from 73 percent in Q1. The declining gross margins was primarily driven by a normal seasonal decline in the mix of our business coming from Asia, which was higher gross margins and also by inefficiencies caused by a recent implementation of a new factory scheduling software from i2 Technology inc. .

The new software was implemented in January and appear to be operating as expected. However in May it became apparent that the new system was causing us to underbuild our safety stocks of high volume products. As a result of this our efficiency levels were reduced. We estimate that this problem increased our manufacturing costs in Q2 by approximatly 300,000 dollars. The problem was fixed in early June and we don't expect this to be a material issue for us in Q3. During the quarter our employees did an outstanding job in controlling costs. Our total expenses were down by 1 million dollars sequentially to 58 million dollars, a 3 percent decrease over Q2 last year.So the marketing expenses were down by 8 percent,R&D expenses were essentially flat and our and our G&A expenses were up 15 percent. As we've discussed in past calls, we have been defending our intellectual properties over the last several years and and as result we have successfully stopped the infringement of our LabVIEW patents on multiple occassions. We are currently pursuing another case to enforce our LabVIEW patents which is due to go to trial this quarter.

In Q2 we incurred legal expenses of 1.3 million dollars relating to this case, resulting in a significant sequential increase in our G&A expenses. This expense amounts to approximately 2 cents per share. We expect to see a similar expense in Q3 before our legal expense returns to more normal levels in Q4. Net income for the quarter was 7.8 or 8 percent of revenue. Bottomline is that we continue to deliver strong profitability one among the highest net margins that we saw in the industry in Q2. I would now like to point out that these are GAAP earnings no restructuring charges, no on-time write-offs. We also had good cash flow in Q2 with 17 million dollars from cash flow from operations. This is offset by approximately 9 million dollars in capital spending related to the completion of our new R&D structure and an installation of a second production line in our Hungarian manufacturing facility. This bringing our capital expenditures for the first half of the year to 16 million dollars.

We expect our capital expenditures to decrease significantly in the second half to approximately 8 million dollars. Now looking out to Q3, since the IPO in 1995 our typical seasonal pattern has been for revenue in Q3 to be flat with Q2. While it is difficult in the current economic environment to predict revenues to within a few million dollars, we are confident that we will return to year-over-year revenue growth this quarter. Our gross margins given the correction of our inventory planning problem and the current strength of the Euro, we are expecting to see our gross margins return to 73 percent this quarter. On the expense side, we currently expect our expenses for the third quarter to be approximately 60 million dollars. We 're expecting a sequential increase of approximately 1 million dollars related to sales and marketing and an additional one million dollars related to moving into our new R&D center.

These are forward-looking statements, I must caution you that actual revenues and margins for Q3 could be negatively affected by numerous factors such as any further decline in the global economy, delays in new product releases, manufacturing inefficiencies, and foreign exchange fluctuations.

Now, on the macro economic front the U.S. industrial economy continued to improve during Q2 with approaches, purchasing managers index and likes moving to 56.2 in June, its highest level since February 2000. Industrial production has also started to recover increasing in each of the last 6 months after dramatic decline in 2001. U.S. industrial production was actually up 2 cents or 1 percent year-over-year in June, compared to year-over-year decline of almost 6 percent in December. We will be closely monitoring these indices for clear signals that the industrial economy can sustain this recovery.

With that I'd like to take a moment to reflect on how we've managed through the last two years since June of 2000. Our revenue in Q2 2000 is essentially unchanged, from Q2 sorry; excuse me; our revenue in Q2 2002 is essentially unchanged from Q2 2000, despite a dramatic slowdown in the industry, which has left many of the major players with dramatically reduced revenues. We believe we have clearly gained market share. In addition we have continued our strategic investments in sales and R&D. We've increased our R&D again by 20 percent over the last two years. In addition, our increased leverage of the web has helped us to increase our field sales force by over 40 percent since June of 2000, while reducing our sales and marketing cost by 2 percent over Q2 2000. We believe that these investments leave us into a very good position to take advantage of any economic recovery. We will continue to watch our business inside future auto trends but our bias now is on increasing investment in R&D and sales, with a view towards achieving our goals in 2003. With that I'll turn it over to Ron.

