National Instruments Corp (NATI) 2003 Q3 法說會逐字稿

Good day, everyone and welcome to the National Instruments Corporation’s third quarter, 2003 earnings release conference call. Today's call is being recorded. You may refer to your press packet for replay dial-in number and the pass code. The replay will be available from 7 p.m. central time today and will end at 10.59 p.m. central time on October 30th, 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. Now for opening remarks, I would like to turn the call 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, future product announcements and expectations of a recovery in the economy in the global manufacturing sector. 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 documents the company files regularly with the Securities and Exchange Commission including the company's current 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, I will now turn it over to President and CEO of National Instruments Corporation Dr. James Truchard.

Good afternoon. Thank you for joining us. Our key points today are record third quarter revenue, 19% increase of net income, strong double digit growth in software sales and another strong quarter for major new product launches. We are pleased with our solid performance in Q3. I believe we are 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, vice president of marketing will discuss our business, and I will close with a few comments before we open it up for your questions. Alex?

Good afternoon. During Q3 NI delivered a good performance in an improving environment with revenue up 9% and net income up 19% from Q3, 2002. This is at the upper end of the mid-to high single digit revenue guidance we gave in July. Earnings per share was $0.15 with net income of $8mand a net margin of 8%. This is at the high end of the $0.12 to $0.16 earnings per share guidance we gave in July.

We're pleased to deliver our 5th consecutive quarter of year over year revenue growth in Q3. In US dollars basis, revenues for the quarter were up 18% in Europe, up 18% in Asia and up 1% in the Americas, giving overall growth of 9%, up from 7% last quarter. On a constant currency basis, revenue for the quarter was up 1% in the Americas, up 3% in Europe and 33%in Asia, giving overall constant currency growth of 7% up from 3% last quarter. $104.6m in revenue represents the highest third quarter revenue in the history of the company.

The strong result was driven by very strong software sales from new product introductions and by a notable increase in our orders over $10,000. The strength of our orders over $10K drove a 6% sequential increase in our average order size to $2,600. This increase in orders over $10Kresulted from the success of increased investments in Lab View, PXI and compact platforms and our improvement and confidence as the economy improved. From a product mix point of you, our computer base measure and automation products grew by 14%. Our instrument control products, which are highly correlated to rate of change in industrial production, fell from 21% of revenue in Q3, 2002 to 17% in Q3, 2003. U.S. industrial production was down 1% year over year in Q2 and Q3.

Year over year industrial production still negative. We're pleased to see the recent improvement [inaudible], as measured by the JP Morgan Global Purchasing Manger index. This index which increased to 52 in Q3 from 48 in Q2 shows that the global manufacturing sector is beginning to improve after a significant pause from February to June. This typically indicates future increase in global production. We are pleased to see our growth improve in Q3 and we believe this is the result of our strong new product output as well as early stage recovery in the industrial economy.

Moving to the income statement. Gross margins for the quarter were 73.8% in line with Q3 last year. The high level of capitalized software in the previous 3 quarters resulted in a $1.1m increase in capitalized software cost being amortized into cost of goods sold which reduced gross margins by 100 basis points. Total expenses for the quarter were $67.5m an increase of 8% over Q3 of last year. Down from a 10% increase we saw in Q2. R&D expense were up $1.5msequentially from last quarter as a result of software capitalization returning to more normal levels after release of Lab View 7 Express. R&D expenses represented18% revenue and were up 14%over Q3, 2002. Sales and marketing costs were up by $2.2m sequentially and by 10% year over year. The sequential increase was related to NI week, marketing costs related to launching our new products. G&A expense were down $400,000 sequentially and were down 7% year over year.

Other income was $500,000 up $400,000 sequentially, due to a gain related to the resolution of a patent issue. Our cash and short term investment balance of $172m was a new record for the company and was up $4m from last quarter. This is net of the $2.6m we paid in dividends during the quarter and $3m we paid for the acquisition of a small complementary testing measurement company that we purchased with cash in July. The board of directors have declared a cash dividend of $0.05 per common share, payable November 24th 2003 to shareholders of record on November 3rd.

