National Instruments Corp (NATI) 2003 Q1 法說會逐字稿

Please stand by. Good day everyone and welcome to the National Instruments quarterly earnings release conference call. Today's call is being recorded.

You may refer to your press packet for the replay dial in number and the pass code. The replay will be available from 7:00 p.m. Central time today and will end at midnight Central time on April 24.

With us today are Dr. Dr. James Truchard, President and CEO, Alex Davern, Chief Financial Officer, and John Graff, Vice President of Marketing.

For opening remarks and introductions, I'd now like to turn the conference over to Mr. David Hugley, Corporate Counsel. Please go ahead, sir.

Good afternoon.

During the course of this conference call we shall make forward-looking statements regarding the future financial performance of the company, including statements regarding our expected revenue and earnings per share, expected litigation expenses, and future product releases. We wish to caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to the document the company files regularly with the Securities and Exchange Commission including the company's recent Form 10-K.

These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections. With that, I will now turn it over to the Chief Financial Officer of National Instruments Corporation, Alex Davern.

Good afternoon. Appreciate those of you who are delaying your start of a three-day weekend to be with us this afternoon and we'll try to keep this short.

Our key points today are number one, geopolitical uncertainty had an impact on our U.S. and European revenues. Number two; we had very strong growth in Asia. Number three; we continued our strong investment in new products. And number four; Q1 was our third consecutive quarter of revenue growth.

During Q1, NI delivered a good performance in a tough environment. We revenue at $99.2 million, up five percent from Q1, 2002. EPS net of two point seven million dollars and patent litigation expenses was 13 cents per share, with net income of seven million dollars and a net margin of seven percent. The patent litigation expense of two point seven million dollars amounts to approximately four cents per share.

We are pleased to deliver our third consecutive quarter of year over year revenue growth in Q1. On the U.S. dollar basis, revenues for the quarter were up eight percent in Europe, up 17 percent in Asia, and down two percent in the Americas, giving overall growth of five percent.

Looking at currency terms, revenue was down three percent in Europe, down two percent in the Americas, up 38 percent in Asia, and up four percent worldwide. So the movement of the dollar had a large, positive effect in Europe, it also had a large, negative effect in Asia and on a worldwide basis it increased our revenues by one percent year over year.

Early revenues are well ahead of budget. And our shortfall came in Europe and the U.S. In February and March, we believe that orders in the Europe and the U.S. were impacted by the uncertain economic and geopolitical environment. The recent announcements that the purchasing managers index for March fell to 36.2 and that U.S. industrial production was down a half of one percent in March, shows that the manufacturing sector in the U.S. has seen a very significant pause over the last two months, and that the contracted in March for the first time in five months.

This impacted our larger orders, especially those over $10 thousand. Our average order size fell sequentially by 15 percent in Europe and by 10 percent in the Americas. This decline exceeded our normal seasonal decline and caused us to miss our earlier expectations. However, on a positive note, our average order size was up approximately three percent over Q1, 2002 and in Asia it was actually up six percent sequentially from Q4.

Now moving down the income statement, gross margins for the quarter were 73.8 percent, consistent with last quarter and remain at their highest levels in two years. Total expenses for the quarter, including patent litigation expenses, were $64.8 million, an increase of 10 percent over Q1 last year.

R&D expenses were down one million dollars sequentially from last quarter as a result of a two million dollar increase in software capitalization. This increase in the value of our software costs capitalized resulted in the release to data testing of some very significant software projects. These projects represent over 300 man-years of development effort and they are expected to be released in late Q2.

As a result of the expected release of these projects in Q2, we anticipate that our capitalized software costs will return to more normal levels and that R&D and expenses will increase to approximately $17 million in Q2. Sales and marketing costs were down by $1.5 million sequentially as a result of lower marketing costs and lower commissions, and G&A expenses were flat sequentially.

Now, looking to the balance sheet, cash flows from operation were $13.5 million, up from $4.4 million in Q1 of 2002. Our cash balance of $158 million increased to a near record. And as predicted in our last call, our capital expenditures for the quarter at $3 million were half of our depreciation and amortization [Inaudible] $6 million, boosting cash flow.

