National Instruments Corp (NATI) 2003 Q2 法說會逐字稿

This is Premier Conferencing. Please stand by. Good day everyone and welcome to the National Instrument -- Instruments Corporation Second Quarter 2003 Earnings Release Conference Call.

Today's call is being recorded. You may refer to your press packet for the replay dial in number and pass code. The replay will be available from 7 p.m. central time today and will end at midnight, central time on July 29th 2003.

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

For opening remarks, I would like to now turn the call over to Mr. David Hugley, Corporate Council, 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, software capitalization costs and future product announcements (Inaudible).

We wish to caution you that such statements are just predictions and that actually events or results may differ materially. We refer you to the documents the company files regularly with Securities and Exchange Commission including the company's recent Form 10-Q.

These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections. With that now, I will now turn it over to the President and CEO of National Instrumental Corporation, Dr. James Truchard.

Thank you David. Good afternoon and thank you for joining us today. Our key messages today are, we delivered our fourth consecutive quarter of year-over-year revenue growth with growth increasing to 7%. With our record cash position and historically deep profitability, we declared a first ever quarterly dividend payment to shareholders and we had our strongest quarter for new products introductions in over six years, including the most significant upgrade of our flag ship LabVIEW products family in more than a decade.

We are pleased with our solid performance in Q-2. I believe we're well positioned and are investing and executing effectively to strengthen our position and expand our future opportunities. In our call today, Alex Davern, our CFO will review our financials, John Graff, our Vice President of Marketing will discuss our business and I will close with a few comments before we open up for any questions. Alex.

Good afternoon. During Q2, NI delivered a good performance in a tough environment with revenue of $100.2m, up 7% from Q2, 2002 and up 1% sequentially. This is at the upper end of the single digit guidance we gave in April. Earnings per share was 14 cents, with net income of $7.4m and a net margin of 7.4%. This is at the midpoint of the 12 to 16 cents earnings per share guidance we gave in April. Added litigation expense of $700,000 amounted to 1 cent per share. We're pleased to lower our fourth consecutive quarter of year over year revenue growth in Q2. On the US dollar basis, revenues for the quarter were up 7% in Europe, up 32% in Asia and flat in the Americas, giving overall growth of 7%, up from 5% last quarter.

On a historical note, 2000 was our last record year of $410m in revenue. Now with almost $200m in revenue for the first six months of the year, we are running 3% ahead of the same period in 2000 and are on target to beat our previous revenue record of $410m. We were especially pleased to see our growth grow in q2 although the industrial economy deteriorated in Q2, our growth increased. We believe this is as a result of our strong new product outlook. The recent announcements of the ISM purchasing managers index for June recovered to 49.8 and that US industry production is returning to growth, shows that the manufacturing sector in the US is beginning to improve after a significant pause from February to May. Also on a positive note our average order size is up 1% sequentially and was actually up 6% over Q2, 2002.

Now moving on to the income statements. Gross margins for the quarter were 73%; up 140 basis points over Q2 last year. Total expenses for the quarter, including the patent litigation expense were $64.2m; an increase of 10% over Q2 last year. R&D expenses were up $1.6m sequentially from last quarter as a result of software capitalization beginning to return to more normal levels and after the release of LabVIEW-7 express. As a result of the release of LabVIEW-7 express in Q2, and the expected release of several other software products in Q3, we anticipate that our capitalized software cost will continue to return to more normal levels in Q3 and that R&D expense will increase to approximately $18.5m in Q3.

Sales and marketing costs were down by $400,000 sequentially and G&A expenses were down to $1.8m sequentially as a result of the decrease in patent litigation expenses following our victory at the Jewer (ph) trial in January. Now I'd also like to give you an update on the favorable jury verdict -- I received in our patent infringement case against MathWorks. In January the jury found infringement on three of our LabVIEW products and awarded NI $3.5m in damages. In June, the court issued an injunction to stop the MathWorks infringement through its Simulex related products. They awarded supplemental damages of an additional $500,000 but there's a delay in the enforcement pending appeal. We look forward to the resolution of the appeal of this case and to ensure that the MathWorks can no longer infringe this patented technology.