Thank you Alex. We turned in a solid performance in Q2 in the face of a tough economic environment. Though the climate remains challenging, we are pleased with the dramatic difference between our performance compared to our peers in the industry. We look forward to Q3 and the exciting new products we'll be introducing next month at NIV. From a product line standpoint, the star performance in Q2 were our modular PXI hardware platform for complete system solutions and our LabVIEW Real-Time software for embedded and real time applications. Both of these product lines once again had very strong growth and record orders in Q2. We also had success in Q2 with our switching products, helped in part by the new Switch Executive Software product we announced last quarter.

Compared to last year, sales of our switching products doubled in Q2. We are also finding continued success of our Dynamic Signal Analyzers products, where our recent new products targeted at high channel count sound and vibration applications helped the average order sales for these products, more than double compared to Q2 last year. The strength of our new products especially LabVIEW real-time and PXI continue to penetrate new counts and with strategic business in both research and production application. We have a lot of customer success stories in Q2 including many such as contract manufacturers, petrochemical manufacturers, alternative energy, and R&D applications in both academia industry and variety of new and exciting better design applications made possible by LabVIEW Real-Time. Many of these will be featured at NIV. I want to give you a few examples here on our call today.

During the building time as many contractor manufacturers simply did not have the time to evaluate alternative test solutions, in the past year however, we have had increased success in penetrating these new accounts. One of our success stories in Q2 for example is of one of the world's largest contract manufacturers with the proliferation of different test strategies and standards across facilities as a major challenge and expense. To better position themselves for the future, this customer recently began a strategic initiative to re-engineer their test strategies and adopt common test platforms and standards throughout the company. They chose our TestStand, LabVIEW, and LabWindows/CVI products as their new software standards. While they are just getting underway in permitting this new initiative, they expect to achieve significant productivity benefits not only in the development costs for new test systems but also in ongoing support and maintenance cost as their future standardized test systems are deployed throughout their facilities worldwide.

A similar success story in Q2 was General Motors who has been working on an initiative to standardize their instrumentation software tools used across their largest R&D facilities in North America. The competition in this case was internally developed custom software tools. They chose our LabVIEW and Measurement Studio application software products because they believe our software will keep their engineers more up- to-date with the latest technologies and will make them more productive and efficient. They also expect that by using open modular platforms they'll be able to integrate future test systems more quickly and with a lower cost than buying turnkey solutions from traditional vendors.

As you know we have a long-term strategic initiative to target higher education institutions, both in classroom and research applications, to build stronger ties between the tools used and academia in industry. One example of our success in this area in Q2 was the FutureTruck 2002 competition, which is sponsored by the U.S. Department of Energy, Ford Motor Company, and other major industry and developmental organizations including National Instruments. Teams from 15 North American universities were challenged to re-engineer a 2002 Ford Explorer to have lower emissions and 25 percent greater fuel economy without sacrificing critical features such as safety and performance. This year 14 of the 15 competing teams used National Instruments products, including PXI and LabVIEW Real-Time, to design, test, and control their alternative fuel systems, hybrid electric vehicles, and fuel cell powered engines.

Tom Grillo, Control System Developer on the Cornell University team stated, quote,". Our use of virtual instrumentation proved crucial in our ability to quickly design, prototype, and implement our vehicles control systems. With LabVIEW, we could begin debugging our control systems software before we even finish building many of the actual components considerably reducing our overall development time in the process." Using Cornell's truck at the NI week exhibit hall next month tell you more about growing role our products are playing in this high profile partnership between academia and the automotive industry. This is also a clear example of the increased success our products are having in embedded system design applications.

A related success story of Q2 from the industry is that a major automotive R&D facility dedicated to fuel cell research. This facility went out to bid for multiple very large fuel cell stack test systems for cell monitoring. The systems required very high speed, high voltage, and high channel count measurement and some of the requirements are so unique that no existing traditional instrument can perform the needed measurements. Their competitors during this opportunity proposed designing custom proprietary box solutions from scratch. With the modularity of our PXI and CXI platforms and the flexibility of LabVIEW, we were able to deliver a prototype solution with open modular components at less than half the cost of the competing proprietary proposal. And our system was up and running successfully while the competitors' proposals were still in paper form.