I would also like to give you an update on the favorable jury verdict NI received in its patent infringement case against The MathWorks, Inc. The jury found infringement on three of our LabVIEW patents, and they confirmed all four of our patents in the suit to be valid. In addition, the jury awarded NI $3.5 million in damages. We are asking the court to issue an injunction to stop The MathWorks infringement through its Simulink and related products.

In regards to future patent litigation costs related to the likely appeal of our jury verdict in the second patent case we filed against The MathWorks in October 2002, we are currently expecting to incur expenses of approximately $600,000 in Q2.

Looking out beyond Q2, we are currently expecting to incur patent litigation expenses of approximately $1 million and $1.7 million in Q3 and Q4 respectively. We will make a decision on how to recognize the gain of the jury's $3.5 million damages award when we receive the court's disposition of post-trial motions. This is expected before the end of the year.

Now, looking out to Q2, we can report that for the first half of April, orders were up (ph) by double digits. However, given the easier compares with early April 2002 and the current uncertainty in global economic conditions, we think it is appropriate to set expectations at single-digit year-over-year revenue growth in Q2 2003. In line with that, earnings per share is currently expected to be in the range of 12 to 16 cents per share for Q2 2003. This EPS estimate is net of the $600,000 we expect in patent litigation expenses in Q2.

On another note, as a result of the faster than expected ramp-up of our new Hungarian manufacturing facility, we currently estimate that our effective tax rate for 2003 and 2004 will drop to approximately 25 percent from 28 percent in 2002.

Now, these are forward-looking statements. I must caution you that actual earnings for Q2 could be negatively affected by numerous factors, such as any further decline in the global economy, delays in new product releases, expenses higher than expected, and foreign exchange fluctuations.

With that, I'll turn it over to John.

Thank you, Alex. We believe we turned in a solid performance in Q1 in the face of a very challenging environment of economic weakness and geopolitical uncertainty.

Asia was the star performer in Q1. In local currency, our year-over-year growth rate was 38 percent. We believe our strong performance there is the result of two factors - first, the strong industrial economy and, second, our increased investments in sales and marketing in the region that have paid off nicely. In addition to the strong revenue growth, we also saw strong growth in customer activity and leads, which we believe shows the positive response to our latest products as well as the additional opportunity we have in the region.

We believe our business in both the U.S. and Europe was negatively affected by broad-based weakness in the industrial economies of both geographies and by uncertainty about the war in Iraq. As Alex mentioned earlier, the primary impact was a decline in orders over $10,000 in both the U.S. and Europe. With an average order size of approximately $2,400, you can imagine that we see a broad mix of small, medium and large order sizes across all our product lines, with orders above $10,000 accounting for about 40 percent of our total revenue.

From a product mix standpoint, the sequential drop in orders above $10,000 in Q1 had a broad-based impact across all of our product lines.

While we are disappointed that U.S. and Europe sales were below our expectations, there was good news in Q1. We saw solid growth and customer activity levels and other metrics we use to measure our effectiveness. We've set a new record for business to our website and quote levels in the U.S. showed strong double-digit growth over Q1 last year.

We also had strong lead growth at three of our most important trade shows; the SAE Automotive Show, National Manufacturing Week and Sitcon (ph) , despite the fact the shows themselves did not see increased attendance.

It is clear that our many new products and our sales and marketing initiatives are effectively creating increased interest from customers.

There was also a lot of good news in Q1 regarding our new products. We were pleased to see that our strategic system level platforms, including PXI, FieldPoint and LabVIEW Real-Time delivered solid year-over-year growth. We were especially pleased that our new Compact FieldPoint family of over 20 products, which we introduced in Q4, had tremendous success in both industry recognition and especially strong sales.

In January, editors of Control Engineering Magazine recognized Compact FieldPoint as one of the most significant innovations of the year 2002. Editors of Instrumentation and Automation News, a major publication in the industrial automation industry, also recognized Contact FieldPoint with an Automation Excellence Reward that the publication gives annually based on significance to the industry, technological innovation, and interest to instrumentation and automation engineers.