On other note, over the July 4th weekend, we successfully completed the upgrade of all our ERP systems in North America to the new oracle 11i suite of applications, which include the front office and all our back office and manufacturing systems. I would like to congratulate the team, all internal, for taking on and successfully completing this major project without using outside consultants, without causing any business down time and without causing any disruptions to our customers. Doing this successfully internally has saved the company millions of dollars, retained the expertise and creates new systems platforms for us to build on for the next decade. This follows on the successful implementation in Japan in July of 2002 and will be followed by the upgrade of our European systems next year.

Now looking out to Q3, given the continuing uncertainty and global economic conditions, we think it's appropriate to set expectations of mid to high single digit year-over-year revenue growth in Q3. Currently, we expect earnings per share for Q3 to be in the range of 12 to 16 cents per share. As these are forward looking statements, I must caution you that actual revenues and earnings for Q3 could be negatively affected by numerous factors such as any adverse changes in the global economy, delays in new product releases, expenses higher than expected and foreign exchange fluctuations.

Now looking to the balance sheet, cash flow from operations in Q2 was $14m; up $500,000 sequentially. Our cash balance of $168m was a new record for the company, and was up $10m from last quarter. Given this new record cash balance, 42 consecutive quarters of profitable operation and the recent reduction in the tax on dividends, the board of directors has declared the company's first ever quarterly cash dividend of 5 cents per common share, payable August 29, 2003 to share holders of record on August 4th.

In summary, NI came through the recent war-induced slowdowns very well with continued growth and profitability. We are on track to have record revenues this year. And given the forward investments we have made over the last two and half years, we believe we can generate operating leverage from any meaningful increase in revenue. With that, I'll turn it over to John.

Thank you Alex . We believe we turned in a solid performance in Q2, delivering our fourth consecutive quarter of year-over-year revenue growth. Q2 was also our best performance in over six years in terms of new product introduction. The highlight of the quarter was our May release of LabVIEW 7 Express, a major upgrade of our entire flagship LabVIEW product software family. We believe this is the most significant upgrade since we introduced the original windows version of LabVIEW over a decade ago. The massive launch of LabVIEW 7 Express is design to dramatically increase ease of use for both new and experienced users. Through our innovative and powerful new technology called Express VI's, we have encapsulated the most common measurement in automation application and easy-to-use interactive configuration dialogue that require little or no programming. We believe LAbVIEW 7 Express will appeal to our large installed base of existing users and also enable us to pursue sales to new customers. Albert Gevans (ph), engineering manager at Royal Phillips Electronics, in the Netherlands stated quote, "the innovation behind LabVIEW 7 Express is incredible. In the ten years that I have used LabVIEW, I have never seen such a large leap in productivity in a single version upgrade. Not only did features such as Express DI's and the new data acquisition framework help us reduce development time, they made it easy for colleagues who have never used LabVIEW, to step in and begin programming immediately." End quote.

We are pleased with the very positive reaction to LabVIEW 7 Express. We executed a comprehensive worldwide press tour and we are now seeing positive coverage in major industry publications.

EDM, a leading electronic design publication wrote quote "experts and novices alike will lust after the latest LabVIEW . The developers of NI's flagship graphical data acquisition, instrument control, analysis in presentation environments have outdone themselves. LabVIEW's huge army of already fanatical fans, will find the new version's speed and extended capabilities irresistible" end quote.

Test & Measurement World Magazine wrote quote "engineers looking for a simple way to get to their first measurement, often look to other packages for simplicity, but LabVIEW 7 Express, National Instruments addresses the rest of us" end quote.

Once LabVIEW 7 Express was released in late May, we saw immediate reaction of strong software sales. In June, we began an aggressive seminar series, targeting new and existing customers that will eventually reach over 200 cities around the world by early Q4. In the coming months, we will be releasing the foreign language versions of LabVIEW 7 Express, including German, French, Japanese and our first Korean version.

