National Instruments Corp (NATI) 2002 Q4 法說會逐字稿

Thank you for standing by, welcome to the National Instruments earnings release conference call. Just a reminder that today's call 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 from 7:00 p.m. central time today, and will end at midnight central time on Friday, January 30. With us today are Mr. Alex Davern, Chief Financial Officer, and Mr. John Graff, Vice President of Marketing. For opening remarks I would like to turn the conference over to Mr. Ben Basch, Corporate Counsel. 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 and earnings during Q1 2003. 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 statements include, fluctuation in customer demand for the company's products, expenses exceeding the company's budget target, and delays in the introduction of new products. We refer you to the documents the company files with the Securities and Exchange Commission, including the company's recent Form 10K and 10Q. These documents contain and identify other important risks. This call is being made at 4:00 p.m. central time on January 23, 2003, and we undertake no duty to update any statement made here in. With that, I will now turn it over to the CFO of National Instruments Corporation, Alex Davern.

Good afternoon and thank you for joining us today. Our CEO, Dr. Truchard, is out of town on business, so I'll be joined today by John Graff, our Vice President of Marketing. Our key points today are double digit growth in both revenue and earnings, a dramatic increase in operating income, and new product sales that exceeded our forecast.

During Q4, NI delivered a very good performance, with revenue of $107m, up 13% from Q4 2001, and up 11% sequentially. Fully diluted earnings per share was 19 cents, with net income of $10m, up 36% from Q4 2001 and up 48% sequentially. Operating margins improved to 12% and net margin improved to 9.4%. Both are at their highest levels in almost two years.

Despite continuing problems for most of the industry, we delivered our second consecutive quarter of good growth. This reflects the benefit of our increased R&D investments, which have resulted in a strong flow of new products. These have helped view our growth with dramatic sequential increases in sales for our LabVIEW Real Time, PXI and FieldPoint platforms in Q4.

During Q4 we saw growth in all regions. In the Americas, revenue was up 9% year-over-year, in Europe we returned to growth with revenue up 9% year-over-year, and we saw continued strong growth in Asia, with growth of 31% year-over-year. For 2002 revenues were $391m, up $6m from the $385m we saw in revenue in 2001. While well below our goals, this makes 2002 the 25th year of growth in the company's 26-year history.

Moving now to the income statement, gross margins in Q4 were 73.8%, up from 73.0% in Q4 2001. The increase in gross margins was primarily driven by improved efficiency and greater leverage of our new Hungarian manufacturing facility.

Now turning to expenses in Q4. We continued our focused investments in R&D, increasing our investment for Q4 by 10% year-over-year. As we said in October, NI week 2002 was a great success, with record attendance and major product introductions. We have continued to aggressively promote these new products in the marketplace, increasing our sales and marketing expenses by over $3m sequentially, and by 10% year-over-year.

[Inaudible] expenses were up 9% and in addition we incurred $1.2m in patent litigation expenses. Patent litigation expense for Q4 was $.5m more than we anticipated when we gave guidance in October. In total, operating expenses were up 12% compared to Q4 2001. Excluding the patent litigation costs, our expenses for Q4 would have increased by 10%.

For the full year of 2002, our operating expenses were up 4% to $245m, with R&D of 5% and SG&A expenses flat. R&D personnel was up 10% for the year and was up 30% from December of 2000. Total personnel was 3,008, up 6% from December 2001 and up by 20% or approximately 500 people, from the end of 2000. This demonstrates our commitment to continue to fund the sustained growth of the company.

Compared to 2001, we saw a large variation in our patent litigation expenses. In 2001 we recorded a $1.2m gain from the settlement of the case, and in 2002 we incurred a $4.7m expense related to our patent suit against DeMathors [ph]. This resulted in a $5.9m increase in litigation expenses and excluding this swing; our full year operating expense growth would have been only 1.6%.

Net income for the quarter was $10m, or 9.4% of revenue, up 36% from Q4 2001. Excluding the patent litigation expense, net income would have been $10.8m or 21 cents per share, up 50% from Q4 2001. I would also like to point out that this growth in net income was not from layoffs, cost cutting or restructuring, but from real growth, growth in revenue and improved gross margins.

Now, turning to the balance sheet. Inventory days improved from 143 last quarter to 128 in Q4. DSOs outstanding was up one day to 54. We also had good cash flow in Q4, with $16m in operating cash flow. Net cash and short-term investments increased by $10m and were net of $6m in capital expenditures for the quarter. For the full year we had $49m in cash flow from operations and the capital expenditures for the year were $31m, down significantly from the $65m we spent in 2001. We expect our capital expenditures to decline significantly in 2003 to approximately $18m.