As I already mentioned, we had another strong growth quarter for our PXI platform. Our PXI-based 6 ½-digit DMM, and RF Signal Analyzer, which we announced, which we announced last August at NI week, had a great Q1, setting new sales records. And this helped PXI to penetrate further into mainstream test applications.

In the most recent issue of the PXI and BXI newsletter, Fred Bode, Editor, summarized some recent market data by saying the PXI market shared "a 35 percent increase in an absolutely terrible economic downturn for the entire test and measurement industry. This is a remarkable result. PXI returned robust growth in the face of all this gloom and doom."

We are pleased that PXI continued to be a star performer for our business, and it remains a key focus for our R&D investment.

Q1 was also another good quarter for new product introductions. We introduced a new PXI chassis, and new 100-Megaherz PXI-based Frequency Source Module, which is our fastest ever, and we released new driver software that allows our PXI-based 6 ½-digit DMM to also function as a 1.8 mega-sample per second digitizer.

We also released the new PXI Swat two (ph) Timing Module that allows our customers to synchronize up to 51 PXI chassis with near perfect precision across all channels. This will allow PXI to scale the very large applications, such as precise synchronization of up to 5,000 measurement channels for highly-sophisticated sound and vibration systems, such as those used for aerodynamic wind tunnel applications.

In Q1, we extended our Data Acquisition Product family with the introduction of our fastest ever 16 bit Simultaneous Sampling Multi-Function Modules for both PXI and PCI, and we released new optical character recognition software for our Machine Vision product family, as well as introduced several new FieldPoint and Signal Conditioning products.

We continued to see numerous end-user successes throughout the quarter leveraging our system level platforms, our lightest products as well as our core virtual instrumentation technologies. For example, on the automotive front, Nissan in Japan is using a PXI system with LabVIEW, LabVIEW Real-time and some of our data acquisition and signal conditioning products for an electronic control module simulation system that provides greater integration and flexibility than their previous test system and a 46 percent increase in productivity.

Another example is the recent success at a major automotive supplier where they are using LabVIEW Real-time and LabVIEW FPGA to develop a transmission simulation test system for new transmission control modules that meets the precise timing needs required in these types of hardware in the loop testing. The diversity of our business along with our increased R&D investment and our system level platforms like PXI, FieldPoint and LabVIEW Real-time, as well as revolutionary new technology like LabVIEW FPGA continue to pay off in Q1.

We have many new, exciting products planned for Q2 and beyond, including some major software products that are current in beta test. In addition to these major software products, we also have many more exciting hardware products underway. As you know, our annual NI week conference is a key event for launching new products and meeting with our customers and strategic partners.

This year, like last year, we will be announcing new products in a variety of areas. We believe some of these new products will again represent a major step forward in dragging virtual instrumentation into the mainstream of measurement and automation, while expanding the range of applications that we can address.

NI week will be held August 13 through the 15 here in Austin. Our investor day is Thursday, August 15. With that, I'll turn it over to Dr. T.

Thank you John. While I'm not satisfied with our overall growth rate, I am pleased with our execution throughout the company in Q1.

We believe we gained market share with our computer based approach. I believe this demonstrates a quality of our business and the strength of our position in the industry and I'm optimistic about the prospects for the future. We had a strong foundation and strategy and we are intent on further innovation that will make our customers even more product, more efficient and more successful.

Prior to NI week last year, we promised revolutionary new products and we delivered. As both Alex and John mentioned earlier, we have some major software products in beta tests right now that we are very excited about. These projects are among the largest development efforts in the company's history. We also have many exciting hardware products underway. I invite you to attend NI week this year to see these products first hand.

While we must operate within the bounds of sluggish economies in U.S. and Europe and glib political uncertainty that remains a challenge, I can assure you that we are executing on the long-term opportunities before us. Customers continue to look very carefully at their own businesses for ways to cut costs and maximize productivity. We believe this works to our advantage.

We believe strongly in our ability to save customers time and money and we are focusing throughout our company to take full advantage of these opportunities. We believe our investment in new products is well placed with many exciting new products in the pipeline.