In addition to increasing ease of use and attracting new customers, LabVIEW 7 Express includes an upgraded version of LabVIEW Real Time, which has been tremendously successful and a key factor in driving the strong growth of our PXI and Field Point System Hardware Platforms, especially into embedded and distributive applications.

LabVIEW 7 Express is also designed to enable customers to build and deploy systems using a wider range of target hardware platforms. It includes the first official release of our LabVIEW FPGA Development System, which empowers customers to easily imbed their LabVIEW applications directly in silicone. Using LabVIEW FPGA with our new re-configurable I/O hardware, customers are successfully creating customized designs in a fraction of the time it would take using traditional FPGA programming tools.

LabVIEW FPGA has been especially well received by customers developing hardware-in-a-loop testing control systems, such as those commonly required in complex military, aerospace and automotive applications. LabVIEW 7 Express also allows our customers to target hand-held PDA's and other mobile devices for the first time.

We can now perceive business in new application areas where we believe PDA devices can change the competitive landscape ranging from portable field service and repair equipment to highly mobile hand-held data acquisition systems.

Another very important benefit of LabVIEW 7 Express is related to our future R&D effort. LabVIEW 7 Express is built upon a new, highly sophisticated I/O driver framework that controls the operation of our vast portfolio of hardware products - - platforms and products. This new I/O driver framework is much more modern, modular and powerful than our previous version. Its high-speed architecture gives us the potential to push the performance envelope even further with future products and its modularity increases our efficiency and productivity in R&D.

As evidence of this, in Q2 we've released more new products in a single quarter than in any quarter over the past six years. Some examples are our new four channel, 24Bit dynamic signal analyzer module, four new compact field point advanced digital I/O modules, several new switch modules, a variety of new signal conditioning hardware products, Gigabit internet connectivity modules for PXI and many more.

Having successfully completed this massive project, we can now execute our many derivative products as well as accelerate our work on next generation projects. You will see this added benefit at our annual NIWeek Conference next month, where we plan to highlight more new products than at any NIWeek conference in recent years.

In addition to the successful launch of LabVIEW 7 Express, we were pleased to see the continued success in growth of our most strategic system level hardware platforms. PXI and Field Point in particular, had very strong, double digit year-over-year growth, well above the overall company growth rate.

In Q2, we also announced our new compact vision system that extends the power of LabVIEW into rugged machine vision applications. It also lowers costs compared to other smart camera approaches by handling multiple IEEE 1394 fire wire cameras in a single very small form factor. Users can mix and match a variety of cameras to meet their specific application needs. For example they can connect a lightweight remote camera for harsh industrial environment, a high resolution camera for gauging small objects and a low cost monochrome camera for optical character recognition.

The system also easily connects to our field point family of distributed measurement control modules as well other industrial devices such as PLC's and motion control equipment. Customers can use our point and click NI vision builder software tool to automatically build their automated inspection applications. In addition because vision builder also generates LabVIEW source code, they can leverage LabVIEW 7 Express to create more customized vision applications with additional measurement and automation capabilities.

Users simply download their application to the compact vision system and they instantly have a low cost, high performance, factor-ready system that is ideal for packaging, assembly, robotics and industrial inspection. Another interesting aspect of the new compact vision system is that we used our own Lab VIEW FTGA product to design the hardware, which greatly accelerated our time to market.

As you know one of our strategic initiatives is to bring the benefits of virtual instrumentation to higher education institutions around the world. In Q2 we announced the NI educational laboratory virtual instrumentation suite, also known as NI Elvis. NI Elvis is a LabVIEW based system targeted for University Engineering and Science laboratories. With its virtual instrumentation architecture it packages the most common instruments used in university labs into a single small bench top unit including a oscilloscope, Function Generator, Digital Multimeter, Programmable Power Supplies, Voting Analyzers, Dynamic Signal Analyzers and Arbitrary Waveform Generator.