Now on another note over the July 4th weekend we successfully completed the upgrade of all our ERP systems in the Americas to the new Oracle 11I suite of applications. This includes both front office and all of our back office and manufacturing systems in the Americas. I would like to congratulate the team, all internal for taking on and successfully completing this major project without causing any disruption to our customers.

On a historical note, 2000 was our last record year of $410m in revenue. So we're happy to report that this quarter was the highest third quarter revenue in the company's history. We are expecting record revenue for the year. We expect high single digit year over year revenue growth in Q4 and earnings per share for Q4 to be in the range of $0.20 to $0.23 per share.

As these are forward looking statements I must caution you that actual revenues and earnings for Q4 and the year could be negatively affected by numerous factors, such as any decline in the global economy, delays in new product releases, expenses higher than expected and foreign exchange fluctuations.

In summary, NI came through the recent war induced slow down very well and inQ3 we saw an increase in orders over $10K, which supported a continued increase in revenue and profitability. We are on track to have a record revenue this year and given to forward investments we have made over the last two-and-a-half years we believe we can continue to generate operating leverage from any meaningful increase in revenue. With that I'll turn it over to John.

Thank you, Alex. We turned in a solid performance in Q3, delivering our 5th consecutive quarter of year over year revenue growth and the highest third quarter revenue in our history. With our many knew products we aggressively ramped up our sales and marketing initiatives in Q3. Strong acceptance of Lab View 7 Express led to double digit year over year growth in sales of our applications products.

One of the goals of Lab View 7 Express was to attract new customers. We believe Q3 was our strongest quarter for new Lab View customers in many years. We also had a record quarter for sales of several products, including data acquisition, modular instruments and distributed IO products. Record attendance at our annual NI week conference once again demonstrated the strength of our vision for virtual instrumentation. As you may know, the May release of Lab View 7 Express was the most significant upgrade of Lab View in over a decade and it was obviously a major focus at NI week. From the keynote presentations to demos on the trade show floor, to the numerous technical presentations and hands on training sessions, attendees got to see first hand how this major upgrade dramatically increases power and ease of use for both new and experienced users. Though we are early in the promotion and sales process, sales of our pioneering new Lab View FPGA product, which allows customers to embed their Lab View applications directly in silicon exceeded our expectations in Q3. One example is [inaudible], a spin off from the institute [inaudible] University of Basil, that delivers tools for nanotechnology research. This customer had no experience with traditional FPGA programming. However with Lab View FPGA and our PXI [inaudible] reconfigurable IO hardware they developed a new generation control system for atonics (ph) level scanning microscopes that costs $20,000 less per system and delivers higher performance than their traditional solution.

We were also pleased that sales of our new Lab View PDA product which allows customers to target hand held PDAs and other mobile devices got off to a great start in Q3. This strong early acceptance leads us to believe that Lab View PDA has successfully expanded our breadth of applications to include such new areas as hand held [inaudible] for the first time.

General aviation modifications, for example, is used in Lab View PDA and [inaudible] systems to do everything from performing maintenance to engine systems checks to making sure planes are ready for flight. Several other customers are using Lab View PDA to perform in the field diagnostics on heavy equipment that is often not near a service bay where it can be properly inspected. Lab View PDA runs diagnostics on engines and other critical components in the field can upload new data to the equipment, log test data for later analysis and test different pieces of equipment just by changing the software.

As another example, several customers are using Lab View PDA with hand held devices fitted with small vacuum-like attachments as particle detectors. The applications analyze certain types of particles in the air and the types, amounts and regions where the samples are taken are all logged and stored for later analysis to determine patterns of interest or concern.

Releasing Lab View 7 Express in May allowed us to release many derivative products as well as accelerate our development on next generation projects in Q3. This was clearly demonstrated at NI week where we highlighted more new products than any NI week conference in recent years.