Now looking out to Q1 2003. On the microeconomic front, capital expenditures in the global economy continue to be under pressure during this fourth quarter, and this pressure is likely to continue during early 2003. We welcome the improvement in the ISMs purchasing measures index to 54.7 in December, but note that the average for Q4, at 50.8, showed only modest improvement over the Q3 average of 50.2. Based on our view of the global economy, and of our customers acceptance of our new products, we believe that National Instruments will continue to see year-over-year revenue and earnings growth in Q1 2003. We are currently expecting to see fully diluted earnings per share of between 17 cents and 19 cents for Q1 2003.

This guidance is net of $2m in expected patent litigation expense. We have a patent case in trial right now, and we expect a verdict by the end of January. The expected patent litigation expense amounts to 3 cents per share, and excluding this expense our guidance is equivalent to 20-22 cents per share for Q1 2003. This is in line with the 21 cents per share we earned in Q4, excluding the Q4 patent litigation expense. On another note, we are projecting an effective tax rate of 26% for 2003.

Now I'd like to discuss the possible implications of President Bush's proposal on the elimination of the double taxation of dividends. It has always been our belief that corporations exist to provide a return to shareholders, and we are very interested in the most efficient vehicle to deliver that return. Moreover, with $154m in net cash and investments, NI is clearly in a position to offer a dividend. As a result, should the president's proposal to completely eliminate the double taxation of dividends being acted into law, National Instruments will review its existing policy on dividends. As these are forward-looking statements, I must caution you that actual earnings for Q1 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. With that I'll turn it over to John Graff, Vice President of marketing.

Thank you Alex. We turned in a solid performance in Q4, delivering our second consecutive quarter of double-digit growth in both revenue and earnings, and returning to positive growth for 2002. Our aggressive investment in R&D resulted in many exciting new products in 2002. To launch and promote our many new products to our customers, we increased our sales and marketing investments almost 20% in the last six months, and we were very pleased with the results of those efforts.

The success of our recent new products resulted in strong growth and record revenue for our LabVIEW Real Time, PXI, FieldPoint and Machine Vision platforms in Q4. From a product mix standpoint, our computer based measurement and automation products saw solid double-digit revenue growth over Q4 2001, as well as strong sequential growth from Q3.

The star performer in Q4 was once again our PXI platform for complete systems solutions, which had another record quarter. PXI's continued strong growth in Q4 was driven by a combination of three factors. First, the growing momentum and acceptance of PXI as an open industry standard; second, the continued success of LabVIEW Real Time with PXI in embedded and distributed applications; and third, very positive reaction to our new PXI based 6.5 digit DMM and RF signal analyzer modules that we announced at NI Week.

As an example of the growing momentum of industry acceptance of PXI, at the end of 2002 there were a total of nearly 900 PXI modules available from all vendors, up 50% from the end of 2001. In December, editors of Test and Measurement World, one of the leading publications in the T&M industry, selected our PXI RF signal analyzer as a best in test finalist for the 2002 test product of the year, and they also recognized our PXI based 6.5 digit flex DMM with an honorable mention.

The RF analyzer was also recognized by the editors of EDN Magazine, the leading publication for electronic design, as not only one of the top 100 products of 2002, but also a finalist for their prestigious innovation of the year award. We were very pleased to receive these honors, along with other very favorable editorial coverage in many industry publications. We were also very pleased with the reaction of our customers in the form of strong sales that helped drive dramatic sequential growth for PXI, up over 30% from Q3.

One example of our success with PXI is the testing of Black Hawk helicopters by the Australian military. Using LabVIEW and PXI they saved 2/3 on measurement hardware costs and slashed testing time from months to weeks. The PXI system resides onboard the helicopter and measures vital information such as rotor speed, air speed, aircraft position and engine torque as pilots land in various weather and sea conditions. Steve Blanford, an Australian military senior avionics design engineer, stated, "Ability to adapt from one type of aircraft to another, along with its low cost, high performance, and the solid support from NI, made it a superior test solution when compared to alternative expensive, proprietary test components. We can quickly reconfigure our test systems simply by plugging in different PXI modules. For example, we originally did not intend to acquire live video from the cockpit, but added that capability by plugging in an NI image acquisition module and programming it with the LabVIEW development environment."