Students design electronic circuits on a removal prototyping board and then use NI Elvis to test their design. Priced at under $2,000 per system NI Elvis offers dramatic cost savings to educators. Archie Holmes, an engineering professor at the University of Texas stated quote "As industry adoption of virtual instrumentation for measurement, control and design grows, hands on training in this area is becoming essential for every engineering and science student. NI Elvis helps us incorporate virtual instrumentation into our curriculum by providing multiple capabilities in one compact affordable system. With this system we can give our students unique hands on experience that will help them make the design challenges they will face after graduation" end quote.

In summary the diversity of our business along with our increased R&D investment continued to payoff with our fourth consecutive quarter of the year over year revenue growth. In Q2 we also set a new record with 2.5 million visitors to our website, set a new record for leads generated by our website and set a new record for revenue generated through our web store.

In addition in the U.S. both seminar attendance and sales quotes showed double digit growth both sequentially and compared to Q2 last year. It is clear that our many new products and our sales and marketing initiatives are effectively creating an increased interest in customers. Going forward our global sales and marketing organizations will be focused on converting this increased interest into orders.

In closing, NIWeek is less than a month away and you don't want to miss it this year, we plan to highlight more new products more than any NIWeek in recent history. LabVIEW7 Express and other recent new products will be featured throughout the conference along with new announcements that will once again represent a major step toward a National Instruments Technology and Innovation.

NIWeek will be held August 13th through the 15th here in Austin. Our investor day is Thursday August 14th with that I'll turn it over to Dr.T.

Thank you John. I am pleased with our executions throughout the company in Q2 especially in R&D, we have a long term vision and strategy and we are intent on other innovations that will make our customers even more productive, more efficient and more successful.

Over the past two and half years we increased our investment in R&D and enhanced our manufacturing operation with our new low cost facility in Hungary, successfully upgraded our information technology infrastructure2 Oracle 11I, significantly expanded and upgraded our product portfolio, dramatically increased our investment in Asia and expanded our field sales course.

These many successful initiatives allowed us to increase the value we deliver to customers and increased our economic recovery. LabVIEW 7 Express with its complete new I/O driver framework was a massive project representing over 309 years of engineering, that was the most significant upgrade of LabVIEW product family in more than a decade. It delivered major breakthroughs in ease of use, expands our target platform include FTGA's and hand held PDA's inaudible for continued technical leadership well into the next decade.

I am very pleased and I congratulate and thank our R&D team for their dedication and solid execution. With this massive project completed we can now accelerate our work on next generation products. We have plenty of direction from customers regarding future products opportunities that will allow us to deliver more complete system solutions and gain as large a share of the dollars our customers are spending.

We look forward to executing on future opportunities and a new high-speed modular architectures embodied in LabVIEW 7 Express that should make our future engineer more efficient and productive. Our investments over the past several years have been well placed and well timed. Our cash position reached new record level in Q2 and given our historically deep profitability, our long proven ability to generate free cash flow and the recent reduction in the dividend tax rate I am pleased to declare our first ever quarterly dividend payment as an additional way of delivering long-term value to shareholders. We will continue to invest aggressively with goals of growing our business, expanding our market opportunities and executing on our core vision of virtual instrumentation. I invite you to attend M.I week this year, to gain more insight into our vision and strategic direction. You can meet with our management and employees as well as leading straight editors and customers from around the world, it is a unique opportunity to share first hand in the excitement of our many new products and get a sneak preview of some of our future initiatives. Thank you for taking time to join us today, we will now take your questions.

thank you, the questions will be conducted electronically, if you would like to ask a question please star 1, if you're using a speakerphone you will have to release your mute function in order for the signal to reach us. Once again, that's star 1 to ask a question, and we will pause just a moment to assemble the roster.

And our first question comes from Paul Knight of Thomas Legal Partners.

Good afternoon, this is Ahjid for Paul.

Ahjid, how you doing?

Good, and you Alex

Good.