We will continue to invest aggressively with the goal of growing our business, expanding our market opportunities and executing on our core vision for virtual instrumentation. Thank you for taking the time to join us today. We will now take your questions.

Thank you very much, sir. The question and answer session will conducted electronically today. If you would like to ask a question, please press star, one on your telephone keypad at this time. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

And once again, if you do have a question that's star, one.

And our first question comes from David Yuschak of Sanders Morris Harris.

You know, guys I think everybody has known what's happened with technology, spending, war, and everything else, but I just bear with me a minute here as I try to put some thing put into perspective as to what this shape of the mix recovery looks like. Because, you know, as I looked at this thing, 2000 was kind of a pivotal year for you guys in the way of PC based test and automation, setting the table for the platform you needed to deliver to bring technology to your space.

And by that I mean, you know, you had Windows introduction to producing superior capabilities. You were having hardware platforms that were giving you quantum leaps. And as you look at the last three years, your returns on capital have far exceeded your cost at capital where others in this space are almost barely breaking even on their returns on capital.

But it gave you guys is the opportunity to put fixed assets in place and you guys have spent a lot in the way of Hungary and other places, you know, I think it was about 90 plus million, I forget the numbers off-hand real quick. But you've put it on resources in the way of sales, marketing, R&D, so you've got a lot of intellectual resources.

And I think if there's anything that the last few years has proven, and I think it's a comment you guys made, software has been solution. I think it's been validated.

The question I'm asking you, though, is it would suggest that you guys have substantial capacity to wrap up revenue and profits in this next recovery. Is that - is that how you would look at it as well?

Well, David, this is John, great question. Maybe I'll start off first and I think we would agree with you that it really is a lot about software. Our virtual instrumentation vision that we've been embarking on over the last 15 years is centered around, you know, the software platform. And that software platform has leveraged the low cost, broad base, PC technologies that have evolved tremendously and continue to do.

And so today, you know, we believe that software platform, kind of our core platform, is what gives us a large and very loyal customer base. It's obviously what gives us the greatest differentiation over our competitors. And it's that same software position that opens up the opportunities for new market adjacencies that you've heard us talk about in a lot of the calls over the last year or so.

And we believe we have some very unique skills and capabilities. So looking forward, on one side, yes, we think our software position and software platform gives us a very high barrier to entry from a competitive standpoint due to our market leadership and of course the large patent portfolio we've built up.

And so now as we referenced in the call, you see us making a pretty sizable investment with the products in Beta that we mentioned representing over 300 man-years of investment.

Maybe I'll turn it over to Dr. T to comment a little more about that investment.

That's right. We've really been looking to the future. We talked in past about how we're reinvesting in R&D. We've been working on next generation platforms to really support these higher performance IO products who are making the PCs continue to grow and it's performance that gives us a hardware platform to work off of.

We worked to expand our user base by moving the learning curve in the software. So a lot of energy and effort is going in present software designs to do that. And we've really, as John mentioned, worked to open that new entry point for new adjacencies in the design chain so we can serve more the needs of our customers.

The - and Alex, you know, you commented in the quarter about how depreciation was substantially less than - more than your capital. Wouldn't it suggest though, that, as we look out at the resources you've got into play that you can get back to these 18 percent operating margins without a whole heck of a lot of additional spending either whether it's for resources - other than for R&D possibly, but you know manpower resources for [Inaudible] - can't that (ph) get you back to an 18 percent operating margin here in this next recovery?

Well, I'll - given that my corporate counsel is here beside me, I'll avoid the temptation to respond directly on the 18 percent. But certainly in the last two years, we have built lots of capacity - capacity in sales department, in marketing, and in manufacturing. And I believe there is a lot of operating leverage in the business model that will respond very, very well to any increase in revenues. That's probably the best answer I could give you.

OK.

OK, thanks, Dave.

But one last question - on the first quarter versus the second half of last year, what was different in this - in what you were seeing - because there was a real recovery developing in that second half versus what happened in the first quarter. Any real variance there that you can discuss?