The English language version of the Lab View 7 Express was followed by multiple foreign language versions including German, French, Japanese and our first Korean version. We're pleased that these native language versions are being very well received.

In Q3, we also upgraded many other major application software products. We announced lab windows CBI 7.0, the most significant release of our popular NCC test and measurement development environment in its 15-year history. We announced measurement studios 7.0, the industry's first comprehensive suite of measurement tools for programmers who use Microsoft visual studio.net environment which includes the C sharp language. We announced [inaudible] 3.0, a major upgrade to our popular test management software product that is designed to enable engineers to build and deploy high volume, automated manufacturing test systems faster than before.

We also announced Matrix X 6.3. An upgrade that delivers many long awaited updates and enhancements, including support for the latest windows XP and Sun Solaris operating systems. This is our first new release since acquiring Matrix X in January. Matrix X contains differentiated leading edge technology for control design, system modeling and automatic code generation. Companies including Boeing, Volvo, NASA and Lockheed Martin use Matrix X for a variety of applications such as developing aerospace flight controller and simulators and building automotive engine and brake control systems. Our new Matrix X 6.3 upgrade is a result of our strategy to work closely with customers to further enhance and expand its use. David Evans, manager of aero dynamics and flight control at Boeing stated that we worked closely with NI to communicate future Matrix X development conducive to the continued success of our programs that rely on Matrix X software, such as our joint [inaudible] emission and unmanned combat air vehicle programs. With the operating systems updates and Matrix X 6.3 in our renewed confidence in future Matrix X, we will continue to use this software for existing and future projects.

Those of you who attended NI week also saw an early prototype demonstration on how this control design and system modeling technology can be much more tightly integrated with Lab View in the future.

In Q3, we also announced many new hardware products, including new products for our PXI and [inaudible], as well as a variety new products for data acquisition, signal conditioning, motion control, machine vision and more. The most significant new hardware products were our new 100 mega sample per second mixed signal suite of PXI instruments. These sophisticated new modular instruments are matched in frequency and capability and include the following, two new digital waveform generator and analyzer modules, a new analog arbitrary wave form generator model, a new high resolution digitizer module, a new clock and frequency generator module, a new switching module and a new system timing and synchronization model. When combined with our 6.5 digit [inaudible] NI week last year, our new PXI mixed signal suites significantly extend the capabilities, flexibility and performance of PXI and opens many new application opportunities.

For example, PXI is now an ideal platform for testing mix signal devices and systems in industries, such as consumer electronics, communications, semiconductor, military avionics and scientific research, including applications such as digital audio and video, data converters, [inaudible] communications, radar and high energy physics.

One of our first customers was LexMark (ph), a leading supplier of printing solutions including laser and ink jet printers. Ed Coleman (ph), [inaudible] consultant for LexMark stated to maintain margins in the printer market we rely on short time to market cycles and focus on managing costs. The 100 mega sample per second mix signal [inaudible], we developed our next generation test systems quickly in Lab View. We used the new instruments to simultaneously increase the rate and measurement accuracy of our high volume, ink jet [inaudible] testers.

Another example is TeleBite (ph), a leading manufacturer of internet and DSL products. They use PXI with our new mixed signal suite to build new generation systems for testing DSL modems and multiplexers. Noise on phone lines can significantly impact the performance of these devices, so manufacturers must thoroughly test them, especially during design verification. According to John Meade(ph), vice president of engineering at Telebite, traditional signal generators do not accurately represent real world noise conditions and do not provide flexibility to meet changing demands. Using Lab View and our new PXI waveform generator TeleBite estimates saving over $1m in design and ongoing support costs.

Sales of our new compact vision system also exceeded expectations in Q3. Along with new customers and packaging assembly and robotics, existing customers in the defense and aero space industries have embraced our new rugged machine vision system. Several defense of national labs, for example, have already used our new compact vision system to increase security in sensitive areas. The ease of use of Lab View real time enabled them to quickly program the system to perform distributive monitoring, detection and analysis of people and objects at full frame rates from multiple cameras. Images and alarms can be quickly transmitted and viewed across the network for further analysis and immediate attention.