Another PXI success story in Q2 was the Motorola production facility, as they had undertaken a strategic initiative to reduce their costs of tests, all at the same time increasing the test coverage. Their existing systems are based on traditional BXI instruments from other vendors. In their Q2, they decided to standardize on PXI for their next generation production test systems. Their decision was based on lower cost as well as to the growing demand of our new PXI products coming into market. Another factor was we were very successful of the beta version of a key new PXI product that we will announce next month at NIV.

In addition, we had another customer success in Q2 with the major producer of automotive electronic components such as radios, power train modules, and body security systems. Each and every new product design must go through a job set validation lab testing such as EMI and safety test, before release to manufacturing. Traditional BXI instrument set in the standard test five form for this lab for over ten years. And because of the large size of the lab and the large number of products and tests they perform, they are constantly upgrading their systems and evaluating ways to speed test . In Q2, they evaluated PXI and adopted it as the new standard platform for next generation validation test systems. They expect to reduce test time by at least 20 percent and save at least 30 percent on the cost of each test system.

One final success story from Q2 is Praxair, a global supplier of specialty gases and related equipment. They recently equipped a major new lab facility with multiple large control systems that allow them to run experiments, where they vary process parameter such as combinations and concentrations of gases, pressures, and so on. The competition in this case was intense and it came from a large, intense industrial automation supplier. The customer chose to adopt our fuel point distributed I/O platform and LabVIEW to implement their new systems because it is easily used to increase their productivity and allowing greater flexibility in developing custom-user interfaces. Another factor in their decision was, our expanding capabilities in Ethernet-based I/O giving them the ability to monitor several different measurement technologies from any location.

In Q2, we announced a number of new products including the new high-speed 16- bit PCI data acquisition board, a new multi-channel monochrome image acquisition board, and several new measurement modules for our fuel point platform for distributed data acquisition and control systems. In Q2, we also expanded our future machine vision opportunities with a new version of our machine vision development software that supports LabVIEW Real-Time. Customers can now use LabVIEW Real-Time to develop reliable non-stop machine vision systems and with our modular PXI system platform they can also integrate other measurement and control capabilities and deploy their systems in ruggedized, embedded network and distributed form factors.

In our last conference call, we talked about our milestone technology used on machine vision and data acquisition products to develop a new breakthrough security system designed for use at airports, government buildings, and other areas requiring tight security. This system will be on display at the exhibit hall at NIV, so you have a chance to try it out for yourself. We are also in great start with exciting new products this year, but the best is yet to come. As you know, our annual NIV conference is a key event for launching new products and meeting with our customers and strategic partners. This year, we will be announcing new products in a variety of areas. We believe some of these new products are breakthrough innovations that refer to a major step forward in driving virtual instrumentation into the main stream of measurement and automation.

So, in closing we believe NIV could be very exciting this year. The dates are August 14 through 16 here in Austin. Our investor day is Thursday, August 15. We will give you an update on our market and the role our new products play in expanding our future opportunity. I know that in past years many of you have stayed for two days to have plenty of time to tour the exhibit hall and talk directly with our customers. If you plan to spend two days this year, we recommend Wednesday and Thursday, so that you can attend Dr. Truchard's opening key note first thing Wednesday morning and then tour to trade shift floor and meet the customers in the afternoon. We also have a special event early Wednesday evening featuring some very interesting customer applications that use our related to products. With that I'll turn it over to Dr. Truchard.

Thank you Ron. We turned in a solid performance in Q2 with net income of 7.4 million in a tough environment. Our performance relative to our peers demonstrates the quality of our business and the strength of our vision for virtual instrumentation. In a broad range of industries and applications, the success with our customers is clearly demonstrating that our vision and our execution are sound. By leveraging generally available technology with our innovative architectures and highly differentiated software platforms, we are bringing to market products that significantly improve the way the scientists and engineers approach measurements in automation. We are executing successfully on that core vision. Yet, there is much more work and opportunity before us.