Just wanted to check a few things, one is that the - - what the foreign exchange effect was on your cost of goods sold, since a lot of your manufacturing is now being done in Hungary? Whether that's actually having a squeeze in your gross margin?

Not really, no. Most of the material cost of our components is still priced in dollars, so that's certainly that we do have some local element there but it's not a very significant portion. One of the issues that affect our margin this quarter is that we had lower factory utilization overall, as you may have noticed on the balance sheet we reduced our inventories in q2 we've been tuning our system, we had our highest on time delivery metrics in the second quarter and we've been able to tune our inventory a little bit. Despite the slightly lower factory utilization we do anticipate with a full quarter of lively 7's in Q3 and higher factory utilizations that our margins will move up towards the 74 mark in the third quarter.

Okay. And then on the R&D and SG&A line, it's still sort of at a very high percentage of sales based on your long-term averages. When do you expect that as a percentage of revenues to start, you know, going down?

Well, see that depends on the top-line, and we have been very focused on the last 2 1/2 years continuing to make investments we felt were necessary to drive the company forward for the next 5 to 10 years, and we believe those have certainly paid off, we've gained a lot of market share in the last 2 1/2 years and as I said in the conference call we expect to return to a record revenue this year, and I think - - I'm pretty certain that there's very few other companies in the industry out there that are going to have a record year in 2003, so even though those investments will pay off quite well for our investors in the long-term. In terms of how much in dropage in the percentage of revenue debt as I said earlier on is really driven by the top-line, and as John said in his corner, that we're getting these products to market, we're really focused on converting that interest in customers into revenue in the hopes that we can return to our target model of 18% operating income.

Right, and on the Oracle implementation, what would the expenses associated with that - - is it material and is it going to stop going forward?

As I said in the call we did Japanese implementation last year in July, we did the U.S implementation this year in July and we're focused doing the European implementation next year. We've done this all internally with our own people and I'll take this moment again to congratulate the team, which has really done an absolutely outstanding job in delivering a very robust system without having any impact on our business. We are going to keep the team together and continue their initiative moving forward to finish off in the U.S. and then to make the conversion in Europe, we're upgrading from Oacle10-7 to Oracle11i and we're expected to finish the entire process by the end of next year. And I think our internal team has really outperformed, I think, any implementation you've seen from any other company in terms of how we've approached it. So we've managed the cost very well and we'll retain that expertise. The scale of the team - - there's a lot of people working on the project, its in the order of 70 to 80 people working on it full time, and that team will stay together through the European implementation next year.

And what will be the impact of N.I. week on you expense line?

Typically we see an increase in our sales and marketing cost in the fourth quarter - - excuse me, in the third quarter relating to N. I. week. The cost of the conference itself is somewhat offset by fees we'll get from exhibitors. We have a record number of exhibitors this year, a significant increase over last year, and then also the fees paid by the attendees themselves. So it's a reasonable amount of money but it's not very material to the overall numbers.

Okay, thank you so much.

No problem. Next question.

Our next question comes from David E. Smith of Robert W. Baird

OK Alex can you do one of two things, one is can you give the dollar amount revenue by geography per region? And then also, what did FX actually do to your top-line?

If you look at the press release you'll get the local currency growth rates David Eastman, I didn't get into them on the call, but in the European market place the dollar shifted the - - what would have been a -7% revenue run rate to a +7%, so we saw a significant lift from the Euro in Europe and in America there is obviously no impact.

Well I understand, but I was trying to look at the number in dollars sequentially and that's not possible from the press release.

Yes. It's about 3%. Look currency growth was about 4%, same as the first quarter. So we got about three points less than the strength of the Euro against the dollar? Help you?

Yes. That helps and then one other question, is there, in terms of the patent litigation cause, you had flagged them at about $1m for Q-3. Is there anything on the Q-4 or '04 horizon that we should concern ourselves with?

Certainly, we had been- the last call, talked about Q-3 being a million dollars which obviously we talked about here again today, and then Q-4 being $1.7m.

It's still intended to- expected to ramp back up?

Yes we use a trial on the second case that is set for April of next year.