Certainly, I mean I would specifically point to orders over 10K in the U.S. and Europe in February and March. That is where we saw the real difference from Q4. Now obviously, we've seen a significant improvement in the business in the first half of April, and that's been across all geographies. We've seen growth in all three geographies in the first half of April. We do have slightly easier compares because obviously the Easter holiday season in Europe is now at the end of April this year. It was at the beginning of April last year. So, we're very encouraged by that.

And obviously the continuing success of our products I think is a - is a critical indicator here in Q - in the first quarter that are platform decisions are correct. But we really do believe that it is focused on the most economically or politically sensitive area of our business which was orders over 10K.

OK, thanks.

OK, thanks, Dave.

And our next question will come from Paul Knight with Thomas Weisel Partners.

Hi.

Hey, Paul.

The orders you said were up double digits in early April.

Yes, through yesterday.

It was orders?

Orders - that's correct. Revenues, also, but I think orders is the most - is the most important metric. But revenues are also up in double digits in the first half of April.

OK. The other is you said I think the press release you're guiding to single-digit growth in Q2 and the rest of the year?

I only mentioned Q2, Paul. I didn't make any reference to the rest of the year.

It's Q2 - is that - you know, is that one or is that nine? Is it above five or below five or [Inaudible] ...

Well, obviously, it's somewhere between one and nine, but I'm taking the deliberate course here of being somewhat cautious. We've obviously seen double-digit growth in the first half of April, but I think it's still a pretty uncertain economic environment. And we deliberately chose to give guidance in terms of single-digit revenue growth [Inaudible] for two reasons - one, the continuing uncertainty, and two, I think we and most technology companies have a slightly easier compare in Europe in the first half of April because of the timing of Easter. So we'd like to get through April into the first half of May before we really feel like we know how the quarter's exactly going to shape up.

And normal seasonality patterns would be that - what - Q1's usually weakest?

Typically Q1 - Q2 is sequentially flat with Q1 is the normal seasonal pattern. Last year we had a release of LabVIEW in the first quarter of 2002. We released LabVIEW 6.1, and that gave us I'm sure some lift in the first quarter. We did see some sequential decline in Q2, which is probably somewhat related to the release of LabVIEW 6.1 in Q1. But the normal pattern over a longer period of time is for revenues to be relatively flat sequentially from Q1 to Q2.

Did you say the biggest hurt was on orders above or below 10,000?

Orders over $10,000. That's where we saw the biggest decline. And our average order size in Q2 was down sequentially from Q4; it was down 15 percent in Europe and 10 percent in the U.S., and that's very heavily concentrated in a lot less orders over 10K in those two regions during February and March.

Now, why do you think the soft -- why do you think your customers are doing that?

Well, you know, I'm a CFO as well and I certainly put more visibility to our purchases over 10 or 15K during times of a lot of uncertainty. My decisions during the major geopolitical uncertainty that we saw in February and March were to put off things; especially things that have a long-term payback. Below a certain threshold, I didn't bother looking at them because there are too many for me to spend time on. And so I put it down to people delaying purchasing decisions in those two territories to wait and see how this war -- or the outcome. And we'll see how it pans out for the rest of the quarter, but certainly, early April would tend to support that conclusion.

And then the last question is, what is the typical PXI setup going to cost a customer; chassis, modules, all in?

I'll let John take that one.

Well, obviously, the average order size for PXI tends to be higher by the nature of you typically buy the chassis -- you know, prices there range from $100 up to a few thousand. You buy the controller and then the mix of modules, depending on the application needs.

So, it tends to be much more of a systems sale. But, you know, as I pointed out, we continued to see strong growth with PXI on a year-over-year basis. So, we continue to be quite pleased with how the PXI platform is performing.

I would say probably the average PXI system sells somewhere between -- certainly north of 10 grand; anywhere between 10 and 20 grand, I would say.

Sounds like the sequential growth wasn't quite like Q4, but still good.

Certainly, Q4 was a very strong quarter, and the war definitely had an impact on that type of business in Q2.

OK. Thank you.

Or, Q1, I should say.

Thanks, you all.