As Ron mentioned earlier, at NIV we will introduce some exciting new products that represent a major step forward in fulfilling our vision for virtual instrumentation. We are also refining our strategies to expand the role that National Instruments plays in the industry. We are in term on further innovation that will grow our customer base and make engineers and scientists even more productive, more efficient, and more successful. At NIV during Thursday's technology launch, I will be discussing our road map for the future including the increasing role that virtual instrumentation can play in the overall design chain in the years to come. While operating within the balance of an uncertain economy remains a major challenge I can assure you that we are executing on the long-term opportunities before us. Well, we are encouraged the economic indicators are improving. We are looking to our execution as a key factor in our long-term growth. I look forward to seeing you at NIV as we continue to drive forward with 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, you can signal us by pressing the star key followed by the digit one on your touchtone telephone. We'll take as much questions as time permits and we'll proceed when the audience signals us. Once again, press star one to ask a question. We will just pause for one moment. And our first question will come from John with Baldwin Anthony .

Good afternoon.

Hi John.

I was wondering, given that Q3 last year was so weak and saying year-over-year will be positive this coming quarter. I just wonder if could be even more precise.

That's a reasonable question John, it is little hard to 100 percent precise right down for the dollar obviously in this economic environment, but what we have seen in Q3 typically has been relatively flat sequential quarter. We have been relatively closely following on our seasonal pattern in the last 3 quarters now. So, that is our best guess at this point time as to what we're likely to see. We do see some positive factors in the third quarter, obviously, the strength of the Euro in recent weeks and months is going to be a good contributor to our European revenue in dollar terms in Q3, which will help both revenues and gross margins. That is the best point I can give at this point given the uncertanity in the economy.

Okay. Fair enough. I was also wondering, if there is a lag time or just how we can figure out your results with industrial production or something as those have been improving for a while, is there a kind of correlation there?

Sure John. Obviously, one of the things that has been key in understanding the whole instrument industries in the last year and a half has been the significant decline in industrial production that happened throughout last year. We had seen industrial production started to improve over the course of last five or six month, which obviously means our customers are, their businesses are starting to stabilize and in the starting of month of June, for the first time, they are likely to start to see a year-over-year increase in output. We received at that moment a leading indicator of our business in the past. It has proved to be a leading indicator. The key issue this time around is going to be, although industrial production is in fact increasing in the month of June. It is still about 4 percent below at its peak in 2000, so, the capacity utilization of all numbers are still relatively low, although they are improving and so we don't have to watch for the sequential increase in the industrial production as well as the overall capacity utilization in trying to assess the impact on our business, but what I can tell you is that the overall economic data is the most favorable for our business, but it has been an year and a half. We are very glad to see the US industrial economy to start returning year-over-year positive territory in the month of June.

Okay and lastly, I was wondering if you could breakdown the geographic as far as local currency terms?

Sure. We were down 4 percent in local currency and in US dollar terms in total. So, there wasn't any difference between the two.

Okay.

Obviously, as we go into the third quarter here with a much stronger Euro, we should start to see if it stays at that level. We should start to see revenue growth in dollar terms, out-pace revenue growth in local currency terms, which will help our margins as well.

Okay.

Okay. The next question.

We will now hear from Richard Eastman with Robert W. Baird.

Yes. There was no effects impact on sales in the quarter?

That is correct. It was, well, it is like one-tenth to two-tenth of one percent.

Right. How did the traditional control business do in the quarter?

It was still down quite sharply from this time last year. It was basically flat sequentially. So, we have seen it stabilize now. We haven't seen any clear evidence of sequential improvement and I look forward to that going, you know, it is going on for several quarters.

Is is sharply 20 percent or so?

That is about it, yeah.

Yeah, and then let me ask you, I get the second thought and may be this has directed Ron as well. I am going to keep trying for this number, but the dollar amount of shop floor products over the LabVIEW Real Time and some of the, you know, some of the modules, how does that look relative to the traditional instrument control business in dollars? Are we past the crossover point in terms of size.