Okay.

On the good news side, we did get an increase through our award and the successful jury verdict we had in January of an addition $.5m, and that will continue to accrue as this case is on appeal so we continue to see a new increase in the amount of the supplementary judgments as we move towards the resolution out of the court of appeal.

Okay.

And we're very much looking forward to the resolution of this case.

Okay. Thank you.

We'll now go to John Harmon at Needham and Company.

Good afternoon.

Hey John.

I was wondering if you could give me any kinds of metric for the rate at which customers have been upgrading to LabVIEW Express7. Maybe when you release LabVIEW 6, what percentage of the installed upgraded? And then if you could just talk about what is (indiscernible) at your website? It looks like as though you have to purchase a brand new version and what your expectations are in general?

Okay John. This is John Graff. We're very pleased as we mentioned in the call. After the announcement late May, in June we saw instantaneous response in LabVIEW upgrades in the weak bench market internally against past releases. We're ahead of expectations. We've got---We've mentioned in the past that the upgrade cycle for LabVIEW ranges from almost immediate, meaning there're some people that see the new version, will place their orders within hours or days of hearing about it, to others that take months, especially large accounts where they have to do a more thorough evaluation and kind of coordinated upgrade. So we typically look at this upgrade happening really throughout the next two quarters and into Q-4.

As far as the upgrade price, there is an offer. Existing users, in US dollars I believe it's $5.95 or $6.95 typical. It depends on what configurations and what options they have. So if you're an existing user you don't need to buy a new license, you buy an upgrade which is, the list price of the full operating system is $2000, just to give you a perspective.

Do you have any feel for about what percentage of the install base typically upgrades to the new released version

That's hard to quantify exactly. We, at this very---over the years a lot depends on the compelling nature of the feature set. I can tell you based on earlier response to the seminars and the events we've held. We've had very strong response. People like the new features, especially the express technology that I mentioned. So at this point, early in the process, we're feeling very good about this upgrade with LabVIEW 7 express compared to previous lively upgrades.

Okay. Thank you. One more quick question, is there any opportunity if you guys, there was only a couple of million dollars a quarter but to pick up customers, of Gage, there was dropped by Techtronic (ph). We do have thorough scope type functionality in LabVIEW.

As you mention Gage, also I was a provider of some PC-based instruments, plug-in vegetisers and scopes and so to some extent, they have them and pulling back out of the market I would look at it as opening some opportunities because obviously you see us continuing to invest in the area and we've had a lot of success with the modular instrumentation especially around our PX-high platform, which once again we had a very strong quarter of growth, double digit growth that was greatly ahead of our overall company.

I'll mention in this area, this will be something that you'll probably see quite a bit about at NI-Wake (ph) as we continue to invest in our modular instruments.

Oh. That's the end of the answer. Thank you very much.

And just a reminder. If you do have a question please press star one on your telephone. We will go now to David Yuschak of Sanders Morris Harris.

I just wondered if you can give us kind of a review of what happened with the, what is over 10,000- what those look like in the quarter versus the first quarter and what percentage of your revenue must produce that?

Sure David. You know, obviously we had seen what the impact of the beginning of the war in the first quarter, a significant reduction in the average oversize in Q-1, about to---average oversize is up 1% sequentially from Q-1 to Q-2 and was actually up 6% year-over-year. In terms of the breakdown of the different categories, the orders let them $2,000 for a roughly flat, or it was over $10,000, was also roughly flat up slightly and we did see an improvement in the revenue for mortgage between $2000 and $10,000. So we're seeing some recovery of capital expenditures in our market space and hopefully as we move beyond the war, the slowdown and we now see industrial production starting to recover. We will see some improvement in our average oversize. I can tell you that June was the strongest month of the quarter and I think that's if you know inaudible pretty well with the beginning of the recovery of the industrial production.

Okay in the first quarter and yet when you had that decline in the $10,000 and more orders.

Yup.

Did you see any shift at all into the second quarter or is that still not there at this point in time?