As you know, one of our strategic initiatives is to bring the benefits of virtual instrumentation to higher education institutions around the world. In September, 14 of the top universities in China including Peking University, Phudon (ph) University, Jajong (ph) University announced they have adopted virtual instrumentation for their engineering and science laboratories. With funding from the world banks higher education development project, the ministry of education in China purchased Lab View and NI measurement hardware for hundreds of student laboratory workstations. Professor Lo Weichong (ph), leader of the electronics project team for the world bank loan project phase 2 stated we must ensure that graduating engineers are prepared for engineering and science careers in China's fast growing technology industry. These universities are setting the standard for all engineering programs by implementing Lab View and virtual instrumentation into their laboratories and giving students hands on training with software and hardware they will use in the workplace after graduation.

In summary, our R&D investments continue to pay off with many new products in Q3. We've released major new versions of our software products including Lab View 7 Express, Lab View real time, Lab View FPGA, Lab View PDA, Lab Window CDI, Measure Studio, [inaudible] and Matrix X. We've developed a complete new [inaudible] driver software architecture that controls and enhances our vast hardware portfolio and we've released many new hardware products, including our PXI mixed signal suite, which features a revolutionary new high performance hardware architecture. To launch these many new products and pursue the new opportunities they make available, we ramped up our sales and marketing initiatives aggressively. We've successfully increased our growth rate and delivered the highest third quarter revenue in our company's history. With that, I'll turn it over to Dr. T.

Thank you, John. I am pleased with our solid execution throughout the company in Q3, especially in R&D and in sales and marketing. I want to thank those of you who attended NI week. We promised some revolutionary new products and as you saw, we delivered. We expanded the visionary role that our core Lab View platform plays in the industry. We released major upgrades to many application software products and we significantly expanded our measurement and automation capabilities with new hardware products.

Lab View 7 Express was a major investment to deliver its revolutionary breakthroughs and ease of use, we had to completely rearchitect an entire software driver layer that controls our vast hardware portfolio. This ambitious initiative requires over 350 man years of engineering effort. As you saw in Q3, once we completed our new [inaudible] index, driver architecture, we were able to quickly leverage that investment to deliver major new upgrades of many other application software products.

The story with our new PXI mixed signal suite is very similar. It was also a major investment over many years. The performance and features of these new products required us to implement a highly sophisticated revolutionary new hardware architecture called NI synchronization and memory core or SMC. Just as Lab View 7 Express was successful completion of our new SMC hardware architecture is a major engineering achievement and an important milestone in the performance road map. It is the key enabling technology that will give us tremendous leverage for future hardware projects. We saw the first benefit of this investment in Q3 with the release of our new PXI mixed signal suite and we have much more in the pipeline.

Two of the most important factors in our long-term growth have been a success in identifying new growth areas that leverage our core strengths and our level of investment in R&D that drives new product. I believe we made tremendous progress in both of these areas in Q3. I congratulate and thank our R&D teams for their hard work, dedication and solid execution. We successfully completed some of the most ambitious architectural initiatives in the history of our company, and the many new products we delivered have received very positive response from our customers.

I believe our investments have been wise, our timing is good and our execution is rock solid. Our many new products helped to set a new record for third quarter revenue, a record achieved in a quarter when we made a major IT infrastructure upgrade to Oracle 11I. Our sales force is excited and we look forward to the future with the goal of continuing to increase our growth rate and delivering long-term value to our shareholders.

Thank you for taking the time to join us today. We will now take your questions.

Thank you, everyone. Today's question-and-answer session will be conducted electronically. If you have a question, please signal by pressing star 1 on your touchtone telephone. Once again, that's star 1 to ask a question. If you are using a speaker phone please make sure your mute function is depressed to allow your signal to reach our equipment. Once again, that's star 1 to ask a question. We'll pause for just a moment. We'll take our first question from David Yuschak with Sanders, Morris Harris.