Another star performer in Q4 was our FieldPoint platform for distributed data collection, which also saw record revenue and strong sequential growth of almost 40% over Q3. Like PXI, Field-Point's success in Q4 was driven by the continued penetration of LabVIEW Real Time, into distributed and embedded systems and industrial applications. In addition, in November we introduced a major new advancement to our FieldPoint platform with our new compact FieldPoint product family. Compact FieldPoint gives our customers an even smaller, more rugged platform that further extends the reach of LabVIEW into extremely harsh industrial environments on factory floors, within industrial machines, and in remote locations. It is about the size of a brick and incorporates a solid metal back plane with steel screw fasteners, to withstand up to 50G of shock and 5G of vibration. It operates in temperature ranges that go beyond any of our previous products, from negative 25 degrees to plus 60 degrees Celsius.

This allows our customers to run embedded LabVIEW applications in smaller form factors and in harsh environments, which expands the number of industrial applications we can pursue. The launch of compact FieldPoint was significant in terms of the number of new products announced together as a complete and integrated new product family. The launch included multiple chassis and back plane options, three intelligent controller options, and over 20 IO modules that perform analog and discreet control, user defined data logging and advanced inline math and signal processing.

With the growing success of our standard FieldPoint platform, software compatibility with our existing installed base of LabVIEW applications, and the comprehensive range of functionality included in this launch, we expected immediate reaction from our customers, and we were not disappointed. Lance Butler, senior systems integrator for B&B Technologies, one of our select system integrators for the transportation industry stated, "By eliminating the possibility of disconnect failures resulting from intense shock and vibration, compact FieldPoint provides a cutting edge solution for the challenges of in vehicle testing. This small, rugged and intelligent platform enables us to implement analog measurements, control and data logging to monitor signals such as oil pressure and vehicle speed. This dramatically reduces the time and cost currently associated within vehicle applications."

Compact FieldPoint is a major addition to our portfolio of industrial automation products. Control Engineering, a leading publication for industrial automation, recently recognized compact FieldPoint with an editor's choice award as one of the most significant innovations of 2002. As further evidence of our progress in the industrial automation market space, in November Dr. Truchard was recognized by the Instrumentation Systems and Automation Society with an honorary member award. This award is the most prestigious award conferred by ISA, and was presented at the ISA 2002 trade show, which is North America's largest exhibition, conference and training event for instrumentation systems and automation professionals.

Another strong performer in Q4 was our Machine Vision product line, which had record revenues for the quarter. During Q4 we introduced Vision Builder for automated inspection. With this new, easy to use software, engineers with no previous programming experience can create Machine Vision applications using intuitive inspection tools to directly interact with images. It also features seamless integration with LabVIEW so that engineers can quickly and easily create factory floor applications such as inline part inspection and quality control monitoring.

I'd also like to give you a quick update on the progress and status of some of the other announcements we made in Q3 at NI Week, where we shared our expanded vision for LabVIEW throughout the design flow. At NI Week we had a joint press conference with Techtronics to announce that LabVIEW would soon be embedded inside their new open windows oscilloscopes. These new oscilloscopes began shipping in Q4 and in December we began a joint technical seminar and conducted some web events and drew strong customer interest. At NI Week we also announced plans to integrate LabVIEW with Texas Instruments' co-composer studio development tool to help customers identify design flaws during the modeling phase of TI based CSP systems. We formally released and began shipping this new product, called the LabVIEW DSP Test Integration Tool Kit, in December, and we are pursuing joint sales and marketing activities targeting both existing and new customers.

At NI Week we demonstrated a prototype of our new LabVIEW FPGA product, and announced our goal to release the first version in Q4. Building on the tremendous success of LabVIEW Real Time, LabVIEW FPGA is an ambitious new initiative that empowers customers to compile and embed their LabVIEW applications directly inside FPGA chips, utilizing a revolutionary new architecture for re-configurable IO hardware products. Executing LabVIEW programs directly in silicon makes possible a quantum leap in IO performance, and allows us to target a much broader range of embedded and distributed applications that require high speed custom logic and tightly integrated real time control, such as hardware in the loop and industrial machine control applications.

On November 19 we formally announced and shipped the LabVIEW FPGA pioneer system. It is a complete PXI system that includes LabVIEW FPGA in our first PXI based re-configurable IO hardware module. Customers are already easily implementing systems that are difficult to create with traditional tools. One example is an automotive application developed by the Woodward Governor Company. Matthew Vielly [ph], senior software engineer at Woodward Governor stated, "Using the LabVIEW FPGA pioneer system, we built a custom engine simulator to test our new line of engine controllers, which would have been impossible with other off the shelf software. This system met or exceeded our specifications and cost 90% less than building our own FPGA board."