It's not - I mean, we had some theories that that was possible but it's very difficult to attempt to quantify that.

Okay so--?

I think what we saw is a very severe you know pause in the industrial economy February, March, April and May and that's starting to begin improve in June, so we'll see what the third quarter holds.

Now June on this - in this June versus a year ago June, what kind of growth rate did you see?

It was the best month of the quarter so --.

Double digits?

Not into double digits but it was the best month of the quarter.

The quarters - cause you'd indicated on your call the first two weeks of April was slow but it would kind of indicate then that the April, May period was really kind of sluggish.

That's correct and then June things improved.

Can you maybe just talk a little bit about adjustable marketing expenses that relates to some success stories you're having.

Sure.

Because in Asia you're doing very well.

Yup very pleased with the execution of the team in Asia.

I'm just wondering as a percent of marketing and support for that initiative as a percentage of sales. Are they comparable to what you generally rte as a company in aggregate or is it more expensive, less expensive to - on the productivity of that dollar of sales there?

Well I wouldn't like to give away too much competitive information about our strategy and how we invest and you know give too much insight into our mode of operation there. What I can tell you is that we are aggressively increasing our investments in Asia, in China, Korea, Taiwan, Japan, across the board and we're seeing tremendous execution from our team in Asia. And that's going to be a focal point of our investment going forward. We believe fundamentally that we have the opportunities to significantly increase the percentage of our revenue that comes from that region. And we taking a lot of attention and dollars to try and achieve that goal.

And would the resource primarily be people, offices or hard assets --?

Primarily people, advertising, marketing you know lots of different areas there.

Okay I was wondering if the last review of the gross margin the--- cause compared to the - your first quarter was down by 90 basis points. But you're just still saying you had some unevenness in production in the quarter as it primarily relates to that decline compared to the first quarter.

No we would have been ramping up our inventory levels. A year ago we had some shipping issues and we're building up our inventory levels in order to deal with that. By the time we got to Q2 of this year we had to hire part time delivery in the history of the company and we've really nailed that problem and the manufacturing team has done a tremendous job in execution there.

And then as we were reviewing where we stood we realized that we would be able to pull back our inventory levels a little bit without impacting the customer. And as you reduce your inventory level, you reduce the demand that goes through the system. And that deduct normalized we expect to see our utilization increased here in Q3 and Q4 and see our margins return in the third quarter toward 74%.

But would that explain the decline from the first quarter to the second quarter inaudible?

Yes.

Okay --?

Fine tuning of our inventories situation.

Okay that's all I have for right now, let somebody else take over.

Thanks Dave.

Moving on we have Edward Selive (ph) of Time Square Capital Management.

Hi this is Drew Galligan calling.

Hey Drew.

Hi how are you doing Alex. Quick question for you, did that business strength that you saw pick up in June continue through July?

We're only a few weeks into the quarter so I don't want to you know, try and comment on too short a period of time and get people off to different track. Obviously the guidance that we gave on the April call for Q2 was for single digit. The guidance we're giving now is for mid to high single digits so we're obviously moving up our expectation from where we were in April to where we are now.

Okay one other question how many people have signed up for NIWeek at this point in time?

Actually I don't have that data with me right now but we are expecting a very good attendance this year and I know, I know on non-exhibitors it's up quite a bit on the actual attendees I don't have the number but I know we're expecting a big crowd this year.

Do you know kind of what percentage more than last year?

I don't have that data in front of my Drew I'm afraid.

Alright great.

Hopefully we'll see you there and you can add -.

I'll be there and I'll add up all the people how does that sound?

Andrew that will do it.

Thanks a lot.

We will get you a machine application that can take a picture of the heads and add them up for you.

That's right thanks again.

No problem.

And gentlemen there are no further questions at this time. I'll turn it back over to you for any closing remarks.

Thank you for taking the time to join us today. We will be presenting at the Salomon Smith Barney technology conference in New York on September the 3rd 2003. Thank you.

That does conclude today's conference. We thank you for your participation.