And moving on, we'll now go to Richard Eastman with Richard W. Baird.

Hi, Alex and Dr. T.

Could you just talk a little bit about Asia and perhaps, you know, where the growth is coming from? You know, is it either a type of product or application -- if you could track that down?

We're seeing broad-based -- this is Alex, here -- broad-based growth across all of Asia -- not only in our newer products, where we're seeing reasonable growth -- some very good growth -- but in our older traditional instrument growth products, we're also seeing growth in Asia, as well, which I think would give you an indication of a general broad-based expansion in an industrial capacity in the Asia region.

Our newer products are doing very, very well there. Certainly, we've seen a lot of success for Compact FieldPoint, which would fit a lot of industrial applications in Asia. LabVIEW Real-Time and PXI also continue to do very, very well there.

So, it's very broad-based. The percentage of revenue mix from Asia is actually very consistent with the rest of the world. In terms of geographies, we've had tremendous success across all the geographies, including Japan. Obviously, very, very strong growth in China, but we're particularly proud of the execution in terms of business operations across all of Asia, where they're really delivering on driving demand and interest for our new products and in closing (ph) that business.

Huh, OK. And the order growth in the first couple of weeks of April, how does that look geographically?

It's up across the three regions, with the strongest growth in Asia/Pacific. And that's orders through yesterday.

OK, OK. And just two other things. I'm struggling a little bit -- you touched on this with an earlier question -- but I'm struggling a little bit to reconcile the weakness in the $10,000-plus orders, but the growth in the PXI -- you know, the factory automation products.

Sure. The growth we talked about was year-over-year.

OK.

And when we talked about the decline in average order size we were speaking of sequentially.

Does that help you understand?

Yes.

But we do see growth in PXI year over year and in comp act sale point inner platform spun on a sequential basis our average order size was down. And obviously the biggest hit was in orders over 10,000.

OK. And then just lastly a technical question, perhaps, on the cash flow statement below the operating cash flow line there's a line that says intangibles. You used eight million of cash. What is that? Shouldn't that correlate to your capitalized software or what is though?

Well, there's a number of things in there. We also had the purchase of the Matrix X acquisition.

Yes.

Which was quite a few million dollars in the quarter. As well as other issues in there. So there's a number of items in that. With the Matrix X acquisition being the ...

... would be the Matrix One acquisition and then the capitalized software?

Those are the two main items. Yes.

OK. All right. Thank you.

And John Harmon (ph) with Needham and Company, has our next question.

Good afternoon. Alex, I realize it's only two weeks into the quarter but do you - I have a couple of questions actually.

Shoot.

Since the uncertainty about the war seems to be for the most part behind us, do you feel your customers are reassured and they are returning to normal activity? Or that it's not dampening your ordering anymore?

Well, it's curious. I notice several other companies that have released results in the last couple of days have also noted an improvement in the tone and order volume in April. So it's somewhat heartening for me to see that we're not the only company that sees that improvement.

So I would say certainly, you know, the first two and a half weeks or so of April through yesterday, we would feel the tone of our customers is a lot better than what we saw in February and March. Whether that will survive the next, you know, ten weeks or so we'll see. But I would definitely categorize it as improved market conditions certainly in the last two and a half weeks.

OK. Thank you. And do you feel the average order size is improving again? Increasing? And what do you think it could come out to be based upon what you see in the last couple of weeks.

I don't actually have average order size data for the first two and a half weeks. I just have total revenue. So I can't comment on that directly, but certainly any increase in order value to total dollar value would probably indicate positively for the average order size.

Our orders under $2,000, for example, the total value there tends to be much more stable. And the orders over two to 10 and 10,000 and plus tend to be a bit more volatile. So typically when we see order growth it usually is led by bigger orders.

Do you think the bigger orders ...

... I do not ...

... come back a little bit?

Sorry, John?

Do you think the over $10,000 orders have returned a little bit at least in the last couple of weeks?

I don't have anything other than anecdotal data. So I couldn't give you any conclusive answer to that.

OK. A couple more, were traditional wick (ph) control products still about 20 percent of sales or was there any meaningful change there?