We are just getting started with our LabVIEW FPGA initiative, and we are working very closely with our pioneer customers. One of the most promising areas is implementation of custom digital protocols for automotive and military aerospace applications. We have been able to successfully prototype many customer applications directly in front of the customer in less than one hour, which creates quite an impression on customers who have traditionally spent months, if not years, developing custom hardware. We are encouraged by the early reaction and success our customers are already having with this innovative and exciting new extension of our core LabVIEW platform.

In October Electronic Design, a leading publication covering the electronics industry, marked its 50th anniversary with the establishment of its engineering hall of fame. The magazine nominated hundreds of candidates, and asked readers to vote for their hall of fame choices online, resulting in the inaugural class of inductees. NI co-founders, Dr. James Truchard and Jeff Kodosky, were both selected for the revolutionary role that their LabVIEW invention and virtual instrumentation have played in the test and measurement industry. Other notable inductees included Thomas Edison, Jack Kilbey, Gordon Moore, Andy Grove, Steve Jabs, Bill Hewitt and Dave Packard. Lucinda Matera, associate chief editor of Electronic Design, stated, "The distinguished careers and exemplary achievements of Truchard and Kodosky make them ideal engineering hall of fame inductees. These men pioneered virtual instrumentation, which serves as a foundation technology for transitioning tests and measurement into the 21st century."

We are also honored that the invention of LabVIEW was recognized as one of the top 50 electronics industry milestones of the past 50 years, alongside such notable milestones as the first integrated circuit and the introduction of the PC.

Now I'd like to end with a few closing comments. Earlier this month we announced that for the fourth consecutive year, Fortune Magazine recognized National Instruments as among the 100 best companies to work for. Keeping NI an innovative, rewarding and fun place to work is a commitment we take very seriously, and we've met the challenge again in 2002 by keeping our focus on the success of our employees and our customers. Dr. Truchard has asked me to personally thank all of the employees for their loyalty and their contribution to National Instrument's success and he's honored to know that they continue to enjoy working here as much as he does.

While the economy has made the past two years very challenging, we were very pleased with our performance in Q4 and for the year, especially with our execution in bringing new products to market. The strong profitability of our business model enabled us to substantially increase our investment in R&D and strategic sales and marketing initiatives throughout the economic downturn and those investments have begun to pay off. In 2002 we successfully ramped up our world class manufacturing facility in Hungary, built our new research and development center, brought 2000 Austin employees together on our corporate campus, delivered record breaking success at NI Week, and released groundbreaking products that significantly expand the boundaries of virtual instrumentation and our future opportunities.

Our execution on new products and new opportunities has enabled us to return National Instruments to double-digit growth in each of the past two quarters, despite the stagnant economy. Our performance, relative to our competitors, clearly shows that we have gained market share and our historically deep profitability enabled us to continue to invest for the future. Our employees have worked together to bring NI through the toughest economic downturn our company has ever faced. We recruited carefully and opportunistically, and we increased our engineering resources, giving us over 1,400 engineers today that are helping to drive our future growth opportunities.

We are excited about the success of our latest products, and we are determined to build on that success in 2003. We will continue to invest aggressively, with the goals of growing our business, further expanding our market opportunities, and executing on our core vision for virtual instrumentation. We will now take your questions.

Thank you very much. At this time if you do have a question or comment, press star, one, on your touchtone telephone. We'll take as many questions as time permits and we will proceed in the order that you do signal us. Again, that's star, one, to ask a question. We'll start the day with Timothy Anderson of Solomon Smith and Barney.

Hi, this is actually Jonathan Keys for Timothy Anderson. Great quarter guys, I'm glad to see the results. I just wanted to think going forward into 2003, in terms of my model, how I should think in terms of SG&A. I just wanted to try to get a better idea in terms of some of the line items, operating expenses for 2003. You've talked about increasing your, growing the company, increasing your promotions, I'm sure that will be factored in. I'm wondering if you could add some more color to that.

Sure Jonathan, it's a good question. I'm glad at least that in the last two quarters we've given specific guidance one quarter out on the bottom line. During the downturn last year and in 2001, we had suspended guidance just due to the uncertainty coming from the economy. It's a reflection of our improved visibility that we're now again giving guidance for one quarter out for the second quarter in a row.