Congratulations on the quarter, gentlemen.

Thanks, Dave.

A couple things. On the orders over $10,000 that you indicated looked pretty solid in the third quarter, could you give us some more color on that, particularly as it relates to what happened in the second half of last year? I think we had some good order rates coming out of last year's NI week. By fourth quarter last year you were over $2,600 average order size and how that might compare with earlier this year when you guys had expectations about that $10,000 order rate ramping up because of the war.

We're pleased to see the recovery in orders over $10K. The average order size is up 7% year over year, so compared to that strong Q3 last year, we've definitely exceeded that. We certainly have seen the success of our compact and PSI platforms driving that. Also built around the success of the new mixed signal suite which is designed to increase the number of modules we saw per system. Those strategies are working out. In terms of the total [inaudible] it's $2,600, it didn't exceed the Q4 peak of last year, it is the second highest order size in the history of the company. For third quarter that's a strong performance. We have our highest size that that comes in the fourth quarter. So it's a good time that confidence is beginning to return in the economy and certainly it's a welcome change from the caution we've seen on large orders early in the year as a result of the war.

Would you -- did you like what you saw in the third quarter, what you may have expected earlier in the year before the war?

Yes.

As far as expectations?

Yes.

[Inaudible] earlier in the year?

The mix of orders is coming back to where we thought we were prior to the war.

And clarify the legal issue. You were expecting $1m in legal expense this quarter and another $1m or so in the last quarter?

Yeah, with the success of our jury trial against [inaudible] where we won a victory there and they were found to infringe on three of our patents, and also as a result on the decision to remove a key featured covered by the second case, they removed that from their products. We have decided to drop the second case. We have achieved our goals and that will drop our patent litigation expense below what we had previously guided as we go forward.

We'll take the next question from [inaudible] Thomas Weisel Partners.

Good afternoon. First a couple of housekeeping questions . The first is about the legal expenses. What should we be modeling it for the fourth quarter?

As I just mentioned to Dave earlier on, the main driver of the large legal expense we had guided to back in the March quarter, we've now resolved that with the removal of that key feature from the products. Guidance number will be a lot less significant going forward than what we've had previously modeled. So I think for Q4 you could use a number relatively similar to the Q3 number and I wouldn't expect any major change in that on a quarterly basis as we go through '04.

At what point do you expect to get my kind of recovery that would be cash based or you don't expect to get one?

We won the jury trial in January and we were awarded several million dollars as a result of that jury verdict. That money is being held on escrow awaiting the resolution of the appeal. And so when the appeal is resolved, we would hope to gain access to that money at that point should that happen, then we'll recognize that gain.

And the timing of that, have you any idea like --

I'd be speculating. We would like to hope to see it around Q4 of '04, but that depends on the legal process. I can't pin it down for you.

Okay. The second question is about currency, and particularly Asia. And this quarter your variance in dollar terms and local currency terms is much greater the variance as compared to last year. I think you are up 18% this year, this quarter on dollar business versus 32%% in the previous quarter.

Correct.

And what is that due to? Because the Chinese sales you expect the dollar directly.

The majority of our revenue, a substantial portion in Asia, traditionally came in Japan against the Yen. We had locked in very, very good hedge rates back in 2001 which paid rich dividends for us last year and we had a very attractive rate for converting revenues last year. And so although the Yen has weakened, or strengthened on the open market it's weakened relative to [inaudible], so it's a bit of a legacy to our currency strategy which was a very good benefit in '02. This will dissipate when we get to the first quarter of '03. So you'll see that -- first quarter of '04, when we get into Q1 of '04 you'll see the gap between the local currency growth and dollar growth in Asia now very substantially. It's got one more quarter to go of this gap and then that will disappear.

Okay.

That will obviously be a positive. More of the local currency growth will come through in dollars in Asia as we get into next year.