I could take a shot at the numbers but maybe I could let Ron add some commentary here, the instrument control business right now is about 19 percent of our revenue. To put some scale on that obviously it was much much greater. It's down basically about 20 percent this quarter year-over-year and was down 20 percent year-over-year in Q2 of last year. So it has declined in absolute terms quite a lot over the course of last 2 years.

Okay.

If you look at our business this year, if we took out 'instrument control', our overall business was flat in Q2 of this year. So we have definitely seen that stabilize as well and certainly as we look at into the future quarter here, the improvement in industrial production, it is definitely positive and we will also look to the strength of the Euro to be positive for us as well.

Okay. So, in the shop floor component of the overall business, you know, ex instrument control is that you gotten to be 10 percent or?

We would look at the overall industrial automation, piece of our business to probably be in the 20 percent range. So that probably reasonably comparable at this point.

Okay and this is the last thought I want. Could you just characterize the European trend, you know, just keep theEuro, a lot of it in conversion...

Sure.

Obviously, other companies that has been suggesting that at least Germany has started to roll back over again or...

Well, we have seen in terms of our overall business, early in the quarter, Europe struggled quite a bit. It was improved somewhat in June and actually June was the best month for NI in terms of year-over-year, comparably the best month in June for the quarter overall. Having said that Europe, we see, there is a slide that's on the web, which we want to take a look at for those who are watching the webcast, that shows our year-over-year trend in Europe and Asia and America is all split up separately and you can see a very definite uptake in Asia which is now turned into positive up around plus 8 percent, a very sharp up turn in terms of relative growth in the Americas and Europe staying relatively flat. So we have seen a much sharper turn around in Asia and the US, than we have in Europe. Although we will have as I said significant easier compares there in Q3. So we will anticipate an improvement on that in the third quarter. But no doubt that, look at the purchasing manager data from Europe, Rick, you see it is around 51 right now, where as the US it is 56. So, clearly there is much more driving in the European or the US industrial economy right now than the European industrial economy.

Okay. All right, very good. Thank you.

Thank you. First, we are going to limit questions to one for now and come back so, we can get there everybody.

Our next question will come from Catherine Moore with C.E. Unterberg .

Hi guys.

Hi Cathy.

Are you going to continue to pay for the maintenance on the i2 software or you are going to turn it off?

Well, actually, it was not all their, for we, you know, the implementations were pretty complicated. So, you know, we had some issues of our own as well as that.So, we will be continuing to pay the maintenance for the IT software.

Okay, and since I was just not, directly related, one more quick question?

Please.

Do you see any other pricing pressure coming from any of the other larger test and measurement equipments on this?

Not at this point. When we look the year-over-year discounts, our discount percentage is very much inline with the second quarter of last year. So we haven't seen any real shift there. Obviously, in their own business, many of them are facing a tremendous amount of re-selling of products that we know, that are second hand. And that is causing a tremendous amount of pricing pressure. We haven't seen much or any of that really at all. Okay Cathy. We will take the next question.

We will now hear from from Frost Securities.

Hi folks. Well, the question that I had was,Alex, you and I had talked in the past about, you know, when software seats are sold and especially in this environment, seats to come empty are you noticing a phenomena especially for LabVIEW or TDR and the older generation of IQ products. The Salomon Engineers here is, you know they take additional seats and that might have sort of an effect in your future sales.

If I understand your question to be, do we sieze licence that are sold in the past, going on use, that are customers', I think that is the question?

Yeah.

That is, you know, certainly there are some of our telecom customers that will be the case. But what I can tell you software is a mix of our business that stayed very consistent from Q2 last year to Q2 this year. So we haven't seen any shift there and obviously we are very very broad-based so while we have a small number of particular customers who may be suffering from significant down sizing, the vast majority of our customer base is not reflecting that, as you know, we sold 24,000 different companies last year. So I don't think that is a significant issues with our business.

Do you have a geographic revenue breakdown? Did you give that in your product, couldn't find that, could you just direct to the question?