In terms of our plans for next year, it's really going to evolve as we go through the year and we see the strength of the business to the extent that our customers respond to our new products during the course of the next couple of quarters. There is a lot of uncertainty out there in the economy, a lot of uncertainty too politically. So at this point, I really would like to focus on guidance on the bottom line for the first quarter. In big picture terms what I can tell you in relation to G&A for sure, we believe we have plenty of capacity to deal with an expanded business with our current level of staffing in G&A. Obviously litigation expenses will be a bit of a variable. In terms of R&D, our commitment is to continue to increase our investment in R&D as we go forward. Sales and marketing will really depend on the strength of the business as we go through the year. We will scale up and down our sales and marketing expenses based on the strength of the business as we go through each quarter.

Great. Can I ask you then, in terms of the in markets, have you seen any shift in terms of the industries? You're talking about geopolitical and some of the uncertainty that's out there. Have you seen any increase in military purchases? Or one industry that's become more predominant versus the other?

This is John, I'll take that. As we saw in Q3, we continue to see growing success in the military aerospace, also continued success in the automotive market. While we did see a little bit of growth across all industries, those two continue to be very successful. We also saw an up tick in electronics, in consumer electronics space. Now some of the areas like telecom and semiconductor continue to be quite depressed, especially compared to their record levels from two years ago. But we're seeing some signs of business in those areas. Again it's the diversity that we have that continues to be a key part in helping to drive our sustained growth.

Great. That's all the questions I have. Again, congratulations on a great quarter.

We'll go next to David Yuschak, of Sanders Morris Harris.

Hi, congratulations on a solid quarter there guys.

Thanks, Dave.

I have a couple of things on the G&A on the marketing side of it. You guys, in the last couple of quarters, in funding your aggressive marketing expenditures, particularly coming out of the NI Link because you had indicated that you were positive about this all happening at that conference. You've been funding some of that marketing with G&A cutbacks. And, you've also had the opportunity within marketing to change, because you're saving some at the lower end, to fund the higher system sales and more experienced people in that area.

The question I've got for you is how much more can we continue to see a G&A that can continue to be cut like it has here to support the sales? And give us a little more clarity as far as where that spending in marketing is coming from? Because, it has been pretty robust coming out of the NI Link.

Well certainly, I'm sure that John here would love to see me cut back G&A and fund more dollars for marketing. As we look forward, and our G&A expenses are up about 9%, year-over-year, we'll continue to moderate those expenses as we go forward and look to invest in the other areas of the business until we see a strong recovery.

We have increased our sales and marketing expenses by almost 20% in the last six months, as John said, and we've done that. We've seen the benefit from it. It's helped fund our double-digit growth we've saw in the last two quarters and the improvement we've seen in gross margin and operating income. But in terms of what we'd like to do in the future, I'll turn it over to John. He can also talk about the [inaudible].

On the sales and marketing side, we did continue to increase. Some of that funding has gone into advertising to promote those new products. We also, in the fall, wrapped up our series of NI Days, which are kind of our regional versions of NI Week, and again, plan off these significant new products. We saw strong response at all those events.

We also went to market with our 2003 print catalog, which we were quite excited to get that market, because we can feature and highlight, again, these new platforms and new products. And that plays a significant role in not only helping Q4, but to launch us into 2003.

Did you hire more systems types of sales guys too, engineers at the higher end, to get more focus on that particular end of the marketplace?

Certainly, we're continuing to put people and deploy them in the field, with the goal of continuing to support the success of the new platforms. That's being reflected in the record average order size we had here in the fourth quarter. We're seeing the value of the significant increases we've made in our sales force over the course of the last two years. And, we'll continue to support that initiative going forward.

What was the average order size?

Average order size in the fourth quarter was right at $2,700, which was a record over the last 10 years. It actually exceeded, for the first time, the record average order size we had in the fourth quarter of 2000. So, we're glad to put some higher points on the chart than what happened in Q4 of 2000.

And then, on your--Asia has been awfully strong for you, the last several quarters, particularly, I think starting last spring, wasn't it?

That's correct.

And, you've indicated, relative to others over there in the Far East, that you guys are still relatively small players. Can you give us an idea just what kind of available, or potential, exists there in the way of available market for you, relative to where you're at today?

Well, I think what I said on the last call too, David, is that, you know, we have a strong presence in Asia, but we started a little bit light. We are building a steadily stronger presence in Asia, but I would see our percentage of revenue coming from Asia-Pacific being still a little behind the other major [DMM] companies. John might perhaps care to comment on also on where we're investing in Asia.