Got it. And then the Lab View 7 Express, you introduced it in the month of September and various languages in Europe?

That's correct, and also Japanese in our first Corinne version also.

Japanese and Korean. Can you give us an idea of where they are expanding the addressable market over there, what kind of traction you are seeing, how many more -- what your strategy over there is so far just at the university –[inaudible] are you trying to penetrate that market, are you getting buyers that have looked at the product in the past and are now adopting it as paying customers?

As we mentioned in the call, we believe we are gaining market share towards our goal of, you know, increasing the new users and getting further penetration in the markets we serve. The results on the localized version for Europe and Asia have been very strong. Granted we're just 6 weeks into it, but the events we hold the Lab View events have been very strong, specifically the Korean version which is our first introduction of that product, we've seen very strong response in our early results. We're quite pleased and obviously that was a big part of driving the double digit growth that we saw in this quarter.

Is that going into the future drive add-on sales with the modular platforms?

As we've explained to you many times, kind of the core virtualization is software and specifically Lab View. So, yeah, we see that gaining a Lab View customer is a great asset and something we profit from for many, many years.

Okay. The last question is about your modular platforms. What percentage of sales were they and what kind of growth are they seeing there?

We saw very good growth in our instrumentation. We had a record sales for modular instrumentation [inaudible]. We don't break out revenue by product so I'll have to defer to not answer that question, but we are seeing strong growth there-- we believe we're definitely getting market share in that area.

Thank you so much.

We'll go to Richard Eastman with Robert W. Baird & Company.

Hi, Alex. I wanted to ask a question on the traditional instrument products. That portion of your sales has been declining with growth in the other areas, but I'm curious, if you look at that in dollars it continues to be down double digits. You know, the industry, the traditional test industry seems a bit healthier than that these days. I'm curious if that is partially being impacted by any preference in change of protocols in the marketplace?

No, we actually had a very large order in the third quarter of last year for instrument control work and that is the lions share of the delta. This was an order to one of the big three automotive manufacturers and it's probably one of the biggest orders we had had for instrument control in a very long time. That gives us a real tough compare for the third quarter. Absent that, the control revenue is pretty flat. It's been pretty flat for most of the year. If you look at earlier quarters, we -- we're relatively flat year over year. I would say the underlying business trend is the same for Q3 with the exception of that one order in Q3 of 2002.

Okay. And let me ask another question. In terms of the incremental margin, gross margin, more so year over year, I'm curious that it's essentially flat. Is that product mix or currency influenced or --

Actually, as I mentioned in the call, we had -- because of the large software investment we've been making in R&D and large capitalized software numbers we had in Q4 of last year as well as Q1 andQ2 of this year, related to the Lab View 7 Express launch, that created a significant increase in capitalized software being amortized into cost of goods sold. That's up $1.1m from Q3 of 2002 to Q3 of 2003. So the underlying trend is that gross margin actually would have been up over one full point. But that's pulled back because of large R&D investment we've made into those platforms. We're getting the benefit of that would very strong software growth and double digit software growth in the third quarter but, it will take some period of time for that amortization to pass us by. In the underlying run of the business where I look at gross margin, we're seeing an improvement based on improved volume, improved efficiency and improved software sales.

Just lastly, the small acquisition you made in July, I'm just a bit curious as to what type of product software hardware, what interested you enough to go out and purchase somebody?

Well, it was a very complementary business, a relatively small business. It was mix of hardware and software, something where we were a market leader and offered a very good opportunity, I think, to probably make more profit out of the business than the existing owners. So it's just a complementary acquisition and we'll look at that periodically as we go through time to look at other add-ons like that that fit the business model.

Was it PXI based?

No.

Thank you.

Next question with Trimark (ph) we'll take a question from Bruce Harrah (ph).

Thanks for taking my question. I'm looking at your slide from the National Instruments week investor presentation, and it shows NI with 6.5% market vary versus the industry. You recall that slide?