Sure. Yeah. Just give me a second here to get to the data. So our revenue breakdown was in America is basically 49.5 million dollars, Europe 29.4, Asia 14.6.

Thank you.

Okay.

And we will now hear from David Yushak from Sanders Morris Harris.

Lets go back to Europe and as I talked about last quarter, Alex and guys, America's, Europe's and Asia's, Asia's looks like its coming along better, Europe is struggling here. And Europe was, probably, couple of years ago, was by one of your stars, because it lasted on growth rates by longer than when I would have thought, even back then that you have shown some pretty good rates. What is different from then to now as far as where you have seen that struggle and you know is it certain areas or is there some issues there that can be fixed, particularly what happened in Asia for instance again?

Well, I think if you look at the broad based, you know, economic data; the trends in Europe are much less veritable right now than they have been in either Asia or the US. I think also if we look at the expectations that we would have relative to those markets, in Asia we feel we are probably the most under penetrated relative to the overall market size, and so we have continued to invest quite aggressively in Asia this year, we are seeing the benefit there in our results. In Europe the economy continues to struggle. I don't think it's an operational issue relative to our business and many other technology companies' that looked at earnings in the last couple of weeks have pointed to weak numbers in Europe entire and America and many others.

I think the technology spending in Europe overall is probably lacking somewhat as a recovery of the other regions. We are looking forward obviously to trying to expand our market in Europe as we are in the other areas, by bringing some new products to market. Our hope is reinvigorate our opportunities there as well in rest of the world and we are looking down to NIV next week or next month to make some of those product announcements to create some more excitement and interest in our product offerings both in Europe and elsewhere, and obviously, you know we have been struggling, one part is, the issue for us in our European business has been the strength of the dollar over the last number of years which has really hurt the dollar conversion of our European sales and so we are glad to see that finally started to turn around and potentially be a hope for us here in the third quarter.

As far as the Europe strength in the last cycle up versus the weakness today, is it broadened like you said, which was confined more than macro event as there is some industry sectors that are more problematic than anywhere?

It's fairly broad across the whole region of Europe and I would say clearly the industries that have been worse within Europe are telecom and that has been the area where there has been the biggest impact of the slowdown. So I would say, it's certainly, sectors the worst is telecom but in terms of regional it has been fairly broad.

Okay. Thanks.

Thank you.

We will now hear from Andrew Galgin with Time Square Capital Management.

Hi Alex. How are you?

Hi.

You guys usually give us some interesting data at the end of the quarter here, such things as you know daily order rates, last quarter things like street show attendance and Nida.com website hits and that sort of stuff. Could you go us through some of those data points that you have in the past?

Sure. I will let, I will let Ron, let Ron go through those data points for you.

Okay, well let us say the average order size this quarter was pretty steady with with first quarter at about 2300 dollars. The website continue to do very well and was up over 1.7 million visitors in second quarter, up about 16 percent year-over-year. The E-Commerce sales through the web was held steady to about 10 percent of revenue. So the website is really driving a lot of our efficiencies. It's becoming the primary method by which we are communicating with our customers and that’s allowing us to get the benefit over a lot of cost savings, even things like E-mail for direct events confirmation and so forth. It is really helping. So, the seminars that we have been doing have been well attended, as they are still one of those primary vehicles, that we get our message outwith. We had some good seminars in second quarter with the Microsoft.net strategy and so forth that were well attended. So activity level is still are looking good.

About the daily order rate, have you got that?

Yeah, we will cover the daily order, or you mean in terms of, for the first 2 weeks of July?

Yeah. Exactly.

Okay. Well, you know we are only a couple of weeks into the quarter but I can tell you is that the daily order rate is up year-over-year for the first half of July. Obviously, in order to be flat sequentially we would have to be up about 10 percent year-over-year. For the first half of July we are in positive territory. It is a little early to call, you know, the exact numbers right now, it has only got two and a half weeks of the quarter behind us. But we are in positive territory for first half of July which is a good change.

One last question. How much of your businesses is coming from the United States?

We are right at about 50 percent. Let me see if I can give you an exact percentage, it's a little over 50 percent, about 52 to 53 percent.