Yeah, I think as we've looked at Asia as a region, there are kind of two primary areas; One is to look at R&D investment. You take something like Japan, where that's still a very significant, large amount of R&D happening in Japan. So, we look to that for guidance on the opportunity.

And then, you look at the manufacturing capacity. Obviously, Asia, China, areas like that are seeing a significant growth in that area. So, we use those two as guides to the potential we have and that's why we continue to invest in those areas.

We're very pleased with our execution in that region, David.

And one last go, as far as that manufacturing capacity is concerned, it sounds like, too, you're just making a tremendous amount of inroads into the industrial automation side of it, probably maybe even more so than maybe you would've thought, at the beginning of the year. From your presentation, it just sounds like industrial automation is getting a bigger and bigger foothold in the revenue stream. Am I correct or not?

Oh yes, we're extremely pleased with the success of LabVIEW Real-Time and PXI and FieldPoint. So, those played a significant role in bringing us in the new applications, which again lead to the double-digit growth.

And, would you give us some kind of number by what percentage of sales it might be at this point?

Well, it's hard to, you know, as we've said before, to break it down exactly, because the products can be used in a mix of laboratory, research and industrial applications. But, as we kind of indicated throughout the call, we are seeing growing success in that industrial area.

That's all I've got for now. Thanks a lot.

Thanks, David.

We'll go next to Jon Hegranes, of Baldwin Anthony and McIntyre.

Good afternoon. Nice quarter.

Hi, John, thank you.

I was wondering, as far as the lower tax rate, is that all because of Hungary?

Heavily, yes, that's correct.

And, are you expecting to get any boost on the gross margin side, because of Hungary?

Yeah. We've seen, certainly as I talked about in the call, our gross margin is up a full point on Q4 2001 to Q4 2002. That's largely driven by improved efficiency and then better scale on our Hungarian operation. It will really depend on revenue in 2003. Certainly, we have the opportunity, if we see revenue growth, to improve our leverage in the Hungarian facility. If we see that, then we'll get a benefit to gross margin from that.

OK, and do you expect the lawyers to be off the payroll after Q1?

[Laughing]. I don't know that we'll ever get all the lawyers off the payroll, but certainly we are expecting a verdict in this case in the next couple weeks.

OK, thank you guys.

And just as a reminder today, if you do have any questions, please press star-one at this time. Moving on, we'll go to Richard Eastman, of Robert W. Baird.

Yes, good afternoon. I have a couple things. Alex, could you just give us, at year-end, how much the traditional instrument business was, as a percentage of sales?

A little under 20%, Rick.

A little under? OK. And has that business stabilized? I know it did in 3Q as it stayed, you know, a little flat, year-over-year?

It was flat sequentially from Q3 to Q4. It's been pretty much flat in dollar terms most of the whole year.

OK. So, if you look year-over-year, was there a big comparison last year? Was it flat as well?

It was up year-over-year. Q4 last year was really a disaster for that business. It was very, very bad, so it was up year-over-year. But all the growth sequentially is coming from the newer products, as we would expect.

All right, and, have you seen anything coming out of the Siemens partnership yet?

Rick, this is John. We continue to see strong interest. On the sales and marketing, we've done a number of events and continued those through Q4. We also, in November at a major automation show in Germany, announced the latest on the product development side, where we brought some new LabVIEW functionalities that can communicate with the latest technologies and protocols, for some of the Siemens industrial equipment.

That goes a long way to helping increase our awareness and perception in that industrial audience.

OK, and, let me ask you another question. You may not have a number like this, but I'm curious. When you look at your PXI in your industrial automation business, do you have either a potential number or an actual number, in terms of what your content per PXI Chassis is today, vs. a year ago?

If your question is, do we know [inaudible]--.

Well, you must track the number of PXI chassis [units] you put there, since that the housing, the case, whatever?

Absolutely.

Right. And, we'll look at how many slots, and you might remember when, earlier in the year, we introduced our 18-slot chassis. You know, as we invest more in R&D, a lot of that investment is increasing the range of the measurement control functionality. So, as we add things like the--DMM and the RF Analyzer, to go along with our existing modules, we do look to drive-we can increase our content in those PXI systems.

As we talked to then, that obviously improves the margin of each system, the more slots we fill. And, that's being reflected in the average order size, which hit a record here in Q4.

OK. All right;thank you.

Thanks, Rick.