Yeah.

Just a question regarding the industry definition there. Is that the test and measurement industry?

We use that as an indicator against our U.S. public company peers. I wouldn't actually define it as the industry, but it's available information that covers a very substantial portion of the total industry.

So it's really a proxy. My question, really, is surrounding the whole industrial automation industry. I want to get a sense for, you know, over the next 5 or 10 years time how big a market could that become for you in relation to what you currently have in tests and measurement. I understand industrial automation, at least my understanding, it's a relatively nascent market. What is your total addressable market today with your existing suite for industrial automation compare with your total addressable market in test and measurement. Your market potential with existing products.

I'll let John Graff answer it.

Well, you're absolutely right that the industrial automation market total available market is significantly larger than the TM market. It's a very broad and diverse market. It's a long term and has tremendous potential for us. We are seeing continuing success in penetrating and growing our business in this area, primarily driven by our Lab View real time platform which includes our hardware PXI and compact platform. That's an area we're seeing strong growth. As far as breaking down the specific [inaudible] available, that's difficult for us because as we mentioned in past calls, you know, a lot of our products Lab View, PXI, machine vision, those same products can be sold, you know, into both markets, but, again, in the long-term, we see a lot of potential for growing in our market opportunities in the industrial site.

We would view the industrial market as being larger than test and measurement. Obviously that heavy, heavy drive to improve productivity in manufacturing we're a key player in allowing companies to increase productivity. That's one of our key focuses.

I'll just add a final thing. If you look in Q3 that from an industry standpoint is one of our areas of strongest growth.

Am I correct to assume that it's still a much, much smaller share of your revenue?

That is correct, yeah.

I mean, you have never broken that out in the past? Can you give us a flavor for that? Is it on an order of magnitude less?

It's less than 50%. It's an area where we see a lot of growth potential.

Thank you very much.

We'll take our next question from Mr. David Yuschak.

On the legal issues, is that legal expenses, Alex you said it was going to be comparable to the third quarter.

In Q4, it'll be comparable to the third quarter.

I think you initially guided about $1.7 before the settlement; right?

Correct. Now that we've been able to dismiss the second case as a result of their action to remove that key future, the trial we had planned on having next year will not happen now and that brings down the cost quite substantially. I'm glad to have this issue resolved.

Your receivables are up in the quarter sharply. Did you have a strong September then? Is that what kind of reflects more than anything else rather than linear?

As I mentioned in the call, it was mainly operational, Dave. We had a shutdown down of our plant in Austin for about 8 or 9 days as we refurbished the ESB floor and the July fourth weekend we had extended vacation for quite a number of our staff to get the ERP system up. It was a product of some delayed shipping products in July and that catch up later in the quarter which moved receivables to the end of September.

More of an operational issue. Than it was any kind of -- did you see strong growth like you did last year then?

Certainly NI week was very, very successful, and we got a lot of good customer interest. But I wouldn't want to break out the revenue throughout the quarter at this point. And as we look to next year, next quarter, we would expect our DSL to be back in a more normal range.

One last question in the sales and marketing in the fourth quarter, would you expect that to be just maybe up modestly because of the extra effort of sales and marketing coming out of NI week and the new product report? Would you expect that to be raised modestly?

We don't have a specific number, but typically we do ramp up going into the fourth quarter. Historically we have seen about a 10% revenue lift in the fourth quarter. That's been our traditional average as we've gone from Q3 to Q4. That's 10% sequential gain. Obviously Europe comes back to work very heavily in September and into Q4 so we will expect to see an increase in expense there. So, you know, as we go through the quarter, we will see an increase in expense in sales and marketing and in terms of earnings guidance I'd really focus on the bottom line guidance that we gave.

Okay. That's all I got right now.

Thanks very much, Dave.

This does conclude today’s question-and-answer session. I'll turn the conference back over to the speaker for concluding comments.

Once again, thank you for taking the time to join us today.

This does conclude today's program. Thank you for joining us today.