Yes. That is still reasonably accurate. Yes. No meaningful change in the quarter.

I've never heard you give a break down, maybe you could give me one now, but even qualitatively of a breakdown of sales by measurement and industrial automation. And has there been any change?

Well, that's a good question. We get that quite a lot and I know you and I touched on it briefly while you were preparing your initiation report. But the honest answer there is its extremely difficult for us to break the orders down between test and measurement applications and industrial automation applications.

The reason for that is that we sell, you know, to 25,000 different companies in 40 countries around the world. And when we sell LabVIEW in a data acquisition board to a purchasing agent at Motorola, it could just as easily go into manufacturing tests, industrial automation as it would go into R&D. So it tends to be very, very difficult.

Now we do have some products that are by their nature and their specs like Compaq Field Point, which is an extremely rugged platform, and LabVIEW Real-time which is an extremely reliable software platform. They tend by their issue, to be more industrial.

But unfortunately, I really can't give you an answer because we don't have concrete numbers. Our guesstimates are that our industrial penetration is increasing and it's increasing as a percentage of revenue. That it's a fairly material percentage, but it really is more speculation on our side than absolute certainties.

So I apologize I can't you better definition on that.

All right. That's it for me. Thank you very much.

Thanks, Jon.

And we'll now move back to David Yuschak with a follow up question.

You guys have come in with about weather having an impact on the quarter, too. Is there any way that you can quantify how much that may have hurt you as well as the war issue?

That's a good question, David. Well the weather affected us in two ways. Number one obviously was the shut down in a lot of the Northeast during February. And then also we had a major ice storm here in Austin, Texas, if you can believe that. And we actually were shut down our whole manufacturing and a whole operations here and our campus were shut down for two days.

We believe that's one of the reasons why our orders were down more in February in the U.S. than they were in March. If you remember on our last call, on April first we quoted that orders in the month of February in the U.S. were down eight percent, in March we're down four percent.

Beyond an anecdotal evidence of, you know, some potential shift from February into March, it's really difficult for us to quantify any additional impact. We believe it had some impact but it would be complete speculation for me to put a number on it.

OK. Now as far as the large orders, 10 thousand orders, is that pretty broad based have you seen when - back in the second half of last year when you had a big, nice, pleasant surprises in the third and fourth quarter. Those large orders - was anything different in this decline on the large orders - was there anything different in this decline on the large orders? Or were these large orders just kind of broad based or is it isolated to certain verticals that you operate in?

It tends to be very broad based. As you know, I often refer to industrial production indexes and also to purchasing manager index. What our broad base of product sales and customer base it tends to be across all industries. Now what we did see in Q3 and Q4 last year was a noticeable increase in our average order size, which obviously was driven heavily by a nice increase in orders over 10-K.

And so that was a primary driver forward and then as uncertainty came, you know, really to bear on the quarter in February and March, we saw that reverse a little bit.

Does that - does that suggest that the increases you're seeing in the average order - in the larger orders - is it more and more stuff that you're doing as moving towards systems solutions?

Yes. I would certainly say that you move it to platforms as we're now bringing to market with Field Point, Compaq Field Point, LabVIEW Real Time, and PXI. We're certainly moving more to where we have the opportunity to sell off 100 percent of the application. Where we can provide the customer with the entirety of these measurement needs to complete the application. And that's a major advance and step forward for National Instruments over the course of last four or five years.

There's just one last question on and I think it me it kind of reflects to what happened last fall after NI week a lot of interest in the product, a lot of interest in the things you're doing. And that was against the backdrop of, you know, pretty lousy ISM numbers, industrial production and so forth. Kind of same kind of thing we're seeing here today.

As far as that customer base is concerned, what assured you last year was a tremendous amount of interest coming out of NI week with the solutions of some things you have. And it kind of gave you an advantage in bringing ideas and things to market, irregardless of what was happening with industrial production, ISM.

As you look at your customer base in this environment today, is it fair to say that the interest level still remains pretty high there and it's just a matter of just solving some of the solutions here? Or is it some more longer term concerns about industrial production here in this country, the ability to be competitive in this country and that's why Asia is doing well?