Next we'll go to Paul Knight, of Thomas Weisel Partners.

Hi, Alex.

Hey Paul, how are you doing?

Good. I didn't hear the last question. It might have been asked, but the growth rate on the control of traditional device, what's the trend there?

It's been flat in dollar terms all year, Paul. It's been flat sequentially.

All year?

Yeah, well pretty much all year it has been pretty stagnant. And, all the growth really in Q4 is coming from the newer product areas from a sequential point of view.

Has that trend, though, at least kind of bottomed out to no growth, from probably a decline in the beginning of '02?

Yes, certainly. I mean it has definitely stabilized. Like I said, it's been basically flat in dollar terms for about four quarters now.

And, you're not really seeing an up turn in that market, correct?

Sequentially no. I mean, like I said the last four quarters it's been flat.

And in the replace traditional devices, obviously the driver there is PXI, right?

PXI, FieldPoint, LabVIEW-Real-Time and then the Vision and Motion business.

And industrial automation?

Well, that's an application for PXI, so PXI is being used in industrial automation, as John said, and also in test and measurements. So, that's one of the applications for those products.

How has software demand been from your partner--well, I don't know how to describe it. How's software demand from the traditional TNM market, like the other box of manufacturers'?

Well, that's hard to distinguish specifically, in terms of the box suppliers. You know, obviously our software is widely used anytime you're connecting traditional instruments in an automated system. But a lot of the growth in software is these newer application areas that we talked about. Industrial automation, NI Week, you heard us talk a lot about increasing our penetration into the whole design process.

We also continue to see a lot of success with our DNM software, Data Management software, which just gives engineers and corporations a jewel to analyze and work with the large amounts of data they collect in a measurement and automation system.

I think one way to describe it, Paul is, we're at, right now, record lows in terms of the proportion of our business that's being tied directly back to traditional instruments.

OK.

I think that's reflecting the success of virtual instrumentation in gaining market share here in the last two years.

What's your '03 tax rate?

We're forecasting 26% right now.

And '04?

I haven't put out a number for that yet. I think we'll probably wait until later in the year to put forward a number for '04. I'm not anticipating an big difference.

And then, the last question would be, you know, you obviously--we hope for a drop in that legal expense after Jan 31?

Yes.

OK, thank you. Well, where is that court case going to be, Alex?

It's going on right now here in Texas.

At the U.S. District Court?

Yes.

OK.

Thank you.

Thanks.

Moving on, we'll go to Bruce Harab of Tri-Mark.

Yes, thank you. Just in terms of your gross margin, I know it was 76% a couple of years ago, in '99 it looks like, and even as high as 77%. I'm just trying to get a sense for, will it get back there over time, once you get back a more normal macro economic environment?

And, I guess specifically, I'm wondering, over time is the content of an average order becoming more hardware and les software? And as such, can we expect to see that gross margin decline over time?

Good question. We've had the target of 76% gross margin in our corporate model now for over a decade. And, we've hit it, basically, probably 10 out of the last 12 years or so. The last two years, our biggest challenge on gross margin has really been the fixed cost in our manufacturing operation, as we started up our second manufacturing facility in October of 2001. That was during a time when we were seeing a real decline in revenues. That put a lot of pressure on the fixed cost base of gross margin.

As volume has started to improve, we've seen our gross margin start to come back. Overall, we are sticking with our target of 76%. We believe that we will have the opportunity to return to that level in the next couple years, assuming we see reasonable revenue growth on the top line.

So, I would put it down, basically, to a volume challenge, to get sufficient volume to fully absorb the second production facility that we've now put in place.

Yeah, I know it's hard to break it out, but has your--if you look at your content, has the mix between hardware and software changed dramatically over the past few years?

The gross margin coming from product mix hasn't really changed that significantly in the last couple of years, no. It's really been focused on the fixed cost base, that's been [inaudible] in the last two years.

OK. And in terms of the litigation, I'm not that familiar with exactly what it is, but is it to do with people knocking off your hardware?

We are suing a company for infringing our LabView software patents. This is the fifth time in the last six or seven years that we have taken action to protect or intellectual property on the LabView patents.

And in terms of your--like, I've got one of your catalogs in front of me, and there are a lot of standard boards and products here. But, I presume within each of those hardware, you've got proprietary firmware in there that prevents anyone else from manufacturing that. Is that correct?

That's correct.

And, my question is, has it been a problem, say, in China, or some countries where the laws are a little looser, for people knocking off your--?