As your business, the risk process (indis) such things as you know US industrial production, these types of statistics get harder to, or makes harder to predict what’s your business is going to be in the future, correct?

Well we look very closely also at the industrial production in the Euro zone. Euro zone and the same in Japan so that similar data is very easily accessible.

Okay. Great. Thank you.

All right.

As a quick reminder press star 1 if you do have a question and limit yourself to one question. We will know hear from Zack Perry with Franklin Templeton.

Hi guys, can you hear me.

Yeah.

Great. Quick question, did some, some of these wins when you sort of won this as a standardized platform, was there test and how does that revenue sort of flow through over time is sort of you see a lot of revenue from that customer for a couple of quarters. Is it implemented or is it slowly trickling over time as they slowly adopt their plan to that standardization?

Well, I mean it can vary from customer to customer, but in general I would say it is more the second somebody's initiatives that we talked about are pretty in strategic to the customers themselves and they take a lot of evaluation and a lot of motivation to get the entire organization behind them and they often begin with the prototype phase and heavy evaluation of our solution versus other alternatives and then comment and then we will work with the customer and schedule the series, with training, training program they help train their staff and help them ramp up. So it can take time but the key is to get designed in, in the call we will try to give you some highlights of some of the kind of new areas. We will be talking more in (indis) about for example some of the embedded system design applications that (indis) real time is opening up for, and we see a lot of interesting opportunities there in the future. But, it starts with getting at the first design win and building that customer loyalty over the long term and once they have, you know, when a company, a customer standardizes on our software that is the most strategic kind of win we can have as a company because that builds loyalty and opportunity for a very long time into the future.

So does that mean (indis) as they standardize and once you win, in some of, over the next year and 80 months you are really going to.

It could be over the next, you know, continuous process over 10 years.

All right.

And we have seen that over and over again. Often times, it is real important that down economic time to win those standardization efforts that would (indis) free up dollars in capital spending returns, you will be able to get an increasing percentage of those dollars.

And in those kind of opportunities, another important thing is that, they don't come around very often. I mean, when companies do those types of, kind of, major strategic, you know, initiatives to re-engineer their strategy that is something that is going to be in place for many years. And so, often it is driven by having the time and the motivation to do that evaluation and make the decision. And then beyond that sales are driven by their own internal schedules and new product introductions and how they need to ramp up their systems to meet their own new products roll offs.

Okay. Thanks.

Thanks.

We will now take a follow up question from David with Sanders Morris Harris.

Yeah, gentlemen, on the NI week, you know, when you have in the past you had some nice pick up in business from things that you have done at NI week when you have introduced some new technologies about the updates and so forth and so on. Comment (indis) you are expecting from breakthrough technology issue in the next NI week. Is some of your reason for optimism here is some of the things that you are planning on sharing with users, investors some of the reason for may be expecting a little bit better quarter, even though seasonally you know things not to be a strong method.

I think we have to encourage you to come down Dave and see for yourself. Obviously we cannot release the story exactly what we are going to release at that time, but.....

I'm just getting curious over some of your optimism in the quarter reflecting some the things that you hope to re-launch.

It usually takes a while, you know, I'm already surprised how long will the cycle is from the time the first word gets out (indis), so that will be too early probably to see the real impact. We are all excited about the products and the technologies we have and we are looking forward to seeing everybody down in the NI week.

I think one other thing I think you will see is kind of, a mix of the things we are announcing at NI week last year we talked, one of our themes in the investor conference was that crossing the theme, the different types of customers and where they sit in terms of how they adopt our products, the early adaptors where we have a large base of customers that are really in the cutting edge and early adaptors and then when we have got the main stream. I think you will see in NI week the mix of products that are spread across that. We have got some things that are free cutting edge; they will appeal to their early adaptors in a very nice way. We have also got some products that are going build on the success of PXI and that will set our channel immediately and move into immediate application.

Just a one real quick follow up on some of the comments made earlier Alec on the, in the quarter, this third quarter, I think you said 60 million in expenses, 1 million plus for the sales and marketing, 1 million for the R&D expenses. Is that from this quarter-quarter?