I'm just kind of getting - I want to get a sense of what your customers read is on what they want to do versus some of the economic environments that are out there today.

I don't know if that - I don't know if that - I made myself very clear on that question or it's complicated or what, but I thought I'd at least give it shot.

Yes, Dave, this is John. You know, the investment we've made over the last couple years, you know, in the new technologies is driven so that we can capture more dollars - more share from both the existing customers we have as well as new application areas. So the interest we're seeing is pretty broad-based.

As we've pointed out in past calls, it's during times like this where you have the economic conditions that companies are actually more inclined to look at ways to lower their costs and improve their productivity. And, you know, we think that's been a key factor in driving our success through the downturn, but obviously the growth we've seen now for three straight quarters.

I think you said, too - just to confirm - that you're going to be introducing some major new products at the end of this second quarter?

That's right, Dave - over the next couple of months, we anticipate some significant product announcements. As we said in the call, these will represent products that we've spent over 300 man years in development that we'll be announcing in the next few months. And obviously we're hoping that that will generate a lot of excitement in our customer base and build up to a very strong NI Week. And we hope everyone on the call who's here and listening can make our investor day on August 14 down here in Austin.

Would it tend to - these introductions - will they tend to drive more large orders in?

I don't want to speculate on the exact products at this point until we actually make the formal announcement.

OK, thanks.

Thanks very much.

And we do have a follow-up question from Richard Eastman.

Hi - just two things - have you developed yet any products with Siemens? Do you have any sales there? Or how has that - how has that partnership progressed?

Rick, this is John. We've continued to focus most of the efforts with Siemens more on the sales and marketing. The development efforts have been more of kind of proving out the integration of the technologies, and we have some examples of that - technologies - actually some examples you can download off our Web site where you can use some of Siemens hardware platforms with LabVIEW as well as integrate LabVIEW into some of their investor automation systems.

Are you finding that beneficial just in terms of, you know, maybe justifying in the customer's mind the robustness of a PC-based controller (ph) have you - do you think you have any traction there?

Yes, absolutely, because when you get a company like Siemens that's just an acknowledged, you know, world leader in this industrial segment, it's quite a testament to the validity of using PC-based solutions. And, you know, that has a carryover effect as we continue to evolve our technologies with LabVIEW Real-Time, PXI, and FieldPoint.

And, you know, I should point out Siemens is a good customer for us worldwide. So, you know, part of this relationship has really helped kind of tighten that relationship and bring up new opportunities within a lot of their facilities around the world.

Rick, while we're having the call here, I'd like to let the audience know that we will be presenting at the [Inaudible] conference on May 14 in Chicago. So, ...

Thanks for the plug. The last thing is just Alex could you just talk to the percentage of your volume or product or sales that will be coming - you know, going through Hungary by the end of this year?

Certainly. We anticipate by the end of this year that we'll be up to about 55 percent of our production - 50 to 55 percent will be coming from Hungary.

OK.

We're really proud of the job our whole entire manufacturing team has done on a global basis of executing really well on establishing the second source. And it's gone really at the very upper end of our expectations.

So at the current level of business, would one expect to see some slight improvement at the gross margin line?

Certainly, you know, I feel pretty good that despite a six and a half or seven million dollar decline in revenue sequentially, we were able to maintain gross margins flat sequentially at 73.8 percent. Had we maintained the same revenue level as we had in Q4, I would definitely have expected to see an improvement on gross margin from that leverage.

So, I think our plans and investments were made to drive gross margin up in the future. We're certainly continuing to struggle very hard and push very hard to execute on those plans.

OK. Alright. Thank you.

Thank you very much.

Gentlemen, we have reached our allotted time for questions. At this time, I would like to turn the conference back to you for any additional or closing remarks.

OK. As Alex mentioned earlier, on the final note, we will be attending the Baird Growth Stock Conference May 14th in Chicago. Join us there.

Thanks, again, for taking the time to join us today.

And that does conclude our conference call. Thank you all for joining us, and have a great day.