I think the simplest way to look at it is, if you look over the last 10 years, the stability of our gross margins, I think that's the best indication I can give you of our ability to deliver unique value that has been able to command those types of gross margins over a long period of time.

So, that hasn't been a problem then?

That's where I point you to, to look at our abilities [inaudible].

That's pretty clear. And, can you say--I know you're probably hesitant to say what percentage of sales are LabView-Real-Time kits, like FieldPoint and Machine Vision products, but can you give us some--like, is it substantially greater than 50% or--?

I really don't want to comment on that at this point in time. I don't think it would really be in the best interests of our shareholders to do that. Certainly I understand your desire to get that number, but I believe it would be very valuable competitively.

Fair enough, and then--.

I'll abstain for now.

Fair enough. Now, and your tax rate's 26% this year, as you just said.

That's my expectation for this year, yeah.

And if I'm modeling beyond that, there's no reason why that would--is three any reason why that would pick up again?

Unless we see some major change in tax law that I'm not aware of right now, but at this point, I'm not aware of any reason that we'd expect to see a significant increase.

OK. Thank you very much.

No problem.

We'll go next to Richard Davis, of Richard Davis & Company.

Excellent growth.

Thank you.

Thank you very much. The question I would have relates to market share. Are you continuing to gain market share, as you've done in the past by expanding the addressable markets?

Yes. It's a combination of that and expanding the range of applications that we can serve, so we continue to see success in both regards.

OK. Does that expand worldwide, or is that--it seems intuitively that you're gaining market share in your very strong markets, like the Far East. But does that hold true for the domestic markets as well as IMA [ph]]?

We believe so.

Yeah.

Thank you very much.

Thanks, Dick.

And, we'll take a follow up question from David Yuschak.

On the FPGA comments that you had earlier, I know you had commented that you didn't expect it to be much of a material impact in 2003, but I just wanted to ask you if you could profile, for us, who these pioneers are, in the FPGA initiative you've got? Is it smaller companies, bigger companies, major projects, or something that just kind of tweaked the process here? I'm just kind of curious if we're seeing some heightened interest on some maybe major initiatives that could, maybe, propel this thing as successful sooner than later.

Yeah, it's a good question. Really, the small number of pioneer customers we have right now, as we start, really come from a broad variety of backgrounds.

You start first with the very large and loyal customer base we have for LabVIEW. And then, among that audience, you know, there's a set of design engineers that we've seen in a variety of industries, from military, automotive, even medical. These people are designing systems and have some unique challenges that get into the timing and control aspects that can't be done just through software control.

And, a lot of them are ones who've kind of messed around or been trying to design their own hardware to handle this control. So now, when they see this capability to take this LabVIEW system that they're familiar with and that they've used for years, and take that LabVIEW code just directly into an FPGA, the light bulbs go off among these users.

So, we're very pleased, but as you mentioned and we've brought up before, this is only the start. We think it's a pretty revolutionary breakthrough. We compare it to the introduction of LabVIEW 1.0, as far as its potential impact. But that's just meaning that we look for it to be a platform that will drive forward for many years.

Are you looking, maybe, at--these early pioneers, are they looking at--I mean, military--because, military certainly would be a pretty attractive area to use that right away. Would that be military of automotive, where the peak interest is right now?

Yeah, that's where we're seeing some of the initial ones; military, aerospace, automotive.

Would these be bigger aerospace type of companies? Or, just the little--?

Yes.

Yes.

OK. Sounds good, thanks a lot.

Thanks, David.

And again, as one final reminder today, if you do have any questions or comments at this time, please press star-one on your touchtone telephone.

OK.

We do actually have a question from Robert Mason, of RW Baird.

Yes, just a couple of housekeeping questions, real quickly. Alex, what was the--did you have any currency impact in the quarter?

Yes, you should see it on the press release.

OK, very good.

It's on the front. You can see it on the income [inaudible] there.

OK. And then, you mentioned the number of PXI products that are being offered in the market place. How does that number relate to what NI is offering, your portfolio?

Yeah, this is John. Our of the total 900 products, there are approximately 100 products that we offer, for PXI.

OK. Very good, thanks.

Thanks, Rob.

And gentlemen, we have no further questions at this time. I'd now like to turn the call back over to you, Mr. Alex Davern, CFO.

Thank you for joining us today. I'll be presenting at the Thomas Weisel Technology conference in San Francisco, on February 3rd. I hope I can see you there. Thank you.

That will conclude today's conference call. Thank you all for joining us and have a great day.