That is sequential.

Yeah

And the increase in the R&D expenses, it is not necessary just R & D, but we will be occupying our new R&D center here and moving in August. And the moving cost itself was the incremental depreciation charge in quarter is about a million dollars.

And the legal expenses in the quarter, were they comparable to 1.3 million that you had.....

1.3 million in Q2, and we are anticipating a similar number in Q3 and then would be back to our normal level in Q4.

And then, one last thing. On the, Could you run through this again, on the 300,000 dollar cost of the manufacturing issue you had in the quarter?

Yeah, as a result of different problems we had, we were not building a sufficient volume of our high running products, and so we fell behind in our manufacturing quantities. That had a couple of issues. Obviously it impacted our delivery time somewhat, but also in order to catch up we didn't have to work considerable amount of overtime in July, in June. And that overall for the quarter reduced our manufacturing efficiency quite a bit. We believe that problem is fixed now and that there will not be issue for us here in Q3.

Were that domestic or over Hungary?

It was in Austin.

Okay. Did that cost you any sales because of that?

Probably, but I could not quantify that for you.

Okay. Thanks.

We will now hear from John Lewis with

Quick question for Alex, I am a little bit confused about some of the questions what I heard you gave guidance earlier. Help me out with what you said about revenues. I thought I heard you say that usually the third quarter is sequentially flat with the segment. I understand what you said about costs. I am just trying to understand whatever you've said about because I have got a revenue estimate out here for the third quarter where your consensus revenue was 101 million and I believe you just did 94 million?

That is correct. We did do 94 million dollars and typically we have been flat sequentially from Q2 to Q3.

And are you saying that, I think what you said is you have been on the typical seasonal pattern so far, so you expect to stay on that typical seasonal pattern? The last call you said some thing about your optimism relative to the third quarter from new products, and I was just trying to figure out what you were referring to.

Well there is, I was just taking to Dave on that one, where we have said is that the last three quarters have been roughly in line with our normal seasonal pattern. In Q3 that would appear to be flat with Q2. Obviously, there is a lot of time to pass between here and the end of September. So how it shapes out in the end we will have to wait and see. But we do see one possible impact certainly going to be from an improvement in the exchange rates we are going to be using in Europe. I think that is probably what he was referring to.

Okay.

And that will be sequential from Q2 to Q3.

Right and the exchange rates, and the costs are sequentially up a couple of million, correct?

Sequentially up a couple of million from Q2 to Q3. That is correct. It is all in the press release as .

Thank you.

No problem.

We will now take a follow-up question from Hegring Pope and Anthony Securities

Yeah, I was wondering if you could put a touch on how the progress is coming in Hungary?

Very much on plan, we are very pleased with the progress there. We installed our second line, as I said in the call in Q2 and it went into production in the first week in July. So, we are very pleased and on track there to achieve our goals, I think in Hungary.

And where do you see that get into by the end of the year?

In terms of, we anticipate having that line fully staffed, fully working two shifts by Q4. So, net-net we would anticipate Hungary in operation to be to go from the slight negative to gross margins here in the first half to probably very neutral or very modest positive to gross margins by Q4.

Okay, great.

We will now take another follow-up question from Syed Haider with Frost Securities.

Yeah, the last caller asked the same question I was going to ask, thank you.

Okay. Thanks

And our final question will come from with Columbia Management.

Yes, I was wondering if you had the daily order rate for the June quarter?

In terms of our average order size?

No just a growth over the June quarter last year.

It was consistent with our billings, so about minus 4 percent.

Okay, thank you.

Consistent with, we run off Typically prettytty low backlogs and it doesn't that tend to be much difference between the billings rate and the bookings rate. Okay. Any other questions.

And with no further questions, I would like to turn the conference back over to Dr. James Truchard, President and Chief Executive Officer. Please go ahead, sir.

Thank you again for taking your time to join us today. We will be presenting at the Salomon Smith Barney Technology Investing Conference in New York City on September 3. Thank you.

And this does conclude today's teleconference. Thank you all for your participation and have a great day.